Good Things Came in Threes for These Drug Companies: Three Judges at the Third Circuit Found for Three Drug Makers in 340B Contract Pharmacy Case

In the Spring of 2021, the Health Resources and Services Administration (HRSA) threatened six drug companies with billions of dollars in penalties for not providing 340B discounts to covered entities that sell drugs through vast networks of contract pharmacies (more background on earlier posts).

The drug makers argued that their statutory obligation to provide discounts did not extend to multiple contract pharmacies, who they said often abused the system. HRSA argued that it unambiguously did, and the companies sued. Six district courts presided over these decisions. The outcomes were almost evenly split.

Three of these cases were in the third circuit. AstraZeneca won in the District of Delaware, while Sanofi Aventis and Novo Nordisk lost at the District of New Jersey. Both courts found the statute to be ambiguous, but only the Delaware court vacated HRSA’s penalties; the New Jersey court remanded the issue to HRSA.

Last week, a panel of three judges at the Third Circuit who reviewed these three cases decided in favor of the drug manufacturers. Writing for the court, Judge Bibas said that, while neither Chevron deference nor Skidmore deference applied (because the agency lacks rulemaking authority here), the agency was “entitled to respect”—but only if it had the “power to persuade.” The court decided that it did not, and gave three reasons for its decision.

First, the statute requires manufacturers to offer 340B prices to covered entities but is silent about delivery.  However, according to the court, this silence does not give HHS the authority to read into the statute a requirement to deliver to wherever and whomever the covered entities demand. Second, the court found that neighboring statutory provisions contemplated the drug companies contracting with vendors or commercial entities to distribute discounted drugs. This suggests that Congress’s silence on the issue in the 340B statute was likely intentional. Finally, the court found that legislative history did not necessarily support the government’s view—the most relevant language did not end up in the final statute, and that omission could have supported either party.

The court also reviewed HRSA’s dispute resolution rule and a majority of the judges upheld it. The court refused to give separate legal significance to the fact that HRSA withdrew the proposed rule in 2017 and found a 30-day notice period before the final rule was sufficient under the Administrative Procedures Act.

A lot is at stake here. The 340B program is growing rapidly, and contract pharmacies have been key to that growth. In 2019, covered entities reportedly bought $30 billion worth of prescription drugs (see here; this ballooned to $44 billion in 2021). Compare that to $151 billion for Medicaid, Medicare Part B, and Medicare Part D combined (see here). There is a high likelihood that this case will end up at the Supreme Court, especially if the other cases create a circuit split.