On Friday, the U.S. District Court for the Southern District of Indiana (the Court) issued a decision supporting HRSA’s statutory interpretation, as reflected in HRSA’s May 17 determination, that Eli Lilly overcharged covered entities that dispense 340B drugs through contract pharmacies.  The Court decided that HRSA’s May 17 letter (1) is not contrary to law based on the Court’s interpretation of the 340B statute and does not therefore exceed HRSA’s statutory authority; and (2) is not an unconstitutional “taking” of Lilly’s private property in violation of the Fifth Amendment because manufacturers voluntarily participate in the 340B program.  However, the Court determined that HRSA’s May 17 letter failed to acknowledge HRSA’s change in position regarding its authority to enforce contract pharmacy arrangements.  The Court therefore invalidated and sent HRSA’s May 17 letter back to HRSA “for further consideration/action consistent with the opinions” explained in the Court’s decision.  HRSA may therefore issue another cease-and-desist letter notifying Lilly that it has overcharged covered entities and explaining HRSA’s change in position regarding the agency’s enforcement authority.  The Court also invalidated the withdrawn Advisory Opinion issued by the HHS Office of General Counsel (OGC) because it was based on OGC’s faulty reasoning that Congress clearly drafted the 340B statute to unambiguously require manufacturers to deliver 340B drugs to an unlimited number of contract pharmacies, rather than on HRSA’s narrow judgment that Lilly overcharged covered entities based on HRSA’s administrative record, which included numerous covered entity complaints against Lilly, and HRSA’s interpretation of the 340B statute.

In deciding that HRSA’s May 17 determination is not contrary to the 340B statute, the Court issued its interpretation of the statute and rejected Lilly’s interpretation, noting that “in drafting the 340B statute, Congress clearly utilized broad, generalized language” that is silent as to the role contract pharmacies may play in connection with covered entities’ purchases of 340B drugs.  The Court noted that Lilly’s interpretation of the 340B statute’s “shall . . . offer” provision “swung too far in the opposite direction” and that “by relying solely on the statute’s silence, drug manufacturers would be authorized to unilaterally impose a wide variety of restrictions on their offers [of 340B pricing], the effect of which would assuredly render 340B drugs inaccessible to many covered entities.”  The Court also emphasized that its ruling that HRSA was acting within the bounds of the 340B statute in issuing the May 17 letter should not be interpreted as a ruling that the 340B statute requires drug manufacturers to deliver to an unlimited number of contract pharmacies.

The Court invoked various Supreme Court rulings, including Bostock v. Clayton County, which held that “when Congress chooses not to include any exceptions to a broad rule, the courts apply the broad rule”, rather than permitting regulated entities to unilaterally erect barriers to the broad rule.  The Court noted that “Congress’s use of broad language in enacting [the 340B] statute and specifically omitting any mention of where 340B drugs are to be delivered does not leave room for drug manufacturers to unilaterally condition or control the availability of their 340B pricing to a particular delivery location of their choosing such that covered entities are prevented from accessing 340B pricing and required to purchase covered outpatient drugs at [wholesale acquisition cost] prices.”  The Court held that the “fairest and most reasonable interpretation of the 340B statute would not authorize drug manufacturers to impose unilateral restrictions on the distribution of the drugs that would frustrate Congress’ manifest purpose in enacting the statute.”

The Court also rejected Lilly’s contention that use of contract pharmacies constitutes diversion because many contract pharmacies rely on the replenishment model to manage 340B drug inventory.  The Court reasoned that the 340B statute mandates that a drug manufacturer’s claim of diversion must first be asserted through ADR proceedings after it has audited the covered entity; that Lilly admits that not every contract pharmacy arrangement constitutes diversion; and that the evidence does not support the conclusion that every contract pharmacy utilizes the replenishment model.  The Court stated that it was beyond the Court’s purview to issue an opinion on whether use of the replenishment drug inventory model constitutes diversion and that the issue should be addressed through 340B ADR.

Finally, the Court reasoned that although the demand for 340B drugs and increased use of contract pharmacies was likely not imagined by Congress when enacting the statute, the evidence establishes that Congress was aware that covered entities relied on outside pharmacies when the statute was enacted.  The Court cited the abandoned 1992 Senate version of the 340B statute that included on-site contract pharmacies as a limitation to a covered entity’s distribution of 340B drugs.  The Court noted that Congress therefore has been well-aware of the use of contract pharmacies and is free to amend the 340B statute to prohibit or restrict their use, but Congress has chosen to refrain from amending the statute to include that distribution limitation.

Despite the Court’s favorable statutory interpretation and finding that HRSA’s May 17 letter was not contrary to the 340B statute, the Court found HRSA’s determination to be arbitrary and capricious in violation of the Administrative Procedure Act and invalidated it because it did not acknowledge or discuss HRSA’s change in position regarding HRSA’s enforcement authority over contract pharmacies.  The Court noted that, under the APA, a federal agency “must at least display awareness that it is changing position and show that there are good reasons for the new policy.”  The Court accepted that HRSA has consistently set forth its view, in guidance documents, that drug manufacturers must comply with their 340B pricing obligations regardless of the manner in which covered entities dispense 340B drugs and must accommodate all contract pharmacy arrangements that the government permits.  However, the Court held that HRSA’s “exponential expansion of what covered entities may do [regarding] contract pharmacy arrangements over the years, has consequently changed what drug manufacturers must do.”  Specifically, the Court cites HRSA’s representations in a 2020 GAO report that it declined to pursue potential compliance issues involving covered entities’ dealings with contract pharmacies because the statute does not address contract pharmacy use.  The Court explained that before December 2020, HRSA consistently represented that its interpretations in the 1996 and 2010 contract pharmacy guidance documents was non-binding and that HRSA had limited authority to issue enforceable regulations.  The Court also cited HRSA’s June 2020 communication to Lilly that stated that HRSA’s prior “contract pharmacy advice” was not binding on manufacturers, and a July 2020 public statement by HRSA that “the 2010 guidance . . . is not legally enforceable” and that HRSA could enforce only direct violations of the statute but could not “compel” manufacturers “to provide 340B discounts on drugs dispensed by contract pharmacies.”   The Court stated that HRSA’s view changed in December 2020 when the Advisory Opinion explained, for the first time, that manufacturers are statutorily obligated to offer 340B pricing to covered entities through contract pharmacy arrangements, an opinion that was followed by HRSA’s overcharge determination in the May 17 letter.

The Court is the first court to issue a decision regarding HRSA’s May 17 letter.  It remains unclear how the Court’s interpretation of the 340B statute will influence other federal courts resolving similar matters, whether ADR panels will adopt similar statutory interpretations when resolving ADR disputes regarding manufacturer overcharges, or how the Court’s ruling will impact the OIG’s assessment of whether the drug companies are liable for civil monetary penalties because they have knowingly and intentionally overcharged covered entities.

The Court had previously issued a decision enjoining enforcement of ADR proceedings against Lilly.  The Court stated that it would issue a final decision on the legality of the ADR rule through a separate decision at a later date.