United States Third Circuit Court building entrance
Drug makers "need not help [covered entities] maximize their 340B profits," a federal appeals court in Philadelphia said yesterday in holding that three manufacturers' restrictions on delivery to contract pharmacies do not violate the 340B statute.

The Day After: Stakeholders Take Stock of Third Circuit Court’s 340B Contract Pharmacy Opinion

Covered entities may still use the 340B program under drug manufacturers’ conditions on the use of contract pharmacies, and while they “cannot squeeze as much revenue out of it as they once could, drug makers need not help them maximize their 340B profits,” a federal circuit court said yesterday.

340B Report’s breaking news alert yesterday about the decision is its most-read article ever.

Monday’s appeals court decision on the legality of manufacturers’ conditions on offers of 340B pricing was the first of three expected to be handed down early this year. Nineteen drug companies have adopted such policies and more could be emboldened to do so now. The federal government meanwhile may be less likely than before to take enforcement action against companies with such policies. To date, it has told 11 that their policies are illegal and referred eight to the U.S. Department of Health and Human Services Office of Inspector General for possible imposition of civil monetary penalties.

In July 2022 during the last session of Congress, 181 U.S. House members—144 Democrats and 37 Republicans—urged the Biden administration to quickly impose civil monetary penalties against all drug manufacturers that restrict access to 340B pricing when covered entities use contract pharmacies.

Increased Chance for Legislative Action

The appeals court decision may increase momentum for a legislative solution to the contract pharmacy impasse. The fix would require opening up the 340B law. Some 340B covered entity stakeholders fear that opening up the law would give critics who say 340B is too big and too lax a chance to make changes.

Neither the Republican majority nor Democratic minority on the House Energy & Commerce Committee responded to requests for comment about the court decision.

The Health Resources and Services Administration said it was reviewing the decision. AstraZeneca, Novo Nordisk, and Sanofi—the three companies whose policies were at issue in the ruling—all said they were pleased with the outcome. Pharmaceutical Research and Manufacturers of America said it appreciated the result. Biotechnology Innovation Organization acknowledged but did not respond to a request for comment in time for this article. National hospital groups said they disagreed with the decision and urged the Biden administration to keep trying to stop the drug manufacturer actions.

The National Association of Community Health Centers has said it wants Congress to stop drug makers from restricting 340B contract pharmacy arrangements and stop pharmacy benefit managers from taking covered entities’ 340B savings. Hospital groups so far have not called for a legislative solution.

Appeals Court’s Ruling

The U.S. Third Circuit Court of Appeals voted 3-0 against HRSA’s position that the 340B statute requires drug makers to deliver 340B-purchased drugs to an unlimited number of contract pharmacies. The law’s text is silent about drug delivery, it said. “Structural clues” in the statute “confirm that the statute does not require unlimited delivery,” and neither the history of how the statute was written nor 340B’s legislative purpose “[call] for a different outcome,” the court said.

“Nowhere does Section 340B mention contract pharmacies,” Judge Stephanos Bibas wrote for the court. Bibas was nominated to the court by President Trump and approved by the U.S. Senate in a 54-43 vote in November 2017. Nor does the word “offer” in the law’s shall-offer provision “imply that the offeror must deliver goods wherever and to whomever the buyer demands,” the court said.

“Even if drug makers limit where they will deliver drugs, they still present the drugs for covered entities’ acceptance. And the drug makers’ delivery conditions do not prevent any covered entity from accepting these offers. Each can still buy and dispense unlimited discounted drugs by having them delivered to an in-house or contract pharmacy,” the court held. It said if a manufacturer “barred all use of contract pharmacies,” it is possible that an entity lacking an in-house pharmacy could not in practice accept an offer of 340B pricing.

“But that situation is not before us,” the court said. “Under the three drug makers’ policies at issue, all covered entities can still use the Section 340B program.”

The court similarly rejected HHS’s reasoning that the 340B statute’s purchased-by clause requires drug delivery “wherever a covered entity demands.”

“Unless Section 340B prohibits drug makers from adopting their policies, HHS cannot show that they have violated Section 340B,” the court said. “Because Section 340B contains no
such prohibition, the drug makers’ policies are lawful.”

Congress knew how to impose delivery-related requirements on drugs and could have in the 340B statute but did not, the court said.

HHS’s position that the 340B statute disallows limits on delivery “also put[s] drug makers in a
legal bind” regarding limiting distribution of drugs with a Food and Drug Administration required Risk Evaluation and Mitigation Strategy (REMS), it said.

The court rejected HHS’s argument that 340B’s “extensive compliance measures” preclude manufacturers from introducing their own measures addressing their concerns about duplicate discounts and drug diversion when entities use contract pharmacies.

Finally, the court said, neither 340B’s drafting history nor legislative purpose “calls for a different outcome.”

“These three drug makers’ restrictions on delivery to contract pharmacies do not violate Section 340B,” the court declared. It said HRSA’s 340B program violation letters to AstraZeneca, Novo Nordisk, and Sanofi and HHS’s withdrawn Office of General Counsel 340B contract pharmacy advisory opinion were unlawful, and it enjoined HHS “from enforcing against them its reading of Section 340B as requiring delivery of discounted drugs to an unlimited number of contract pharmacies.”

Drug Manufacturers Lose Challenge to ADR Rule

The court separately ruled 2-1 in HRSA’s favor that the December 2020 340B administrative dispute resolution final rule was legal. The drug manufacturers had argued that the government did not follow proper procedures in establishing the current ADR rule. Judge Bibas and Judge Cheryl Ann Krause (an Obama nominee) ruled against the drug companies. Judge Thomas Ambro (a Clinton appointee) issued a dissenting opinion, arguing that HRSA “took multiple actions alerting the public it had withdrawn” the proposed ADR regulation and therefore the rule was no longer valid and the agency needed to issue a new rule.

Subsequent to the drug manufacturers’ lawsuit, HRSA announced it is issuing a replacement to “(1) establish a more accessible ADR process that is reflective of an administrative process rather than a trial-like proceeding; (2) revise the structure of the 340B ADR Panel so that it is comprised of 340B Program subject-matter experts; (3) ensure that the parties have worked in good faith before proceeding through the ADR process; (4) more closely align the ADR process with the provisions set forth in the 340B statute (diversion, duplicate discounts, and overcharges); and (5) include a reconsideration process for parties dissatisfied with a 340B ADR Panel’s decision.”

Comments on its proposed replacement were due yesterday and we will be reporting on those comments in Thursday’s issue.

Other federal appeals courts are expected early this year to hand down two companion decisions, one on Eli Lilly’s conditions on 340B contract pharmacy use and another on Novartis and United Therapeutics’ policies.

Stakeholders Reactions

Government, drug industry, and covered entity stakeholders offered these comments about yesterday’s ruling:

A HRSA spokesperson

“HRSA is reviewing the opinion.”

An AstraZeneca spokesperson

“AstraZeneca is pleased with the Court’s decision. We remain strongly committed to the 340B Program and to ensuring that any patient prescribed an AstraZeneca product has access to that medicine. AstraZeneca’s products have been—and will continue to be—available to all covered entities at or below applicable statutory ceiling prices through either their own on-site dispensing pharmacy or a designated contract pharmacy. AstraZeneca maintains that its approach to contract pharmacy arrangements fully complies with all operative requirements.”

A Sanofi spokesperson

“Sanofi is pleased with the Court’s decision upholding the legality of Sanofi’s 340B integrity initiative. We hope this decision, as well as the recent string of investigative reports uncovering excessive abuse and misuse of the 340B program by certain hospitals, encourages all stakeholders to work to enact reforms badly needed to bring the program back to its original intent—delivering quality and affordable care to the most vulnerable people in our communities.”

A Novo Nordisk spokesperson

“Novo Nordisk is pleased with the Court’s decision. We continue to support the 340B drug program so that uninsured and vulnerable patients have access to outpatient drugs.”

A PhRMA spokesperson

“PhRMA filed an amicus brief in this matter urging this result, and we appreciate the court’s careful consideration of contract pharmacy participation in the 340B program. As stated in our brief, ‘the program today bears little resemblance to the one Congress enacted—and contract pharmacies have been one of the primary drivers of that radical transformation.’”

American Hospital Association Deputy General Counsel Chad Golder

“The AHA disagrees with the Third Circuit’s decision. As we have explained in numerous amicus briefs, drug companies do not have the authority to place restrictions on how 340B hospitals ensure that their patients will get the drugs they need. We expect the two other courts of appeals that are currently considering the issue will agree. The only result of this decision will be even greater profits for drug companies and reduced access to medicines for patients.”

America’s Essential Hospitals Senior Vice President of Policy and Advocacy Beth Feldpush

“Today’s decision by the Court of Appeals for the Third Circuit allows drug companies to continue their unconscionable and harmful restrictions on 340B discounts for drugs dispensed through contract pharmacies and jeopardizes access to lifesaving medications for disadvantaged patients. This decision does not sway us from our belief, as asserted by the U.S. Department of Health and Human Services (HHS), that these manufacturer restrictions violate the 340B Drug Pricing Program statute. Essential hospitals depend on 340B savings to meet their safety net mission, and they extend their reach into communities by partnering with pharmacies to make 340B drugs more accessible. This is consistent with Congress’ intent that the 340B program should make drugs affordable for low-income patients and create savings for hospitals to use for safety net care. We urge HHS to continue its efforts to end these harmful drug company policies immediately and restore savings lost to these restrictions.”

340B Health President and CEO Maureen Testoni

“We respectfully disagree with the Third Circuit’s decision that drug companies are not required to offer 340B discounts through all community and specialty pharmacy partners. We are encouraged by the court’s recognition that companies must offer their drugs at 340B pricing to all eligible covered entities, which could require preserving discounts through these pharmacy partners in certain instances. Amid high prescription drug prices and limited federal resources, 340B hospitals rely on access to discounts through community and specialty pharmacies to care for their patients in need. Continued barriers to that access will weaken the health care safety net, harm patients with low incomes and those living in rural areas, and drive drug prices even higher. We await decisions from the other two appeals courts on this crucial issue, and we urge the Biden administration to continue a strong defense of its interpretation of the 340B law.”

National Association of Community Health Centers Interim President and CEO Rachel Gonzales-Hanson

“NACHC is extremely disappointed in the recent 3rd Circuit Court decision and its interpretation of the 340B statute. Over the last two years, the role of contract pharmacies within the 340B program has been a constant debate in the courts. What is missing from the conversation is the ongoing impact on the underserved and vulnerable patients at risk of losing access to affordable health care and medications and safety-net providers, like Community Health Centers. This decision demonstrates that we need Congress to speak to the true intent of the 340B program and strengthen the 340B statute to address the illegal restrictions on contract pharmacies. We are hopeful the other Courts will understand the necessity of contract pharmacies in the 340B program and the value they bring to patients.”

Advocates for Community Health Executive Director Amanda Pears Kelly

“We are deeply discouraged and concerned by the Third Circuit Court ruling, and hope that the Department of Health and Human Services plans to appeal. Federally qualified health centers do not ‘squeeze revenue’ or ‘maximize profits’ from the 340B program, as the ruling states. Health centers reinvest every penny of 340B savings into patient care and access, complying with Congressional intent to stretch scarce federal resources to serve all patients that walk through their doors, regardless of their ability to pay. More specifically, in serving under-resourced communities, health centers rely on contract pharmacies to ensure that patients have ready access to the medicines they need to stay healthy. Given the results of this lawsuit, ACH once again calls on lawmakers to protect access to 340B discounted drugs, including at contract pharmacies.”