A federal district judge late this afternoon struck down, as arbitrary and capricious, HRSA's finding that Lilly's 340B contract pharmacy policies violate the 340B statute. However, the judge said that manufacturers should not be allowed to unilaterally impose conditions on the location and delivery of 340B drugs and sent the matter back to HRSA.

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Breaking: Federal Judge Vacates HRSA’s May 17 Letter to Lilly on 340B Contract Pharmacies, Sends Matter Back to Agency

A federal district judge in Indianapolis late this afternoon set aside and vacated the federal government’s May 17 finding that drug manufacturer Eli Lilly’s denials of 340B ceiling prices when covered entities use contract pharmacies violate the 340B statute.

A spokesperson for Lilly said this evening “Lilly is encouraged by today’s opinion, which confirms that the government’s enforcement decision against it was improper.”

The U.S. Health and Human Services Department (HHS) and the U.S. Health Resources and Services Administration (HRSA) have not yet responded to requests for comment.

Not Contrary to Law, But Arbitrary and Capricious

U.S. Senior District Judge Sarah Evans Barker said in an Oct. 29 order that while HRSA’s May 17 findings against Lilly were not contrary to law, unconstitutional, or violative of notice and comment procedures, they were arbitrary and capricious and thus violative of the federal Administrative Procedure Act (APA).

Barker set aside HRSA’s findings and its directives to Lilly in May to

  • immediately begin offering its covered outpatient drugs at the 340B ceiling price to covered entities through its contract pharmacy arrangements, regardless of whether they purchase through an in-house pharmacy
  • comply with its 340B statutory obligations and the 340B program’s civil monetary penalties final rule and credit or refund all covered entities for overcharges that have resulted from Lilly’s policy
  • work with all its distribution/wholesale partners to ensure all impacted covered entities are contacted and efforts are made to pursue mutually agreed upon refund arrangements.

HRSA has made similar findings about and sent similar letters to drug manufacturers AstraZeneca, Boehringer Ingelheim, Novartis, Novo Nordisk, Sanofi, and United Therapeutics. All are suing HHS and HRSA in defense of their 340B contract pharmacy actions. Barker’s ruling today likely will prompt a slew of court filings by the manufacturers in those cases.

Barker sent HRSA’s May 17 letter to Lilly back to the agency “for further consideration/action consistent with the opinions explicated” in her order.

Barker also invalidated, as arbitrary and capricious, the HHS Office of General Counsel (OGC) Dec. 30, 2020, advisory opinion that the 340B statute requires manufacturers to offer their products for purchase by covered entities at or below the 340B ceiling price, “not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs.” A federal district judge in Delaware in June likewise set aside and vacated the 340B contract pharmacy advisory opinion as arbitrary and capricious. HHS withdrew the advisory opinion that same month.

Ruling Does Not Address 340B ADR Rule

Barker’s decision did not address Lilly’s claims in its lawsuit against the 340B administrative dispute resolution (ADR) final rule that took effect in January. In March, she granted Lilly’s motion for a preliminary injunction stopping HHS from implementing or enforcing the ADR rule against Lilly. “Pursuant to our prior ruling, defendants are currently enjoined from enforcing the ADR rule as to Lilly,” she said. “The parties have agreed that a final decision on the merits of this claim can be issued by separate order at a later date. Accordingly, we do not address the ADR Rule in this entry.”

340B Statute “Silent as to Contract Pharmacy”

In her ruling, Barker, like the judge in AstraZeneca’s case before her, said “The 340B statute is silent as to contract pharmacy arrangements and drug manufacturers’ delivery obligations.”

However, she added: “Congress’s use of broad language in enacting this statute and specifically omitting any mention of where 340B drugs are to be delivered does not leave room for drug manufacturers to unilaterally condition or control the availability of their 340B pricing to a particular delivery location of their choosing such that covered entities are prevented from accessing 340B pricing and required to purchase covered outpatient drugs at WAC prices.”

“The fairest and most reasonable interpretation of the 340B statute would not authorize drug manufacturers to impose unilateral restrictions on the distribution of the drugs that ‘would frustrate Congress’ manifest purpose’ in enacting the statute,” she wrote.

Imposing “Extra-Statutory Conditions on Covered Entities”

“Given the expansion of the 340B program and the vast proliferation of contract pharmacy arrangements since Congress’s most recent amendments to the 340B statute, Congress may at some point choose to amend the statute to directly address these issues,” Barker said. “But that is for Congress to determine; drug manufacturers may not usurp the role through unilateral extra-statutory restrictions.”

“Construing the 340B statute not to permit drug manufacturers to impose extra-statutory conditions on covered entities’ access to discounted medications is not only a permissible construction, but, in our view, the construction that best aligns with congressional intent,” she wrote. “Accordingly, we hold that the May 17 Letter, which determined that Lilly’s policy under which it delivers drugs to only one location per covered entity and otherwise charges covered entities prices high above the ceiling price for covered outpatient drugs resulted in violations of the 340B statute’s prohibition against overcharging, neither exceeds the agency’s statutory authority nor is contrary to law.”

Barker rejected Lilly’s argument that the May 17 letter is unconstitutional and illegal because it takes property away from Lilly in violation of the Fifth Amendment.

“Arbitrary and Capricious”

But she agreed with Lilly that the May 17 letter is invalid under the APA “because the position it espouses is arbitrary and capricious.”

“A careful review of the May 17 Letter reveals its failure to acknowledge, never mind explain HRSA’s change in position regarding its authority to enforce potential violations of the 340B statute connected to contract pharmacy arrangements,” she said.”

“While we have most assuredly crafted the most careful judgments of which we are capable with respect to the challenging issues raised by the parties in this litigation, we do not presume to have a full, integrated understanding of the way(s) in which the 340B program should properly and fairly be administered going forward in a way that attempts to reflect the dramatically altered healthcare landscape in which the regulated parties now operate,” Barker concluded.

HRSA’s Inconsistency

“We do not know, for example, why the agency said for so long that it was not able to enforce its view of drug manufacturers’ obligations under the statute in the context of contract pharmacy arrangements and then suddenly changed tack and said it was able to enforce these requirements. We cannot divine whether Congress intended for drug manufacturers to have unlimited delivery obligations under the statute, untethered to the particular covered entity’s actual distribution needs. We have no insight into why there is apparently so much reluctance to promulgate a holistic legislative proposal to bring clarity to the scope of the regulated parties’ obligations and entitlements under the statute with regard to contract pharmacy arrangements rather than engage in piecemeal interpretations and after the fact patchwork characterizing the history of the agency’s attempts to manage this program.”

“What we have come to see, however, is that the 340B program can no longer be held together and implemented fairly for all concerned with non-binding interpretive guidelines and mixed, sometimes inconsistent messaging by the agency regarding the source and extent of its authority to enforce statutory compliance in the area of contract pharmacies,” she said.

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