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Lilly told a federal appeals court its decision in the drug company's 340B contract pharmacy lawsuit "will have profound consequences for the integrity of the national healthcare system."

Judge’s 340B Statutory Interpretation Was “Exactly Backward,” Lilly Tells Appeals Court

A federal district court’s ruling last October that federal law requires drug manufacturers to deliver 340B purchased drugs to contract pharmacies conflicts with two other courts’ conclusions, “upsets the delicate statutory balance Congress struck, and raises serious constitutional problems,” drug manufacturer Eli Lilly told a federal appeals court last week.

U.S. Senior Judge Sarah Evans Barker of the U.S. District Court, Southern District of Indiana found last fall that Congress’ omission of any mention in the 340B statute of where 340B drugs are to be delivered means manufacturers may not unilaterally condition 340B pricing to locations of their choosing, as Lilly did. “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,” Barker wrote.

Lilly told the U.S. Seventh Circuit Court of Appeals, based in Chicago, in a May 25 brief it is “exactly backward” to treat “congressional silence as restricting private parties’ otherwise-lawful conduct with respect to their own property, rather than restricting the agency’s authority to impose new rules upon them.”

“That is no way to conduct statutory interpretation, and this court should reverse it,” Lilly said. “The court should hold instead that Lilly complies with its statutory obligation by offering discounted drugs to covered entities at the ceiling price and that it has no further, unwritten obligation to deliver those drugs to for-profit contract pharmacies without restriction.”

The 340B statute “confers specifically limited regulatory authority” on the U.S. Health and Human Services (HHS) secretary “to implement the program,” Lilly said. “That authority does not include the power to impose new obligations on manufacturers, expand the universe of covered entities, or fill in substantive gaps—as the agency itself has conceded. And it is a basic tenet of our constitutional system that agencies lack power to act unless specifically authorized by Congress.”

“The government may not, as the agency now demands, constitutionally compel private parties to transfer their wealth to other private parties,” the company said. “When Lilly first agreed to join the 340B program as a condition of participating in Medicaid and Medicare Part B, it would have been unthinkable that 340B would one day be larger than every other federal drug program then in existence, or that manufacturers would be required to deliver discounted drugs to, much less subsidize, for-profit pharmacies.”

Lilly continued, “Now, because Medicaid and Medicare are practically inescapable for any manufacturer, it would be all but impossible for Lilly to extricate itself from the ever-expanding 340B program and defy the agency’s command to give away its property on a massive scale—a demand that bears no nexus or proportionality to the ‘benefit’ to which it is attached. Participation in 340B was supposed to be a way to help the Medicaid program on the margins; HHS’s interpretation has made it bigger than Medicaid—all at the expense of manufacturers.”  

Lilly asked the Seventh Circuit Court to hold oral arguments because it would help resolve “this complex statutory interpretation case implicating the second-largest government drug-purchasing program.”

“The government’s authority to impose novel regulatory requirements on pharmaceutical manufacturers—on threat of severe civil monetary penalties and expulsion from the Medicare and Medicaid programs—has already sparked intractable disagreement across four district courts,” Lilly said. “The outcome of this appeal, and the appeals on the same question in other circuits, will have profound consequences for the integrity of the national healthcare system.”

Lilly is challenging the U.S. Health Resources and Services Administration’s (HRSA) May 2021 finding that Lilly violated the 340B statute when it limited distribution of its drugs bought through the 340B program to covered entities’ in-house pharmacies or to just one contract pharmacy for those that do not have their own pharmacy.

Barker backed HRSA’s rationale for reaching that finding. She set aside and vacated the May 2021 violation letter to Lilly nonetheless on the grounds it was arbitrary and capricious and thus violated the federal Administrative Procedure Act (APA).

HRSA and the U.S. Health and Human Services Department are challenging that part of Barker’s decision. The government’s brief is due June 24.

Lilly’s interpretation of who is responsible for 340B’s growth will likely be challenged by the government. Congress has expanded the program to more entities both in 2007 and in 2010 and the current contract pharmacy rules have been in place for over a decade. 

On Wednesday, Pharmaceutical Research and Manufacturers of AmericaCommunity Oncology Alliance, the pro-business Washington Legal Foundation, and drug industry contractor Kalderos filed friend of the court briefs in the case backing Lilly.

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