Over the last several years, the Public Health Service (PHS) section 340B drug discount program1 has spawned a host of litigation, ranging from challenges to Medicare outpatient hospital payment cuts for 340B discounted drugs2 to requests for declaratory judgments concerning the permissibility of manufacturers’ policies limiting distribution of 340B-discounted drugs to covered entities’ contract pharmacies.3 On November 3, 2023 a federal district court added a new theme to the list in Genesis Health Care, Inc. v. Becerra,4 ruling that the Health Resources and Services Administration’s (HRSA’s) interpretative guidance concerning the term “patient” was unduly narrow. Specifically, the district court ruled that it was not necessary for a 340B prescription to arise out of a specific health care service furnished by the covered entity. Rather, it was only necessary that the individual receiving the prescription be or have been a patient of the covered entity at some (specified) point in time.
Background
Congress enacted the section 340B drug discount program in 1992 as a response to unintended consequences of the Medicaid rebate program – i.e., the rebate program’s “best price” rebate provision had led some manufacturers to mitigate their rebate liability by eliminating discounts that they had previously offered to many “safety net” providers. Under section 340B, a manufacturer must offer a discounted price – generally at least 23.1 percent off of the average manufacturer price for brand drugs but potentially as deep as a penny per unit – to specified classes of “covered entity” safety net providers. At the same time, however, the statute prohibits covered entities from diverting 340B-discounted drugs in that they may “not resell or otherwise transfer the drug to a person who is not a patient of the entity.”5
In 1996, HRSA issued interpretive guidance to the effect that an individual is a “patient” of a covered entity if (i) the entity has established a treatment relationship with the individual and maintains records of the individual’s health care; (ii) services are received from a health care professional who is employed by or under contract with the entity; and (iii) except for hospital covered entities, the services are consistent with the range of services for which PHS grant funding has been provided.6 In 2015, HRSA proposed to narrow this definition to require that the specific prescription for the product must result from an underlying covered entity medical service, but this proposed clarification was never finalized.7
Genesis Health Care arose out of a 2017 HRSA audit of a covered entity in which HRSA found that Genesis (a federally qualified health center) had failed to maintain auditable program records, and further, that HRSA had been unable to determine whether Genesis’ 340B prescriptions arose out of covered entity services. Following the audit, HRSA terminated Genesis from the program, and Genesis immediately filed a lawsuit in federal court. In 2018, HRSA reinstated Genesis’ participation in the program, and the district court dismissed Genesis’ lawsuit as moot.8 Genesis appealed to the Fourth Circuit, however, which ruled that the case was not moot because there was ongoing disagreement among the parties regarding the meaning of the term “patient” and whether HRSA’s interpretation was inconsistent with the statute.9 Specifically, HRSA’s position – expressed to Genesis as part of its reinstatement – was that the covered entity must have initiated the health care service resulting in the prescription.
The district court’s decision
The district court framed the issue as whether HRSA’s interpretation of the term “patient” was consistent with the language of the statute, noting that the applicable administrative deference standard was that specified in Skidmore v. Swift & Co.10 Under Skidmore, agency subregulatory interpretations are entitled to deference to the extent that they have the power to persuade, taking into account the agency’s historical positions and analysis.
Under that standard, the court found HRSA’s interpretation to be contrary to the statute. First, from a textual perspective, the court noted that the statute was silent with respect to the meaning of the term “patient,” but viewed the omission of any reference to a relationship between the underlying service and the prescription to be controlling. Second, the court stated that the 340B program was designed to “make covered entities profitable so that they could stretch scarce Federal resources,” and thus, a more permissive definition of “patient”11 was consistent with this purpose. Third, the court noted that the agency’s position that the prescription must relate to a recent covered entity service was inconsistent with its historical regulatory practice, inasmuch as the 1996 guidance did not adopt such a requirement and the 2015 proposed guidance, which contained such a requirement, was never finalized.
On the other hand, the district court’s declaratory judgment did not extend as far as Genesis requested. Although the court ruled that the statute only required that a person be a patient of a covered entity (without any time specification or relationship between the prescription and a covered entity service), the court declined to rule that “any prescription from any source” can be filled under section 340B. Further, Genesis requested that the court rule that HRSA lacked rulemaking authority to implement its interpretation, but the court ruled that the agency’s authority to promulgate administrative dispute resolution regulations under 42 U.S.C. § 256b(d)(3)(A) included rulemaking authority to define the term “patient,” since the term would be substantively relevant to disputes. Finally, the court specifically limited its injunction against HRSA’s application of the narrow “patient” definition to Genesis.
Commentary
- Implications for covered entity 340B programs. At first glance, the decision in Genesis Health Care could cause covered entities to attempt to expand 340B purchasing and dispensing. For example, both covered entities with in-house pharmacies and those using contract pharmacies might “solicit” former patients for prescription fulfillment business, and both could liberalize the “patient” criteria used to identify 340B eligible prescriptions for replenishment. Notably in this vein, the district court’s decision does not specify any durational limits with respect to “patient” status.12 Covered entities should nevertheless exercise caution in this regard, particularly given that the court’s injunction was limited solely to the application of the HRSA policy to Genesis. First, covered entities considering more liberal criteria should assess potential 340B program compliance and audit risks. Aside from potential “overaggressiveness” with respect to the duration of patient relationships, it bears emphasis that Genesis Health Care does not address other potential limits in the 1996 “patient” definition, such as the requirement for services from a prescriber employed by or under contract with the covered entity. Moreover, given that a contract pharmacy may work with multiple covered entities, the potential for multiple covered entities to “claim” the revenue associated with dispensing, or the ability to replenish, a single prescription needs to be considered both as an audit risk and a potential source of contractual disputes. Second, entities should consider other factors, such as potential patient privacy considerations and whether the assertion of enduring “patient” status could affect overall patient care responsibilities or liabilities.
- Interaction with manufacturer contract pharmacy restrictions. At the same time, the magnitude of any potential program expansion is unclear and, it may be tempered by some manufacturers’ policies restricting distribution of 340B drugs through contract pharmacies. As a practical matter, where covered entities operate their own in-house pharmacies, much of their dispensing will likely continue to arise from related health care visits. By contrast, the contract pharmacy replenishment model presents the easiest opportunities for expansion (i.e., by redefining 340B replenishment-eligible prescriptions more broadly), but if a manufacturer is otherwise restricting contract pharmacy distribution, such redefinition may not produce much impact. Indeed, if broader “patient” definitions are applied following Genesis Health Care that increase manufacturer 340B liabilities, it could even lead additional manufacturers to impose restrictive contract pharmacy policies.
- Agency authority. The decision in Genesis Health Care raises several questions relating to HRSA’s ongoing administration of the 340B program. First, although the decision is limited by its terms to Genesis, it may call into question the “patient” definition and standards used by HRSA in ongoing agency 340B audits of covered entities and could lead other covered entities to file similar lawsuits. Second, the district court suggested a relatively broad view of the agency’s authority to promulgate rules to implement the 340B program, on the theory that its authority to make rules relating to dispute resolution processes by implication gave it the authority to promulgate substantive rules. This construction is in tension with that of Pharmaceutical Research and Manufacturers of America v. Department of Health and Human Services,13 which held that HRSA’s 340B rulemaking authority was narrowly limited to dispute resolution procedures. In theory, it could provide “cover” for the agency to try to address ongoing 340B program policy and reform issues through rulemaking, although such an approach would likely be at odds with the agency’s positions in contract pharmacy litigation.
- Ongoing 340B program reform debate. Over the past decade, manufacturers and covered entities have been at loggerheads regarding the appropriate scope of the 340B program, while HRSA has been somewhat hamstrung by its limited regulatory authority. On balance, Genesis Health Care represents a victory for covered entities following a recent series of manufacturer victories in cases involving contract pharmacy limitations. Although its impact on the broader debate is ultimately unpredictable, it could conceivably serve as a positive catalyst (i.e., through leverage) or negative catalyst (e.g., through overreach) for political resolution of these broader program issues.
- 42 U.S.C. § 256b. Under the 340B program, pharmaceutical manufacturers generally must sell “covered drugs” to “covered entities” at discounted prices for outpatient uses.
- American Hospital Ass’n v. Becerra, 596 U.S. ___ (2022). See also 88 Fed. Reg. 77150 (Nov. 8, 2023) (proposing a mechanism for hospital refunds in the wake of a Supreme Court ruling).
- See, e.g., Sanofi Aventis U.S. LLC v. U.S. Dept. of Health & Human Servs., 58 F.4th 696 (3d Cir. 2023).
- No. 4:19-cv-01531-RBH (D. S.C. Nov. 3, 2023).
- 42 U.S.C. § 256b(a)(5)(B).
- 61 Fed. Reg. 55156 (Oct. 24, 1996).
- 80 Feg. Reg. 52300 (Aug. 28, 2015).
- No. 4:19-cv-01531-RBH (D. S.C. Dec. 19, 2019).
- Genesis Health Care, Inc. v. Becerra, 39 F.4th 253 (4th Cir. 2022).
- 323 U.S. 134 (1944).
- Genesis Health Care, slip op. at 23. While the 340B program was undoubtedly designed to reduce covered entities’ drug costs and thereby maximize efficiency in the use of federal grant funds, the legislative history lacks any reference to the concept of creating affirmative profit centers around drugs based on the difference between third-party reimbursement and discounted 340B prices, and such a concept is arguably inconsistent with the fact that all covered entity categories include only non-profit organizations.
- Genesis applied a policy under which a patient could be deemed 340B-eligible if they had received some service within the last two years, and while the district court did not establish any outer limit on the duration of a “patient” relationship, it cited American Medical Association guidance suggesting that limit might ordinarily be three Years. But it is conceivable that even more aggressive positions could be taken (e.g., based on providers’ continuing duty to maintain medical records).
- 43 F. Supp.3d 28 (D.D.C. 2014). Notably, HRSA’s absence of rulemaking authority under PhRMA has also been a lynchpin of manufacturer litigation challenging HRSA’s contract pharmacy guidance as non-binding.
In-depth 2023-252
