Third Circuit Rules on Manufacturer Restrictions on Contract Pharmacies
The first of three pending appeals on whether a pharmaceutical manufacturer can limit distribution of covered 340B drugs to contract pharmacies resulted in a clear victory for pharmaceutical manufacturers. The Third Circuit resolved conflicting decisions among district courts within the Third Circuit by ruling that the 340B program did not require pharmaceutical manufacturers to distribute or deliver drugs purchased by 340B covered entities to all contract pharmacies that the entity had partnered with. Sanofi-Aventis U.S., LLC v. HHS, Case No. 21-3167 (1/30/2023). The court rejected the government’s contrary interpretation that would have required manufacturers to deliver drugs to any location designated by the covered entity.
Both cases were filed by manufacturers after the government sent letters stating that manufacturers had violated the 340B program by restricting the delivery of drugs to a covered entity’s contract pharmacies. The manufacturers prevailed in AstraZeneca Pharms. LP v. Becerra, 2022 WL 484587 (D. Del. Feb. 16, 2022), and the government prevailed in Sanofi-Aventis U.S., LLC v. HHS, 570 F. Supp. 3d 129 (D.N.J. 2021).
The Third Circuit decision focused on the statutory language requiring that manufacturers “shall offer” drugs that are available to anyone at any price to “covered entities” for “purchase” at a discount. 42 U.S.C. §256b(a)(1). The court observed that “nowhere” did Section 340B mention contract pharmacies, and further, that neither the word “offer” nor the word “purchase” implied any specific requirement for delivery or distribution. The court held that 340B “imposes a price term for drug sales to covered entities, leaving all other terms blank.” The court rejected the government’s interpretation that would have given covered entities discretion to fill in the blanks on delivery or distribution so long as they foot the bill. Said the court, “when Congress’s words run out, covered entities may not pick up the pen.”
Not All Statutory Interpretation Issues Were Resolved
The Third Circuit noted that its decision did not necessarily give manufacturers the right to impose any and all conditions on the use of contract pharmacies. The court noted that it might come to a different result if a drug maker barred all use of contract pharmacies, where a covered entity that lacks an in-house pharmacy would have no way to dispense the drugs and so could not in practice “accept” them. But it refused to speculate on a situation that had not been presented.
Pending Appeals Could Create Circuit Conflicts
Two other circuits are considering the same issue on appeal. The government has appealed from a decision in the District of Columbia that two manufactures’ policies of restricting the use of contract pharmacies did not violate the 340B statute. Novartis Pharmaceuticals Corp. v. Espinosa, Nos. 21-cv-1479 (DLF), 21-cv-1686 (DLF) (D.D.C. Nov. 5, 2021) (appeal pending).
The Seventh Circuit also heard argument in October of 2022 in a manufacturer’s appeal from an Indiana decision that upheld the government’s interpretation, but no opinion has been issued. Eli Lilly and Company v. Becerra, Case No. 21-3128 (7th Cir.).
States Weigh In
States have also recently weighed in on the treatment and availability of 340B covered drugs dispensed by contract pharmacies.
In December of 2022, a court upheld 38 Ark. Code Ann. § 23-92-604(c) from a challenge by the Pharmaceutical Manufacturers Association that the law was preempted by the Federal 340B statute. Pharma v. McClain, Case No. 4:21-CV-864-BRW (E.D. Ark. 12/12/22). The law prohibits pharmaceutical manufacturers from denying or prohibiting “340B drug pricing for an Arkansas-based community pharmacy that receives drugs purchased under a 340B drug pricing contract pharmacy arrangement with an entity authorized to participate in 340B drug pricing.” The court held that the 340B program did not preclude states from protecting state interest related to the distribution of pharmaceuticals within the state. The case is on appeal to the Eighth Circuit.
Finally, in a policy that became effective on January 1, 2023, Pennsylvania issued guidance that appears to eliminate Medicaid reimbursement for 340B covered drugs dispensed by contract pharmacies. That guidance can be found here: MAB2022122201.pdf (pa.gov). The policy arises out of ongoing tension between the Medicaid rebate program and 340B discounted pricing, because a manufacturer is obligated to offer rebates or discounts under only one of these programs on drug purchases. Failure of state Medicaid programs to earn rebates for drugs that are purchased under the 340B program but reimbursed under the Medicaid program has led to conflicts over, essentially, whether 340B covered entities or state Medicaid programs should receive the financial benefit of Federal drug discounting programs. In addition, both states and manufacturers have alleged significant documentation errors by covered entities and their contract pharmacies in identifying 340B covered drugs that are dispensed to Medicaid beneficiaries, leading to protracted disputes and requests for recoupment by manufacturers.