In what is being touted as a significant win for pharmaceutical drug manufacturers, the DC Circuit affirmed on May 21, 2024 that Section 340B of the Public Health Service Act does not categorically prohibit manufacturers from imposing distribution restrictions on covered drugs to covered entities. By rejecting the US government’s position that the 340B Drug Pricing Program categorically prohibits manufacturers from imposing any contractual conditions on the distribution of covered outpatient drugs, the court opened the door for new contract relationships between program manufacturers and covered entities.

340B Program Overview

Under the 340B Drug Pricing Program, manufacturers participating in Medicaid agree to provide outpatient drugs at deeply discounted 340B ceiling prices to certain healthcare organizations providing care to vulnerable patient populations, including disproportionate share hospitals, freestanding cancer hospitals, federally qualified health centers, children’s and critical access hospitals, and specialized clinics.

According to the Health Resources and Services Administration (HRSA), the organization tasked with administering the 340B program, enrolled hospitals and other covered entities can achieve average savings of 25% to 50%.

To participate in the 340B program, eligible healthcare organizations—or “covered entities”—must enroll in and maintain compliance with certain program requirements:

• Maintain accurate and up-to-date 340B Office of Pharmacy Affairs Information System (OPAIS) information;
• Establish a mechanism to ensure Medicaid drug rebates are not requested for the same drugs for which a 340B discount is already provided;
• Agree not to resell covered outpatient drugs to anyone that is not a patient of the covered entity (known as diversion); and
• Permit the Department of Health and Human Services or participating manufacturers to audit the covered entity to ensure compliance with program requirements.

To facilitate distribution of eligible outpatient drugs under the program, covered entities often contract with outside pharmacies, or contract pharmacies (CPs). However, these relationships have drawn scrutiny from participating manufacturers who claim that the rapid growth of CP distribution channels has led to patient safety concerns, increased diversion, and decreased compliance with program requirements.

Statistics show that CPs have expanded from fewer than 1,300 in 2010 to more than 33,000 in 2023. In response, participating manufacturers have begun imposing their own contractual terms on covered entities, including limitations on the number and types of pharmacies to which the manufacturer will ship 340B drugs. These opposing positions have caused a series of legal challenges between manufacturers and providers. 

The Case Before the DC Circuit

Following the imposition by manufacturers of these contractual conditions, HRSA issued enforcement letters to a number of participating manufacturers, including the appellees in this case. HRSA asserted in its letters that program manufacturers have a statutory duty to offer drugs to covered entities that cannot be qualified, restricted, or dependent on how the covered entity chooses to distribute the drugs.

On a challenge from the recipient manufacturers to vacate the enforcement letters and issue a declaratory judgment that the disputed conditions are lawful, the DC Circuit upheld the district court’s findings that Section 340B does not categorically prohibit manufacturers from limiting the distribution of discounted drugs by contract.

In doing so, the court analyzed the conditions imposed by the appellee manufacturers through the lens of three historical guidance documents issued by HRSA:

• 1994 Guidance: HRSA’s initial guidance on the 340B program stated that a covered entity may use a “purchasing agent” to receive the covered drugs from manufacturers for distribution to the covered entity. HRSA also clarified in this guidance that manufacturers may include provisions in their contracts with covered entities that address customary business practices, request standard information, or include other appropriate contract provisions.
• 1996 Guidance: Shortly thereafter, HRSA issued additional guidance that permitted covered entities without an in-house pharmacy to contract with one (and only one) outside pharmacy for the distribution of covered drugs to its patients.
• 2010 Guidance: Years later, HRSA overhauled its previous guidance to permit covered entities, including those with in-house pharmacies, to contract with an unlimited number of outside pharmacies.

Taken as a whole, the court construed HRSA’s guidance to permit manufacturers to insist on at least some reasonable conditions, finding that (1) the 1994 guidance permitted manufacturers to include provisions on customary business practices, requests for standard information, or inclusion of other contract provisions as appropriate; (2) the 1996 guidance permitted manufacturers to limit distribution to just one contract pharmacy; and (3) the 2010 guidance did not foreclose the possibility of other commercially reasonable distribution conditions.

It appears that one of the driving factors in the decision was the issue of patient safety. The court noted that the manufacturer’s specialty drugs require an “unusual degree of instruction and support.” To ensure patient safety, the manufacturer makes drugs available only through specialized pharmacies or healthcare providers that can otherwise provide the required instruction and support.

According to the court, adopting HRSA’s position requiring unrestricted distribution to any pharmacy or healthcare provider would produce “absurd consequences” as it would force the manufacturer to distribute its specialty drugs in a potentially dangerous manner if that type of restriction violated Section 340B.

Ultimately, the court reasoned that Section 340B’s silence on delivery conditions preserves, rather than abrogates, the ability of manufacturers to impose at least some level of commercial distribution restrictions. The court tempered its decision by limiting its ruling to the specific restrictions at issue and acknowledging that there could be other, more onerous restrictions that would in fact violate the law.

Key Takeaways

The court’s holding that Section 340B does not categorically prohibit manufacturers from imposing conditions on distribution of covered drugs is the first of its kind. However, both the courts and the legislature have yet to define the true contours of the types of distribution conditions that manufacturers may impose under the 340B Program. And, given varying court interpretations of HRSA’s prior guidance and enforcement letters, it is unknown whether HRSA will take steps to help shape the contours of permissible manufacturer distribution restrictions going forward.

For now, the order of the day is to proceed with caution. As the DC Circuit recognizes in closing, its decision does not foreclose the possibility that certain conditions may be violative of Section 340B under some circumstances or that more onerous conditions may be reasonably applied in others.

While it is too early to know for certain, this decision may result in an increased number of manufacturers placing distribution restrictions on covered drugs to covered entities. In turn, if implemented, covered entities could potentially experience supply chain disruptions during the implementation process of any such restrictions. Accordingly, manufacturers and covered entities would be well advised to closely assess their 340B programs to ensure compliance with the current 340B legal landscape and best prepare for efficient implementation of any imposed distribution restrictions.