Circuit Courts, State Laws to Test Drug Discount Program in 2024

A federal program created more than 30 years ago to provide discounted drugs to low-income and uninsured patients is set for a handful of circuit court decisions in 2024 that could alter its landscape.

Congress created the 340B Drug Pricing Program in 1992 to allow covered entities such as qualifying safety-net hospitals, clinics, and other providers to buy outpatient drugs at discounted prices from manufacturers participating in Medicaid to offset rising drug prices. The program is named for Section 340B of the Public Health Service Act. The discounts, which average 25% to 50%, allow providers to offer uninsured and underinsured patients free or low-cost drugs. The savings also allow providers to reach more people with more comprehensive services.

But a rift is growing between drugmakers and health-care systems over the program’s integrity, how discounts are used, or where they’re provided. Drugmakers in recent years have limited dispensing discounted drugs to hospitals and certain pharmacies alleging practices that don’t benefit patients, but covered entities argue the opposite and say the savings are used for extended care. The differences have spurred lawsuits that will continue in the new year.

The 340B program sits in a vulnerable place as pending court cases and administrative rules in 2024 could critically change the program’s operations and who benefits from it. More than 2,600 US hospitals—over a third of them—participate in the 340B program, according to a report from the US Government Accountability Office.

“There remains a really open, very live, vigorous debate on what is the purpose of these 340B savings and how hospitals deploy their resources when they save money via 340B purchases,” said Susan Banks, a health-care attorney for Holland & Knight’s Denver office.

“Those issues are still very live, and I would expect to see all debated in the coming year,” Banks said.

From the Courts

Manufacturer restrictions on distributing discounted drugs to multiple and unlimited contract pharmacies have been a subject of debate for years. Some manufacturers in 2020 started to limit or restrict shipments to pharmacies in contracts with covered entities that distribute drugs, allegedly for unlawful practices such as duplicating discounts.

Drugmakers like Eli Lilly & Co., AstraZeneca PLC, and Novartis AG disagreed with the Health Resources and Services Administration’s position that manufacturers are obligated to deliver drugs to contract pharmacies because they are “agents of a covered entity.”

Various lawsuits were filed against HRSA, where cases ended up in different circuit courts.

The first appellate decision on this issue came from the Third Circuit in January 2023, where the court ruled that the drugmakers’ refusal to deliver drugs “to an unlimited number of contract pharmacies” didn’t violate the 340B statute.

Two cases related to the same issue are pending in the Seventh and D.C. circuit courts.

“We’re looking into 2024 expecting to see these two remaining circuit court decisions,” said Jeff Davis, a health-care attorney at Bass, Berry, & Sims PLC.

“Certainly from a covered entity perspective, hoping to see a decision different than the Third Circuit that recognizes HRSA’s ability to take enforcement action against those manufacturers that are restricting access,” Davis said.

State Laws

State laws regarding drug distribution in the program are also being litigated. One case between the leading drugmaker industry group, the Pharmaceutical Research and Manufacturers of America, or PhRMA, and the Arkansas Insurance Department awaits an Eighth Circuit decision. A similar case is pending in the US District Court for the Western District of Louisiana.

Louisiana and Arkansas’s laws seek to prohibit drugmakers from cutting off contract pharmacies, and it’s likely more states could follow suit in 2024 with introducing or moving 340B antidiscrimination laws, said Chad Golder, general counsel and secretary for the American Hospital Association.

“When certain courts started disagreeing with that position, a number of states stepped in to fill the void and that’s why we’re getting some of this state-level legislation,” Golder said.

“This is a perfect example of our federal system where both the state and the federal government can act here to protect patients and communities from these drug companies that are really just seeking to boost their enormous profits on the backs of ordinary people and 340B hospitals that serve them,” he said.

The AHA represents close to 5,000 hospitals and health-care systems, and nearly 2,000 of them participate in the 340B program.

Sixteen states in 2023 considered 340B legislation and eight of those enacted laws, according to an Avalere Health analysis.

Who’s Eligible?

The new year could see the impacts from the recent decision from the US District Court for the District of South Carolina regarding who’s a 340B-eligible patient.

The court in Genesis HealthCare, Inc. v. Becerra overturned part of the government’s meaning of a 340B-eligible patient and endorsed a broader definition of a patient eligible for discounted drugs.

Though the ruling only applies to Genesis, it could upend the program’s operations and provide a legal footing for future challenges against HRSA’s patient standards.

HRSA also reminded hospitals in the program that they must register their off-site, outpatient locations with the 340B Office of Pharmacy Affairs to qualify for discounted drugs—a requirement that had been waived during the Covid-19 public health emergency.

According to HRSA, program integrity efforts demonstrated that the pandemic-era waiver added “risk and complexity” to the agency’s ability to oversee compliance in the program.

Immediately after the agency’s notice, a group of hospitals across the US filed a lawsuit in the US District Court for the District of Columbia against HRSA.

The Department of Health and Human Services is also expected to see a final rule on the 340B administrative dispute resolution process.

Eyes From Congress

Lawmakers have also eyed the 340B program for changes and updates.

The PROTECT 340B Act (H.R. 2534), a bill that would prohibit pharmacy benefit managers and health insurers from discriminating against health providers in the 340B program, was introduced in April 2023, but hasn’t seen any movement.

Sen. Bill Cassidy (R-La.), ranking member of the Senate Health, Education, Labor, and Pensions Committee, in September independently opened an investigation into how certain hospital systems spend revenue generated from the program.

Lawmakers also requested information that would help strengthen the program’s operations, savings, and spending. Among the comments received, various health-care providers and industry groups asked for stricter guidelines on who can qualify as a 340B covered entity and recommended other transparency policies.

PhRMA has been working closely with Congress to request more guardrails in the program. The group in the past has called out 340B hospitals, comparing them to pharmacy benefit managers and accusing them of taking advantage of the health-care system.

“We’re seeing more and more people ask questions, and raising concerns about whether the program is actually helping patients,” said Nicole Longo, a spokesperson for PhRMA.

“We don’t think you can make one or two tweaks around the edges. We truly think you need a comprehensive set of changes that work together to get this program back on track. Our hope is that members of Congress take that step,” Longo said.