The United States Court of Appeals for the Third Circuit ruled on Monday in favor of drug manufacturers AstraZeneca, Sanofi and Novo Nordisk in their challenge against attempts by the Health Resources and Services Administration (HRSA) to require them to ship drugs purchased through the federal 340B drug discount program to contract pharmacies (“Ruling”).1 The Ruling held that drug manufacturers may impose restrictions on the shipment of 340B drugs to contracted pharmacies, including refusing to ship drugs to any contract pharmacies if the covered entity owns a pharmacy. The court did not decide whether manufacturers could refuse to ship to any contract pharmacies (regardless of whether the covered entity owns a pharmacy) or if manufacturers could restrict the number of covered entity-owned sites that can purchase 340B drugs. The Third Circuit includes Pennsylvania, New Jersey, Delaware and the United States Virgin Islands.
The case came before the court following actions taken by the three manufacturers in 2020 to impose restrictions on the shipment of 340B drugs to contract pharmacies. AstraZeneca created a policy that took effect on October 1, 2020, that refused to honor 340B pricing at contract pharmacies, except that a covered entity that does not have an in-house pharmacy can identify a single contract pharmacy location to receive AstraZeneca’s drugs. Sanofi and Novo Nordisk followed with similar policies, except that they agreed to ship to an unlimited number of contract pharmacies if the covered entity agreed to share pharmacy claims data relating to the manufacturers’ drugs with a third-party vendor, Second Sight Solutions, using its 340B ESP tool. HRSA sent letters to all three manufacturers in May 2021 advising them that they must resume shipping to all contract pharmacies by June 1, 2021 or face potential fines for overcharging covered entities in violation of Section 340B(d)(1)(B)(vi) of the Public Health Service Act. The manufacturers instead filed suit.
The lower courts issued slightly different rulings, though they agreed that HRSA could not enforce its contract pharmacy policy. The federal district court in Delaware, hearing AstraZeneca’s complaint, ruled that HRSA could not enforce its contract pharmacy shipment requirements because its position had shifted multiple times, but it did not opine on whether HRSA’s position could be enforceable.2 The federal district court in New Jersey, hearing both Sanofi and Novo Nordisk’s complaints, agreed that HRSA could not enforce its contract pharmacy policy but agreed with HRSA’s interpretation insofar that it “has the statutory authority to require manufacturers to ship 340B drugs to at least one contract pharmacy site each,” and that the government’s interpretation “squares better with Congressional intent than [the manufacturers’] position that Congress simply never intended to authorize such a dispensing mechanism.”3 Both decisions were appealed to the Third Circuit.
The manufacturers’ position is based on language in Section 340B(a)(1) of the Public Health Service Act, which states that manufacturers that have entered into a pharmaceutical pricing agreement with HHS (in order to have their drugs covered by Medicaid and Medicare) “shall…offer” covered outpatient drugs for purchase by 340B program “covered entities” at or below the calculated 340B ceiling price “if such drug is made available to any other purchaser at any price.” The manufacturers’ position is that the word “offer” implies that the drugs only must be made available for acceptance by a covered entity. The government contended that the “shall offer” language requires manufacturers to sell the drugs to any covered entity that wishes to purchase them, regardless of where the drugs will be shipped.
The Third Circuit accepted the manufacturers’ logic and rejected the notion that manufacturers must deliver 340B drugs wherever the purchaser wants them sent.4 The policies created by the manufacturer constituted a valid offer because the covered entities could accept the offer – either by shipping the drugs to in-house pharmacies or, if they do not have an in-house pharmacy, to at least one contract pharmacy.5 The court declined to say whether it would reach a different result if the manufacturer refused to ship to any contract pharmacies utilized by a covered entity that lacked any in-house dispensing capability – i.e., if the manufacturer made an offer that a covered entity had no way to accept.6
HHS may attempt to appeal the Ruling to the Supreme Court, though the Supreme Court might not choose to accept the case unless other courts reach conflicting decisions. That possibility is discussed below.
The Implications of the Ruling
The Ruling is binding in the states in the Third Circuit (PA, NJ, and DE) but it does not compel any action on the part of drug manufacturers or covered entities. It approves the policies implemented by AstraZeneca, Sanofi, and Novo Nordisk, but does not require manufacturers to stop shipping drugs to contract pharmacies or for covered entities to stop purchasing them. Currently, 21 manufacturers impose restrictions of some form on contract pharmacy shipments, including the three that were party to the Ruling. The coming months will reveal whether additional manufacturers will impose restrictions in light of the Ruling, and whether those restrictions will apply nationally or only in the Third Circuit. Some of the 21 manufacturers that have restrictions might also choose to tighten them (by expanding the types of covered entities to which the policies apply or eliminating the Second Sight Solutions data sharing workaround.)
If manufacturers choose to adopt the tightest restrictions endorsed by the Ruling (one contract pharmacy, and only if the covered entity lacks its own pharmacy, without any workaround,) covered entities may face a difficult decision between operating in-house pharmacies or closing them and choosing to use a single contract pharmacy. For some covered entities, a single mail order contract pharmacy might afford more patient access to 340B drugs than less capable safety-net provider-owned pharmacies.
Manufacturers might also choose to stand pat until other appeals (described below) have been decided. Some manufacturers might choose not to impose any restrictions or might impose more generous restrictions. The drug industry might fear the intervention of Congress if they squeeze covered entities too hard, though each manufacturer can decide for itself whether or not to impose restrictions.
Other Balls in the Air
Two other appellate courts have heard oral arguments on substantially the same issue, including the Seventh Circuit (IL, IN, and WI) and the District of Columbia Circuit. If they reach the same or a similar conclusion as that expressed in the Ruling, covered entities and manufacturers may have to contend with different interpretations of the same federal law in different parts of the country. Such “circuit splits” in interpretation are often more likely to be heard by the Supreme Court of the United States than cases involving laws that have been interpreted consistently by multiple appellate courts. If they issue opinions that are consistent with the Ruling, the view expressed in the Ruling might be the de facto law of the land until and unless a court rules to the contrary in the future.
Arkansas also has a state law that compels drug manufacturers to ship drugs to contract pharmacies if they ship any drugs into the state. That law survived a preemption challenge in federal court but is still facing a constitutional Commerce Clause challenge from manufacturers. It is unclear whether other states might pass similar laws, and whether those laws will survive constitutional scrutiny.
How Can Covered Entities Still Win?
Covered entities have two paths back to the contract pharmacy model they enjoyed between 2010 and 2020. First, one or both of the other appellate courts could rule in favor of HRSA, or the Supreme Court could take an appeal on one or more of the pro-manufacturer decisions and overrule them. Most court watchers seem to agree that the Supreme Court would be more likely to side with the manufacturers if it heard the case with its current composition. Second, Congress could choose to intervene and amend the 340B statute to remove ambiguity regarding contract pharmacies. Both drug manufacturers and some covered entity groups would like to see Congress intervene, though it is unclear whether the 340B program would be better or worse for covered entities following any such reform.
The 340B community can expect to see more impactful decisions and activity in 2023. The picture is clarifying as decisions are issued. If you have any questions regarding the Ruling or any other aspects of the 340B program, please contact Michael Glomb at firstname.lastname@example.org or 202.466.8960 or the FTLF attorney with whom you have a relationship.