'Stunning' court ruling broadens hospitals' 340B use, calls HRSA's enforcement authority into question

A recent federal district court ruling against the office overseeing the 340B Drug Pricing Program has opened the doors for hospitals to more broadly claim discounts, healthcare legal experts say.

The decision in Genesis Healthcare, Inc. v. Becerra, handed down Friday by the U.S. District Court of South Carolina, establishes that “at least some of [the] interpretative policies surrounding the 340B definition of patient are inconsistent with the 340B statute,” Anil Shankar, a partner at Foley & Lardner, told Fierce Healthcare.

“This is a stunning decision that will have the attention of every 340B stakeholder,” he said. “… This creates new opportunities for 340B-covered entities to purchase 340B for their patients and suggests that [the Health Resources and Services Administration’s (HRSA’s)] audit processes will need to change.”

The decision is also “likely to raise questions” over HRSA’s authority to oversee other aspects of the controversial program, law firm Bass, Berry & Sims wrote in a Monday publication breaking down the ruling.

“Drug manufacturers have repeatedly called for limits on the patient definition test to rein in the volume of 340B purchases,” Bass, Berry & Sims wrote. “The court’s declaration that HRSA cannot impose restrictions on patient definition beyond the language in the statute suggests that HRSA’s role in placing guardrails on patient definition is limited.”

Genesis Healthcare, Inc. v. Becerra

The case at the heart of the decision was brought by Genesis Healthcare in 2018 after a HRSA audit concluded that the system had committed diversion by using the discounted drugs for an ineligible patient—specifically, to a “person who is not a patient of the entity.”

Though the case was previously dismissed as moot, due to HRSA later choosing to reverse the audit’s finding, Genesis successfully appealed to settle the legal controversy.

Genesis argued a covered entity could use the discounted drugs to fill prescriptions from any originating source since an individual becomes its patient once they have received any services from Genesis, according to case filings.

HRSA’s more restrictive definition of a 340B-eligible patient—which required that a covered entity must initiate the services resulting in the relevant prescription in order to claim them as a patient—was inconsistent with the 340B statute that does not specifically define the term “patient,” Genesis argued.

The Department of Health and Human Services had published guidance in 1996 that outlined a “flexible application to accommodate the large number of covered entities and the wide diversity of eligible patients,” Chief U.S. District Judge R. Bryan Harwell wrote in Friday’s decision. Guidance with a more restrictive definition akin to HRSA's audit enforcement was proposed in 2015 but later withdrawn.

As such, “the court found that the 340B statute and congressional intent behind the 340B program require a broad definition of a 340B-eligible patient, and a covered entity does not need to initiate a prescription for it to be filled with a 340B drug,” Bass, Berry & Sims explained.

The court’s ruling also establishes that a covered entity must have an “ongoing relationship” with an individual to meet the broad definition of a 340B-eligible patient, though no specific periods of time are required under the statute, the firm wrote.

In a celebratory statement, Maureen Testoni, president and CEO of 340B Health, a lobbying group representing more than 1,500 participating hospitals, said the court's decision “underscores the importance of the government adhering to the plain and ordinary meaning of ‘patient’ as well as the broader application of 340B to assist safety-net providers amid high prescription drug prices, both as Congress intended.” 

More discounts for 340B hospitals

Off the bat, the court’s ruling opens the door to more outpatient drug purchase savings for 340B entities, though critics contend these providers already expanded their use of the programs’ discounts beyond congressional intent in recent years.

Data released in September by HRSA indicated that from 2021 to 2022 alone, discounted prescription drugs purchased wholesale under the 340B program have grown 22.3% to $53.7 billion.

Genesis, for its part, wrote in its original 2018 filing that it tallied about $650,000 in 340B discounts per month and that revenues derived from the program “are critical to Genesis’ financial survival and continued provision of vital healthcare services to patients in medically-underserved areas.” The filing did not outline how much of those savings are specifically from drugs given to individuals meeting its broader definition of a 340B-eligible patient.

The decision should also lead HRSA to revise its audit protocols and audit enforcement standards to include the more permissive patient definition—though the Bass, Berry & Sims write-up noted that the change will be hard to measure since HRSA doesn’t explicitly share its standards and, at least to some extent, may have already loosened its position on a patient’s relationship with a 340B-covered entity.

Drugmaker restrictions, child site registration among the fallout

Legal experts from both firms highlighted the potential broader impact this ruling could have on HRSA’s interpretation and enforcement of the 340B statute, particularly in regard to ongoing disputes over drugmaker restrictions and a recent hospital child site registration notice.

Much of the judge’s decision focused on HRSA issuing regulations despite a lack of published guidance establishing the more restrictive definition of a patient for 340B enforcement. In doing so, Bass, Berry & Sims wrote that the court has limited HRSA’s ability to take enforcement actions that haven’t been established in guidance.

“The court acknowledged that HRSA has the authority to implement statutory interpretations through guidance, including an interpretation of the term ‘patient,’" Bass, Berry & Sims wrote. “However, such interpretations must be consistent with the statute, and they must have the ‘power to persuade,’ which is a more difficult standard to meet than the standard courts use when reviewing the legality of agency regulations.”

For 340B Health’s Testoni, the decision is “a clear message that HRSA has not been transparent or consistent in its interpretation of 340B.”

“While the decision affirms that the agency has the authority to issue and act on guidelines based on their interpretations of federal law, it also makes clear that HRSA must be consistent when enforcing its interpretations,” she said. “Here, the judge found that HRSA was enforcing language that was not included in any of its published final interpretations, causing the court to enjoin HRSA enforcement in this case.” 

It's yet to be seen whether the court’s limitation on HRSA will extend beyond the Fourth Circuit or whether the federal government will make use of its 60-day appeal window, Bass, Berry & Sims noted. In an email statement, pharmaceutical industry lobbying group PhRMA also stressed that the court's decision is narrowly focused on HRSA's enforcement against Genesis, and "did not make any ruling regarding HRSA's current definition which has been in place since 1996."

Still, legal experts pointed to downstream impacts Friday’s decision could have on recent industry conflicts over HRSA’s 340B enforcement.

“The willingness of courts to depart from HRSA’s positions will cause uncertainty and exploration similar to what existed when the program was new,” Foley & Lardner's Shankar said.

Take the dozens of drug manufacturers that are clashing with HRSA over their ability to implement restrictions on covered entities’ 340B drug dispensing through contract pharmacies. Bass, Berry & Sims said that the Genesis decision “is consistent” with a Third Circuit ruling that HRSA had overreached its statutory authority, thereby bolstering the pharmaceutical industry’s attacks on HRSA’s enforcement actions.

However, several drugmakers (Abbvie, Bristol Myers Squibb, Eli Lilly and Merck) had filed “friend of the court” briefs supporting HRSA’s push in the Genesis case, which would have limited the number of drug discounts they would be required to offer.

“Stakeholders should monitor how drug manufacturers react to the Genesis decision,” Bass, Berry & Sims wrote. “On the one hand, the court’s endorsement of a broad patient definition may make it more difficult for manufacturers to unilaterally impose restrictions on 340B use based on their own narrow interpretation of patient eligibility. On the other hand, the court’s general position on HRSA’s ability to take enforcement action may have implications for HRSA’s ability to stop contract pharmacy restrictions.”

Friday’s ruling “also calls into question” HRSA’s ability to enforce a late October notice ending a pandemic waiver that lowered the bar for covered entities to add new off-site locations, Bass, Berry & Sims wrote. That update was challenged days later by dozens of hospitals that alleged in a complaint that the notice exceeded HRSA’s authority and conflicted with statutory language.

Even beyond those ongoing cases, Shankar said the industry is “likely to see new litigation around other interpretive policies HRSA has developed over the years” due to the doubts introduced in Friday’s decision.   

Harwell wrote in the decision that “Congress is the appropriate entity” to introduce any new restrictions on the 340B program and that “it is not the role of HRSA to legislate and limit the 340B program.”

These statements add fuel to the industry’s urging that Congress “amend the 340B statute to define key terms and provide HRSA with the authority to administer the program through regulations,” Bass, Berry & Sims wrote.