340B Developments in 2024 – Litigation and Legislation

Although we are only two and a half months in, 2024 has already seen its fair share of impactful 340B developments on both the litigation and legislative fronts.

Litigation Update

Although 340B stakeholders still await the 7th Circuit and the DC Court of appeals to weigh in on the permissibility of manufacturer contract pharmacy restrictions, another Appellate Court ruling reinforced the growing efforts on the state level to prohibit these same restrictions imposed against covered entities. On March 12, 2024, the 8th Circuit Court of Appeals upheld an Arkansas law prohibiting manufacturer restrictions on the acquisition or delivery of 340B drugs to covered entities and their contract pharmacies located within the state. Affirming the District Court’s ruling, the court agreed that Congressional silence within the 340B statute on pharmacies indicates that Congress did not intend to preempt state-level laws related to 340B drug delivery to those pharmacies. The decision is sure to be well-received by 340B covered entities and related advocacy groups.

While Arkansas is one of two states with current laws that bar manufacturer contract pharmacy restrictions (Louisiana is the other), there are at least 19 additional states that have introduced similar proposed legislation. The 8th Circuit Decision reinforcing the validity of the Arkansas version of these covered entity protections may spur even more states to propose similar legislation in the coming months.

Proposed Federal Legislation

On the legislative front, Senator Doris Matsui introduced the 340B PATIENTS Act, a federal bill that would prohibit manufacturers from restricting 340B pricing availability for contract pharmacy relationships or otherwise imposing conditions on offering 340B pricing via those arrangements. The bill is substantively similar to the numerous state-level laws described above and would formally codify the concept of contract pharmacies (and a covered entity’s ability to receive 340B pricing through those relationships) within the 340B statute itself.

Importantly, federal legislative activity has not been limited to addressing 340B contract pharmacy relationships, as other more comprehensive efforts to address 340B Program uncertainties are also being considered. Most notably, a group of six bipartisan Senators recently released the Supporting Underserved and Strengthening Transparency, Accountability, and Integrity Now and for the Future of the 340B Act (“SUSTAIN Act”), a draft discussion bill addressing many areas of uncertainty that exist in the current 340B Program space. Many 340B stakeholders are viewing the draft SUSTAIN Act as an important initial step to crafting comprehensive “compromise” legislation that better and more clearly defines 340B Program parameters. As the SUSTAIN Act contains benefits and concessions for and from both covered entities and manufacturers, there is a material chance that this legislation may gain traction in Congress.

At a high level, the SUSTAIN Act proposes the following key changes:

  • Contract Pharmacy Use: Formalizes covered entity contract pharmacy arrangements within the 340B statute and imposes a penalty on drug manufacturers that refuse to offer or otherwise impose conditions on 340B pricing available for drugs utilized in contract pharmacy arrangements. This provision is similar to the protections within Arkansas’ now upheld Act 1103 and the proposed 340B PATIENTS Act on the federal level, both mentioned above.
  • Patient Definition: Includes placeholder for a definition of the term “patient,” allowing stakeholders to propose an appropriate definition. This is particularly relevant in light of the recent Genesis decision, which highlighted the lack of statutory clarity as to who is a “patient” for 340B Program purposes.
  • Child Sites: Clarifies child site eligibility criteria and directly ties eligibility to existing Medicare provider-based rules.
  • Transparency: Requires covered entities to provide additional reports on the use of the 340B savings generated.
  • Program Integrity: Allows for more extensive government oversight and auditing of 340B Program participants.
  • Duplicate Discounts: Establishes a neutral, centralized clearing house to process claim information submitted by covered entities and state Medicaid agencies.
  • PBM Anti-Discrimination: Enacts federal prohibitions on PBM discrimination against covered entities, in line with similar legislation enacted in a majority of states.
  • Miscellaneous Provisions: Introduces a 340B “user fee” on covered entities, facilitates studies and reports regarding duplicate discounts and contract pharmacy dispensing fees, and approves an additional $3 million per year in funding from 2025 to 2029 for 340B Program audits, oversight, investigations, and enforcement activities.

The six Senators included a request for information (“RFI”) in their release, giving interested stakeholders an opportunity to provide feedback on various proposed aspects of the draft bill. Responses to the RFI are due by April 1, 2024.

The RFI gives 340B stakeholders a unique opportunity to weigh in on the SUSTAIN Act and influence what could ultimately serve as the basis for comprehensive and consequential changes to the 340B Program.

District Court Allows for Expanded Interpretation of Eligible Patient in Impactful 340B Program Ruling

In a decision likely to send shockwaves through the 340B Program space, the United States District Court of South Carolina recently provided a favorable ruling to 340B-participating covered entities hoping to take a more expansive view of who can reasonably constitute a 340B-eligible patient.

Background:

The case originated more than five years ago when Genesis Health Care, a federally qualified healthcare center (FQHC), was temporarily removed from the 340B Program shortly after a formal government audit determined that it was dispensing high volumes of 340B drugs to individuals who were not 340B-eligible “patients” of Genesis (i.e., 340B diversion). Genesis filed suit and argued that HRSA’s interpretation of an eligible “patient” was unduly restrictive and not aligned with the plain wording of the 340B statute. Further detail on the case’s long and winding history can be found here.

The Court’s Analysis:

In its ruling, the District Court largely focused on HRSA’s “current interpretation” of a 340B-eligible patient as reflected in a March 20, 2019 letter to Genesis, which stated that “in order for an individual to qualify as a 340B patient, [the covered entity] must have initiated the healthcare service resulting in the prescription. . . .” Genesis argued in its filings that the 340B statute only states that 340B drugs may not be sold or resold to “a person who is not a patient of the covered entity,” and does not otherwise condition patient eligibility on when or where a specific service was initiated, or to which service a drug order or prescription was tied.

The Court largely agreed with Genesis, stating that because “nothing in the statute conditions an individual’s eligibility as a 340B patient on whether the health care service resulting in the prescription was initiated by the ‘covered entity,’” HRSA’s interpretation of a 340B-eligible patient is “contrary to the plain language of the 340B statute.” In addition to the plain reading of the statutory language itself, the Court pointed to extensive evidence in the legislative history that Congress intended “patient” to be interpreted more broadly and “to have its plain and ordinary meaning: ‘an individual awaiting or under medical care and treatment.’” The Court also noted that HRSA has never provided any specific time limitation as to when the patient must have received services from the covered entity in order to constitute 340B eligibility for prescriptions written for that patient.

Although the Court acknowledged that its ruling could significantly expand the number of patients covered entities could consider 340B-eligible, it stated that a legislative change would be necessary if stakeholders wanted to limit the 340B-eligible patient definition:

“If there is a desire to restrict the 340B Program and limit the ability of ‘covered entities’ to remain profitable in the face of prescription drug price increases, Congress is the appropriate entity to take the necessary action. It is not the role of HRSA to legislate and limit the 340B program by restricting the definition of the term ‘patient,’ thereby frustrating the ability of the 340B statute to accomplish its purpose.”

Ultimately, after stepping through its legal analysis, the Court made the following declarations:

  1. “The only statutory requirement for 340B eligibility of a person is that the person be a patient of a covered entity, as clearly stated in 42 U.S.C. § 256b(a)(5)(B).”
  2. “The plain wording of the 340B statute does not require the ‘covered entity’ to have initiated the healthcare service resulting in the prescription.”
  3. “Agency interpretations in contradiction of the plain wording of a statute are not entitled to deference and are not enforceable.”
  4. While HRSA does possess authority to implement its interpretations of the statutory term “patient” in 42 U.S.C. § 256b(a)(5)(B). HRSA’s interpretation of the term “patient” must be consistent with the plain language of the statute and the intent of Congress. As explained above, HRSA’s present interpretation of the term “patient” as reflected in the March 20, 2019 now-voided audit letter is inconsistent with the plain language of the statute and the intent of Congress in passing the 340B statute.
What Comes Next?:

The Court’s decision only provides relief to Genesis specifically by enjoining the enforcement of HRSA’s patient definition in the 2019 letter (as opposed to invalidating HRSA’s guidance more broadly). Nonetheless, this decision provides a strong legal footing for future and broader challenges against HRSA’s eligible patient standards. At this time, it is unclear if HHS will appeal the District Court’s ruling. We will continue to update this article as the situation develops.

If you have any questions about the ruling or how it may impact your entity’s 340B Program operations, please contact your Quarles & Brady attorney or:

HRSA Notice Provides Clarity on 340B Child Site Registration Requirements

After months of relative uncertainty, the Health Resources and Services Administration (HRSA) published a Notice today confirming the end to a COVID-19 pandemic-era flexibility that allowed unregistered child sites to utilize 340B Program benefits in some circumstances. However, HRSA also introduced new “transition periods” in its Notice, providing covered entities a longer runway to come into compliance while minimizing negative operational impacts.

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CMS Proposal to Make One-Time $9 Billion Lump Sum Payment to 340B-Covered Entity Hospitals

The Centers for Medicare & Medicaid Services (“CMS”) recently announced its proposal to make a one-time lump sum payment of roughly $9 billion to 340B-covered entity hospitals that were impacted by the agency’s unlawful reimbursement reductions for 340B drugs billed to Medicare Part B from 2018 to 2022. This proposal comes after the Supreme Court sided with affected 340B participating hospitals last June in American Hospital Association v. Becerra, ruling that the government must provide a remedy to the approximately 1,600 impacted hospitals for historical amounts owed.

The authority for these payments comes from proposed rule CMS 1793-P (“Hospital Outpatient Prospective Payment System: Remedy for the 340B-Acquired Drug Payment Policy for Calendar Years 2018-2022”), which will be formally published on the Federal Register’s website on July 11, 2023. The rule has a stakeholder comment period ending on September 5, 2023. Pending any changes to the proposed rule, we expect CMS to begin making this lump-sum payment shortly after the proposed rule is finalized, likely later this year.

In an effort to remain budget neutral, CMS’s proposal involves offsetting the majority of the proposed lump sum repayments with corresponding hospital reimbursement cuts for services and non-drug items, although these cuts would be spread over approximately 16 years.

While hospital entities and advocacy groups have initially stated appreciation for the lump sum format of the repayments owed, there is some disappointment that the repayments do not include interest, and that CMS proposed corresponding repayment cuts that impact 340B and non-340B hospitals alike.

Continuing Changes in the 340B Space: New Restrictions and Shifting Alliances

As detailed further in our article on the current state of the 340B Program and what to expect in 2023, a growing list of manufacturers have taken the step of significantly restricting 340B pricing for fills completed by contract pharmacies. Over the last few weeks, the number and scope of these restrictions have only continued to grow. Most notably, on February 15, 2023, Johnson & Johnson (“J&J”) released an updated policy with the most restrictive terms yet, limiting 340B hospitals to receiving 340B pricing at only one contract pharmacy location within 40 miles of the hospital, effectively eliminating the possibility of utilizing most mail order or specialty pharmacies for J&J 340B fills via a contract pharmacy arrangement. Moreover, if a hospital covered entity wants to obtain 340B pricing for a single contract pharmacy location, J&J now requires such hospitals to submit 340B claims data to 340B ESP for the hospital’s entity-owned pharmacies (if applicable). This is the first such manufacturer policy to require claim data submission outside of the contract pharmacy space.

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The Current State of 340B and What to Expect in 2023

2022 was an eventful year on the 340B front, packed with updates to consequential litigation, proposed new rules, ongoing uncertainty into the Health Resources and Services Administration’s (HRSA) underlying enforcement authority, and changes to 340B-related laws on the state level. We saw the Supreme Court side with 340B hospitals in a significant $1.6 billion Medicare Part B drug payment ruling. There were developments in the impactful Genesis case regarding the definition of a 340B-eligible patient. We saw multiple states either enact or propose anti-discrimination laws restricting the ability of payors and pharmacy benefit managers (PBMs) to reimburse 340B-eligible claims at a lower rate. HRSA proposed a revised ADR rule outlining a more informal dispute resolution process. We saw the continuation of litigation surrounding manufacturers’ 340B pricing restrictions for prescriptions filled at contract pharmacy locations. Given the multitude of developments in 2022, we expect 2023 to be another action-packed year for 340B covered entities and stakeholders. Below, we discuss the 340B issues to track and where additional developments are likely to occur.

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Brenda Shafer, Michael French and Richard Davis Author Law360 Article on Questions Related to Section 340B Drug Pricing

Quarles Health & Life Sciences attorneys Brenda Shafer, Michael French and Richard Davis recently wrote an article for Law360 about questions surrounding the ability of the Health Resources and Services Administration’s ability to enforce key requirements related to the Section 340B drug pricing program.

In the article, Shafer, French and Davis address aspects of the 340B program such as manufacturer contract pharmacy pricing restrictions and associated litigation, Section 340B PBM anti-discrimination laws and Section 340B HRSA audit trends.

An excerpt from the article:

The Section 340B program, Public Health Service Act Section 340B, Title 42 of the U.S. Code, Section 256b, allows qualifying safety net providers to purchase certain outpatient medications at significant discounts. Savings resulting from program participation are significant and relied upon by participating hospitals and clinics to serve their patient populations more effectively.

The HRSA primarily defined the contours of the 340B program, especially those related to contract pharmacy relationships, through subregulatory guidance documents and FAQs.

Until late 2019, Section 340B stakeholders operated within the parameters of this subregulatory guidance. However, in late 2019, the HRSA appeared to question and reevaluate its own enforcement authority based on Executive Order 13892, which was geared toward limiting the prevalence and enforceability of administrative guidance documents promulgated outside of the formal rule making process.

With this regulatory background in mind, four recent developments in the Section 340B space are discussed below, with guidance about what each means for your clients.

https://www.law360.com/lifesciences/articles/1558075/navigating-uncertainties-in-section-340b-drug-pricing

340B Program Changes on the Horizon? Start Planning Now for Potentially Seismic Impact of Upcoming Genesis Decision

As the extensively covered Genesis Healthcare, Inc. v. Azar case continues to proceed, 340B covered entities expect to soon receive much-anticipated clarification on what can reasonably constitute a 340B eligible patient. In the meantime, covered entities should begin planning and strategizing now for how such a significant change to the 340B Program would impact its 340B services and operations.

Genesis Healthcare, Inc. v. Azar is an ongoing case that arose from a 2017 Health Resources and Services Administration (“HRSA”) audit and subsequent exclusion of the covered entity from the 340B Program on February 14, 2018. HRSA’s audit determined that Genesis Healthcare (“Genesis”), a system of 340B-participating Federally Qualified Health Centers (FQHCs), was no longer eligible to participate in the 340B Program because it was dispensing 340B drugs to individuals who were not 340B-eligible “patients” of Genesis (i.e., 340B diversion). Genesis filed suit a few months later in June 2018, arguing that HRSA’s interpretation of an eligible “patient” was not aligned with the 340B statute itself1 and was instead based on nonbinding, sub-regulatory guidance originally released in 1996.2 In apparent response to the lawsuit, HRSA allowed Genesis back in to the 340B Program on September 24, 2018, but continued to insist that Genesis comply with the more restrictive 1996 eligible patient guidance. Genesis filed an amended complaint, alleging that HRSA continued to seek enforcement of an unreasonably narrowed definition of “patient” and was relying on nonbinding sub-regulatory guidance as support.

In December 2019, a federal district court sided with HRSA and dismissed Genesis’ case as moot. Genesis subsequently filed an appeal of the dismissal with the U.S. Fourth Circuit of Appeals. The Fourth Circuit ultimately sided with Genesis, remanding the case back to the federal district court with instructions to consider Genesis’s broader interpretation of a 340B-eligible patient rooted in the actual 340B statute. The Fourth Circuit stated that the situation presented an “ongoing controversy” since Genesis “remains subject to audit and, as the record stands, would still have to comply with HRSA’s 1996 Guidelines.”

With the upcoming federal district court’s decision on the horizon, covered entities have some important items to consider. If the federal district court rules in Genesis’s favor, covered entities may be able to rely solely upon the “patient” reference in the 340B statute and conceivably take a much broader approach to which of its patients are 340B-eligible (i.e., any patient that it considers a “patient” of the covered entity, without any other stipulations on when or where that patient was treated or how the associated medication related to that treatment). Covered entities may consider planning ahead as to how the decision may impact their 340B Program and provide opportunities for additional 340B benefit capture, including changes to third party administrator settings, and policy and procedure updates, among others. The district court may also direct HRSA to produce formal regulatory guidance for the definition of “patient,” which may allow covered entities the unique opportunity to provide input on a key aspect of 340B Program regulation.

1 The 340B statute does not clearly define a 340B-eligible patient, and simply states that “a covered entity shall not resell or otherwise transfer the drug to a person who is not a patient of the entity.” 42 U.S. Code § 256b(5)(B).

2 61 FR 55157-58


Quarles & Brady attorneys will be closely monitoring this rapidly evolving case. If you have any questions or are interested in strategizing for these potentially seismic changes, please contact your Quarles & Brady attorney or:

UPDATE: U.S. Supreme Court Sides with 340B Hospitals in Significant $1.6 Billion Part B Drug Payment Ruling

On June 15, 2022, after many years of ongoing litigation1, the U.S. Supreme Court unanimously overturned a substantial Medicare Part B payment reduction to many 340B Program participating hospitals related to certain outpatient prescription drugs provided to Medicare patients for fiscal years 2018 and 2019, totaling an estimated $1.6 billion across all affected entities. While the Supreme Court ultimately remanded the decision to the U.S. Court of Appeals to craft the appropriate remedies, this decision will likely result in a very positive financial outcome for the affected 340B hospitals. Given the ongoing 340B Program turmoil related to contract pharmacy arrangements, this is some excellent news for 340B Program hospitals affected by the Part B payment reductions. Continue Reading

Supreme Court Decision Maintains Status Quo for Disproportionate Share Percentage Calculation: What Does It Mean for the 340B Program?

Earlier today, the Supreme Court released a decision relating to how the Department of Health and Human Services (HHS) requires hospitals to calculate its disproportionate share percentage. While this percentage is primarily used to determine enhanced reimbursement rates depending on how many low-income patients the hospital treats, it is also used as a minimum 340B eligibility threshold for certain hospital providers.

In short, the Court determined that HHS’s current methodology (in effect since 2004) for calculating the disproportionate share percentage is correct and the percentage should continue to be calculated in the same manner as it has been over the last eighteen (18) or so years.

We will spare the reader from an in-depth breakdown of the Byzantine Medicare regulatory structure (even the Court acknowledged that the laws and rules at issue in this case are “mind numbingly complex”). The crux of the case revolves around the total number of Medicare “patient” days that should be included in the statutory formula used to calculate the disproportionate share percentage. Specifically, the case largely hinged on whether days where a Medicare-eligible patient was (1) treated at the hospital but (2) did NOT actually utilize his/her Medicare coverage should count as patient days included in the formula (for example, if a Medicare beneficiary has supplemental commercial insurance that has not yet been exhausted, so Medicare was not billed). The Court ultimately determined that those days should still be included in the formula, which aligns with current HHS requirements.

What Does This Mean for the 340B Program?

340B participating disproportionate share hospitals (DSH), children’s hospitals (PED), and free-standing cancer hospitals must have a disproportionate share percentage of at least 11.75% per their most recently filed Medicare Cost Report to maintain 340B eligibility. Rural referral centers (RRC) and sole community hospitals (SCH) must have a percentage of at least 8%.

From a practical perspective, this will have little to no impact on current 340B participating hospitals. The disproportionate share percentage will continue to be calculated in the same manner.

On the other hand, the Court’s ultimate decision was unfavorable to non-qualifying hospitals hoping to attain a disproportionate share percentage above the 340B Program’s minimum thresholds. If the Court would have decided the case differently and the Medicare patient days discussed above were deemed to be excluded from the calculation, this would, on the whole, have led to higher disproportionate share percentages and potentially allowed additional hospitals to qualify for the 340B Program. However, the methodology will remain the same, and hospitals on the cusp of 340B eligibility (but still under those minimum thresholds) will not experience a bump in their disproportionate share percentage based on an updated calculation.

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