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HHS Power Over Drug Discounts Put to Test in Looming Legal Fight

Sept. 23, 2020, 5:36 PM

A brewing legal fight over drugmakers’ efforts to rein in a federal drug discount program offers the courts a chance to clarify the reach of that program and the government’s power to enforce it.

The National Association of Community Health Centers says it will sue the HHS if it doesn’t penalize Eli Lilly & Co. and other companies by Oct. 1 for cutting certain pharmacies off from marked down products.

The threat of a lawsuit kickstarted a debate over the legal gray areas of the program known as 340B, which requires drug companies to offer steep discounts to hospitals with primarily low-income patients and their associated pharmacies. Many provisions regulating the program, like who gets access to discounts, was set up through guidance and not written into statute.

“The giant program it’s become was created by guidance, and guidance doesn’t have the same legal strength as a regulation or the statute,” said Karyn Schwartz, a senior fellow at the Kaiser Family Foundation and a former vice president of the Pharmaceutical Research and Manufacturers of America.

“There’s a question of whether companies really have to follow it and what would happen if they didn’t,” she said. “People have been wondering that for a while, and I think pretty soon we’ll find out.”

Drug companies over the last several months have reduced the number of pharmacies that can access discounted drugs in an effort to narrow the scope of the program that they call opaque, overgrown, and fraught with abuse. AstraZeneca said it will offer discounts to only one pharmacy per 340B facility. Eli Lilly cut discounts to contract pharmacies altogether, and Novartis will offer discounts to multiple pharmacies only if they provide data about how they’re using the discounts.

The Department of Health and Human Services oversees the 340B program, but said it isn’t sure it has enough authority to curb the drugmakers’ actions.

HHS General Counsel Robert P. Charrow told Eli Lilly in a Sept. 21 letter that while the agency has concerns about the drugmaker’s new policy, it “has yet to make a final determination as to any potential action.”

The letter is “encouraging,” but “we’re not out of the woods yet,” Amy Simmons Farber, a spokeswoman for the National Association of Community Health Centers (NACHC), said. Both the NACHC and 340B Health, two groups representing facilities that get these drug discounts, are still considering legal action, their representatives said Wednesday.

Foundation of Guidance

Drugmakers say their actions are meant, in part, to cut back on paying a discount for the same drug twice. But health centers say that if drugmakers continue to cull pharmacies from their discount list, the financial loss will be disastrous to the facilities and patients that depend on them.

This is “perhaps one of the most serious threats to our uninsured and under insured patients we’ve ever seen,” Sue Veer, president and CEO of Carolina Health Centers in South Carolina, said.

Health facilities can’t sue drug companies directly over their actions to limit discounts under the program, according to Jason Reddish, a partner at Feldesman Tucker Leifer Fidell LLP who represents the NACHC. Absent federal action, the only option is to sue the government for failing to provide the centers with an avenue to fulfill their obligations to their patients, Reddish said.

Hospital centers say preserving off-site or “contract” pharmacies is a key part of ensuring drugs get to patients that need them, especially those that can’t travel to reach the main 340B facility.

Thanks to guidance implemented over the last decade, 340B facilities increased the number of pharmacies they partner with to dispense discounted drugs to their patients. Pharmacies not located on-site at hospitals or community health centers are referred to as contract pharmacies.

Congress created the program in 1992, without mention of contract pharmacies. But guidance by the HHS’ Health Resources and Services Administration in 1996 allowed facilities without an on-site pharmacy to have one contract pharmacy.

In 2010, the HRSA took away that limit. Meanwhile, more hospitals and sites became eligible for the 340B program following changes made in the Affordable Care Act. Participation skyrocketed as a result.

HHS Authority Questioned

The HRSA stated outright it doubted it had the power to stop drug companies from reining in that expansion. A 2014 federal district court ruling kept HRSA’s authority over the program relatively narrow.

The U.S. District Court for the District of Columbia shot down the HHS’ attempt to let 340B facilities buy expensive drugs for rare diseases using the discount in certain instances. The court ruled that the agency didn’t have the authority it needed to make such a change.

The HRSA can penalize drug companies for overcharging 340B facilities. However, it isn’t clear if it can penalize drug companies for altering contracts with pharmacies, since off-site pharmacies weren’t part of the original statute and their inclusion in the program is based on non-binding guidance.

“The 340B statute does not specify the mode by which 340B drugs may be dispensed,” an HHS spokesman said. “Without comprehensive regulatory authority, HRSA has only limited ability to issue enforceable regulations to ensure clarity in program requirements across all the interdependent aspects of the 340B Program.”

But health centers argue the agency’s inaction is costing them, and that the HRSA failed to create the pathway they need for 340B facilities to seek relief, Reddish said. His clients are writing letters to Congress, urging them to push HRSA to take action.

“This is not a drill,” Veer said. “The impact is already upon us.”

To contact the reporter on this story: Jacquie Lee in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Alexis Kramer at