Update on the 340B Contract Pharmacy Showdown: Judge Rules HRSA threat of enforcement is consistent with the 340B statute and the Constitution, but is arbitrary and capricious under the APA

On September 30, we blogged about the ongoing dispute and litigation around the use of contract pharmacies under the 340B Drug Discount Program (click here).  We reported that HRSA was proceeding with enforcement actions against drug manufacturers that have declined to sell to 340B covered entities that use multiple contract pharmacies to dispense 340B drugs to their patients, despite the pendency of several lawsuits challenging such enforcement.

Last week, the U.S. District Court for the Southern District of Indiana decided several substantive motions in Eli Lilly & Co. v. HHS, No. 1:21-cv-00081-SEB-MJD (S.D. Ind. Oct. 29, 2021), one of the lawsuits challenging HRSA’s enforcement actions. A key issue before the court was whether, despite the relevant statute’s silence on the issue, Congress intended to allow the use of contract pharmacies.  The court found that it was clear that the statute required manufacturers to honor their contractual obligation to charge covered entities no more than the 340B ceiling price. Lilly’s refusal to honor the price for covered entities’ purchases, based solely on the delivery location or dispensing mechanism, directly conflicted with this statutory requirement because it prevented covered entities from accessing 340B pricing and would force them to purchase those drugs at higher prices. In the court’s view, Congress’ broad language did not leave room for manufacturers to unilaterally control the availability of their 340B prices to a particular delivery location of their choosing. The court also disagreed with Lilly that the 340B program had expanded beyond Congress’ intent because, even at the time of the statute’s enactment in 1992, Congress was aware that reliance on outside pharmacies by covered entities was a common business practice.

Although HRSA prevailed on the substantive, statutory argument, the agency did not fare as well on procedural grounds. Judge Barker ruled that HRSA’s December 30, 2020 Advisory Opinion was arbitrary and capricious because it was legally flawed in assuming that the statute required drug companies to offer the discounted prices to covered entities regardless of the drug distribution model. As discussed above, the judge found that the statute was silent on the issue. Further, although HRSA’s May 17, 2021 enforcement letter did not require notice and comment and was not contrary to law, it was arbitrary and capricious for HRSA’s failure to acknowledge, much less explain, its change in position regarding its authority to enforce potential violations of the 340B statute connected to contract pharmacy arrangements.

According to the court, HRSA consistently represented before December 2020 that its 1996 and 2010 guidance documents were non-binding and that the agency had limited authority to issue enforceable regulations regarding contract pharmacy arrangements. For example, throughout 2020, the agency continued to inform covered entities that, although “HRSA continues to strongly encourage manufacturers to sell 340B priced drugs to covered entities directly and through contract pharmacy arrangements,” it lacked “comprehensive regulatory authority” to “issue enforceable regulations to ensure clarity in program requirements . . . .” With its December 2020 Advisory Opinion and May 2021 enforcement letters, HRSA dramatically changed course by asserting its authority to compel manufacturers to provide the 340B price to covered entities that use multiple contract pharmacies.  According to the court, when an agency adopts a position that is radically different from its previous views, the Administrative Procedure Act requires the agency to show that there are good reasons for the new policy. HRSA failed to even acknowledge any change in its position with regard to drug manufacturers’ dealings with covered entities through contract pharmacy arrangements.

The Court’s order provides both sides with reasons to claim success.  Drug companies can claim vindication that HRSA’s threats of enforcement are arbitrary and capricious. Unless HHS appeals the decision and it is reversed, the companies do not have the immediate threat of large refunds and fines anymore. On the other hand, HRSA and covered entities can find comfort that the court’s statutory analysis has opened the door for HRSA to allow covered entities to contract with multiple pharmacies, albeit through the proper procedures.