D.C. District Court Declines Manufacturers’ Unilateral Efforts to Move Forward with Proposed 340B Rebate Models

Last month, the United States District Court for the District of Columbia (the “District Court”) evaluated Motions for Summary Judgment concerning drug manufacturers’ efforts to unilaterally pay 340B Program discounts in the form of a rebate. The drug manufacturer plaintiffs, including a technology company that hopes to implement manufacturer-developed rebate processes, brought actions against the U.S. Department of Health and Human Services (“HHS”) and the Health Resources and Services Administration (“HRSA”) requesting injunctive and declaratory relief. The American Hospital Association and other hospitals filed amicus briefs in opposition. [1]

Overall, the District Court’s holding appears to be a step in the right direction for 340B covered entities, as the District Court recognized both the preapproval power of HRSA and the potential pitfalls of implementing rebate methodologies for the delivery of 340B Program discounts. 

At the core of these cases, the plaintiffs claimed that HRSA acted beyond the scope of its authority under the 340B statute by requiring them to obtain preapproval for any 340B rebate model, and that HRSA violated the Administrative Procedures Act by “arbitrarily and capriciously . . . imposing this requirement and failing to approve [plaintiff’s] rebate models.” [2]

As to the first claim, the District Court held that HRSA’s preapproval requirement was within the scope of its statutory authority under the 340B Program statute. The District Court cited the 340B Program statute’s clear language providing HRSA authority to determine how a 340B Program discount must be paid, and the agency’s issuance of prior guidance in “interpreting and implementing pricing” as evidence of the agency’s authority.[3]

Regarding the second claim, the District Court declined to assess HRSA’s initial evaluation of four rebate models proposed by three drug manufacturers and the technology company. The District Court reasoned that such an assessment would be “premature,” given that HRSA has not yet rejected these models and is still in the process of evaluating the rebate programs in accordance with its preapproval process.[4] As such, the District Court’s decision does not opine on the merits of the plaintiffs’ claims related to HRSA’s substantive review of their proposals. This means that following HRSA’s approval or rejection of these programs, drug manufacturers could in theory challenge the sufficiency of HRSA’s evaluation and reasoning.

The District Court’s denial of summary judgment in these matters is important for many reasons.  Chief among them, is that the plaintiffs’ proposed rebate models (if implemented) could swiftly shift drug costs to covered entities, forcing them to pay a higher up-front price and creating substantial cash flow concerns. The District Court seemingly recognized these potential financial issues in coming to its decision. However, Judge Dabney Friedrich made it clear that if HRSA does reject rebate model proposals, it must give adequate reasoning and address manufacturers’ “valid concerns” surrounding duplicate discounts and diversion.[5] In this vein, the District Court also partially granted one other plaintiff’s Motion for Summary Judgment on the basis that HRSA’s rejection of its credit rebate proposal lacked sufficient reasoning. We anticipate the District Court’s decision will not only invite further litigation concerning this plaintiff’s proposed rebate model, but potentially litigation concerning other models considered by HRSA and any guidance it may issue on this topic from time to time.

If you are interested in learning more about 340B Program-related rebate proposals or the 340B Program in general, please contact your Dinsmore attorney. 

*Emily Veltri is a summer associate and not yet licensed to practice law.