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In a recent victory against the U.S. Department of Health and Human Services (HHS), the Third Circuit Court of Appeals ruled in favor of drug manufacturers regarding the limitations on contract pharmacy distribution under the 340B Discount Drug Program (340B program). In doing so, the three-judge panel emphasized that since “legal duties do not spring from silence,” HHS cannot require drug manufacturers to deliver drugs to an unlimited number of contract pharmacies absent direct Congressional action.

The 340B program requires pharmaceutical companies wishing to participate in federal healthcare programs to provide discounts on outpatient prescription drugs to qualifying hospitals and clinics (340B providers) treating low-income and uninsured patients. 340B providers then administer the discounted drugs to patients, including patients with Medicare or private insurance, via an in-house pharmacy or a contract pharmacy owned or operated by third parties. Once a prescription is filled, the 340B providers may then retain the full difference between the discounted prices and the reimbursement rates they receive from private insurance or Medicare.

The 340B program has been no stranger to controversy. Since its inception, pharmaceutical companies have argued that the 340B program does not allow for the use of contract pharmacies as it enables 340B providers to obtain duplicate discounting and leads to illegal drug diversion. Additionally, many in the industry have argued that 340B providers exploit required discount provisions to generate profits instead of lowering costs and improving care for low-income patients as every federal health program requires.

In 2020, because of these concerns, drug manufacturers began adopting polices to limit contract pharmacy distribution, avoid duplicative discounts, and ensure 340B providers are adhering to 340B program requirements on investment. More specifically, manufacturers notified 340B providers that they may only use one contract pharmacy, except in certain situations at the manufacturer’s discretion or if willing to submit patient drug claims data.

In response to the implementation of these new policies, HHS wrote an Advisory Opinion, later rescinded, declaring that the 340B program requires drug makers to deliver 340B drugs to an unlimited number of contract pharmacies. HHS then sent Violation Letters to manufacturers, including Sanofi, Novo Nordisk and AstraZeneca—plaintiffs in the consolidated litigation referenced herein—ordering the policies be rescinded and 340B providers be reimbursed for any overcharges.

The Advisory Opinion and subsequent Violation Letters resulted in years of tempestuous litigation at the District Court level which provided no clear and consistent answer as to the issue at hand. Finally, however, after various appeals, the Third Circuit ruled against HHS stating that, and upon agreement between the parties, HHS lacks rulemaking authority in this instance to merit Chevron or Skidmore. Therefore, as the text of the 340B program is silent as to delivery, and “Congress never said that drug makers must deliver discounted Section 340B drugs to an unlimited number of contract pharmacies,” HHS overstepped its bounds in deeming such limitation policies unlawful.

While it remains to be seen whether HHS will seek further review of the Third Circuit’s decision, the D.C. and Seventh Circuit are also set to address whether drug manufacturer limits on contract pharmacy distribution are lawful. For now, however, manufacturer’s limitation as to contract pharmacy distribution remains lawful in the Third Circuit.

If you need assistance in navigating and determining how various regulation, litigation and Congressional action may impact your company, Buchanan’s experienced Life Sciences attorneys and Government Relations professionals are here to help. Please reach out to Natalie Oehlers, Associate, Life Sciences;  Michael Strazzella, Practice Group Leader and Senior Principal, Government Relations; or to our Life Sciences Practice Group with any questions.