Ann Johnson, Pharm.D.
Ann Johnson, Pharm.D.

In 1992, Congress enacted Section 340B of the Public Health Service Act, which requires manufacturers to enter into an OBRA ‘90 Medicaid National Drug Rebate Agreement with the Department of Health and Human Services (HHS) in order to have their drugs covered by Medicaid. Manufacturers agree to provide discounts on covered outpatient drugs purchased by covered entities, with the rebates for brand drugs being partially based on the manufacturers’ “best price.” Covered entities may include federally qualified health centers, disproportionate share hospitals, critical access hospitals, and several other organizational types. The original purpose of the 340B program was to enable covered entities to provide comprehensive services to the nation’s most vulnerable patients. Covered entities choose how to use the 340B discounts. These 340B discounts or savings do not have to be pharmaceutically focused, and may, for example, be used to add additional service offerings (e.g., dental) or expand primary care access.

Within the last year, eight pharmaceutical manufacturers have announced that they will no longer provide 340B discounted product to contract pharmacies or will do so only if covered entities meet certain data submission requirements. These manufacturer announcements have set off a chain of events in the industry that have led to legal actions, and ultimately may force legislation that provides more definitive 340B guidelines.

Contract Pharmacy History

In 1996, the HRSA (Health Resources and Services Administration) issued guidance stating that a covered entity can purchase and dispense 340B drugs through an internal or a single external pharmacy, meaning that a covered entity could have a single contract pharmacy. In 2010, the HRSA issued new guidance stating that eligible covered entities, including those with an in-house pharmacy, could access 340B pricing through an unlimited number of contract pharmacy arrangements. From 2010 to today, there has been a 4,000% increase in the number of contract pharmacies in the 340B program, with almost 110,000 current contract pharmacy arrangements. The unlimited number of covered-entity contract pharmacy relationships has pushed the program beyond its original intention and is one catalyst for the current 340B controversy between pharmaceutical manufacturers, covered entities, and the HRSA.

340B Impact on Manufacturers

Per PhRMA (Pharmaceutical Research and Manufacturers of America), the 340B program is the second-largest federal drug program behind Medicare Part D. Discounted purchases under the 340B program reached $38 billion in 2020, a 27% increase over 2019. Despite these robust 340B discounts, approximately two-thirds of covered-entity hospitals have charity care rates that are below the national average for all hospitals.

Timeline of Current Events

Based on our review of the currently available information in the marketplace, we understand the current timeline events to be as follows. Note that this is a rapidly changing area, and the events are constantly evolving.

July 2020: Eli Lilly and Company announced it would no longer allow certain strengths of Cialis (if purchased by a 340B provider at the 340B price) to be delivered to contract pharmacies. The HRSA announced it lacks the authority to stop Lilly from taking this action.

July 2020: Merck announced that contract pharmacies would be required to submit data on every Merck drug dispensed beginning August 14.

July 2020: Sanofi and Novartis announced that contract pharmacies would be required to submit data on every one of their respective drugs dispensed beginning October 1.

September 2020: Lilly announced it would stop providing discounts to 340B contract pharmacies on Sept. 1, 2020. 340B discounts would only be given to covered entities and their child sites. Insulins would be exempt.

September 2020: AstraZeneca announced it would stop providing discounts to 340B contract pharmacies on Oct. 1, 2020.

September 2020: Sanofi announced that contract pharmacies not providing the requested data would no longer be able to obtain 340B pricing as of Oct. 1, 2020.

September 2020: Apexus, the 340B Prime Vendor Program, published a sample form for covered entities to report instances where covered outpatient drugs are not available at a 340B ceiling price and/or are charged at the incorrect 340B ceiling price.

October 2020: Novartis announced it will continue to provide 340B pricing to contract pharmacies, as long as they are within 40 miles of their covered-entity parent facility.

November 2020: United Therapeutics notified covered entities that contract pharmacy orders placed on or after May 13, 2021, will be denied unless the covered entity provides associated claims data for its products.

December 2020: Novo Nordisk announced that beginning Jan. 1, 2021, it will no longer give 340B discounts to contract pharmacies.

December 30, 2020: HHS issued an advisory opinion on contract pharmacies under the 340B drug program. The Office of the General Counsel reiterated that contract pharmacies are acting as agents of the covered entity. HHS notes that “manufacturers’ rationale for precluding the use of contract pharmacies is not supported by the language of the statue and leads to absurd results.” HHS concludes that manufacturers are required to deliver covered outpatient drugs to contract pharmacies and charge covered entities no more than the 340B ceiling price for those drugs.

January 2021: The American Hospital Association (AHA) and similar groups sued HHS to get the agency to clamp down on these manufacturers.

January 2021: Three manufacturers (Eli Lilly, AstraZeneca, and Sanofi) sued HHS over this advisory opinion, with each company filing a separate lawsuit. The manufacturers claim that the advisory opinion contradicts the 340B program statues and does not require manufacturers to recognize contract pharmacies.

February 2021: HHS is granted a motion to dismiss a lawsuit accusing the department of failing to force manufacturers to pay 340B discounts for drugs dispensed from contract pharmacies. The judge noted that the issue cannot be challenged in court because HHS has not issued a final agency action on 340B discounts for covered entities that use contract pharmacies.

March 2021: Federal courts side with Eli Lilly and grant a preliminary injunction barring the HRSA from implementing the final administrative dispute resolution rule that was to allow a panel to resolve disputes between participating 340B covered entities and pharmaceutical manufacturers participating in the 340B program.

May 2021: The HRSA notes that six drug manufacturers are in violation of the 340B statute and must begin offering their drugs at discounted prices to covered entities participating in the program. The HRSA states that these manufacturers must credit or refund all hospitals for overcharges that resulted from the limiting policies or face civil monetary penalties for each instance of overcharging. The HRSA gave the manufacturers until June 1 to release a plan on how to resume giving the discounts.

May 20, 2021: Eli Lilly filed a motion to halt 340B-related monetary penalties until a court case between Lilly and HHS is resolved.

June 2021: HHS withdrew its advisory opinion on the use of contract pharmacies. Federal courts sided with Lilly in March, noting that the HHS December rule did not follow the Administrative Procedure Act. HHS cited the “need to avoid confusion and unnecessary litigation.”

June 2021: Boehringer Ingelheim notified 340B covered entities that it would stop providing discount pricing for covered drugs dispensed in contract pharmacies.

August 2021: Merck announced that it will stop providing 340B discounts on drugs dispensed from community-based pharmacies if those covered entities and contract pharmacies do not submit claims data by September 1.

Going Forward

The 340B program is a complex program that has seen rapid expansion over the last five years. Adding another layer of complexity, the recently passed American Rescue Plan Act of 2021 removes the maximum cap on Medicaid rebates starting Jan. 1, 2024. The OBRA Medicaid rebate calculation will change, and all CPI (consumer price index) inflation adjustments will be included without a cap. This means that a manufacturer of a brand drug with cumulative price increases that are greater than 76.9% of the CPI will be required to pay Medicaid programs for dispensing its drug. Previously, these products were known as penny products, where the 340B price was equal to $0.01 per unit. If manufacturers are expected to pay to have their drug used, some manufacturers will simply discontinue these drugs, rather than take losses on them.

The historic lack of regulatory guidance on 340B may soon be coming to an end. The change in rebate calculations, coupled with the rapid growth of contract pharmacy arrangements, has prompted eight manufacturers to take steps challenging the current 340B program structure. These manufacturers are refusing to provide 340B discounts to contract pharmacies or are only doing so when the covered entities provide the claims data associated with all 340B contract pharmacy claims for the manufacturer’s covered outpatient drugs. This ongoing dispute has resulted in legal battles that will likely continue until Congress clarifies the intent of the 340B program through definitive regulations. CT

Ann Johnson, Pharm.D., is president at Pharmacy Healthcare Solutions. The author can be reached at