Major 340B Drug Pricing Program Developments Implicate Program Scope

Last week, there were three major developments implicating the 340B Drug Pricing program: (1) a court decision addressing the 340B patient definition, (2) new litigation involving 340B “child” site eligibility, and (3) a final rule outlining a plan for the Centers for Medicare & Medicaid Services (CMS) to repay 340B covered entities for reimbursement reductions in prior years pursuant to a Supreme Court decision. We provide more details about these important developments below.

Genesis Decision

On November 3, 2023, the U.S. District Court of South Carolina issued its opinion in Genesis Health Care Inc v. Becerra et al, holding that the 340B statute does not require a covered entity claiming a 340B discount to have been responsible for originating the relevant prescription or providing any healthcare service related to that prescription. The court’s decision comes in a high-profile case involving the Health Resource and Service Administration (HRSA) audit of 340B covered entity Genesis Health Care (Genesis) and Genesis’s challenge to the “patient” definition that HRSA applied in that audit. The court’s decision seeks to interpret the 340B statute’s diversion prohibition, which states that “[w]ith respect to any covered outpatient drug … a covered entity shall not resell or otherwise transfer the drug to a person who is not a patient of the entity” (emphasis added).

The court granted partial summary judgment in favor of Genesis, including some of Genesis’s requests for declaratory judgment. It also entered an injunction that bars HRSA from “enforcing its March 20, 2019 interpretation of the term ‘patient’ against Plaintiff Genesis Health Care, Inc. until further Order of this Court.” In particular, the court rejected HRSA’s prescription origin requirement as articulated by HRSA in its 2019 corrective action plan/audit letter to Genesis. In that letter, HRSA discussed its view that if a covered entity claims a patient, the covered entity must initiate the healthcare service resulting in the relevant prescription. While the court concluded that “the statute does require an ongoing relationship between the individual and the ‘covered entity’ ” for the individual to be a patient, it disagreed that the prescription “must originate from the ongoing relationship” (emphasis added).

The court expresses a view that HRSA’s 1996 “patient” definition guidance reflects that the term “was intended to have a flexible application to accommodate the large number of covered entities and the wide diversity of eligible patients.” The court discusses and quotes extensively from the 1996 guidance and states that “[t]he 1996 guidance contains no such language specifically addressing whether a ‘covered entity’ can fill a ‘patient’s’ prescription when that prescription did not originate from an encounter with the ‘covered entity.’ ”

The court’s opinion also addresses the declarations requested by Genesis, granting two of the four:

1. Requested Declaration 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).
   • Ruling: Granted.
2. Requested Declaration 2: The plain wording of 42 U.S.C. § 256b(a)(5)(B) requires that any prescription from any source is available to a patient of a covered entity.
   • Ruling: The court concluded that this declaration was too broad, but it revised the requested declaration to provide “[a] more appropriate declaration more narrowly tailored to this action.” Specifically, according to the court “the plain wording of the 340B statute does not require the ‘covered entity’ to have initiated the healthcare service resulting in the prescription.” (emphasis added)
3. Requested Declaration 3: Any and all interpretations or guidance of HRSA in contradiction of the plain wording of 42 U.S.C. § 256b(a)(5)(B) are unlawful and unenforceable as a matter of law.
   • Ruling: The court appears not to have granted this request, at least as a technical matter, as the court states that the requested declaration “merely [was] a restatement of the law.”
4. Requested Declaration 4: HRSA does not have the broad rulemaking authority necessary to implement its interpretations and restrictions to the plain language of 42 U.S.C. § 256b(a)(5)(B).

• Ruling: The court declined to enter this declaration and instead concluded that HRSA does have authority “to implement its interpretations of” the term “patient” in the statute to the extent that those interpretations are consistent with the text of the statute and congressional intent.

Finally, although Genesis did not seek injunctive relief, the court states that “Defendants are, hereby, enjoined from enforcing its March 20, 2019 interpretation of the term ‘patient’ against Plaintiff Genesis Health Care” specifically. The court emphasizes in a footnote that this relief is “limited to Genesis” and does not extend to other entities. Importantly, the district court’s ruling, which is not binding on any other court, does not bind HRSA generally; it expressly grants relief solely to Genesis.

The government has 60 days in which to file an appeal in civil cases such as the Genesis case. The district court can extend that period if the government so requests, as the government sometimes does to allow time for the Solicitor General’s office to review appeal requests. The Solicitor General must ultimately approve any appeal taken by the United States. 

Key Takeaways

In its decision, the court cited both plain-language arguments and congressional intent as bases for its reasoning. The court, however, failed to address the fact that the statute, in specifically prohibiting diversion, directs that the determination as to whether a prohibited “transfer” has occurred to any person who is not a “patient” must be undertaken “with respect to any covered drug.” The court also failed to address the argument that Genesis’s preferred “definition” of “patient” was so broad that it would render the diversion prohibition a nullity and lead to the absurd result that multiple covered entities would be able to claim discounts for the same drug dispensed to the same patient. In citing certain aspects of the statute’s legislative history, the court failed to consider other portions, including parts stating that only covered entities providing “direct care” to patients were to receive the benefit of receiving discounts. The district court also failed to follow the Third Circuit Court’s admonition, which concluded in a 340B contract pharmacy case that certain unenacted bills considered by Congress before enacting the 340B statute were an unreliable source of legislative history.

Hospital Litigation Regarding Eligibility of Child Sites

On October 31, 2023, 44 hospitals filed a complaint in U.S. District Court of the District of Columbia challenging HRSA’s notice that “remind[ed]” covered entities of the ending of the waiver of certain registration and cost reporting requirements for offsite outpatient facilities following expiration of the Covid-19 public health emergency (PHE).

The notice, published October 27, 2023, addresses a FAQ that HRSA issued in June 2020 during the Covid-19 PHE that was terminated in a website update. That FAQ provided a waiver of typical 340B covered entity cost reporting requirements by allowing 340B entities to access 340B pricing at new offsite outpatient sites (i.e., child sites) before the sites were formally listed on the hospital’s Medicare cost report.

The notice states that “[v]arious HRSA program integrity efforts conducted since the start of the Covid-19 PHE have demonstrated that the waiver has added risk and complexity to HRSA’s ability to effectively oversee ongoing compliance in the 340B Program.” The notice also highlighted compliance concerns resulting from the waiver, stating that “HRSA cannot verify whether use of 340B drugs at those sites for patients is warranted, leading to possible diversion and duplicate discounts.”

The complaint alleges that HRSA violated the Administrative Procedure Act. Specifically, the complaint states that HRSA’s notice failed to comply with the requirement of notice-and-comment rulemaking, exceeds HRSA’s authority, conflicts with the statutory language, and is arbitrary and capricious. The complaint states that without the waiver, covered entities will be required to wait eight to 23 months before offsite outpatient facilities are eligible for discounts, “costing covered entities hundreds of millions of dollars.” The complaint argues that patients of an offsite facility, even if separately incorporated, are patients of the distinct covered entity.

The outcome of this litigation may further affect considerations related to the 340B “patient” definition and scope of the 340B program, the statutory prohibition on diversion, and stakeholder advocacy and litigation strategy. Manufacturers may wish to consider intervening in this case or participating as amicus curiae in the court’s consideration of the plaintiffs’ claims.

340B Repayment to Covered Entities Under Outpatient Prospective Payment System

On November 2, 2023, CMS released an advance copy of a final rule that provides 340B covered entities with $9 billion in repayment for the reimbursement cuts implemented from 2018 through 2021. Under the final rule, the payments will be given to nearly 1,700 340B covered entity hospitals.

The payments follow the 2022 Supreme Court decision in American Hospital Association v. Becerra, 142 S. Ct. 1896, which found that CMS’s reimbursement reduction from average sales price (ASP) plus 6% to ASP minus 22.5% for 340B covered entities under the Medicare Hospital Outpatient Prospective Payment System (HOPPS) was inappropriate because CMS did not conduct a survey of hospital acquisition costs before making the reimbursement reduction.

To offset the $9 billion lump sum payments, CMS will reduce future payments under the HOPPS for nondrug items and services for 16 years, starting in 2025, “to maintain budget neutrality or equitable payments when remedying this policy.” Covered entities have been sharply critical of the offset. Under the recently issued final rule, CMS will continue to reimburse 340B covered entities at the standard ASP plus 6% rate in 2024 (subject to sequestration), but it may conduct a survey of hospitals in the future.