Government Continues to Explore Role of 340B Contract Pharmacies

The 340B Drug Pricing Program (the “Program”) allows certain healthcare providers (“covered entities”) to purchase pharmaceuticals from drug manufacturers at discounted rates. Some covered entities do not have an internal pharmacy to dispense drugs or otherwise choose not to dispense drugs, and they instead dispense drugs purchased under the Program (“340B drugs”) by contracting with an outside pharmacy (“contract pharmacy”). Amid concerns that the increasing prevalence of contract pharmacies has led to improper payments to covered entities and the diversion of 340B drugs, drug manufacturers continue to be wary of contract pharmacies. For example, on June 1, 2023, two additional drug manufacturers announced restrictions related to shipping 340B drugs to contract pharmacies.¹ These announcements follow at least 21 other manufacturers that have placed limits on 340B drug deliveries to contract pharmacies.

Since 2010, a policy of the US Department of Health and Humans Services (HHS) has allowed covered entities to use an unlimited number of contract pharmacies.² On December 30, 2020, HHS issued an advisory opinion concluding that Section 340B of the Public Health Service Act (PHSA) requires drug manufacturers to ship drugs purchased by covered entities to an unlimited number of contract pharmacies (versus a single contract pharmacy per covered entity).

Manufacturers have resisted HHS’s unfettered shipping policy for many reasons. For example, the PHSA grants drug manufacturers and HHS audit rights over the covered entity but not over the entity’s contract pharmacies, which limits the ways drug manufacturers may verify that discounts are limited as required under the PHSA. HHS’s policy was litigated before three circuit courts, and two of these cases remain pending.³ As discussed in an earlier client alert, the Third Circuit issued an opinion on January 30, 2023, concluding that the PHSA does not support HHS’s policy and effectively permitting drug manufacturers to limit the number of contract pharmacies that a covered entity may use to dispense 340B drugs. In response, other drug manufacturers have imposed limits on contract pharmacies.

HR 3290 was introduced to Congress on May 15, 2023, further supporting limitations on contract pharmacies. As drafted, the proposed legislation would amend the requirements for covered entities (in 42 US Code § 256b(a)(5)) to add the following: require additional information disclosures regarding who is receiving 340B drugs and how covered entities are utilizing the money saved by participation in the Program, and grant HHS additional audit rights over the savings (defined below) that covered entities are able to generate through their participation in the 340B Program. The law would require covered entities to annually report with respect to themselves and any of their off-site outpatient departments the following figures: the total number of individuals receiving 340B drugs, thepercentage of total drugs dispensed that are 340B drugs, the total costs and charity care costs by location, the gross profits generated by Medicare and Medicaid patients (minus any payments received by the covered entity from uninsured patients for items or services), and the difference between the covered entities’ aggregate 340B drug cost and what the covered entity would have otherwise paid for such drug obtained through a group purchasing organization or other group purchasing arrangement (the “savings”) or the wholesale acquisition cost. The total number of patients and percentage of 340B drugs dispensed must be reported for individuals covered under a group health plan or group or individual health insurance coverage, Medicare patients, Medicaid patients, state children’s health insurance program patients, and other patients.

HR 3290 was referred to the health subcommittee within the House Committee on Energy and Commerce, where it remains at the time of this publication. It is unclear whether this proposed law will be enacted. The proposed law adds a heading (“Duplicate Discounts and Drug Resale”) to the section granting manufacturers (and HHS) audit rights over covered entities, but it does not grant drug manufacturers audit rights over contract pharmacies. Thus, the bill does little to address drug manufacturers concerns regarding improper savings.

However, the reporting requirements outlined in the bill would allow HHS to collect data on the 340B Program, its utilization, and its profitability with respect to contract pharmacies. The 340B Program generates savings for covered entities by requiring drug manufacturers to sell 340B drugs at a discounted price. The Program is a mandate from Congress requiring drug manufacturers to transfer profits, in the form of discounted prices, to covered entities. Information about where savings are being spent could provide useful information for policy makers. However, the bill is unlikely to satisfy drug manufacturers.

^[1] In June 2023 press releases, Novo Nordisk announced changes to its policy, including limited covered entities to two 340B contract pharmacies, and Organon announced changes to its 340B policies to limit covered entities to a single contract pharmacy. 
^[2] 75 FR 10272.
^[3] Eli Lilly and Company v. US Department of Health and Human Services; and Novartis Pharmaceuticals Corporation v. Espinosa et al.