On January 30, 2023, the United States Court of Appeals for the Third Circuit issued its decision in Sanofi Aventis U.S. LLC v United States Department of Health and Human Services (Sanofi),1 a consolidated appeal relating to whether drug manufacturers may impose limits on the number of “contract pharmacies” to which they will ship discounted drugs sold to participating “covered entities” under Section 340B of the Public Health Service Act.2 On the merits, the panel unanimously ruled that the statute did not require manufacturers to distribute discounted products sold to covered entities under the Section 340B program to an unlimited number of contract pharmacies, and enjoined the federal government from enforcing a contrary position against the manufacturers. The case is the first federal appellate decision to address the contract pharmacy issue.
The Section 340B drug discount program requires pharmaceutical manufacturers, as a condition to Medicaid and Medicare Part B coverage for their outpatient drugs, to offer to sell their products at significant discounts to “covered entity” safety net providers participating in the 340B program. In response to concerns that many covered entities did not operate their own in-house pharmacies, the Health Resources and Services Administration (“HRSA”) issued guidance in 1996 authorizing covered entities to enter contract pharmacy arrangements with a single third-party contract pharmacy, whereby the manufacturer would ship the discounted product to the contract pharmacy but bill the covered entity.3 In 2010, HRSA issued revised guidance that allowed covered entities to enter into an unlimited number of contract pharmacy arrangements.4
As the scope of 340B-program discounted sales expanded following the implementation of HRSA’s revised guidance, some manufacturers imposed distribution limitations on contract pharmacy arrangements beginning in 2020. These included limiting contract pharmacy arrangements to covered entities that did not otherwise have their own in-house pharmacies, limiting the number of contract pharmacies they would recognize, and conditioning contract pharmacy distribution on agreements to provide claims data to the manufacturers to assess potential duplicate discounts or diversion. The Department of Health and Human Services (“HHS”) Office of the General Counsel initially issued an advisory opinion that the 340B statute required distribution to an unlimited number of contract pharmacies, and HRSA subsequently issued notices to manufacturers that their policies were in violation of Section 340B and may be cause for enforcement actions. In response, manufacturers filed lawsuits seeking declaratory and injunctive relief with respect to the agency’s enforcement notices.5
The Third Circuit’s decision
The Third Circuit began by noting that the 340B statute does not make any reference to contract pharmacies, and that in the absence of rulemaking authority, the agency’s statutory interpretation was not entitled to deference and was subject to de novo review.
In the absence of specific terms addressing contract pharmacies, the appellate court first considered whether the agency’s position mandating contract pharmacy distribution was persuasive in light of the statutory requirements that (i) manufacturers agree to cap prices for drugs “purchased by” covered entities and (ii) manufacturers “offer” their products to covered entities for purchase at or below the mandatory discounted price.6 On those issues, the court drew a distinction between pricing terms associated with offers and sales on the one hand, which the statute clearly regulates, and delivery terms on the other.7 In the absence of language regulating delivery under Section 340B, the court concluded that HRSA could not establish a violation of the statute based on the manufacturers’ limitations on contract pharmacy distribution.8
Second, the court noted that other provisions within Section 340B (e.g., provisions referencing prime vendor arrangements and responsibility for delivery costs for direct shipments) and the contemporaneous section 603 of the Veterans Health Care Act9 (i.e., depot contracting) referenced distribution-related matters, suggesting that Congress “knew how to impose delivery-related requirements."10 Further, the court noted that HRSA’s position might conflict with FDA-mandated limited distribution systems for certain drugs under risk evaluation and management strategies.11
Third, with respect to legislative history and purpose, the appellate court noted that the legislative history of Section 340B, which included proposals specifically referencing contract pharmacies, was ambiguous inasmuch as those proposals were not enacted. While the court recognized that a single contract pharmacy would facilitate access by covered entities to the program discounts, the court declined to extend that rationale to a mandate to recognize an unlimited number of contract pharmacies.
In light of its analysis, the Third Circuit enjoined enforcement action against the manufacturers because “legal duties do not spring from silence."12
Finally, in addition to the substantive contract pharmacy issue, the court also rejected a procedural challenge under the Administrative Procedure Act (“APA”) to HRSA’s existing 340B program administrative dispute resolution (“ADR”) rule. HRSA originally proposed the rule in 2016, but in 2017 described the proposal as “withdrawn” in the agency’s unified regulatory agenda. Ultimately, however, the agency nevertheless finalized the rule in 2020 in the midst of litigation by manufacturers and covered entities.13 A 2-1 panel majority rejected one of the manufacturer’s claims that the 2017 withdrawal necessitated a new public notice process, reasoning that the unified agenda withdrawal notice had no legal effect under the APA, and that the original 2016 proposal satisfied the APA’s notice-and-comment requirements.
The Sanofi decision is significant for 340B program stakeholders, both as the first appellate decision to address the permissibility of manufacturer contract pharmacy limitations and because of its relatively definitive interpretation of Section 340B to prohibit enforcement actions against manufacturers because of their limits on contract pharmacy distribution (which, presumably, could also include relief in the context of ADR proceedings). While it remains to be seen whether the two other courts of appeal addressing the issue will be aligned with the Third Circuit’s interpretation or whether the government will seek further review of the Third Circuit’s decision, in the near term, the decision sustains manufacturer limits on contract pharmacy arrangements.
- Nos. 21-3167, 21-3168, 21-3379, 21-3380, 22-1676 (3d Cir. Jan. 30, 2023).
- 42 U.S.C. § 256b.
- 61 Fed. Reg. 43,549 (Aug. 23, 1996).
- 75 Fed. Reg. 10,272 (Mar. 5, 2010).
- Although there are multiple lawsuits pending in federal courts relating to the contract pharmacy issue, including pending appeals in the D.C. and Seventh Circuits, the three Third Circuit cases involved in the consolidated appeals were brought by Sanofi Aventis, Novo Nordisk, and AstraZeneca, respectively. AstraZeneca prevailed in the lower court in Delaware, 2022 WL 484587 (D. Del. Feb. 16, 2022), and the government prevailed in the New Jersey lawsuits brought by Sanofi and Novo, 570 F. Supp. 3d 129 (D.N.J. 2021).
- See 42 U.S.C. § 256b(a)(1).
- Slip op. at 13-15.
- Id. at 15.
- 38 U.S.C. § 8126.
- Slip op. at 15.
- Id. at 15-16.
- Id. at 20.
- 85 Fed. Reg. 80,632 (Dec. 14, 2020).
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