District Court Finds Favorably For Manufacturers in 340B Contract Pharmacy Dispute

Featured Expert Contributor, Life Sciences and Medtech Regulation

Matt Wetzel is a partner in the Washington, DC office of Goodwin Procter LLP and serves as the WLF Legal Pulse’s Featured Expert Contributor, Life Sciences and Medtech Regulation. William Jackson is a partner in the firm’s Washington, DC office, and Heath Ingram is an associate in the firm’s New York, NY office.

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On November 1, 2021, the Southern District of Indiana issued a narrow, yet favorable, opinion for Eli Lilly, finding that the drug manufacturer would not be held liable for alleged violations of the 340B Drug Pricing Program’s (“340B”) contract pharmacy requirements. Eli Lilly and Co. v. US Dept. of Health and Human Services, Order, C.A. No. 1:12-cv-00081 (S.D. Ind.). The court’s opinion resolves an ongoing conflict between Eli Lilly and the Department of Health and Human Services’ (“HHS”) Health Resources & Services Administration (“HRSA”) over Eli Lilly’s 2020 policy to prohibit covered entities from dispensing Eli Lily’s drugs under 340B unless they dispense through an in-house pharmacy or designate a single contract pharmacy to do so.

As we have previously written in the WLF Legal Pulse (see here and here), 340B is enforced through a haze of informal guidance issued by HHS and HRSA that has shifted over time. Eli Lilly, consequentially, implemented these restrictions to protect against the possibility of drug diversion and other abuses of the 340B Program. In December 2020 HHS issued an Advisory Opinion requiring manufacturers like Eli Lily to dispense through as many contract pharmacies as the covered entities engage. In response, Eli Lilly sued the agency under the Administrative Procedure Act. During the course of the litigation, HHS retracted the December 2020 HHS Advisory Opinion.¹

On May 17, 2021, as the APA litigation was proceeding, HRSA issued a letter to Eli Lilly warning that its restrictive policies violate 340B and would result in substantial penalties should they continue.² In its opinion, the district court found the May 2021 HRSA letter, and the lack of reasoning behind it, to render the letter “arbitrary and capricious.” The court stated that as HRSA fails to “acknowledge or explain” their changed position on 340B enforcement, the penalties threatened under the May 2021 letter may not be enforced. In reaching its decision, the court pointed towards HRSA’s previously implied position that they lacked the ability to enforce 340B. The court, however, did not reject the HRSA’s position or adopt Eli Lily’s stance all together. Instead, it found that manufacturers may not “impose unilateral extra-statutory restrictions” on dispensing 340B drugs and noted that the intent of the letter to be legally permissible and within the agency’s authority.

The Indiana court concluded its opinion by criticizing HRSA’s haphazard 340B guidance, stating that the court has “no insight into why there is apparently so much reluctance to promulgate a holistic legislative proposal to bring clarity to the scope of the regulated parties’ obligations and entitlements.” In doing so, it signaled a need for lawmakers to settle 340B’s ambiguity and encouraged HRSA to offer more concrete guidance then its “piecemeal interpretations” and “after the fact patchwork characterizing the history of the agency’s attempts to manage this program.”

While this ruling may be an apparent victory for Eli Lilly and the other manufacturers that received similar May 2021 HRSA letters, manufacturers following along should remain wary of future 340B restrictions. The Southern District of Indiana decision hinges solely on the inconsistent nature of HRSA’s 340B guidance. And the court signaled a willingness to accept such measures, so long as they are issued in a straightforward manner. While manufacturers may have escaped penalties this time, it is possible that HRSA may promulgate similar restrictive measures in a way that passes court review in the future.

Notes

The court vacated the December 2020 Advisory Opinion following subsequent lawsuits from Eli Lilly and other drug manufacturers. In rejecting the advisory opinion, the court considered it to be an “unjustified assumption that Congress imposed the HHS’s interpretation [of 340B] as a statutory requirement.” As a result, the agency action needed to be “declared invalid” as it was “not based on the agency’s own judgment but rather on the unjustified assumption that it was Congress’ judgment.” See AstraZeneca Pharmaceuticals LP v. Becerra, 2021 WL 2458063, at *11 (D. Del. June 16, 2021).
HRSA Letter to Lilly USA, LLC Regarding Sales to Covered Entities Through Contract Pharmacy Arrangements (May 17, 2021).