A federal appeals court recently ruled that drugmakers are allowed to limit and impose conditions on pharmacies they send discounted drugs to under the 340B program. The ruling is a win for drug manufacturers, who were previously threatened with fines from the federal government for violating guidance regarding which pharmacies they would send discounted drugs to. The Court of Appeals upholds a prior District Court ruling, which sided with drugmakers Novartis Pharmaceuticals and United Therapeutics after they sued the HHS in 2021.
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On May 21, the U.S. Court of Appeals for the D.C. Circuit issued a unanimous decision in favor of drug manufacturers, finding that certain manufacturer restrictions on the use of contract pharmacies under the 340B drug pricing program are permissible. In upholding a lower court decision that set aside enforcement actions taken by the federal government to stop the manufacturer restrictions, the court rejected the government’s position that the 340B statute prohibits any restrictions on the use of contract pharmacies. However, the court did acknowledge that the statute may prohibit “more onerous” manufacturer restrictions, including the conditions at issue in the case, if applied under certain circumstances, leaving the door open for future controversy.
The decision is the second U.S. circuit court opinion favoring manufacturer restrictions on contract pharmacy use, following a decision last year from the U.S. Court of Appeals for the Third Circuit. A third decision evaluating contract pharmacy restrictions is expected from the U.S. Courts of Appeals for the Seventh Circuit at any time.
At issue was whether drug manufacturer policies restricting the ability of 340B providers (referred to as “covered entities”) to access 340B prices for drugs dispensed through contract pharmacies violated manufacturers’ obligations under the 340B statute, which include a requirement for manufacturers to “offer” outpatient drugs to covered entities at or below the ceiling price if the drug is made available to other purchasers.
The D.C. Circuit considered a November 5, 2021, consolidated decision by a judge in the U.S. District Court for the District of Columbia addressing two manufacturers’ restrictions. The policies had the effect of restricting the number and types of contract pharmacies to which covered entities could have 340B drugs shipped, including, in one case, limiting contract pharmacy use to a single contract pharmacy location for those covered entities that did not have an in-house pharmacy. The policy also required covered entities to provide 340B claims data through an online platform in order to access 340B pricing through a contract pharmacy. As these types of policies have become more common, the decision has wide-sweeping implications.
Both the Health Resources and Services Administration (HRSA), the agency that administers the 340B program, and 340B covered entities have argued that the 340B statute prohibits drug manufacturers from imposing restrictions on the ability of covered entities to purchase drugs at 340B prices, including those dispensed through contract pharmacies because to do so would conflict with the manufacturer’s obligations to offer 340B pricing to 340B covered entities. However, the D.C. Circuit found that the 340B statute “does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities” and that “the conditions at issue here do not violate section 340B on their face.”
In rejecting HRSA’s position, the court focused on the plain language of the 340B statute. The court noted that the statutory requirement for manufacturers to “offer each covered entity covered outpatient drugs for purchase” at or below the 340B price “merely requires manufacturers to propose to sell covered drugs to covered entities at or below a specified monetary amount” and is silent as to the delivery of 340B drugs.
In support of this conclusion, the court considered that an “offer” under a contract can include both terms related to pricing as well as terms unrelated to pricing, which can include terms related to a product’s delivery. Because the statute does not address the delivery of 340B drugs, the court found that the statute allows manufacturers to “impose distribution conditions by contract.”
The court’s decision is similar to that of the Third Circuit, which concluded that the 340B statute does not require manufacturers to deliver 340B drugs to an “unlimited number of contract pharmacies.” The Third Circuit based its decision on the fact that the 340B statute does not reference contract pharmacies or the delivery of drugs to such pharmacies. The Third Court also noted that because “offer” means to “present … something for acceptance,” manufacturers may meet their obligation to offer 340B pricing while restricting the delivery of 340B drugs to contract pharmacies.
Muddying the waters, the court acknowledged that the statute may prohibit “other, more onerous conditions.” The court also recognized that the specific conditions at issue in the case could violate the 340B statute “in particular circumstances.” To determine whether a specific restriction violates the 340B statute, the court indicated that the focus should be on whether the manufacturer has made a “bona fide offer” and whether the restriction is “onerous enough to effectively increase the contract ‘price’” above the 340B price. The court also suggested that a manufacturer restriction could violate the statute if a covered entity is unable to comply with the restriction, such as if an entity is unable to provide claims data as required by the manufacturer.