Recent Lawsuits Question HRSA Oversight of the 340B Program
In November of 2024, three lawsuits were filed by pharmaceutical manufacturers against the Department of Health and Human Services (HHS) and the Health Resources and Services Administration (HRSA), challenging how HRSA oversees the Federal 340B Drug Pricing Program. (HRSA is the sub-agency within HHS that administers the 340B Program).
The potential impact of the lawsuits on the 340B Program is significant in its own right, but the outcome of the lawsuits could also have an indirect effect on merger and acquisition activity. Research has indicated that the merger and acquisition activity of hospitals may be affected by the inclusion of facilities in the Program; subsequently changes to the Program could impact M&As.
What is the 340B Program?
Section 340B of the Public Health Service Act (part of the Veterans Health Care Act) was enacted by Congress in 1992. Hospitals and healthcare centers that serve low-income and uninsured patients and meet specific criteria can qualify for the 340B Drug Pricing Program and buy prescription drugs at discounted rates directly from manufacturers. The goal is to allow these entities to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” The exact amount of pricing discounts is confidential. HHS reports that 340B providers get 25 to 50 percent discounts, but the pharma lobby claims the discounts average nearly 60 percent.
The Program requires pharmaceutical companies to sell outpatient drugs at discounted rates to these covered entities, which include HRSA-supported health centers, Medicare/Medicaid Disproportionate Share Hospitals, children's hospitals, and other safety-net providers. The facilities that purchase these drugs have no restrictions on the use of the savings realized by buying drugs at the discounted rate – the lower price can be passed on directly to the patients, or the entities can bill the patient (or their insurer) for the full cost of the drug and use the difference either to fund programs for the good of the patients, or can save the difference as revenue.
The 340B Program has grown significantly in recent years (an average annual rate of increase 22.3% since 2015). The 340B Program is now the second largest drug program in the US after Medicare Part D. According to America’s Essential Hospitals (a trade group), all but 3% of safety-net hospitals participate in 340B.
The 340B Program has attracted criticism in recent years, with some pointing out that there are no requirements that the savings generated from the discount drugs actually be used to invest in programs to help lower-income patients or that discounts even be passed on to patients. According to the lawsuit filed by Lilly (discussed below), “[l]arge hospitals and other covered entities pocket billions in profit from these transactions every year.” Related issues with transparency have also been highlighted, as there is no way of knowing what facilities are actually doing with the savings from discounts.
The 340B Program has been the focus of intense lobbying from both the hospital and pharmaceutical industries because manufacturers make lower profits when drugs are sold at reduced rates and, conversely, the 340B Program puts many hospitals in a much stronger financial position.
Drug Manufacturers Have Recently Filed Suits
Four major drug manufacturers (Johnson & Johnson, Lilly, Bristol Myers Squibb, and Sanofi) have all recently tried to implement changes to how they comply with the 340B program. Instead of offering drugs to 340B covered entities at discounted prices, the pharma companies want to provide discounts as rebates that take effect after the sale. The drug manufacturers assert that having covered entities submit claims data for review would reduce duplicate discounts, fraud, and waste. This process would give the manufacturers more control over determining when a 340B discount is due. HRSA has rejected these plans, and in response, Johnson & Johnson, Lilly, and Bristol Myers Squibb have all filed separate lawsuits (Sanofi is attempting to proceed with its plan without government approval).
Among other things, these suits claim that HRSA lacks the authority to restrict how drug companies can distribute 340B discounts. The suits argue that the 340B statute allows for either up-front discounts or back-end rebates, so HRSA can't deny the rebate system unilaterally. The manufacturers also claim that a rebate system would provide transparency through the audit process to determine if covered entities were non-compliant with provisions in the 340B statute that prohibit obtaining a 340B price on the same drug purchase that receives a Medicaid rebate or diverting 340B-priced drugs to individuals who are not patients of the covered entity. The cases claim that HRSA’s attempts to bar implementation of the Rebate Model are fundamentally at odds with the 340B statute, and they are asking the courts to declare that HRSA’s prohibition of the rebate model as unlawful.
Experts believe that if HRSA loses in these cases, it will shift the ability to determine who gets lower-priced drugs from HRSA to drug companies, and more litigation will follow to challenge HRSA's management of the Program.
Potential Effects of the 340B Program on Mergers and Acquisitions
The potential for these lawsuits to weaken the 340B Program could also have an impact on merger and acquisition activity. A recent study, funded by the Alliance for Integrity and Reform of 340B, a group that includes “biopharmaceutical innovators”, found that 340B participating hospitals were significantly more likely to be buyers in merger and acquisition deals than other hospitals. Purchased hospitals were substantially less likely to be 340B-covered entities. 340B hospitals might acquire clinics and physician practices because the 340B entity can then move services from the freestanding clinics, which do not have 340B discounts, to hospital outpatient sites which do. Additionally, some drugs prescribed by physicians in the acquired entity may become eligible for 340B discounts due to the merger, allowing the purchasing hospital to realize the difference between the 340B discounted rate and the price the patient or insurer ends up paying. Researchers have suggested that this would make practices that heavily use expensive prescription drugs (including oncology, neurology, and ophthalmology) more likely to be targets for acquisition by 340B entities looking to profit. Additionally, the American Economic Liberties Project has claimed that many rural hospitals' ability to buy drugs at a discount via the 340B program makes them desirable acquisition targets for purchasers seeking profits.
The authors of the Alliance for Integrity and Reform of 340B study noted that “[t]hese findings do not necessarily mean that the acquisition of physician practices by 340B hospitals is driven solely by the drug discounts available in the 340B Program. The analysis merely indicates that there appear to be differences between 340B and non-340B hospitals with regards to possible physician acquisitions.” The funders of this study have been highly critical of many aspects of the 340B program, while unsurprisingly the American Hospital Association has been critical of this research.
Potential Effects of These Cases
If the drug manufacturers win their cases against HRSA, that could shift some decision-making power about eligibility from HRSA to the drug manufacturers. This shift could reduce one incentive for M&A activity by reducing the financial advantages of the 340B Program to hospitals, but it would give pharma companies more power over implementation of an important program serving lower income Americans which could drive up costs and create new harms for patients. While more transparency and oversight of 340B covered entities would likely benefit patients, giving that oversight to large pharmaceutical companies seems like a case of letting the fox guard the henhouse.
These lawsuits are unlikely to end the 340B program, but they may alter the way it is implemented and open the program to future legal challenges. Additionally, the significant expansion of the 340B Program suggests that even if these lawsuits fail, regulators should consider additional reforms to the 340B Program so it no longer functions as an incentive for health care providers to consolidate.