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Drugmakers have to continue paying hospitals upfront discounts for drugs in the 340B program — at least in the near term — after a federal court ruled late last week against major manufacturers that wanted to issue rebates for 340B drugs instead.
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However, the D.C. district court didn’t entirely rule out drugmakers’ paying after-the-fact rebates in the future, instead determining that the companies would need to get prior approval from the Health Resources and Services Administration, the HHS subagency that oversees 340B. It also directed HRSA to reconsider a rebate plan from Sanofi that regulators had denied.
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As such, the decision is a mixed bag for hospital and pharmaceutical companies, which are frequently at odds over 340B. Still, hospital groups cheered the ruling for preventing rebate plans for now.
Drugmakers Eli Lilly, Bristol Myers Squibb, Sanofi and Novartis all sued the government after HRSA blocked their plans to pay hospitals rebates to defray the full cost of 340B medications after the drugs have already been acquired.
Currently, regulators’ interpretation of 340B statute requires drugmakers to give discounts at the point of sale.
Manufacturers argued that allowing them to transition to a rebate model would give them a chance to make sure that the hospitals prescribing the drugs and the patients they’re going to are actually eligible for 340B, curbing fraud, waste and abuse in the drug discount program.
Drugmakers have grown increasingly concerned about improper discounts as 340B grows, both in how many providers are eligible to participate and in the volume of purchased drugs. The program, which was founded three decades ago to lower drug prices for safety-net providers, can result in discounts of 20% to 50% off list prices, cutting significantly into manufacturers’ profits.
Lilly, Bristol Myers, Sanofi and Novartis were joined in their lawsuits by technology company Kalderos, which offers software to implement the rebates. The litigation sought the courts’ blessing for the rebate plans.
Under proposed cash rebate models from Lilly, Bristol Myers and Novartis, covered providers would purchase drugs at commercial prices and submit claims through a third-party platform for cash rebates for the difference between the 340B and the commercial price. The providers would have to share data about the quantity of covered drugs and how they were dispensed before manufacturers would approve their claim and pay out rebates in about a week.
Sanofi’s model is slightly different. The drugmaker would offer rebates in the form of credit that would become effective before a provider’s bill comes due, meaning the provider would only have to pay out the 340B price for an eligible drug.
HRSA flat-out denied Sanofi’s proposal and has yet to issue an official determination on those from Lilly, Bristol Myers and Novartis, besides warning them that they needed HHS approval to go ahead with the plans.
In Sanofi’s case, HRSA said the credit proposal would violate 340B law by inflating providers’ purchase price for select drugs.
Now, the D.C. district court is backing up HRSA’s power to preapprove or deny how changes to 340B pricing are implemented.
“The Court finds that HRSA did not act contrary to law by requiring the plaintiffs to obtain approval before implementing their proposed rebate models,” Judge Dabney Friedrich, a Trump appointee, wrote in her decision Thursday.
Since HRSA is still considering rebate models from Novartis, Lilly and Bristol Myers and hasn’t formally rejected them, the court can’t find that regulators acted arbitrarily or capriciously in reviewing the proposals, according to the order.
However, Friedrich declined to issue a declaration that rebate models are expressly prohibited under 340B law, in a partial win for drugmakers.
Sanofi came out even more ahead. HRSA threw out the company’s rebate proposal “without providing adequate justification for its decision,” including without addressing concerns about illegal duplications and diversions under current 340B payment arrangements, Friedrich determined. The judge directed HRSA to reconsider Sanofi’s plan as a result.
But “to be clear, this decision does not vacate the agency’s preapproval requirement, and therefore Sanofi may not unilaterally implement its rebate proposal at this juncture,” Friedrich ruled.
Hospital groups applauded the court’s decision. Providers had argued that allowing the rebate proposals to move forward would place cash-strapped safety-net hospitals, many of which operate on thin margins, on the hook for substantial upfront payments.
“We are pleased this opinion recognizes the immense harm unilateral drugmaker rebate schemes would cause safety-net hospitals and the patients in need whom they serve,” Maureen Testoni, the president and CEO of hospital lobby 340B Health, in a statement Friday. Testoni added that rebates would “force hospitals to spend hundreds of millions of dollars on drug carrying costs, additional staff resources, and other expenses for complying.”
340B Health and two safety-net hospitals, UMass Memorial Medical Center and Genesis Health System, had joined the HHS as codefendents in the suit.
America’s Essential Hospitals, an association representing safety-net facilities, also thanked the D.C. district court for its decision.
“There is certainly adequate justification for rejecting these proposals, and we are confident HRSA’s final decisions for four manufacturers and reconsideration of Sanofi will demonstrate that,” Bruce Siegel, AEH’s president and CEO, said in a statement.
Drugmakers’ view that 340B has grown beyond its intended scope is shared by some lawmakers, including Sen. Bill Cassidy, R-La.
Cassidy, the chair of the Senate Health, Education, Labor and Pensions Committee, released the results of an investigation last month finding rampant growth in 340B, and that the discounts don’t always translate to lower costs or improved access for patients.
In statements, Sanofi, Lilly and Bristol Myers said they were disappointed with the court’s decision, but pleased that it left door open to enacting rebate models in the future.
“Lilly is pleased that the court found that the 340B statute ‘explicitly contemplates’ rebate models and that HRSA must evaluate manufacturers’ models and address their ‘valid concerns’ about widespread program abuses,” a spokesperson for the company said.
“We appreciate that the opinion recognized that the 340B program is rife with abuse,” a spokesperson for Sanofi said.
“We also applaud the court for ordering that HRSA address some of these flaws raised by Sanofi when reconsidering our 340B Credit Model” and “are assessing next steps,” they added.
“Bristol Myers Squibb is disappointed in the U.S. District Court’s decision and plans to appeal,” a spokesperson for the drugmaker said, though “we are pleased that the Court asked HRSA to continue its review and consider the costs of duplication and diversion to the industry.”
Novartis did not respond to a request for comment.
A separate lawsuit filed by Johnson and Johnson — the first drugmaker to propose a 340B rebate plan in the summer of 2024 — is ongoing.
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