Last week, the United States District Court for the District of Columbia issued an opinion declaring that HHS has authority to approve drug manufacturers’ rebate models before they are implemented and that these models are not prohibited by the 340B statute.

The ruling comes in response to cases filed by Eli Lilly, Novartis, Sanofi, Bristol Myers Squibb, and Kalderos arguing that manufacturers have the right to offer 340B pricing in the form of a rebate rather than as an upfront discount. The plaintiffs alleged in their complaints that: 1) HRSA acted outside of its statutory authority by requiring approval of the rebate models; and 2) if approval is required, HRSA’s refusal to approve use of their rebate models was arbitrary and capricious.

Under the proposed rebate models, covered entities would buy outpatient drugs at full price and then submit claims data to the manufacturers (or their preferred claims processor operated by Second Sight Solutions or Kalderos) to request a rebate, or a credit on a subsequent purchase, equal to the 340B discount.

340B Health and two of its member health systems – UMass Memorial Medical Center (UMass) and Genesis Health (Genesis) – intervened in the Eli Lilly, Novartis, Sanofi, and Bristol Myers Squibb cases to support HHS.  The groups sought a declarative judgment that all 340B rebate models are prohibited, which Judge Dabney Friedrich denied.

In her ruling, Judge Friedrich agreed with the government that HRSA has the authority to require approval of the rebate models and that manufacturers may not implement a rebate model unilaterally. The judge cited in support of her ruling the plain meaning of the 340B statute, the congressional intent of the statute, and HRSA’s past actions.  Judge Friedrich did not rule on the plaintiffs’ second claim – that HRSA’s refusal to approve the rebate model was arbitrary and capricious – because, according to the judge, HRSA had not yet made a final decision on the rebate models being proposed. Plaintiffs’ argument that HRSA had acted unlawfully with respect to those rebate proposals was therefore premature.  The only exception was Sanofi’s rebate request which, according to the judge, was subject to a final decision.  However, the judge ruled that HRSA’s analysis of the Sanofi rebate model was incomplete and that HRSA needed to revisit Sanofi’s model to take additional factors into account.

Judge Friedrich stated that it was “concerning” that HRSA and CMS did not appear to have a definitive coordination plan prior to the January 1, 2026, effective date for certain provisions of the Inflation Reduction Act.  As reported in a previous alert, HHS recently submitted a filing stating that it will release guidance on manufacturer rebate models by June 1, “keeping in mind the approaching effective date of certain Inflation Reduction Act requirements.”

Johnson & Johnson (J&J) has also sued HHS to defend its rebate model, raising arguments similar to the ones raised by the plaintiffs in the case before Judge Friedrich. The J&J case is before a different judge and a final ruling has not yet been issued. The judge in the J&J case recently allowed 340B Health, UMass and Genesis to intervene.

The stakes are high in these rebate model lawsuits because, if manufacturers are successful, they will have the ability to withhold payment on rebates whenever they suspect a given drug is ineligible for 340B pricing due to diversion or duplicate discount concerns. The burden would shift to covered entities to fight for any contested rebates. It would also create a serious cash flow problem for many covered entities that cannot afford to pay retail prices for drugs and to wait for payment of their rebates from manufacturers. A decision in favor of the manufacturers would also introduce another administrative hurdle that covered entities would have to overcome to receive the 340B discount on medications and could force them to find upfront financing of their pharmacy programs while they wait for their rebates and reimbursement from payers.

The judge’s decision is mixed for covered entities. It is good news that, according to the court, manufacturers lack the right to institute the rebate model unilaterally. It is bad news, however, that the rebate model is still a viable option depending on HRSA’s review of it. Powers will continue to monitor developments on the use of rebate models to provide 340B discounts.