Third Circuit Court building entrance
Today 340B Report takes a closer look at Tuesday's oral arguments in federal circuit court in Philadelphia in three 340B contract pharmacy lawsuits.

A Closer Look at Tuesday’s Arguments in Federal Appeals Court Over the Legality of the 340B Contract Pharmacy Program

On Tuesday we reported about oral arguments before a federal appeals court in Philadelphia in AstraZeneca, Novo Nordisk, and Sanofi’s lawsuits challenging federal agency findings that the companies’ conditions on 340B covered entities’ use of contract pharmacies violate the 340B statute.

Today we follow up with highlights and analysis from the exchanges between judges and lawyers during the hearing.

“Just Five Minutes”

Judge Cheryl Ann Krause (an Obama nominee) of the U.S. Third Circuit Court of Appeals asked Sanofi lawyer Noel Francisco (President Trump’s U.S. Solicitor General) if he interprets the 340B statute’s requirement that drug manufacturers must offer drugs at the 340B ceiling price “to mean, at least, there is delivery to the covered entity.”

Francisco said he did not, adding that “offer and delivery are separate.” Krause then asked if Sanofi was delivering drugs to entities “simply as a charitable matter” and Francisco answered yes.

“We agree to deliver right to their doorstep, to another contract pharmacy if they don’t have that doorstep, or to an unlimited number of contract pharmacies if they provide us with seven data fields that they already collect and provide to all of the insurance companies and to the government,” he said.

“It takes them just five minutes every other week to comply” with Sanofi’s claims data submission requirement,” Francisco said.

“340B providers would vigorously dispute Francisco’s contention,” 340B Publisher and CEO Ted Slafsky says.

Billions Are Falling into Pharmacies’ Pockets

“I think it shows just how far we’ve come from the actual purpose of the program that now the government is arguing for this massive multibillion dollar cross-subsidy from one commercial for-profit industry, the manufacturers, to another for-profit industry, the commercial pharmacies,” Francisco said during an exchange with Krause. “There simply is no basis for that conception of the 340B program.”

“Times have evolved, there’s this massive use of contract pharmacies,” Krause said. If covered entities are the ones doing the purchasing, and they are earning revenue even though a fee is taken off by the contract pharmacies, why is that a problem?” she asked.

“We could have a robust debate in this country about how best to subside covered entities,” Francisco answered. “The purpose [of the program] is much more modest than the government thinks, than what it has evolved into today, that it’s now this massive multibillion dollar subsidy, where billions of dollars are falling into the pockets of commercial pharmacies.”

Didn’t the 340B program’s purpose “extend to the interests of individual patients receiving drugs at a discount of sometimes at no cost at all, and if that’s the case, to the extent patients are using contract pharmacies, because it’s convenient for them, why shouldn’t we interpret the statute to require” delivery to contract pharmacies, Krause asked.

“Very little of the discount is passed on to any customer at all,” Francisco said. “A patient walks in the door, they purchase the drug generally for what their insurance company is going to pay, and then the contract pharmacy and the covered entity reverse engineer the discount and split the difference.”

Arbitrage Scheme, or Accessibility?

“There is no basis in the text or the history [of the statute] to say … we have to honor this massive network of contract pharmacies, the purpose of which is to exploit a gigantic arbitrage scheme where you transfer billions of dollars from once commercial entity, the manufacturers, to another commercial entity, the commercial pharmacies,” Francisco said later.

“You may look at it as arbitrage, but the government looks at it as accessibility to patients,” Krause said. “What is it about your policy that provides some standard that could be applied more broadly?”

“It would go back to the meaning of the word offer, are we actually offering our drugs to them at the ceiling price,” Krause answered.

Later in the hearing during an exchange with Krause, U.S. Justice Department attorney Daniel Aguilar, who has served at the DOJ for seven years and received an award from Attorney General William Barr in 2020 for his distinguished service, disputed Francisco’s assertion that entities pass on little of their 340B discounts to patients.

“I’ve heard a lot of discussion of arbitrage to contract pharmacies,” Aguilar said. He cited figures from a 2018 Government Accountability Office report on federal oversight of 340B contract pharmacies. He said GAO found that “for a majority of covered entities, these hospitals and clinics are passing on those savings to their patients.” To the extent that covered entities retain some of their savings, “they’re reinvesting it, they’re expanding services to dental care, to OBGYN, mobile clinics for rural populations, or vaccines drives to poor or medically underserved populations.”

“Help Us … Draw a Line Here”

Judge Stephanos Bibas (a Trump nominee) asked Francisco a question that also came up during arguments in the companion 340B contract pharmacy cases (Novartis and United Therapeutics’ consolidated cases and Eli Lilly’s case). “Help us to think through how we would write an opinion and draw a line here,” Bibas said. “What’s a bona fide offer and what makes it illusory?”

“You just need to say [the statute] requires an offer, it doesn’t impose a flat-out prohibition on all conditions, and that the conditions we impose constitute an actual offer because we’re willing to deliver an unlimited number of drugs right to their doorstep,” Francisco said.

“Not the Bill Gates that Comes in”

Novo Nordisk’s lawyer Ashley Parrish, who has significant Supreme Court and appellate court experience, said the government in its violation letters to manufacturers “has taken a very specific position for the very first time that that the statute imposes a binding obligation for us to deliver to third parties at other locations. Our position is that’s not in the statute. All the court has to say is we’re right about that and it can vacate the government’s position.”

“From the government’s perspective, you got five different manufacturers and they all seem to have different ways of addressing this perceived problem,” Judge Thomas Ambro (a Clinton nominee) said to Parrish. “How do you go about trying to get something that’s at least semi-uniform?”

“You say the statute imposes one thing: an offer obligation. The second thing you say is it did not displace any common law rights manufacturers had over their drugs…. You say Congress understood this was a charitable program … for the benefit of patients that visit the covered entities themselves, not the Bill Gates that comes in then goes off to a contract pharmacy a hundred miles away,” Parrish said. “You say those three things, and the case is over.”  

“This is not the first time that the Bill Gates analogy has been raised by drug industry advocates,” 340B Report’s Ted Slafsky says.

“340B providers would argue that the 340B program is intended to help covered entities stretch scare resources and serve more patients, rather than a direct discount program for patients,” he says. “They would also point out that the program was never limited to a certain patient populations and that the program would not be effective if covered entities were not able to bring in revenue from commercially insured patients. They would also argue that imposing geographical limits on patient access to contract pharmacies would reduce access to care, particularly in rural areas.”

“Government Has Yet to Tell the Court What an Offer Is”

“The most remarkable thing about this case is, after four briefs and 60 minutes of argument, the government has yet to tell the court what an offer is and what it thinks the word offer means,” AstraZeneca lawyer Alon Kedem, who has argued 12 times before the U.S. Supreme Court, said during his remarks. “The only thing you have to decide is, was the May 17 violation letter correct when it said that our policies were a direct violation of some requirement contained in the statute. Because there is no such requirement, the letter was incorrect and should be set aside.”

“Manufacturers Cannot Impose Unilateral Obligations”

Judge Ambro told Justice Department attorney Aguilar “it looks to me, maybe simplistically” that the government’s position changed “pretty dramatically” from 1996, when it said entities were allowed just one contract pharmacy, to 2010, when it said they may use more than one, “to binding enforceable guidance in 2020 that manufacturers have to deliver to multiple contract pharmacies.”

Aguilar answered that the government’s 340B contract pharmacy guidance has always been nonbinding and advisory. “But HHS has consistently said even longer that manufacturers cannot impose unilateral obligations, even if they are entirely consistent with the statutory obligations of the covered entities.”

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