Four drug manufacturers have announced plans to offer discounted drug prices to safety net providers under the federal 340B program via rebates instead of upfront discounts, despite the federal government’s position that manufacturers cannot do so without prior approval. The Health Resources and Services Administration (HRSA) has threatened two manufacturers with enforcement actions if they proceed with implementation, and all four manufacturers and a drug industry vendor have filed lawsuits challenging HRSA’s position on rebates.
340B providers argue that requiring them to access 340B prices via rebates will allow manufacturers to deny 340B prices and reduce 340B savings by creating cash flow issues and increasing costs. Manufacturer efforts to convert 340B into a rebate program are the latest actions taken by the drug industry to increase oversight of 340B providers and restrict access to 340B pricing.
Overview of 340B Rebate Model
Under the 340B program, drug manufacturers participating in Medicaid and Medicare Part B must offer outpatient drugs to 340B providers at prices that do not exceed the 340B ceiling price, which is set by a statutory formula. Since the program’s enactment in 1992, manufacturers have met this obligation by offering 340B prices to nearly all 340B provider types through upfront discounts. Under a rebate model, instead of making an upfront purchase at a 340B-discounted price, providers would order drugs at higher prices, likely at wholesale acquisition cost (WAC), and after dispensing or administering a drug to a 340B-eligible patient, submit a rebate request. If approved, the manufacturer would issue a refund for the difference between the WAC and 340B prices.
Manufacturers proposing rebate models point to several justifications. They highlight growth in the 340B program and concerns that 340B use is increasingly resulting in diversion—providing 340B drugs to individuals who are not “eligible” patients—and duplicate discounts, where a manufacturer provides a 340B price and a rebate to a payer on the same claim. Manufacturers also point to duplication concerns under the new Medicare drug price negotiation program created by the Inflation Reduction Act (IRA). The IRA requires manufacturers to provide a maximum fair price (MFP) for drugs selected for negotiation when sold to Medicare beneficiaries, but the IRA does not require manufacturers to make the MFP available to a 340B provider or pharmacy if the 340B price is less than the MFP. The Centers for Medicare and Medicaid Services (CMS) has recognized a need to identify 340B claims to prevent MFP duplication, but they have not created a mechanism to do so. Because manufacturers will generally provide the MFP through rebates, manufacturers argue they must also provide 340B pricing via rebates to ensure they are providing only one discount on the same claim.
Providers are concerned that rebate models would diminish the value of 340B in several ways:
- Cash Flow Concerns: Rebate models would require 340B providers to float hundreds of thousands of dollars in WAC purchases, with no guarantee a manufacturer will approve a rebate request and issue a refund.
- Operational Burdens and Compliance Challenges: 340B providers would need to expend significant resources to gather the information needed to submit rebate requests. Rebate models could also create challenges with respect to certain payer billing requirements, such as Medicaid requirements for 340B providers to identify 340B claims using claims modifiers.
- Reduced 340B Savings: Providers are concerned rebate models would give manufacturers the power to make their own determinations as to whether a claim was 340B-eligible using their own statutory interpretations. For example, manufacturers could deny 340B pricing for a claim that was dispensed by a pharmacy that is not a “designated” location meeting the manufacturer’s contract pharmacy policy (e.g., a pharmacy using an alternative distribution model). At least one of the four manufacturers proposing a rebate model also intends to apply their own patient definition test and deny rebates for claims that the manufacturer finds are not for 340B-eligible patients.
Summary of Announced Rebate Models and Litigation
Johnson & Johnson
On August 23, 2024, Johnson & Johnson (J&J) announced plans to make 340B pricing available to 340B disproportionate share (DSH) hospitals for two of its products – Stelara and Xarelto – effective October 15, 2024. DSH hospitals would purchase the products at WAC and, after dispensing, request a rebate for the difference between WAC and the 340B price.
HRSA informed J&J that it should “cease implementation” because the 340B statute requires pre-approval of a rebate model and HRSA has not approved J&J’s proposal. HRSA followed up to inform J&J that, if the manufacturer proceeded with implementation, HRSA would begin the process of terminating J&J’s Pharmaceutical Pricing Agreement (PPA), which would remove J&J from Medicaid and Medicare Part B, and refer J&J to the Department of Health and Human Services (HHS) Office of Inspector General (OIG) to consider implementation of civil monetary penalties (CMPs). On September 30, 2024, J&J informed HRSA that it would not proceed with implementation at that time.
On November 12, 2024, J&J filed a lawsuit against HHS and HRSA in the U.S. District Court for the District of Columbia requesting that the court declare HRSA’s determination that J&J may not implement a rebate model without prior approval to be arbitrary and capricious, an abuse of discretion, and unlawful under the Administrative Procedure Act (APA) and the 340B statute. J&J also asked the court to set aside and vacate HRSA’s letters to J&J declaring the rebate proposal unlawful and enjoin HHS and HRSA from taking any enforcement action against J&J related to the rebate model.
Eli Lilly
On November 14, 2024, Eli Lilly (Lilly) filed a lawsuit in the U.S. District Court for the District of Columbia against HHS and HRSA. In its complaint, Lilly outlined plans to make 340B pricing available to all 340B provider types for all Lilly products through a platform operated by drug industry vendor “Kalderos.” Lilly referred to its proposal as a “cash replenishment model,” under which 340B providers would purchase drugs at the “usual market rate” and then request a rebate for the difference between the purchase price and the 340B price.
Lilly informed HRSA of its plans in August 2024 and met with HRSA in September. According to Lilly, HRSA rejected the proposal in a September 18, 2024, letter noting that implementation would be inconsistent with the 340B statute, which requires pre-approval of a rebate model. Lilly asked the court to set aside HRSA’s rejection of Lilly’s proposed rebate model because HRSA’s position is contrary to the law, in excess of HRSA’s statutory authority, and arbitrary and capricious under the APA. Lilly also asked the court to preliminary and permanently enjoin HRSA from enforcing its position against Lilly with respect to its proposed rebate model and declare that the proposal is lawful and can be implemented.
Related to the Lilly proposal, Kalderos is pursuing its own legal challenge against HRSA through a lawsuit first filed in 2021. At that time, Kalderos was marketing its services to assist manufacturers in identifying 340B claims through rebate requests. In response to statements by HRSA that drug manufacturers could not impose any restrictions on access to 340B pricing through contract pharmacies, Kalderos asked the District Court for the District of Columbia to declare HRSA’s position unlawful, issue an order vacating HRSA’s policy, and grant an injunction to stop HRSA from taking enforcement action based on the policy. Kalderos argued that HRSA’s policy injured Kalderos by reducing the demand for its services. The court paused the Kalderos lawsuit for several years while manufacturer lawsuits challenging HRSA’s policy related to contract pharmacy restrictions moved through the courts. After the resolution of those lawsuits, the case resumed and Kalderos filed an amended complaint on December 9, 2024.
Sanofi
On November 22, 2024, Sanofi informed 340B providers that they would begin implementing a 340B “credit model,” effective January 6, 2025, for certain hospitals—DSH hospitals, critical access hospitals (CAHs), rural referral centers (RRCs), and sole community hospitals (SCHs)—and on March 1, 2025, for consolidated health centers (CHs). The model, which would apply to 25 of Sanofi’s products, would not apply to children’s hospitals, cancer hospitals, or grantees other than CHs. Sanofi would require impacted providers to buy products at WAC and submit purchase and claims data through an online platform to request credits within 30 days of a claim’s dispense or administration. The platform would confirm 340B eligibility and issue a credit for the difference between WAC and 340B pricing. To address concerns that providers would need to float the WAC costs until receiving credits, Sanofi indicated it would issue the credit to providers within 30 days of a WAC order, which according to Sanofi is typically before wholesaler invoices are due, but only if the provider submits the request within 22 days of the WAC order.
The platform would confirm that drugs were dispensed or administered at a provider’s eligible location, including an in-house pharmacy or a designated contract pharmacy per Sanofi’s contract pharmacy policy. For hospitals, the platform would also confirm that drugs were dispensed or administered to a 340B-eligible patient of the hospital. Effective March 1, 2025, hospitals must submit encounter data, in addition to prescription claim data, to support a credit request. Encounter data would include elements such as billing and rendering provider identification, diagnoses codes, and place of service codes identifying where a product was administered.
Sanofi indicated that the platform would use the encounter data to confirm patient eligibility “as set forth in HRSA’s 1996 [patient definition] guidance.” However, Sanofi outlined its own standards for how it will “operationalize” HRSA’s guidance. Sanofi would use the encounter data to confirm whether a patient: “(1) is currently receiving medical care from the covered entity, and (2) receives the prescription in connection with health care services provided by the covered entity.” Sanofi would “presume that a person who has received healthcare services from the covered entity within 24 months of the prescription being dispensed is currently receiving medical care from the covered entity” and would not consider a person to be a patient if they have not received healthcare services from the covered entity within 24 months.
Sanofi would also “presume that a prescription written by a health care professional who is employed by or similarly affiliated with the covered entity is being provided in connection with health care services provided by the covered entity. For prescriptions that arise from a referral following a patient encounter at the covered entity, where the prescriber is not employed by or similarly affiliated with the covered entity, Sanofi will analyze the data submitted to determine if the prescription relates to the health care services provided by the covered entity to the patient.” Sanofi recognizes there may be cases where the platform denies a credit request for not meeting patient definition. In such a case, a provider could submit “additional or alternative data for the same claim in order to demonstrate that the individual was the covered entity’s patient.”
On December 13, 2024, HRSA sent a letter to Sanofi similar to the letter issued to J&J, warning Sanofi that the unapproved credit proposal violates the 340B statute and that HRSA expects Sanofi to “cease implementation.” HRSA outlined potential enforcement actions if Sanofi proceeds with implementation, including termination of Sanofi’s PPA and referral to the HHS OIG for the imposition of CMPs.
On December 16, 2024, Sanofi filed a lawsuit in the U.S. District Court for the District of Columbia against HHS and HRSA. Sanofi asked the court for a declaration, order, and judgment holding HRSA’s letter unlawful and to enjoin and set aside the letter. Sanofi also asked the court to declare, order, and hold that Sanofi’s credit model complies with the 340B statute and to issue an injunction prohibiting HRSA from terminating Sanofi’s PPA or taking other enforcement action. Sanofi argued that pre-approval is not required because the statute recognizes the ability of manufacturers to offer 340B pricing through rebates and is silent on pre-approval. Sanofi announced it will pause implementation of the credit model while the lawsuit proceeds.
BMS
On November 26, 2024, Bristol Myers Squibb (BMS) filed a lawsuit in the U.S. District Court for the District of Columbia against HHS and HRSA. In its complaint, BMS indicated it had informed HHS on October 22, 2024, that it intends to start using a rebate model in the spring of 2025. Under the model, BMS would remit rebates to providers within seven to ten days after submitting the required data to request a rebate. If a provider agrees to “share the 340B price directly with the patient,” BMS will issue the rebate “even faster.” To start, the rebate model would apply only to the product Eliquis and would apply to all covered entity types. On November 4, 2024, HRSA sent a letter to BMS specifying that pre-approval would be required and that HRSA was not providing approval.
BMS argued that HRSA’s approval is not needed for BMS to implement a rebate model and, even if it were, HRSA’s disapproval of BMS’s proposal is unlawful under the 340B statute and the APA. BMS also argued that HRSA’s decision violates the Due Process Clause of the Fifth Amendment of the U.S. Constitution because it results in manufacturers having to provide multiple discounts on the same drug, thereby taking BMS’s property without due process. BMS asked the court for a declaration that HRSA’s position is unlawful; an order vacating and setting aside HRSA’s disapproval as unlawful, arbitrary and capricious; and temporary, preliminary, and permanent injunctive relief barring the government from taking enforcement action against BMS in connection with the rebate model.
Legal Issue in Dispute
The 340B statute requires manufacturers to enter into a PPA with the Secretary of HHS under which the amount to be paid to the manufacturer for covered outpatient drugs purchased by a 340B provider does not exceed the 340B ceiling price. The statute includes a parenthetical describing the amount to be paid as “taking into account any rebate or discount, as provided by the Secretary.” HRSA is taking the position that, because prices can take into account rebates only as provided by the Secretary, a manufacturer may not implement a 340B rebate model without prior approval from HRSA. Manufacturers argue that HHS did not indicate in the PPA that rebate models are not allowed and, therefore, manufacturers can meet their statutory obligation to offer 340B pricing via rebates without prior approval.
Implications and Potential Next Steps
Manufacturer efforts to implement 340B rebate models are the latest development in a series of actions taken by drug manufacturers to limit the size of the 340B program. Beginning in 2020, drug manufacturers began implementing restrictions on the use of 340B contract pharmacy arrangements, where a 340B provider contracts with an outside pharmacy to dispense 340B drugs on the provider’s behalf. The proposed rebate models would go further by extending beyond the contract pharmacy setting and making it more difficult for providers to access 340B pricing for drugs administered onsite at the provider or through a provider’s entity-owned in-house pharmacy, in addition to contract pharmacies.
So far, none of the four manufacturers proposing a rebate model have proceeded with implementation. All four manufacturers have filed lawsuits challenging HRSA’s position preventing them from proceeding, and it appears they are pausing implementation while the lawsuits proceed. 340B stakeholders are monitoring whether any manufacturers will proceed with implementation, despite the warnings issued by HRSA. Termination of a manufacturer’s PPA would have significant consequences, as a manufacturer’s products would no longer be covered by Medicaid or Medicare Part B.
Stakeholders are also monitoring CMS’ implementation of the Medicare drug negotiation program. J&J limited its rebate proposal to two products— Stelara and Xarelto—both of which were selected for negotiation in 2026, the first year of the program. BMS limited its proposal to Eliquis, which was also selected for negotiation in 2026. The other two manufacturers—Lilly and BMS—do not sell drugs that were selected for negotiation. So far, CMS has issued guidance on steps manufacturers should take to prevent duplication of the 340B price and the MFP and has suggested manufacturers may have the flexibility to create their own processes to prevent duplication. 340B providers have urged CMS to make clear that manufacturers may not use 340B rebate models to prevent duplication with the MFP.
The new presidential administration and Congress, which is set to begin in January, could also impact whether manufacturers are able to implement 340B rebate models. Providers are likely to urge new leadership at HRSA not to allow any rebate model, given their financial and operational concerns. New leadership at CMS will also control the implementation of the Medicare drug negotiation program and will be responsible for determining how to avoid duplication between the 340B price and the MFP. 340B stakeholders should monitor future CMS guidance related to the negotiation program.
The use of 340B rebate models could also be considered as part of congressional scrutiny of 340B. Bipartisan efforts to overhaul 340B and address concerns of both manufacturers and providers made considerable progress in the current Congress. Although this Congress is likely to end without enactment of 340B legislation, stakeholders expect Congress to resume efforts to enact 340B legislation next year.
In the meantime, 340B providers and pharmacies should consider the potential impact of 340B rebate models. Providers should evaluate the financial challenges associated with purchasing drugs at WAC and waiting for the possibility of a 340B rebate to reduce net purchase costs. Providers should also confirm whether they have access to the data elements required to submit rebate requests under the proposed models and what challenges they would face obtaining and submitting this information. Finally, providers should evaluate potential reductions in 340B savings as a result of manufacturer determinations of 340B patient eligibility based on their own patient definition standards.
If you have any questions about the 340B rebate models and related litigation, please contact the authors.