Significant 340B Drug Pricing Program Litigation May Impact 340B Scope

Two recent federal court cases signal new significant developments with respect to the 340B Drug Pricing Program. Specifically: (1) new federal district court litigation challenging a recent HRSA Notice involving 340B Program “child site” registration and eligibility; and (2) a court decision in other litigation that implicates the scope of the 340B “eligible patient” definition. Details regarding these developments are below.

340B Drug Pricing Program Background

The 340B Drug Pricing Program (the 340B Program) is a government program administered by the Health Resources Services Administration (HRSA) that allows qualifying hospitals and clinics (Covered Entities) treating low-income and uninsured patients to buy certain prescription drugs at a steep discount from drug manufacturers. The program is intended to help safety-net healthcare providers’ financial resources reach more financially vulnerable patients and deliver comprehensive services.¹ Drug manufacturers are required to participate in the 340B Drug Pricing Program as a condition of obtaining Medicaid coverage of their drugs. For the many drug manufacturers who want their products to reach the broadest patient population, participation in the 340B Program is therefore de facto mandatory.

Drug manufacturers — which must sell their products at steep discounts under the program — regularly identify two primary types of abuse within the 340B Program:

• First, the deeply discounted prescription drugs should go only to Covered Entity patients. Manufacturers are concerned that the discounted drugs are often diverted to individuals who are not patients of the Covered Entity (a practice commonly known as “drug diversion”).
• Second, under the 340B Program, Covered Entities are not permitted to obtain the drugs at the steep discount and at the same time recover additional discounts and rebates under the Medicaid program. Manufacturers are concerned that, notwithstanding that prohibition, Covered Entities are doing just that (i.e., “duplicate discounts”).

Since its creation in 1992, the 340B Program has grown exponentially in both the number of healthcare providers eligible to participate and the volume of drugs purchased through the program. There were $43.9 billion in purchases under the 340B Drug Pricing Program in 2021, more than triple the program’s $12 billion in 2015.² Data released in September 2023 by HRSA indicated that from 2021 to 2022 alone, discounted prescription drugs purchased wholesale under the 340B program grew an additional 22.3% to $53.7 billion.³

HRSA 340B Off-Site Facility Notice and Related Health System Litigation

In light of the significant consolidation of healthcare entities in the past several years, many Covered Entities have not only a principal site but also a number of off-site outpatient facilities (referred to as “child sites”). During the COVID-19 public health emergency, in an FAQ document, HRSA temporarily granted a “waiver” that allowed Covered Entities to access 340B pricing at new child sites before the sites were formally listed on the Covered Entity’s Medicare Cost Report (MCR). The FAQ has subsequently been terminated.

The requirement for a child site to first be included as a reimbursable cost center on a filed MCR and then registered in the Office of Pharmacy Affairs Information System (OPAIS) often delays a Covered Entity’s ability to dispense its 340B-discounted drugs at child sites. Covered Entities benefited from the COVID-19 waiver because it can take up to approximately two years to establish a new child site under the 340B Program as a result of limited registration windows for the OPAIS database plus variable MCR deadlines that are based on the end of a Covered Entity’s fiscal year.

On October 27, 2023, HRSA published a Notice⁴ to “inform and remind” Covered Entities that to be considered 340B Program eligible, child sites must be reimbursable on the Covered Entity’s most recently filed MCR and listed in the OPAIS as a child site of the Covered Entity.

HRSA’s Notice stated that recent 340B Program integrity reviews “demonstrated that the waiver has added risk and complexity to HRSA’s ability to effectively oversee ongoing compliance in the 340B Program.”⁵ Notably, the Notice also indicated that HRSA had compliance concerns with the COVID-19 waiver because HRSA could not verify whether “use of 340B drugs at those sites for patients is warranted, leading to possible diversion and duplicate discounts” — which, as noted above, are two key issues identified by drug manufacturers regarding 340B abuse.⁶ Under the Notice, HRSA gave hospitals 90 days (until January 25, 2024) to comply with the renewed requirements in order to avoid audit and compliance actions.

On October 31, 2023, 44 health systems filed a complaint in the US District Court of the District of Columbia challenging HRSA’s Notice. Healthcare systems including Stanford Health Care, Mercy Health, and the Hospital of the University of Pennsylvania argued that HRSA’s action violated the Administrative Procedures Act’s notice-and-comment rulemaking requirement and that the Notice will force them to lose months of 340B discounted pricing, resulting in hundreds of millions of dollars in losses. The complaint also alleges that HRSA did not make it clear that eliminating the MCR requirement was a pandemic-specific policy and that the Notice exceeds HRSA’s authority, conflicts with the statutory language, and is arbitrary and capricious.

The outcome of this case and future challenges to HRSA’s Notice are not yet known; however, the case itself demonstrates both that the 340B Program continues to come under significant scrutiny from drug manufacturers and the public, and that much of the 340B Program’s policy continues to be subject to significant litigation and dispute. Industry stakeholders should carefully monitor the impact of this litigation on the scope of the 340B Program, including assessing whether participating in this litigation as amicus curiae or intervening in the case would be appropriate.

Genesis Healthcare Decision and Scope of the 340B Program Patient Definition

On November 3, 2023, the US District Court of South Carolina issued an opinion in Genesis Healthcare Inc. v. Becerra et al. that may have the result of expanding access to 340B Program discounts beyond Congress’s original intent for the 340B Program.

In Genesis, the parties were litigating whether HRSA’s proposed definition of a 340B-eligible patient includes only the drugs resulting from care provided by the Covered Entity. HRSA had audited Genesis Healthcare (a 340B Covered Entity) and terminated Genesis Healthcare from the 340B Program after finding that, among other things, Genesis Healthcare dispensed 340B drugs to individuals who did not qualify as “patients” under HRSA’s interpretation of the term. Genesis Healthcare argued that the discounts extend to the Covered Entity’s patients, even if the relevant prescription did not arise from care provided by the Covered Entity. Genesis alleged that HRSA’s definition of “patient” has “never been promulgated by regulation” and “contradicts the plain language of the statute” by “improperly focus[ing] on a patient’s prescription, and who wrote it, rather than the existence of a patient relationship with Genesis (or any other  Covered Entity).”⁷

The court sided with the plaintiffs and found that HRSA’s narrow definition was not grounded in statute or regulation. Specifically, the court held that the discount is available even if the Covered Entity is not responsible for originating the relevant prescription or providing any healthcare service related to that prescription.⁸ Notably, the district court’s ruling expressly stated that it does not bind HRSA generally or any parties other than those in the case. Put simply, the decision in this case applies only to Genesis Healthcare. HRSA is likely to appeal the decision.

Despite this opinion being issued by a lower federal court and despite the opinion being limited to Genesis Healthcare, its reasoning and weight could still be used to significantly expand who qualifies as a 340B-eligible patient and the scope of the 340B Program.

With this in mind, a few key takeaways for industry stakeholders to consider include:

• The Genesis Healthcare decision may limit HRSA’s ability to establish a narrower patient definition because HRSA cannot establish a patient definition that conflicts with the plain language of the statute, even via rulemaking.⁹ This approach favors Covered Entities, which prefer to maintain a broad definition of eligible patient.
• The Genesis Healthcare court questioned whether the statute authorizes HRSA to impose temporal requirements on how frequently an individual must have visited a Covered Entity to qualify as a patient. The court rejected arguments that a ruling in favor of Genesis Healthcare would allow Covered Entities to divert drugs to individuals who had not had a healthcare encounter with the Covered Entity for many years following their first interaction. Similar to a broad patient definition, this approach favors Covered Entities.
• The Genesis Healthcare court repeatedly suggested in its opinion that Congress intended for the 340B Program to make Covered Entities profitable. Notably, the court stated, “HRSA’s restrictive definition of the term ‘patient’ limits the scope of the 340B program, limits the profitability of ‘covered entities,’ and frustrates the goal of the 340B statute, which is to make ‘covered entities’ profitable in the face of the prescription drug price increases that followed the Medicaid Drug Rebate Program and that continue to this day.”¹⁰ Absent further Congressional action, stakeholders will continue to fight over these issues and conclusions.
• The Genesis Healthcare court did not address the argument that Genesis Healthcare’s preferred “patient” definition was so broad it would nullify the prohibition on drug diversion. If an individual were a patient of multiple Covered Entities, each could theoretically claim the 340B Program discount for the same drug dispensed to that patient. In light of this possibility, manufacturers will continue to closely monitor their 340B Program information to ensure that they are not providing discounts to multiple entities for the same prescription.
• As it relates to the Notice discussed in the first half of this insight, the Genesis Healthcare decision could prove helpful to litigants challenging whether HRSA has the authority to impose the child site registration requirements. The Notice arguably has the effect of restricting the population of Covered Entity “patients” eligible to receive 340B drugs, which would run contrary to the principles identified in the court’s opinion.

Goodwin attorneys will continue to monitor this litigation and other developments in the 340B Drug Pricing Program.

^[1] HRSA, 340B Drug Pricing Program (Dec. 30, 2022).
^[2] HRSA, 2021 340B Covered Entity Purchases (Dec. 30, 2022); see also Drug Channels, Reality Check: 340B is 4% (not 2%) of the U.S. Drug Market—And Growing Quickly (July 19, 2016).
^[3] Dave Muoio, Discounted drug purchases under 340B grew 22% to $54B across 2022, HRSA reports, Fierce Healthcare (Sept. 29, 2023, 6:15 PM). 
^[4] 88 Fed. Reg. 73,859 (Oct. 27, 2023).
^[5] Id. at 73,860.
^[6] Id. at 73,861.
^[7] See Genesis Healthcare, Inc. v. Becerra, 39 F. 4th 253, 258 (4th Cir. 2022).
^[8] Genesis Healthcare, Inc. v. Becerra, Civ. 4:19-cv-01531-RBH, slip op. at 21 (D.S.C. Nov. 3, 2023). 
^[9] The 340B Statute provides that “a covered entity shall not resell or otherwise transfer the [340B] drug to a person who is not a patient of the entity” but offers no definition of the word “patient.” In 1996 HRSA crafted its own definition of “patient,” but the definition is broad and often debated. HRSA’s definition of “patient,” as applied to disproportionate share hospitals, states an individual is a 340B-eligible “patient” if: (1) the Covered Entity has established a relationship with the individual, such that the Covered Entity maintains records of the individual’s healthcare; and (2) the individual receives healthcare services from a healthcare professional who is either employed by the Covered Entity or provides healthcare under contractual or other arrangements (e.g., referral for consultation) such that responsibility for the care provided remains with the Covered Entity. 61 Fed. Reg. 55,157 (Oct. 24, 1996).
^[10] Genesis, slip op. at 28.