340B rebate model lawsuit seeks to halt 2027 rollout, citing hospital costs

Oct. 12 Update

Another potential challenge to the 340B rebate model is forming in Congress, where a bipartisan quartet in the House introduced the 340B Rebate Model Delay Act on Oct. 9. The legislation, which has not yet been posted, would delay the model until 2029 to give Congress more time to evaluate the financial and administrative effects.

Sponsors are Reps. Rob Bresnahan, Jr. (R-Pa.), Debbie Dingell (D-Mich.), Lois Frankel (D-Fla.) and Tracey Mann (R-Kan.).

Original Story

Hospital advocates are seeking to stop the planned launch of a rebate model for the 340B Drug Pricing Program, filing litigation in the court that granted them relief on the same issue a year ago.

The American Hospital Association (AHA), Maine Hospital Association (MHA) and four safety-net hospitals brought their lawsuit to Maine federal court, seeking to have the rebate model blocked from taking effect as scheduled Jan. 1, 2027. In the model, participating 340B providers would pay the wholesale acquisition cost (WAC) for selected drugs upfront, submit claims data and receive rebates reflecting the difference between the WAC and the 340B ceiling price.

The Health Resources and Services Administration (HRSA) previously planned a rebate model to start Jan. 1, 2026, before the Maine court issued a preliminary injunction three days prior, backing the argument of the AHA, MHA and fellow plaintiffs that HRSA had instituted the model without a proper assessment of its impact on hospitals and other stakeholders. After an appeals court declined to intervene, HHS and HRSA withdrew the model and set about taking another shot at implementation. That effort resulted in the scheduled 2027 pilot.

What the lawsuit seeks to stop

Specific outcomes sought by the plaintiffs in the newly filed case include a ruling that HRSA acted unlawfully in creating the rebate model; a court order preventing the government from implementing or enforcing the model; and vacatur of associated regulatory guidance.

A separate filing requests a temporary restraining order that would ensure the model does not begin at the start of the new year, as scheduled. As recently reported, HRSA earlier in October took the step of announcing the drug companies and products that will be part of the model in 2027.

Why 340B savings matter to safety-net hospitals

Plaintiffs joining the AHA and MHA in the lawsuit are Eastern Maine Medical Center (Bangor), Unity Medical Center (Grafton, N.D.), Dallas County Medical Center (Fordyce, Ark.) and Nathan Littauer Hospital & Nursing Home (Gloversville, N.Y.). All are community-based safety-net providers, and the last three were parties in last year’s lawsuit against the rebate model.

For the plaintiffs, “the 340B program is necessary to their mission, if not their survival,” the lawsuit states.

The rebate model is consequential for such providers because it will impose significant ongoing costs to comply and will harm cash flow by requiring hospitals to incur upfront costs while waiting for their rebates, according to the complaint. Many 340B hospitals lack the finances to adequately handle such changes.

Among the plaintiffs, for example, Unity Medical Center has an annual operating margin of $2.2 million per year, with 340B savings accounting for 73% of the hospital’s 2026 margin.

“Hospitals and healthcare providers like these plaintiffs are the intended beneficiaries of the 340B program, and plaintiffs’ experiences are perfect examples of the program functioning precisely the way Congress intended,” per the complaint.

Hospitals dispute HRSA’s estimates of rebate model costs

Although HRSA made some changes in implementing the rebate model this time, the plaintiffs say the same general issues are apparent. They maintain that the agency did not follow statutory requirements to adequately consider stakeholder feedback regarding the impact of a major regulatory change.

An AHA news release notes that some of the more than 2,400 comments in response to a request for information on the 2027 model included “extensive evidence from 340B hospitals and other covered entities describing the financial and operational impact of a rebate mechanism.” HHS and HRSA did not sufficiently respond to estimates that administrative expenses could exceed $1 billion annually for 340B providers, according to the news release.

The government’s estimate of $537 million “captures only a small part of the burden” and “does not fully account for costs associated with reconciliation of incoming rebate payments, startup costs, cash-flow burdens, loss of cost-of-goods-sold benefits, and other operational impacts,” the release states.

Plaintiffs wrote in the complaint that the model violates the Administrative Procedure Act’s ban on arbitrary and capricious decision-making by regulatory agencies: HHS and HRSA “seek to impose, at a minimum, hundreds of millions of dollars in annual costs on safety-net providers to remedy a purported harm that Defendants have never measured, through a mechanism that, by the [rebate model] Notice’s own terms, cannot remedy it. Agency action premised on an unmeasured problem and ineffectual solution is the paradigm of arbitrary and capricious decision-making.”

One “harm” purportedly addressed by the rebate model is the exposure of drug manufacturers to duplicate discounts under 340B and the Medicare Drug Price Negotiation Program.

Rebate timing raises cash-flow and operational concerns

In addition to hiring or diverting staff to accommodate the requirements of the rebate model, the plaintiff hospitals anticipate higher vendor costs and a scramble to get ready for the model’s start date.

Cash flow is another key concern, since 340B covered entities must cover the wholesale acquisition cost of the drug while waiting for their rebate to come through. Although HRSA has said drug companies must pay rebates within 10 days of receiving the appropriate claims, the complaint says a survey of MHA members found that the gap between dispensing a drug and receiving the rebate is anticipated to be anywhere from 11 days to a month. Meanwhile, the payment deadlines of drug wholesalers range from seven to 15 days among the same group of hospitals.

The resulting float costs could be daunting in some cases.

“For hospitals already in the red, the sums are staggering,” according to the complaint. “EMMC must advance approximately $14 million a year.”

HRSA also failed to substantively account for projected impacts on patients, the plaintiffs say.

“To absorb these costs, covered entities across the country will have to terminate or shrink programs providing free or discounted drugs, close service lines, hire fewer clinicians and put off replacing outdated equipment,” according to the complaint. “Patients will bear the consequences.”