Health care providers who qualify for preferential pricing through the Health Resources and Services Administration 340B Drug Pricing Program are bracing themselves for further reductions in the drugs they can dispense through their contract pharmacy networks.

Many manufacturers have announced changes in their policies effective Oct. 1, 2020, (or sooner) that will limit 340B drug discounts to in-house pharmacies or a single contract pharmacy for each qualifying provider.

The change comes as drug manufacturers react to statements by the Health Resources and Services Administration Office of Pharmacy Affairs (HRSA OPA) suggesting that guidance it previously issued allowing providers to use multiple contract pharmacies exceeded its statutory authority and is therefore unenforceable.

These manufacturer actions will result in sharply reduced 340B savings for health care providers if they are not curtailed by HRSA OPA or the courts.

Recently, the Department of Health and Human Services (HHS) – the agency which oversees HRSA OPA – has taken the highly unusual step of publishing its response to a drug manufacturer’s request for an advisory opinion, in which it castigates the drug manufacturer for this behavior and implies (but does not confirm) that it may take actions to counteract the manufacturer’s activity.

340B Program Overview

The 340B Program requires drug manufacturers to sell certain outpatient drugs to certain categories of health care providers (or covered entities) at reduced prices.

There are various categories of covered entities, ranging from large hospitals to small clinics, but as a rule, covered entities treat large percentages of vulnerable and underserved patient populations. The drug pricing discounts are intended to enable these covered entities “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”1

While some argue that the savings should pass directly to the patients, the prevailing statutory interpretation is that the benefit inures to the covered entities themselves. These covered entities, in turn, use the 340B Program savings to sustain and expand their operations to serve their vulnerable patient populations. Notably, drug manufacturers, not the taxpayers, pay for the benefits of the 340B Program.

340B Program History

A relatively short statute found in Section 340B of the Public Health Service Act gives the 340B Program its authority, now codified at 42 U.S.C. 256b. Since the 340B Program’s inception, HRSA OPA provided the specific operational guidance and regulatory oversight which allowed the program to function.

In 1996, HRSA OPA issued guidelines that permitted covered entities participating in the 340B Program to contract with a pharmacy to provide services to the covered entity’s patients.2

The statute had been silent as to contract pharmacy arrangements, but these administrative guidelines permitted a covered entity to use a single point for pharmacy services – either an in-house pharmacy or an individual contract pharmacy.

In 2010, HRSA modified its guidance to allow a covered entity to use as many contract pharmacies as it wanted to provide 340B drugs to patients (in addition to in-house pharmacies).3

This 2010 guidance caused an explosion in 340B Program growth over the last 10 years, with the number of contract pharmacy arrangements (and the corresponding 340B drug dispenses) growing exponentially. For instance, according to a 2017 Government Accountability Office report, since the release of the 2010 guidance, the number of unique contract pharmacies has increased from about 1,300 at the beginning of 2010 to around 18,700 in 2017. According to HRSA data, in 2017 there were more than 46,000 contract pharmacy arrangements.4

2020 Changes

Until this year, HRSA OPA maintained that it had regulatory authority over contract pharmacy arrangements, and would routinely audit – and penalize – covered entities for failure to comply with its delineated contract pharmacy requirements. Early in 2020, however, HRSA OPA began to scale back its purported authority via a series of comments to various industry stakeholders.

In essence, HRSA OPA began to imply that its authority to regulate the 340B Program is expressly limited to the thin statutory confines of Section 340B. Under this position, the contract pharmacy Federal Register guidelines were just that – mere guidelines. Confusingly, HRSA OPA never publicly published this new position, but instead conveyed this message to certain trade groups and stakeholders.

The New HRSA OPA Position

At its core, the underlying issue is that the governing statute does not directly address contract pharmacies, and manufacturers are now taking the position that they don’t need to follow the HRSA “guidance” allowing contract pharmacy arrangement.

Drug Manufacturer Response

The consequences of the new HRSA OPA position are clear from the following timeline:

  • On July 1, 2020, drug manufacturer Eli Lilly posted a notice on the HRSA OPA webpage stating that they will no longer allow certain dosages of Cialis, if purchased by a 340B provider at the 340B price, to be delivered to contract pharmacies. The following week, HRSA OPA stated in a press interview that they lack the authority to stop Lilly from taking this action.
  • In early July 2020, drug manufacturer Merck sent a letter to all 340B providers requesting them to submit data to a third party, 340B ESP, every two weeks about every Merck drug that was dispensed by a contract pharmacy. Merck stated that there would be much more severe consequences if 340B providers refused to submit this data. The Merck deadline was Aug. 14, 2020.
  • On July 27, 2020, drug manufacturer Sanofi sent a letter to all 340B providers requesting that they submit the same data as Merck (except for Sanofi) to 340B ESP, and stating explicitly that if a 340B provider did not comply, they would refuse to permit any Sanofi drugs to be shipped to its contract pharmacies. The deadline to comply is Oct. 1, 2020.
  • As reported by 340B Health on Aug. 18, 2020, drug manufacturer AstraZeneca sent a letter to covered entities indicating that it will cease providing 340B pricing for 340B-eligible drugs dispensed by contract pharmacies on Oct. 1, 2020.
  • Effective Sept. 1, 2020, Eli Lilly is limiting distribution of all 340B priced product directly to covered entities only. Covered entities will not be eligible to purchase Eli Lilly and Company products at the 340B price for shipment to a contract pharmacy.
  • On Sept. 8. 2020, Sanofi sent a follow-up letter to covered entities indicating entities that have not provided the requested data by Oct. 1, 2020 would no longer be able to obtain 340B pricing at contract pharmacies.

AstraZeneca on Aug. 17, 2020, explained its approach as follows:

AstraZeneca to date has processed chargebacks associated with Contract Pharmacy arrangements consistent with the approach proposed in the Health Resources and Services Administration’s (“HRSA”) April 2010 guidance. Beginning on Oct. 1, 2020, AstraZeneca plans to adjust this approach such that AstraZeneca only will process 340B pricing through a single Contract Pharmacy site for those Covered Entities that do not maintain their own on-site dispensing pharmacy.

Other drug manufacturers have adopted a similar approach, and this trend is expected to continue, absent significant legal or legislation action.

Legislative Response

On the legislative front, Energy and Commerce Chairman Frank Pallone, Jr. (D-NJ), Health Subcommittee Chairwoman Anna G. Eshoo (D-CA), and Oversight and Investigations Subcommittee Chair Diana DeGette (D-CO) wrote to Health and Human Services (HHS) Secretary Alex Azar, according to a press release Sept. 3, 2020, expressing concern over the manufacturers actions.

The letter stated:

[T]here is no provision of law which allows participating manufacturers to deny service to covered entities or choose where covered entities may dispense the drugs they purchase. Failure of manufacturers to offer drugs at the appropriate 340B price may violate the 340B statute’s requirements or result in overcharges to covered entities, in contravention of the law.

The effect of this letter on HHS, which oversees HRSA, remains to be seen.

Somewhat surprisingly, as of the date of this article, there has not been a meaningful legal challenge to the recent manufacturer actions.

HRSA Response

However, earlier in September 2020, possibly as a result of the Congressional letter, HRSA has launched an “investigation” into these manufacturer actions. Per conversations with Apexus, the 340B Program prime vendor which helps administer the program, sources have learned that HRSA has stated that:

HRSA is aware of the activity and reviewing the materials. We are unable to comment on this at this time; covered entities may consult legal counsel. We do not have any further reference materials or information to point you to at this time.

HHS Strikes Back

On Sept. 21, 2020, HHS took the highly unusual step of publishing its response to Eli Lilly’s request for a pre-enforcement advisory opinion as to whether Eli Lilly’s actions could subject Eli Lilly to Sanctions. In this response, HHS indicated that, while it “has significant initial concerns” with Eli Lilly’s new policy, it “has yet to make a final determination as to any potential action.”

However, HHS indicated that Eli Lilly “cannot and should not view the absence of any questions from the government as somehow endorsing Lilly’s policy especially when this Department is leading the response to the COVID-19 pandemic.”

HHS went on to castigate Eli Lilly’s approach as “at the very least, insensitive to the recent state of the economy.” HHS compared the struggles faced by many health care providers (and American citizens and businesses generally) with Eli Lilly’s “outstanding year” as evidenced by a 14 percent increase in profits.

HHS finalized its letter by suggesting that a False Claims Suit (which may impose treble damages) against Eli Lilly is a “potential consequence in the event that Lilly knowingly violates a material condition of the program that results in over-charges to grantees and contractors.”

Conclusion: More to Come

It remains to be seen as to whether HHS’s Sept. 21 letter gives the manufacturers pause in their increasingly confident pushback against contract pharmacy arrangement. Nonetheless, the HHS letter will surely give covered entities a much needed morale boost as they attempt to react to the flurry of adverse manufacturer actions.

This is a rapidly evolving situation, and all affected parties will no doubt want to continue to closely monitor what happens next – whether from the manufacturers or from HHS.

This article was originally published on the State Bar of Wisconsin’s Health Law Blog. Visit the State Bar sections or the Health Law Section web pages to learn more about the benefits of section membership.


1 H. R. No. 102-384, Part II, Pg. 12, 102nd Congress, Second Session.

2 61 Fed. Reg. 43549, Aug. 23, 1996.

3 75 Fed. Reg. 10272 (March 5, 2010).

4 GAO-17-749T Drug Discount Program (July 18, 2017).​