Glenn G. Lammi is WLF’s Executive Director and Vice President of Legal Studies. This post originally appeared on WLF’s Forbes.com contributor site.

This past September, a sub-agency of the Department of Health and Human Services (HHS) threatened to kick a pharmaceutical company out of Medicare because the company, in line with federal law, offered a healthcare provider discounts on two of its drugs. This unprecedented turn of events is but the latest example of the Health Resources and Service Administration’s (HRSA) distortion of Public Health Service Act § 340B and the agency’s broader statutory overreach. The incoming administration would do public health, and especially low-income patients, a true service by recalibrating HRSA’s administration of the 340B program.

340B Background

Section 340B imposes only two requirements on pharmaceutical manufacturers. If they wish to sell their drugs to the federal government, drug makers must offer certain healthcare providers the opportunity to purchase drugs at or below a price ceiling that is set out in a pricing agreement. The providers, or “covered entities,” service low-income patients and include certain hospitals, black lung clinics, and rural referral centers.

To protect the program’s integrity, Congress imposed two requirements on covered entities. First, the law prohibits diversion, where covered entities resell or transfer a 340B drug to someone that’s not a patient of the entity. Second, entities cannot receive a duplicate discount, such as a Medicaid rebate. The law permits hospitals and other covered entities to earn profits when commercial and Medicare Part B and Part D payers reimburse the providers at a higher price. Consistent with the program’s purpose, HRSA anticipated that covered entities would “pass all or a significant part of the discounts to their patients.”

Consequences of HRSA’s Tinkering

After four years of relative success, HRSA could no longer resist the urge to tinker with the 340B program. Because the statute limits HRSA’s rulemaking authority, the agency sought change through non-binding guidance documents. A 2007 guidance indicated that covered entities lacking an in-house pharmacy could contract with third parties for 340B program purchases. Because of its concern with an increased risk of diversion and double discounting accompanying the involvement of more third parties, HRSA limited contracting to a single pharmacy. Then, in 2010, the agency inexplicably lifted the one-pharmacy limit in a new guidance, allowing covered entities to use an unlimited number of contract pharmacies.

An explosion in third-party involvement fueled a dramatic expansion in the 340B program. The GAO reported that the number of pharmacies contracted by covered entities increased from 1,300 in 2010 to 23,000 in 2020. As HRSA’s own audits have found, covered entities’ increased use of unlimited contract pharmacy arrangements has produced a sharp rise in unlawful drug diversion and duplicate discounting. As recently as 2020, the GAO reported that, for HRSA audits in FY 2012–2019, there were over 1,500 findings of 340B non-compliance by covered entities. Neither HRSA nor covered entities police whether third parties purposely or unintentionally dispense discounted 340B drugs to patients not treated by a covered entity, and whether third parties mark up the price of those drugs. Nothing prevents contract pharmacies from replenishing their stock of medication via the 340B program. HRSA can terminate covered entities for 340B non-compliance but has only done so once in the program’s history.

Drug Makers Step In

In the face of HRSA inaction, some manufacturers, including Sanofi Aventis and Novartis, have adopted policies for their 340B dealings with covered entities meant to limit diversion and double discounting. Sanofi’s policy requires covered entities to submit de-identified claims data if those entities wish to contract with more than one pharmacy. Novartis announced that for 340B hospitals, it would work only with contract pharmacies within 40 miles of the contracting hospital.

HRSA sent letters of violation to four companies, ordering each to rescind the policies. The companies challenged HRSA’s action in court. The cases worked their way up to the U.S. Court of Appeals for the Third Circuit and the D.C. Circuit.

The Third Circuit unanimously enjoined HRSA’s violation letters in a January 30, 2023 opinion. The court quipped that “statutory silence, like awkward silence, tempts speech.” Section 340B is silent on contract pharmacies and offers HRSA no language to limit how and to whom drugs must be delivered when “purchased by” a covered entity. HRSA could not, the court reasoned, simply fill in the desired words. The court added that drug makers’ policies offer all covered entities the opportunity to purchase discounted drugs, “though covered entities cannot squeeze as much revenue out as they once could.”

The D.C. Circuit also ruled unanimously against HRSA on May 21, 2024. Like the Third Circuit, the D.C. Circuit noted Section 340B’s silence on delivery conditions and reasoned that silence cannot prohibit otherwise lawful conduct. Including non-price terms in a contract like place or manner of delivery, the court explained, is not only typical but under the law of contracts necessary “to be definite enough to bind the contracting parties.”

Undeterred, HRSA Oversteps Again

Instead of reflecting on its decisive legal defeats, HRSA doubled down on its opposition to drug-delivery methods meant to safeguard 340B program integrity. In September, Johnson & Johnson (J&J) announced a rebate model for 340B sales of two drugs to certain large 340B-participating hospitals. J&J would provide discounts for drug purchases after a hospital submits data showing that a hospital-covered entity (including a contract pharmacy) has purchased and dispensed the drug. HRSA issued a letter warning that the proposal violates J&J’s 340B obligations, a transgression which, the agency wrote, could result in termination of its Pharmaceutical Pricing Agreement (PPA) and monetary penalties. On September 30, J&J informed HRSA that though it “continues to believe that the Rebate Model is legally permissible,” the company would forego implementation.

HRSA’s strident approach to J&J’s limited model, which would have advanced the goals of § 340B, is troubling. Rather than accept J&J’s request for a meeting, HRSA reminded the company that “even apart from a violation of the Agreement,” HHS could cancel its PPA “for other good cause.” Debarment from Medicare would be a death penalty not only for the company but also potentially for Medicare and Medicaid patients that rely on J&J medications. Such a measure, or even the threat of it, should be used with great caution, not as a bureaucratic muscle flex.

Perhaps HRSA’s nuclear threat reflects an agency concern that J&J could successfully fight the violation allegations in court. J&J would have had as good of a chance of success as Sanofi and the other companies that prevailed in their challenges, if not better. Those companies successfully argued that § 340B’s silence on how or to whom drugs must be delivered deprived HRSA the authority to prohibit delivery conditions. HRSA accused J&J of violating a statute which explicitly includes rebates as a method of offering covered entities a 340B price. Section 340B does not, however, dictate how drug makers should apply rebates in the course of offering a 340B price. As the D.C. and Third Circuits concluded, HRSA cannot claim enforcement authority that the statute fails to provide. Finally, HRSA argued in its violation letter that J&J did not secure the agency’s approval for the pricing mechanism. Because each drug company’s PPA governs 340B pricing matters, J&J could credibly argue that HRSA can only exercise its authority over the rebate model by renegotiating the PPA.

A Reset Needed

The 340B program has grown from being a laudable patient-assistant program narrowly focused on certain healthcare providers to an unrecognizable, profit-generating behemoth second only to Medicare Part D in size and cost. Rather than focus on asserting the authority § 340B grants it, HRSA has trained its sights on drug makers’ efforts to limit their financial losses and redirect the program back to its original beneficiaries: patients. Manufacturers have shown a willingness to oppose HRSA when it delegates authority to itself not found in the statute. Supreme Court rulings like Loper Bright v. Raimondo will further stiffen businesses’ spine against such agency overreach.

Drug makers and others involved in the 340B program, as well as HRSA itself, have called on Congress to reform the statute and clarify the agency’s authority. In the meantime, new leaders at HHS should put an end to HRSA’s pursuit of power it plainly lacks and stress collaboration with program participants to reduce diversion and double discounting. Public health will be much the better for it.

Editor’s Note: After this post originally appeared on Forbes.com, Johnson & Johnson filed a complaint for declaratory and injunctive relief in the U.S. District Court for the District of Columbia against HRSA’s position that it could not implement the Rebate Model.