On May 21, 2024, the U.S. Court of Appeals for the District of Columbia released its opinion reviewing and ultimately upholding certain restrictions that drug manufacturers unilaterally imposed on the distribution of prescription drugs eligible for discounted pricing under the federal 340B statute. The D.C. Circuit’s opinion followed a similar opinion from the Third Circuit in January 2023. Another similar case remains pending in the Seventh Circuit.

Along with several developments in state legislatures and Congress, the D.C. Circuit’s opinion has ramifications for health centers and other 340B covered entities. 

What 340B Covered Entities Need to Know

1. The D.C. Circuit upheld the manufacturer restrictions but acknowledged that other restrictions might be illegal.

The federal cases addressed whether drug manufacturers can impose restrictions on the locations where a 340B covered entity may direct the manufacturer to ship discounted drugs. For nearly 30 years, the Health Resources and Services Administration (HRSA) had permitted contract arrangements between 340B covered entities and non-entity owned pharmacies, significantly expanding the scope of 340B-eligible prescriptions. However, starting in 2020, drug manufacturers began unilaterally imposing restrictions on contract pharmacies to which the manufacturers would ship 340B drugs.

The D.C. Circuit noted that the 340B statute does not specify the terms under which manufacturers must “offer” drugs to 340B covered entities at a discounted 340B ceiling price. The court rejected HRSA’s position that manufacturers could not impose any delivery restrictions, noting that this would be inconsistent with other legal requirements. The court upheld United Therapeutics’ restrictions on the number of locations a 340B entity could direct for shipment but left open the question of other restrictions potentially violating common law requirements for a bona fide offer.

2. The D.C. Circuit invited further review by HRSA through the 340B Administrative Dispute Resolution process.

The D.C. Circuit’s opinion made a point of noting that the court had invited HRSA to provide further justification for its position, including the opportunity to return the case to the agency for further administrative review, but HRSA had declined the offer. In its opinion, the court invited the agency to conduct an administrative review of contract pharmacy restrictions in the future. The D.C. Circuit opinion follows the opinion from November 2023 in the Genesis health center case in the U.S. District Court for the District of South Carolina which similarly observed that the statutory vehicle for HRSA to present and justify its interpretation of the 340B statute is the 340B ADR process.

At the time of the oral argument, HRSA had not finalized the 340B Administrative Dispute Resolution (ADR) process. HRSA published its 340B ADR Final Rule in April 2024, fourteen years after the deadline Congress had imposed for its implementation. It remains to be seen if manufacturers will seek to block implementation of the new ADR final rule. However, the D.C. Circuit opinion reaffirms that while the 340B statute did not provide a specific grant of rulemaking authority to HRSA regarding contract pharmacy, HRSA does have the authority—indeed, the obligation—to provide detailed and reasoned interpretations of the 340B statute through the ADR process.

Status of State Legislative Action 

While federal litigation continues, state legislatures protect 340B contract pharmacy rights.

As federal litigation continues, state legislatures are actively protecting their state safety-net providers’ contract rights. The D.C. Circuit affirmed that contract rights of sellers and purchasers are typically matters of state contract law. In the past year, a majority of state legislatures have introduced bills to protect 340B covered entities’ rights to contract with pharmacies, and six states have passed and begun implementing such laws. The Court of Appeals for the Eighth Circuit upheld Arkansas’s law, with the Arkansas attorney general actively enforcing it, leading most manufacturers to remove restrictions on 340B contract pharmacy rights in the state.

Health centers, Ryan White Clinics, rural hospitals, and other 340B covered entities seeking to protect their ability to promote their nonprofit public health mission through 340B contract pharmacy rights should educate themselves on the status of such laws in their respective states and determine whether and how to engage their state lawmakers around such protections.

For more information on 340B contract pharmacy rights, please contact Stephen Kuperberg (skuperberg@feldesman.com) or call 202.466.8960.