Drug manufacturer Eli Lilly and Co. told a court this week that HHS has placed it in the "untenable position of offering 340B discounts that are not required by the statute or else facing crippling financial sanctions." | Source: Shutterstock

Lilly Asks Court to Shield it From “Crippling” 340B Sanctions

340B program stakeholders are still digesting drug manufacturers AstraZeneca, Eli Lilly and Co., and Sanofi’s Jan. 12 lawsuits to block federal sanctions over their decisions to stop or impose conditions on 340B discounts on drugs dispensed by contract pharmacies.

The three drug manufacturers sued the U.S. Health and Human Services Department (HHS), the Health Resources and Services Administration (HRSA), and top HHS and HRSA executives the day before HRSA began accepting 340B covered entity claims against drug companies under HRSA’s new 340B program administrative dispute resolution (ADR) system.

The National Association of Community Health Centers (NACHC) on behalf of its members last night submitted a petition against Lilly, Sanofi, and AstraZeneca for overcharges “by refusing to offer covered outpatient drugs for FQHC [federally qualified health center] covered entity purchase at or below the applicable ceiling price whenever the FQHC covered entity will dispense the drugs to its patients through contract pharmacy arrangements.” Earlier yesterday, a federally qualified health center in Northern California submitted a petition against AstraZeneca over its denial of 340B pricing on drugs shipped to the health center’s contract pharmacies. (See related story.)

A Washington State health system has told Lilly it plans to file a 340B ADR claim against it, Lilly disclosed in its complaint.

We are focusing today on Lilly’s complaint filed Tuesday in the U.S. District Court for the Southern District of Indiana. We’ll similarly break down AstraZeneca and Sanofi’s lawsuits in the days ahead.

Lilly’s “Untenable Position”

Lilly says HHS, HRSA, and their leaders have left it “in the untenable position of offering 340B discounts that are not required by the statute or else face crippling financial sanctions.” It wants the court to declare illegal and unconstitutional HHS’s Dec. 30 legal advisory opinion that manufacturers must offer 340B ceiling prices to covered entities that use contract pharmacies; to declare that Lilly is not required to offer 340B discounts to contract pharmacies; and to enjoin enforcement of the advisory opinion “and all actions by defendants inconsistent with that declaratory relief.”

Of the three drug companies suing HHS and HRSA, Lilly alone argues that requiring it to provide 340B discounts to contract pharmacies is a government taking of private property forbidden by the U.S. Constitution’s Fifth Amendment.

Lilly told the court that HHS and HRSA “have jettisoned their prior nonbinding guidance that contract pharmacy arrangements are permissible but not enforceable and replaced that guidance with a new, binding decision under which manufacturers like Lilly must offer full 340B discounts to contract pharmacies on all covered drugs, lest they face massive penalties of up to $5,000 per occurrence, plus the potential revocation of the manufacturer’s ability to participate in and receive reimbursements under the pervasive Medicare and Medicaid programs.”

Lilly said the point and overriding goal of 340B is “helping vulnerable and low-income patients acquire lower-cost access to life-saving medicines.” That description of 340B’s intent is very different and far narrower than the statement of 340B’s purpose accepted by the federal government and essentially all covered entities (namely, to enable safety-net health care providers to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”)

“The 340B statute contemplates that manufacturers will provide covered outpatient drugs at 340B discounted prices only to covered entities,” Lilly said. “Nothing in the statute allows, let alone mandates, the use of contract pharmacies or that manufacturers respect an unlimited number of covered entity – contract pharmacy relationships.”

“The 340B statute thus lists 15 different types of entities that can qualify as ‘covered entities’ for purposes of the 340B Program,” Lilly said. “Contract pharmacies do not make the list.”

Lilly said HRSA’s 2010 340B multiple contract pharmacy guidelines turned the 340B program into a “a massive profit-making endeavor for large businesses such as Walgreens, CVS, and other for-profit commercial enterprises.” These pharmacies need not, and rarely do, pass on discounted prices to patients, it said, yet can generate, in Walgreens case, “hundreds of millions” of dollars in profit from contracting to dispensing 340B drugs.

Lilly said neither 340B statute nor any other law authorizes the government to require manufacturers to provide discounts to contract pharmacies “by claiming that contract pharmacies act as the ‘agents’ of covered entities.” It said when covered entities transfer or sell 340B drugs to contract pharmacies, they are engaging in statutorily prohibited drug diversion. It also said contract pharmacy arrangements lead to statutorily prohibited duplicate discounts.

Lilly Cites Two 340B Report Articles

Lilly said that after informing HRSA in May 2020 about its intention to stop providing discounts on three formulations of Cialis dispensed by contract pharmacies, HRSA in June 2020 told the company that it “look[ed] forward to receiving” Lilly’s limited distribution notice, which HRSA later posted on its website on July 1.

About a week later, Lilly pointed out, HRSA told 340B Report for an article about the limited distribution notice that although its 2010 contract pharmacy guidance remains in effect, it is not legally enforceable.

Lilly said, in August, when it told HRSA it was extending its contract pharmacy policy to all of its covered outpatient drugs, “HRSA and HHS suddenly change[d] course, threatening Lilly with sanctions, including CMPs [civil monetary penalties].” Lilly said it asked HRSA to confirm by Aug. 31 that nothing in the statute prohibited the Cialis contract pharmacy plan or Lilly’s plan to extend it across its product line.

Lilly said instead of responding to it, HRSA issued a statement to 340B Report, which we published Sept. 2, that it was “considering whether manufacturer policies, including Lilly’s, violate the 340B statute and whether sanctions may apply.” Lilly said it wrote again to HRSA in early September. HRSA responded with HHS General Counsel Robert Charrow’s Sept. 21 letter telling the company not to assume that HRSA endorsed its contract pharmacy actions.

Lilly Reject HRSA’s Rationales

Lilly rejected Charrow’s “novel” reasoning, in his Dec. 30 advisory opinion, that contract pharmacies act permissibly under the 340B statutory framework as covered entities’ agents.

“Defendants made no mention of the fact that their decision to mandate that manufacturers provide an unlimited number of contract pharmacies with 340B-priced drugs forces manufacturers like Lilly either to transfer their property, in the form of the prescription medicines they manufacture, to for-profit entities at a devastating financial loss, or to choose not to and suffer the economic equivalent of the death penalty by losing their ability to participate in and be reimbursed under critical federal healthcare programs,” Lilly said.

Lilly also attacked the common practice in which contract pharmacies keep a single inventory, buy drugs to stock it, track when drugs are dispensed to 340B-eligible patients, then retroactively replenish dispensed stock with 340B purchased drugs. “The 340B product, once transferred to a contract pharmacy, is then sold by the contract pharmacy in its own name to its own patients,” it said. Such ship-to/bill-to arrangements “result in statutorily prohibited diversion of 340B-discounted product to independent commercial actors that are not covered entities or patients of covered entities.”

Lilly said, “given the 25,000-plus contract pharmacy locations nationwide and the 190,000-plus arrangements between contract pharmacies and covered entities,” if HRSA were to impose CMPs of up to $5,000 for each instance of overcharging under Lilly’s contract pharmacy policy, “Lilly’s decision to remain faithful to the plain text of the statute could thus have astronomically detrimental financial consequences.”

“And given Defendants’ authority to terminate Lilly’s PPA [pharmaceutical pricing agreement] if they determine that Lilly has failed to comply with the 340B Statute’s obligations, a decision by Lilly not to acquiesce to the new obligations reflected in the December 30 decision would jeopardize Lilly’s participation” in Medicare and Medicaid, which it said “is functionally necessary for Lilly (or any manufacturer) to be viable.”

“The need for immediate review is all the more acute given that the December 30 decision does more than put Lilly to the choice between severe penalties and complying with the regulation: It effectuates an unconstitutional taking of property by forcing Lilly to transfer property in the form of its drugs to private, for-profit entities, not for the benefit of the public, but solely so that those for-profit entities can increase their profit margins,” Lilly said. “The Fifth Amendment expressly forbids such a regime. Moreover, the revenues Lilly generates pursuant to the 340B Program constitute personal property that cannot be taken by the government without just compensation.”

340B Provider Groups Reaction To Manufacturer Suits

340B provider groups criticized the moves by the three manufacturers to sue HHS.

National Association of Community Health Centers’ legal counsel Jason Reddish told 340B Report this morning, “Sometimes strange things come in threes—like three simultaneous suits by three giant drug manufacturers in three different federal courts—all challenging the same HHS advisory opinion.”

“These lawsuits are just another step in the drug manufacturers’ concerted effort to undermine nearly 25 years of settled 340B program practice,” said Reddish, partner at Feldesman Tucker Leifer Fidell. “The manufacturers themselves readily sold their drugs to health centers and their contracted pharmacies for over two decades, and appear frustrated that, despite record profits, they have not badgered HHS into accepting their new position at the expense of the health care safety-net.”

“Interestingly, the manufacturers’ latest tactic evidently responds to their realization they will soon lose before HHS’s newly created administrative dispute resolution panel,” Reddish said. “NACHC filed its claim against the overcharging manufacturers on behalf of hundreds of its members, and ought to receive a favorable decision shortly.”

340B Health President and CEO Maureen Testoni said yesterday, “It is disappointing, but not surprising, that these huge, for-profit drug companies are continuing to attack the nation’s health care safety net when it already is under great duress.”

“By refusing to comply with the law and withholding mandatory 340B discounts, these manufacturers are depriving safety-net hospitals of the vital resources they require to care for patients in need amid the COVID-19 pandemic,” she said. “Their illegal actions will prolong the pain for providers and patients. The Dec. 30 advisory opinion from the Department of Health and Human Services is crystal clear. These manufacturer actions are in direct violation of the law and must stop. It is long past time for drug companies to stop unilaterally cutting 340B.”

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