Pharma loses appeal to change 340B drug discounts to rebates

A federal appeals court has dealt a blow to pharmaceutical manufacturers' attempts to restructure the 340B drug discount program -- a decision that preserves billions of dollars in savings for safety-net hospitals and clinics.

Issued on July 21, the decision from the U.S. Court of Appeals for the District of Columbia Circuit unanimously rejected appeals from major drugmakers, reinforcing that the manufacturers cannot unilaterally impose 340B drug rebate models in lieu of upfront drug discounts.

The court ruled that Section 340B of the Public Health Service Act requires the Department of Health and Human Services' pre-approval for any rebate mechanism, holding that federal officials -- not pharmaceutical companies -- control 340B program administration.

"The manufacturers' reading would also counterintuitively let manufacturers, rather than the Secretary, take the lead in administering the 340B Program, rendering the Secretary's role largely reactive," the court explained in the ruling. "Put simply, the statute places the Secretary, not the manufacturers, in the driver's seat of this important program."

Since 2024, pharmaceutical companies, including Johnson & Johnson, Eli Lilly, Bristol Myers Squibb, Sanofi and Novartis, have attempted to impose a rebate model on 340B providers. These models require providers to purchase qualifying drugs at the full wholesale acquisition cost, then wait to receive a rebate from the drug company after submitting claims data.

The 340B program typically provides upfront discounts on covered drugs to help safety-net providers stretch federal resources. However, leading pharmaceutical companies said this method has led to illegal duplicate discounts across 340B, Medicaid and Medicare Part D rebates.

The companies argue that a rebate model would improve cash flow and financial transparency as the 340B program continues to grow at an accelerated pace.

However, hospitals have fiercely opposed these rebate models, arguing they create severe financial and administrative burdens. The American Hospital Association and other provider groups noted that hospitals would have to front enormous sums of cash and expend millions of hours processing complex data to get reimbursed.

Hospital groups also alleged that the simultaneous rollout of these plans by major drugmakers was collusive, leading them to ask the federal government to investigate.

When drugmakers attempted to implement these changes, the Health Resources and Services Administration, which runs the program, blocked or sanctioned the moves, maintaining that altering the 340B payment structure requires agency review and approval.

Drug companies, including Bristol Myers Squibb, Eli Lilly, Novartis, Sanofi and later Johnson & Johnson, sued the federal government, arguing that they can impose rebate models until the HHS disapproves of them.

The latest appeal case filed by Novartis and Johnson & Johnson closed the door on drugmakers, but the HHS hasn't locked it. The HRSA released a request for information in February on implementing a rebate model in the future to address concerns about duplicate discounts.

The ruling is still a relief for hospital groups, many of which filed a joint amicus brief defending the HHS' decision to reject the rebate models from Novartis and Johnson & Johnson.

"The AHA is pleased with the Court's decision reaffirming HHS' central role in overseeing the 340B program," Chad Golder, AHA’s general counsel, said in an emailed statement. "We were particularly pleased that the Court held that the law 'places the Secretary, not the manufacturers, in the driver's seat of this important program.'"

"With increasing attempts by drug companies to wrest control over the program, the AHA urges HHS to take prompt action to prevent manufacturers from undermining the program and the patients and communities that depend on it," Golder continued.

The 340B program remains under the microscope, though, as drugmakers continue to rein in its expansion, particularly through hospitals' use of contract pharmacies. The Centers for Medicare and Medicaid Services has also targeted 340B hospital payments in proposed rulemaking to slash Medicare reimbursement rates on qualifying drugs and impose greater price transparency in the program.

Lawmakers are on a similar path, pushing legislation, such as the SUSTAIN 340B Act, that would increase program transparency, clarify patient eligibility and address supply chain friction.

Jacqueline LaPointe is an Executive Editor at Xtelligent Healthcare Media, covering revenue cycle management, healthcare payers, health policy and health IT since 2016.