J&J, Bristol Myers Turn to Drug Rebates in Fight Over Price Cuts

Major drugmakers are waging a new legal battle over how they discount drugs to certain health-care providers, as they search for new ways to operate under the nascent Medicare drug price negotiations.

Johnson & Johnson, Eli Lilly & Co., and Bristol Myers Squibb Co. are leading a new wave of lawsuits against the US Health Resources and Services Administration after the agency rejected their proposed plans to discount drugs via rebate rather than up-front to health providers under the federal 340B Drug Pricing Program.

The manufacturers in separate lawsuits argue that implementing a rebate would address long-held concerns about the 340B program’s integrity, how discounts are used, or where they’re provided. But they also notably claim it would prevent issues that may arise in the Biden administration’s signature Medicare Drug Price Negotiation Program.

The negotiation plan, created under the Inflation Reduction Act, gives Medicare powerful authority to negotiate drug costs for some of the most widely used and expensive medicines it covers.

The negotiations have met opposition from the industry as manufacturers raised concerns over its implementation, including drugmakers’ responsibility to deduplicate discounts that may occur between negotiated prices and 340B prices. The rejected 340B rebate system is one solution the manufacturers proposed to tackle these concerns.

“It’s going to be something to watch to see whether courts decide that these IRA arguments impact their analysis of the 340B statute,” said Amanda Smith, counsel in the health-care and FDA practice at K&L Gates LLP.

“Only a small number of drugs are impacted, but those affected manufacturers will need a mechanism to make sure that they’re fulfilling their statutory obligation to offer the lower of the two prices.”

Drugmakers under the 340B program are required to discount outpatient drugs for covered entities, which are qualifying hospitals, clinics, and providers that treat a disproportionate number of low-income and uninsured patients. Covered entities currently purchase drugs at a steep discount, but under a rebate model, they would buy drugs at commercial price and then submit data to receive a rebate for the discounted price.

Sanofi SA is the latest manufacturer to publicly share that it will implement a 340B rebate plan, which it labels as a “340B Credit Model,” according to a company letter sent to HRSA on Nov. 22. A spokesperson for Sanofi said the company is “prepared to defend the legality of the 340B Credit Model.”

Duplicate Discounts

The 340B program has grown substantially since the passage of the Affordable Care Act in 2010, which expanded 340B to additional covered entities. The number of covered entities from 2012 to 2022 grew from 17,491 to 57,372, according to an analysis by Avalere Health.

HRSA, which administers the program under the US Department of Health and Human Services, reported in October that prescription drugs purchased under the program amounted to $66.3 billion in 2023, a 23.4% increase from the previous year.

But drugmakers claim the rise in covered entities and program purchases is driving prohibited duplicate discounts.

“And the problem is only going to get worse,” Lilly wrote in its complaint, pointing to the Inflation Reduction Act’s price negotiations.

Manufacturers with drugs selected under the negotiation program must offer the lower of the negotiated price and the 340B price, but the Centers for Medicare & Medicaid Services made clear in a final guidance that the agency won’t assume responsibility for deduplicating discounts when drug prices roll out in 2026.

Taking on that task, drugmakers argue a rebate model would provide timely information about how 340B drugs are distributed, dispensed, and billed, especially at the interplay of the Inflation Reduction Act, Medicare Part B and Part D.

“A lot of this rationale from pharma is the need for greater transparency,” said Stephen Callahan, senior director of advisory and insights at Managed Markets Insight & Technology (MMIT). “This plan would bring that because they would be able to verify that there were no duplications.”

Rebate Opposition

However, agency and covered entity pushback argues the plan violates the 340B statute because the model hasn’t been approved by the HHS secretary, and manufacturers are prohibited from overcharging covered entities knowingly and intentionally.

According to lawsuits from J&J, Lilly, and Bristol Myers, HRSA declined to approve their rebate model because it would be inconsistent with the 340B statute. For J&J specifically, HRSA warned that if the drugmaker didn’t cease implementation of its model, the agency would begin the process for terminating their pharmaceutical pricing agreement that allows the manufacturer to have its drugs covered by Medicaid and Medicare Part B.

“It is really a way for them to enforce implementation of their unilateral policies that the agency still has not agreed are legal in the first place,” Todd Nova, a partner at Hall, Render, Killian, Heath & Lyman P.C., said about the lawsuits from the manufacturers.

“They would be solely in the position of determining whether or not, in their view, a 340B drug is eligible to be sold at 340B pricing,” Nova said.

The plan would also allow manufacturers to “immediately audit any 340B transaction,” said Randall Nice, an attorney at Boesen & Snow LLC.

“Traditionally, what happens under the current model is they have to get permission from HRSA, but then they hire a third party to come in and audit the 340B transactions, looking for duplicate accounts or diversion to non-patients,” Nice said. “It makes it more difficult for covered entities to get their reimbursement because they have to jump through hoops and submit all of their information on time.”

“What we’re seeing here is the result of the manufacturers trying to change or reform 340B,” Nice added. “If it were to be successful, I think we’d see a pile on by all the other manufacturers who prefer this model.”