Hospitals hope litigation will stop the 340B rebate model before it gets started

Hospitals are going to court in an effort to thwart major changes to the 340B Drug Pricing Program.

The American Hospital Association (AHA) was among a group that filed a lawsuit against the federal government Dec. 1, seeking to have implementation of a planned 340B rebate model halted before it begins Jan. 1.

Under the rebate model as it stands to be instituted, 340B providers will have to foot the full cost when procuring any of the 10 covered drugs. They can subsequently send in claims data to receive a manufacturer rebate that would bring the cost down to the 340B price.

Other plaintiffs in the lawsuit include the Maine Hospital Association and four safety-net hospitals (St. Mary’s Regional Medical Center in Maine, Nathan Littauer Hospital & Nursing Home in New York state, Unity Medical Center in North Dakota, and Dallas County Medical Center in Arkansas). Named defendants include HHS Secretary Robert F. Kennedy Jr. and Thomas Engels, administrator of the Health Resources and Services Administration (HRSA). The case was filed at the U.S. District Court for Maine.

Plaintiffs hope to obtain a permanent injunction blocking implementation and an order requiring HRSA to rescind all related guidance and materials. In the interim, plaintiffs have requested a temporary order preventing the rebate model from taking effect while the court considers the case.

Urgent concerns about the rebate model

The lawsuit describes the stakes as crucial for safety-net hospitals, saying the obligation to pay full prices for 340B drugs before receiving a rebate will hamstring their already-limited cash flow and require them to hire new staff to manage the claims process. The safety-net hospitals participating in the lawsuit fear the resulting financial constraints will force them to terminate or scale back service lines such as behavioral health, tele-oncology, infusion and opioid disorder treatment.

Switching to a rebate model “would inflict millions of dollars’ worth of annual costs on hospitals and other covered entities,” the lawsuit states, citing the administrative costs, the upfront cost burden and the potential for drug companies to “slow and stymie the issuance of rebates.”

There also is concern surrounding the platform selected by manufacturers to process rebate claims. According to the lawsuit, 340B vendors and third-party administrators “have warned HRSA of significant technical issues with the Beacon platform due to a lack of testing and completed integration.” HRSA appears not to have taken action to address the potential problems, the plaintiffs say.

Another issue is that the platform’s terms of use seemingly grant Beacon broad commercial rights to hospital data.

“It can sell that data to drug companies, insurance companies, artificial intelligence companies or anyone else who will recognize the significant value of hospitals’ information,” the lawsuit states.

A big change in direction

Since 1992, HRSA had required drug manufacturers to provide upfront discounts to 340B covered entities and had rejected manufacturer efforts to launch rebate models.

Even this year under the Trump administration, HRSA said in a court filing that a rebate model “would not only negatively impact covered entities, but it would also upend the 340B Program as it has operated for 33 years.” That filing came in one of several lawsuits filed by drug manufacturers, which were seeking grounds to unilaterally implement rebate models.

Over the summer, HRSA reversed itself and adopted the nationwide rebate model. As the plaintiffs see it, HRSA failed to engage in reasoned decision-making (as judicial doctrine has established is required of federal agencies) in that it ignored evidence of the potentially adverse effects of the rebate model and also overlooked its own past arguments about the harms.

Per the lawsuit, the agency also failed to weigh the prospective costs and benefits or to consider recommended alternatives such as a clearinghouse that could fulfill the stated goal of ensuring Inflation Reduction Act (IRA) and 340B discounts are not duplicated.

The published notice of the rebate model “did not elaborate on why such a convoluted Rebate Program involving the transfers of hundreds of millions of dollars was necessary if the goal is really a data-checking deduplication exercise,” the lawsuit states.

HRSA not adhering to required procedures

The Administrative Procedure Act (APA) requires any federal agency to allow for a comment period when implementing a major policy change, and to respond to those comments. HRSA did not adequately abide by the second part of that mandate, according to the lawsuit.

Among the more than 1,100 comments submitted during the roughly 30-day comment period for the model, hospitals and their advocates raised issues such as the administrative costs and cash-flow restrictions that would be incurred, along with preferred approaches to avoiding duplicate discounts between 340B and the IRA.

Plaintiffs view the comment period as failing to live up to APA requirements, voicing the belief that HRSA had predetermined that it would allow the rebate model. For example, language in the agency’s emergency request to the Office of Information and Regulatory Affairs for an expedited review period “indicates that Defendants did not have an open mind about whether to move forward with this so-called ‘pilot’ program, but rather intended to press forward as quickly as possible,” the lawsuit states.

Little clarity on the future of the rebate model

Part of the trepidation is that the rebate model belies HRSA’s characterization that it’s a pilot, according to the plaintiffs. The model is mandatory for any covered entity that wants to retain 340B access, the lawsuit notes, while the duration is indefinite and the geography is unlimited (one aspect characteristic of a pilot program is the applicability to only 10 drugs).

America’s Essential Hospitals (AEH), which represents safety-net hospitals and is not a party in the lawsuit, raised a related question as part of a letter to HRSA expressing concerns and seeking clarifications about the new model.

Noting that the pilot is set to run for at least one year, AEH says HRSA “must provide clear details for how it intends to evaluate the rebate pilot and gather feedback from stakeholders. Providing clear measures will allow covered entities to better document and detail their experience in ways that will be useful to understand the pilot’s successes and/or shortcomings.”