340B rebate model no longer beginning Jan. 1 after court issues preliminary injunction

A federal court stopped implementation of a 340B Drug Pricing Program rebate model that had drawn fierce opposition from providers.

The Dec. 29 preliminary injunction by a Trump-appointed judge at the U.S. District Court for Maine requires the Health Resources and Services Administration (HRSA) to pause the rebate model that was set to take effect Jan. 1.

Hospital plaintiffs filed for the injunction in early December and now will look to make their case that HRSA should be permanently enjoined from implementing the model. The pilot program includes 10 drugs in the first year, replacing upfront 340B discounts with rebates that require providers to file claims data.

“The court’s decision halts a rule that would have caused a devastating sea change in a 30-year-old program relied upon by hospitals that serve America’s most vulnerable patients and communities,” stated the American Hospital Association (AHA).

A key point made in the preliminary order by Judge Lance Walker was that the plaintiffs appear likely to win their case based on the issues presented.

“The anemic administrative record [establishing the basis for the model] alone supports a conclusion that Plaintiffs have made a strong showing of likelihood of success, at least as matters stand today,” Walker wrote. “Additionally, Plaintiffs’ showing of economic impact and disruption to services is substantial and, paired with such a strong showing on the merits, sufficient to demonstrate irreparable injury.”

HRSA and its parent department, HHS, have said they intend to appeal the injunction. The government initially is seeking for the injunction to be stayed by the U.S. Court of Appeals for the First Circuit, pending the larger appeal.

Why the rebate model was proposed

As announced in a HRSA statement at the end of July, the pilot is intended to ensure drug manufacturers do not pay redundant rebates on drugs through 340B and the negotiated Medicare prices authorized by the Inflation Reduction Act (IRA). Given that rationale, the rebate program seemed likely to expand in subsequent years as additional drugs became subject to negotiated prices under the IRA.

Drug manufacturers, many of which had advocated for a rebate model, said requiring providers to submit claims data would boost program integrity, allowing manufacturers to guard against duplicate discounts between 340B and not only the IRA but also Medicaid. They also said a rebate program could help avoid scenarios where 340B-discounted drugs are provided to ineligible patients (e.g., in situations when there is no documented provider-patient relationship).

Even with the program limited to 10 drugs at the outset, the prospective impact posed a substantial concern to provider advocates because of the administrative burden and the upfront costs that would be incurred. As reported in an amicus brief filed in December in the Maine lawsuit, the provider advocacy group 340B Health found in a survey that disproportionate share hospitals would have to float $8.6 million per year, on average, in upfront payments for 340B drugs.

Seeking to stop the model before it began, the AHA, the Maine Hospital Association and four safety-net hospitals filed suit at the beginning of December.

Not living up to statutory obligations

In issuing the preliminary injunction, Walker said the plaintiffs’ arguments were sound. Under the Administrative Procedure Act (APA), government agencies must engage in reasoned decision-making that describes the basis for substantial regulatory changes.

HRSA fell short, Walker said, in large part due to its failure to sufficiently analyze how a rebate model would affect providers that have come to depend on 340B discounts under the current structure.

“There is no evidence in the administrative record that Defendants considered Plaintiffs’ significant reliance interests,” Walker wrote.

“Fatal to Defendants’ counterargument is their own admission that the Agency [HRSA] is ‘currently examining’ administrative costs,” he added.

HRSA initially projected a $200 million compliance burden on providers before announcing it would address feedback that the estimate was too conservative. Walker noted that AHA members estimate the impact would amount to $400 million, constraining the healthcare services they can offer.

 “These claims are not unsubstantiated fears of what the future might hold,” he concluded.

“The administrative record is also silent on the cost of floating the full price of covered drugs until 340B entities receive their rebate,” despite the reassurance HRSA sought to provide by requiring manufacturers to issue rebates within 10 days of receiving claims data, the judge said.

A sigh of relief for providers

Provider advocates commended the decision and said HRSA did not follow regulatory protocols.

“The agency rushed forward a sweeping new rebate model without evidence that it could work, without addressing foreseeable operational challenges, and without meaningfully responding to concerns raised by 340B hospitals,” 340B Health stated.

“HRSA provided hospitals with only 60 days to overhaul complex billing, claims and data systems to comply with the new requirements, changes that would have imposed massive changes to their systems to accommodate the model. 340B Health heard from many of its members that they could not comply with the proposed requirements and that the financial costs of implementing the model would significantly reduce their ability to care for their patients.”

What lies ahead

If the government’s request for a stay is granted at the First Circuit, the injunction would be paused for the duration of the appeal, noted Jeff Davis, an attorney specializing in 340B issues with the firm of Bass, Berry & Sims. A pause initially could take the form of a brief administrative stay while the appeals court rules on the larger stay request.

“If a court grants an administrative stay that lifts the injunction for a short period, it is possible the Pilot Program could go into effect, and then if the court ultimately denies the full stay pending appeal, the injunction would go back into effect and the Pilot Program would go offline,” Davis said in emailed comments.

Barring a stay or reversal at the appellate level or a change in the district court’s thinking as the case proceeds, the 340B program will continue to operate as it has.

The preliminary injunction “is not to say that a rebate model is impermissible,” Walker wrote in his ruling. “Congress clearly gave Defendants that option. The problem is that the Defendants failed to follow the APA’s basic blueprint in assembling the Rebate Program.”

If the ruling stands, HRSA might still try to institute a rebate model.

“The injunction will temporarily block implementation of the Pilot Program, and the court may ultimately invalidate the Pilot Program, but HRSA could still correct its errors and implement a revised Pilot Program in the future,” Davis said.