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The federal government cannot compel pharmaceutical manufacturers to sell prescription drugs at a discount to unlimited numbers of pharmacies.  That is the takeaway from the Third Circuit’s recent opinion in Sanofi Aventis U.S. LLC v. United States Department of Health and Human Services, No. 21-3167, 2023 WL 1098017 (3d. Cir. Jan. 30, 2023) (to be published in F.4th).  We see two interesting angles.  First, the government can and does overstep its power at times, and HHS did so here.  Not so fast.  Second, HHS’s mandate threatened to undermine FDA-required Risk Evaluation and Mitigation Strategy (or REMS) programs, which can be key to controlling liability arising from drugs with particular risks.  HHS had to give way. 

So what happened?  The federal government pays for something like half of all prescription drugs through Medicare and Medicaid, and if drug manufacturers want a piece of that pie, they have to offer their drugs at a discount to certain healthcare providers—called “covered entities.”  There are compelling policy reasons supporting this exercise of market power.  Covered entities typically care for low-income and rural populations, and the HHS-required discounts allow covered entities to provide prescription drugs to uninsured patients at little to no cost.  The discounts also allow covered entities to turn a larger profit with insured patients, whose carriers reimburse at full price.  We have no problem with supporting care for people who otherwise might go without.

There are, however, limits.  When Congress first enacted the governing statute, known as Section 340B, few covered entities had in-house pharmacies.  HHS therefore issued a guidance allowing each covered entity to use one external contract pharmacy.  Sort of a discount by proxy.  The covered entity was able to acquire drugs at a discount, and it was allowed to designate a dispenser where its patients could get their meds.  Makes perfect sense. 

But then the Affordable Care Act came along.  In a guidance issued at the same time the Act was enacted, HHS said that covered entities could use an unlimited number of contract pharmacies, which caused the use of contract pharmacies to increase twentyfold.  That is a huge increase in what was already a large market, and it created problems well beyond the bottom line.  First, the much larger number of contract pharmacies receiving Section 340 discounts increased the risk that covered entities were also receiving other rebates—i.e., duplicate discounts, which Second 340B forbids.  Second, the risk of drug diversion through doctor shopping and other means increased. 

Several drug manufacturers therefore imposed their own pharmacy limits, which generally allowed covered entities to use (1) one contract pharmacy or (2) multiple contract pharmacies under certain conditions.  In response, HHS doubled down and issued an Advisory Opinion purporting to mandate that drug manufacturers deliver Section 340B drugs to an unlimited number of contract pharmacies.  After HHS sent multiple Violation Letters, several manufacturers sued.  One of them prevailed in Delaware, causing the HHS to rescind the Advisory Opinion.  Two others lost in New Jersey, where the district court found their lawsuits moot.  

On a “flurry of appeals,” the Third Circuit has ruled that the HHS exceeded its power.  To begin with, the manufacturers’ challenges were not moot.  Although HHS fecklessly “rescinded” the Advisory Opinion after losing in Delaware, it still held the position that manufacturers had to deliver Section 340B drugs to an unlimited number of contract pharmacies.  The specter of enforcement actions still loomed.  2023 WL 1098017, at *3. 

On the merits, Section 340B did not authorize HHS to mandate delivery to unlimited numbers of dispensers.  The statute requires price caps for drugs “purchased by” covered entities, and it states that manufacturer must “offer” drugs to cover entities at or below that cap.  But the act is silent on delivery, and it does not mention contract pharmacies anywhere.  The manufacturers’ limits therefore complied with the statute, and HHS had no authority to rewrite the law on the covered entities’ behalf.  As the Third Circuit observed, “[W]hen Congress’s words run out, covered entities may not pick up the pen.”  Id. at *4.  The question was whether Section 340B prohibited drug manufacturers from limiting the number of contract pharmacies to which they delivered discounted drugs, and the statute “contains no such prohibition.”  Id. at *5. 

The Third Circuit had other reasons, and one stands out in the product liability context.  For some drugs with particular risks, the FDA requires REMS programs for their safe use.  Drug manufacturers often comply with these requirements by limiting distribution to pharmacies that are specially trained on the drugs’ risks and best practices for dispensing.  HHS’s Advisory Opinion essentially ruled that those limits were illegal, by mandating that drug manufacturers had to delivery Section 340B drugs to unlimited numbers of pharmacies.  This “legal bind” was yet another strike against HHS’s interpretation. Id. at *5. 

It is good public policy to make prescription drugs more widely available to low-income and rural populations, but the pharmaceutical manufacturers here were doing that, and they were doing it consistent with the governing law.  HHS overreached on this one.