Court rules against drug companies on the question of a 340B rebate model

Hospitals hoping to avoid having to use a rebate model in the 340B Drug Pricing Program received good news in court recently.

A federal judge issued a May 15 written opinion that the Health Resources and Services Administration (HRSA) was within its rights to deny four drug manufacturers unilateral authority to implement a rebate model for providing 340B discounts.

The case combined lawsuits brought by Bristol Myers Squibb (BMS), Eli Lilly, Novartis, Sanofi and a technology company against HRSA during the Biden administration. Although the judge mostly ruled for the government, she also backed Sanofi’s claim that the agency acted arbitrarily and capriciously in stating that the company’s rebate plan would violate the 340B statute.

With the legal issues settled barring an appeal, 340B stakeholders still need to wait and hear from the Trump administration regarding the permissibility of a rebate model.

High stakes

Hospitals and their advocates have expressed concern that rebate models would create an additional administrative burden while adversely affecting cash flow.

For example, UMass Memorial estimated that compliance with the proposed rebate model of one manufacturer, Johnson & Johnson, would require diversion of nearly $400,000 from its annual operating budget. And J&J, which is litigating a separate lawsuit from the one that was decided last week, has proposed a narrower rebate model than the other plaintiffs.

UMass Memorial is one of three parties that petitioned to join the J&J case and the recently decided case as an intervenor, as a hedge against the possibility that the Trump administration would not defend the government’s position against the drug manufacturers. But ultimately, the administration sought to uphold HRSA’s authority to determine the viability of rebate models.

Per a court filing, HRSA intended to issue guidance on the rebate model concept within 30 days as of May 2.

June 3 update: HRSA has submitted new regulatory guidance for a standard review by the Office of Management and Budget, but the details are not yet known.

“On behalf of our more than 1,600 hospital members, we are pleased this opinion recognizes the immense harm unilateral drugmaker rebate schemes would cause safety-net hospitals and the patients in need whom they serve,” the provider advocacy group 340B Health said in a written statement.

The group joined UMass Memorial and Genesis HealthCare as intervenors in the case.

“The opinion relied in large part on information we provided in our briefings demonstrating that rebates would force hospitals to spend hundreds of millions of dollars on drug-carrying costs, additional staff resources and other expenses for complying with drugmaker rebate mandates,” 340B Health stated.

A look at the arguments

Providers have maintained that even if manufacturers live up to their pledges of timely rebate payments following a claim submission, hospitals and other 340B covered entities will have to bear the full price for as long as they take to finish dispensing the drug.

It may even be that requiring providers to temporarily incur the full price would effectively increase the contract price, thus violating the statutory 340B ceiling price, according to last week’s court ruling by Judge Dabney Friedrich, a Trump appointee at the U.S. District Court for Washington, D.C.

Manufacturers have said 340B rebate models would ensure providers don’t reap duplicate discounts on the price of a drug from 340B and the Medicaid Drug Rebate Program. They also say the claims submission system accompanying a rebate model would supply the data needed to conduct authorized audits of providers and to file formal disputes with HRSA.

The court recognized those concerns but noted that HRSA has not rendered decisions on the proposals of Eli Lilly, Novartis and BMS. Thus, “it would be premature for the court to decide at this juncture whether HRSA has considered all relevant factors with respect to [those] proposals,” the written opinion states.

Manufacturers began pushing for a 340B rebate model after passage of the Inflation Reduction Act (IRA), which includes a provision requiring them to give rebates to Medicare when the price of a drug exceeds inflation. Their apprehensions grew when CMS under the Biden administration said it would not be responsible for ensuring that manufacturers avoid duplicate discounts between the IRA and 340B.

A reprieve for one company

Sanofi is in a different situation from the other manufacturers because HRSA under the Biden administration issued a December 2024 letter stating that the company’s proposal violates the 340B statute. HRSA “provided no explanation for its failure to address these valid concerns” about duplicate discounts and diversion of 340B discounted drugs to ineligible patients, Friedrich wrote in the recent ruling.

HRSA’s thin explanation for disregarding those issues is grounds for vacating the violation letter and remanding the issue back to the agency for further consideration, according to the court. Essentially, HRSA must start from scratch in assessing Sanofi’s rebate model, putting the company in the same situation as its co-plaintiffs.

“To be clear, this decision does not vacate the agency’s preapproval requirement, and therefore Sanofi may not unilaterally implement its rebate proposal at this juncture,” Friedrich wrote. “Nor is the Court placing a thumb on the scale in terms of balancing the need to curb duplications and diversions and other statutory objectives.”

The opinion also highlights a few aspects of Sanofi’s proposal that could give HRSA pause on behalf of providers.

“The agency shall reconsider and explain whether and why the specific conditions in Sanofi’s proposal — for example, those that permit manufacturers to adjudicate claims or impose a 30-day deadline for claims submission — improperly usurp the agency’s authority over the dispute resolution process or otherwise violate the 340B statute,” the opinion states.

What comes next

While all signs from the Biden administration were that it intended to protect access to upfront discounts for 340B participants, the Trump administration has taken a more skeptical view of the program’s expansiveness.

Plans are for HRSA to cease to exist as a stand-alone agency and for oversight of 340B to transfer to CMS. A preliminary version of President Donald Trump’s FY26 budget request said the shift would allow HHS “to set clear enforceable standards for participation in the 340B program and ensure that the program is used to benefit low-income and uninsured patients of the covered entities.”

There was no mention of 340B in the HHS budget request that formally went to Congress in early May, although Trump is expected submit a more detailed budget in the coming weeks

Amid the uncertainty surrounding 340B, the court decision gives hope about the prospects of avoiding a rebate model.

“There is certainly adequate justification for rejecting these proposals, and we are confident HRSA’s final decisions for four manufacturers and reconsideration of Sanofi will demonstrate that,” America’s Essential Hospitals, which represents safety-net hospitals, said in a written statement.