Background

HRSA generally allows 340B-participating hospitals (i.e., “covered entities”) to utilize 340B medications both at its main hospital location and its off-site provider-based hospital departments (i.e., “child sites”). Before a hospital covered entity may use 340B drugs at its child sites, HRSA has historically required that the child site (1) be included as a reimbursable facility on the hospital’s most recently filed Medicare cost report, then (2) registered on the covered entity’s 340B Office of Pharmacy Affairs Information System (“OPAIS”) profile during a subsequent quarterly registration period, with an effective date on the first day of the following quarter.¹ These registration requirements are not directly addressed in the federal statute authorizing the 340B Program.²

Because of these conditions, child sites have traditionally had to endure a waiting period between when the facility becomes operational and when it becomes 340B eligible. Depending on the hospital’s cost reporting timelines, this lag between a child site becoming operational and obtaining 340B eligibility could extend up to 12-16 months.  

Notably, HRSA introduced flexibilities during the COVID-19 public health emergency that permitted child sites to access 340B drugs prior to being listed on the most recently filed Medicare cost report or formally registering with OPAIS – provided the location was truly a part of the covered entity (i.e., met hospital provider-based requirements for off-site departments). Although HRSA had previously communicated to at least one industry trade publication, along with several 340B covered entities, that it intended to make these flexibilities permanent even after the pandemic ended, HRSA published a notice on October 27, 2023 putting an end to the waiver exception for child sites (“Notice”).³ This decision by HRSA was quickly followed by the filing of this action by the various health systems (“Plaintiffs”) that, among other items, challenged HRSA’s statutory authority to impose these stringent child site registration requirements in the first place. Plaintiffs requested that the Court set aside and vacate HRSA’s 2023 Notice and find that child sites can become 340B-eligible as soon as they qualify as part of the larger covered entity.

Court Ruling

After hearing oral arguments from Plaintiffs and HRSA, Judge Amit Mehta determined that the child-site registration requirement “conflicts with the text of the 340B statute” and “is contrary to law.”⁴ Specifically, Judge Mehta expressed that, while the HRSA may believe that a child site registration requirement promotes transparency and accountability in the 340B program, such requirements were not expressed in the law enacted by Congress. As a result of this finding, Judge Mehta vacated the Notice and found that it was unlawful “insofar as it reverts to a regime that requires a child site of a covered hospital both to appear on the hospital’s Medicare cost report and to secure certification from HRSA for listing in the OPAIS database before the child site becomes eligible to treat “patient[s] of the [covered] entity” using 340B discounted drugs.”⁵ In practice, this Order will permit hospital covered entities to utilize 340B medications, and realize 340B benefit, at its new child site locations much more quickly. Importantly, however, the Order does not expand the types of locations that a hospital covered entity may consider a child site for 340B purposes—it simply permits them to begin utilizing 340B medications ahead of formally registering that site with HRSA.

Remaining Unknowns

• At this stage, it is unclear if HRSA intends to appeal this decision.
• As part of the Order, Judge Mehta noted that “nowhere” does the 340B statute require covered entities to secure registration with HRSA as a necessity or condition of 340B program participation.⁶ While the Order was ultimately limited to vacating HRSA’s child-site registration requirements as detailed in the 2023 Notice, the language could conceivably lay the groundwork for arguing that eligibility delays tied to registration timelines for covered entities themselves may also be unlawful.
• The Order may have significant implications for both drug wholesalers and manufacturers. What additional information, if any, will wholesalers require before agreeing to ship 340B drugs to child sites that are not yet registered on OPAIS? Will these child site facilities be subject to increased scrutiny and audit activity by drug manufacturers?

Given the significant implications of this Order, we will continue to closely monitor any subsequent activity and relevant stakeholder reactions relating to child site 340B eligibility. In the meantime, if you have questions or would like to further discuss the impact of the Order, please reach out to your contact at Quarles or:

• Richard Davis: 414-277-5844 / richard.davis@quarles.com
• Michael French: 312-715-5261 / michael.french@quarles.com
• Brenda Maloney Shafer: 602-229-5774 / brenda.shafer@quarles.com
• Jake Pallotta: 317-399-2810 / jake.pallotta@quarles.com

END NOTES

¹ Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Outpatient Hospital Facilities, 59 Fed. Reg. 47884, 47885 (Sept. 19, 1994), available here.

² 42 U.S.C. 256b.

³ Notice – Registration Requirements in the 340B Drug Pricing Program, Health Resources and Services Administration, available here.

⁴ Albany Med. Health Sys. v. Health Res. & Servs. Admin., Memorandum Opinion, available here.

⁵ Id.

⁶ Id.

As part of the RFI, HRSA is inviting stakeholder commentary regarding several rebate-related issues, including medication access concerns, anticipated cash-flow impacts, proposed alternatives and scope-limiting measures to inform the rebate pilot design, among others. Many requests expressly seek submission of detailed data to demonstrate expected impacts and operational costs, signaling HRSA’s intent to conduct a more detailed and granular review of its proposed model this time around. Stakeholder comments to the RFI must be submitted and received no later than March 19, 2026.

Notably, the RFI comes just two days after the White House’s Office of Management and Budget (OMB) completed its regulatory review of HRSA’s new 340B rebate proposal – which also occurred over the span of just a few days. Although no material steps toward implementation are expected until the conclusion of the comment period, the quick advancement of HRSA’s RFI suggests a sense of urgency in advancing a new rebate model proposal.

For additional background information regarding the initial 340B rebate model proposal, please review our earlier publications on this subject, available on our 340B Blog. Given the significant implications for both manufacturers and covered entities, we will continue to closely monitor activity related to the RFI and provide additional updates as necessary. In the meantime, if you have questions or require assistance in developing responsive comments to the RFI, please reach out to your Quarles attorney or:

• Brenda Maloney Shafer: 602-229-5774 / brenda.shafer@quarles.com
• Richard Davis: 414-277-5844 / richard.davis@quarles.com
• Michael French: 312-715-5261 / michael.french@quarles.com
• Jake Pallotta: 317-399-2810 / jake.pallotta@quarles.com

END NOTES

¹ 340B Rebate Model Pilot Program – Request for Information, Health Resources and Services Administration, available here. Note that the RFI will be formally published in the Federal Register on February 17, 2026.

Background

In August 2025, in a shift from its prior position concerning rebate models, HRSA’s Office of Pharmacy Affairs (OPA) announced its intent to carry out the Pilot in order to determine the efficacy and impact of manufacturer-proposed rebate models on 340B-eligible providers (Covered Entities). This August notice included some basic parameters related to the rebate models, including a requirement that manufacturers pay all rebates within ten (10) days of receipt of a rebate request, and prohibited manufacturers from using the Pilot as a mechanism by which to second-guess Covered Entity 340B eligibility determinations.

340B stakeholders had a limited opportunity to provide comments in response to the August 2025 notice, and did so in significant numbers. While some comments were supportive of the Pilot, many Covered Entities submitted comments expressing serious concerns with the rebate model. The Covered Entities’ primary concerns related to the financial challenges associated with absorbing the increased upfront costs for drug purchases, unilateral manufacturer control over the final approval of 340B eligibility, and the technological and data privacy concerns surrounding the submission of rebate claims data. However, on October 30, 2025, OPA approved eight rebate models and adopted its August 2025 rebate model parameters without modification. Notably, OPA did not provide meaningful detail as to how it accounted for 340B stakeholder comment in adopting the final version of the rebate Pilot.

HRSA OPA also confirmed that the recognized programs would take effect on January 1, 2026, giving Covered Entities a short runway toward implementing the specifics of the models.¹ For additional background information regarding the anticipated impact of the Pilot program and its implementation to date, please review our earlier publications on this subject which are available here.

In response, on December 1, 2025, the American Hospital Association (AHA) and the Maine Hospital Association (MHA) filed their Motion for Temporary Restraining Order with the Court, primarily citing deficiencies in HRSA OPA’s administrative processes in approving the Pilot.

Court Ruling

On December 29, 2025, U.S. District Judge Lance Walker found in favor of the AHA and MHA by enjoining the Department of Health and Human Services (HHS) from instituting the Pilot (Order). The Order cited significant deficiencies in HRSA’s administrative processes when developing and implementing the Pilot, pointing to the threadbare nature of the administrative record and lack of evidence that HHS sufficiently considered relevant and potential impacts to stakeholders as required by the Administrative Procedures Act (APA). As Judge Walker succinctly stated in the Order, “[HRSA] cannot fly the plane before they build it.”² Importantly, the Court highlighted that its ruling should not be interpreted to suggest that a rebate model in the 340B Program context is impermissible.³ Rather, in this specific case, HRSA failed to reasonably document and explain its rationale for shifting to rebate models as required under the APA thus justified the grant of a preliminary injunction.

On the same day the Order was issued, HHS appealed the decision to grant the preliminary injunction to the Court of Appeals for the First Circuit (First Circuit), while also filing a motion with the District Court seeking an administrative stay of the injunction pending that appeal.⁴ In the memorandum supporting its motion requesting a stay, HHS argued that it had acted reasonably and thoroughly in approving the Pilot and requested that the Court give a swift ruling on its motion so as not to disrupt industry preparation and implementation. The Court was not persuaded, quickly issuing an order denying HHS’ request. In support of the denial, the Court stated that the agency is “unlikely to secure the relief that they seek in the First Circuit; that they do not face an irreparable injury of their own due to the preliminary injunction; that substantial injuries would flow to others from the grant of a stay; and that the public’s interest is not on the line if the requested stay is denied.”⁵ Judge Walker affirmed his prior assessment that, in his view, no apparent or actual urgency existed for the January 1, 2026, start date, and indicated that the HHS could benefit from the additional time to shore up the Pilot.⁶

Next Steps

On December 31, 2025, the First Circuit denied HHS’s request to immediately stay the Court Order, but noted its intention to rule on the preliminary injunction appeal as soon as practicable.⁷ The First Circuit subsequently affirmed its denial for an emergency administrative stay by court order on January 7, 2026, noting that the HHS failed to satisfy the burden of showing that it was likely to succeed on appeal.⁸ However, in doing so, the First Circuit also indicated its intent to review the full merits of the appeal and resolve it “without undue delay.”⁹

Thus, pending the First Circuit’s ruling on appeal, HRSA has formally paused implementation of the Pilot, requiring manufacturers in the meantime to continue offering up-front 340B discounts to Covered Entities on those drugs that were intended to be included in the rebate Pilot.¹⁰

Given the significant implications that this may have for both manufacturers and Covered Entities, this article will be revised and updated promptly as soon as the First Circuit issues a decision on HHS’s appeal.

END NOTES

¹ 340B Rebate Model Pilot Program, available here.

² AHA v. Kennedy, 2025 U.S. Dist. LEXIS 266232, 1, 28 (D. Me. 2025).

³ Id.

⁴ Def.’s Mot. For Stay Pending Appeal or, in the Alternative, an Administrative Stay of Prelim. Inj., available here.

⁵ AHA v. Kennedy, 2025 U.S. Dist. LEXIS 267061, 1, 3 (D. Me. 2025), available here.

⁶ Id.

⁷ 1^st Circuit Declines HHS’ Bid to Immediately Pause Order Blocking 340B Rebate Pilot, But Signals Plans for Quick Ruling, 340B Report, available here.

⁸ Federal Appeals Court Rejects HHS’ Bid to Revive 340B Rebate Pilot, 340B Report, available here.

⁹ Id.

¹⁰ 340B Rebate Model Pilot Program, supra note 1.

Background

Historically, drug manufacturers have been required to offer covered outpatient drugs at discounted prices to participating 340B-eligible providers (“covered entities”). Under a rebate model, however, covered entities must purchase drugs at an upfront wholesale cost, and would only be reimbursed for the difference between the price paid and the discounted 340B Program price once a rebate request is approved by the manufacturer. As detailed further in a previous article, manufacturer efforts to move toward a rebate model have been extremely contentious. 

With that historical backdrop in mind, OPA announced the Pilot back in August 2025 as a voluntary mechanism that will professedly be used to gauge the viability of rebate models in the 340B space. The Pilot is limited to the 10 medications included in the initial round of the Medicare Pricing Negotiation Program, with OPA allowing applicable manufacturers for those drugs to submit proposed rebate programs that meet OPA-established parameters. Manufacturer plans for participation in the Pilot were required to be submitted no later than September 15, 2025, with a tentative approval deadline set for October 15, 2025. However–presumably as a result of the ongoing federal government shutdown–this deadline came and went without any indication from the HRSA as to which plans had been approved or whether the Pilot would be delayed.

HRSA-Approved Programs

On October 30, 2025, OPA announced the approval of eight (8) proposed rebate models by drug manufacturers for participation in the Pilot,¹ which will take effect at the start of 2026. Approved manufacturers, and the specific medications included in the Pilot, can be found in the table below:

While HRSA did not provide detailed overviews of the approved plans, it generally indicated that the plans “met all the requirements as stated” in its initial Notice related to the Pilot, and that approved manufacturers would be reaching out to covered entities with additional information for effectuating the plans. With that said, key aspects of the approved plans based on OPA’s updated Pilot website landing page include the following:

• Applicable to all covered entity types (i.e., hospitals and grantees)
• Applicable to drugs billed via a patient’s pharmacy benefit and a patient’s medical benefit. Relatedly, OPA approved inclusion of additional medical claim field submission requirements even though they were not included in OPA’s original parameters in its Pilot Notice.
• All manufacturers will utilize the Beacon Platform to effectuate their rebate programs. Beacon is operated by the same parent company as 340B ESP, the platform utilized by numerous manufacturers to manage their ongoing contract pharmacy restrictions and associated reporting requirements.
• Manufacturers are required to submit a rebate within 10 days of a covered entity appropriately submitting required claim information, and are not permitted to reject rebate requests based solely on suspicion of 340B diversion or violation of the Medicaid duplicate discount prohibition.
• Covered entities can report instances where it does not receive a rebate within 10 days to OPA, and OPA reserves the right to revoke its rebate plan approval for a manufacturer if it observed “trends” of inappropriate delays.

Importantly, OPA reserves the right to “consider expanding the rebate pilot to other drugs purchased under the 340B Program that have not been selected for negotiation,” leaving the door wide open for potential expansion of the rebate model to other medications in the future. If you have questions or would like to discuss potential impact of the Pilot and 340B rebate models in general on your organization, please reach out to your contact at Quarles or:

• Brenda Maloney Shafer: 602-229-5774 / brenda.shafer@quarles.com
• Richard Davis: 414-277-5844 / richard.davis@quarles.com
• Michael French: 312-715-5261 / michael.french@quarles.com
• Jake Pallotta: 317-399-2810 / jake.pallotta@quarles.com

END NOTES

¹ 340B Rebate Model Pilot Program, available here.

Background

Generally, drug manufacturers are required by the 340B statute to “offer” covered outpatient drugs to participating 340B-eligible providers (“covered entities”) at discounted prices.[3] Historically, manufacturers have met this requirement by offering the 340B Program discounted price at the time of purchase, allowing the covered entity to immediately realize the cheaper 340B price. However, several manufacturers have recently signaled that they seek to move to a retroactive rebate model. Under such rebate model, covered entities would be required to initially purchase drugs at a significantly higher wholesale acquisition cost (WAC), then submit a rebate request to the manufacturer with claim information justifying 340B eligibility for that purchase. The manufacturer would then review the submitted claim data and, if it agrees with the covered entity’s 340B eligibility determination, offer a rebate for the difference between the WAC and 340B price of the drug at issue.

From the manufacturer perspective, this proposed model would assist in addressing their concerns related to perceived 340B Program “bloat” and serve as a tool in reducing 340B diversion and Medicaid duplicate discounts by providing oversight over eligibility determinations before the 340B benefit is actually delivered. Covered entities, however, tend to be stridently against these proposed 340B rebate models for a variety of reasons, including (1) expected cash flow issues caused by making initial purchases at significantly higher WAC prices, (2) near-complete manufacturer control over 340B eligibility determination with minimal government oversight, and (3) lack of clear timeframes for claim review and 340B rebate payments. Covered entities also point to language within the 340B statute ostensibly indicating that rebate models under the 340B Program may only be implemented “as provided by the [HHS] Secretary,”[4] and that manufacturers have not obtained the requisite government approval. Importantly, HHS itself has indicated that government approval of a rebate model is required due to this statutory language, and that manufacturers who unilaterally implement such models are subject to significant civil monetary penalties and potential termination of Medicare Part B and Medicaid coverage for their medications.

This issue came to a head when Johnson & Johnson (“J&J”) formally filed a proposal with HRSA in mid-2024 to implement a rebate model. To the relief of covered entities, HRSA ultimately denied J&J’s request. Nonetheless, J&J indicated that it would be proceeding with the implementation of the rebate model despite HRSA’s rejection, leading to HRSA forcefully threatening to levy the civil monetary penalties described above along with potential Medicare/Medicaid loss of coverage for J&J medications.

In response to HRSA’s position, J&J filed a lawsuit seeking approval for its unilateral implementation of the drug rebate program, arguing that HRSA misconstrued the 340B statute and that its approval is not needed provided the rebate model otherwise meets 340B Program requirements. In a win for covered entities, the District Court sided with HRSA, finding that it acted within its authority in blocking the drug maker from implementing its rebate model.[5] On the same day that this decision was published, J&J appealed the matter to the Washington D.C. Court of Appeals, which is where the case remains today. Notably, other courts considering similar issues have thus far consistently ruled that 340B rebate models cannot be implemented without the requisite government approval.

Importantly, however, these decisions have not ruled that rebate model implementation would be per se illegal—just that they cannot proceed without approval from HRSA.

HRSA 340B Rebate Model Pilot Program Guidance

With that background in mind, and after several months of consideration, HRSA recently released first-of-its-kind proposed guidance pertaining to 340B rebate models and an initial “pilot program.”[6]

While the proposed guidance provides an avenue for certain manufacturers to offer 340B rebates in the near-future, the scope of the proposed pilot program is very narrow, and manufacturer rebate model proposals would need to meet extensive requirements to obtain requisite HRSA approval. Specifically, HRSA has limited the pilot program to drugs included on the Medicare Drug Price Negotiation Selected Drug List (“Pilot Program”), which necessarily limits the pool of potential manufacturers that could opt to participate. Importantly, HRSA maintains its stance that manufacturers must receive prior approval from HRSA before implementing a rebate model, including one under the proposed pilot program. Proposals for participation in the Pilot Program would be required to be submitted to HRSA by September 15, 2025, and, if approved, will become effective and available for implementation on January 1, 2026.[7] Manufacturers that are approved must also agree to participate under the Pilot Program for a minimum of one year.[8]

Additionally, HRSA’s proposed guidance also identifies several criteria that must be incorporated into the manufacturers’ rebate models. Generally, many of these requirements appear to address concerns previously raised by covered entities surrounding these models, including but not limited to the following:

• Defined timeframe for rebate payments: Rebates must be paid to the covered within ten (10) calendar days of data submissions;
• Limits on required data submission fields: Pharmacy claim data required to be provided to drug manufacturers upon request has been limited to eleven (11) readily available pharmacy claims fields, which include date of service, Rx number, 340B ID, among others;
• Applicable notice to covered entities: Manufacturers must provide covered entities and other impacted stakeholders with sixty (60) calendar days’ notice before implementing an approved rebate model; and
• Limited scope for manufacturer denial of rebate payments: Manufacturers are expressly prohibited from denying 340B rebates based solely on suspicion of diversion or Medicaid duplicate discounts.[9]

340B stakeholders have been given until August 31, 2025, to offer comments on the proposed guidance. If you have any questions related to the proposed guidance or would like assistance in crafting comments to submit to HRSA, please contact your local Quarles attorney or:

• Brenda Maloney Shafer: 602-229-5774 / brenda.shafer@quarles.com
• Richard Davis: 414-277-5844 / richard.davis@quarles.com
• Michael French: 312-715-5261 / michael.french@quarles.com
• Jake Pallotta: 317-399-2810 / jake.pallotta@quarles.com

[1] These laws have primarily related to (1) requiring manufacturers to offer 340B pricing via all validly registered contract pharmacy arrangements for Covered Entities in the state, (2) introducing Covered Entity reporting requirements as to how 304B savings are being used, and (3) restricting pharmacy benefit managers (“PBMs”) and insurers from reducing reimbursement for 340B fills and/or denying network access based solely on 340B Program participation.

[2] See Inflation Reduction Act of 2022, Pub. L. No. 117-169; see also One Big Beautiful Bill Act of 2025, Pub. L. No. 119-21.

[3] 42 U.S.C.S. § 256b(a)(1) (“The Secretary shall enter into an agreement with each manufacturer of covered outpatient drugs under which the amount required to be paid . . . to the manufacturer for covered outpatient drugs . . . does not exceed an amount equal to the average manufacturer price for the drug under title XIX of the Social Security Act. [. . .] Each such agreement . . . shall require that the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price.”)

[4] See id.

[5] See Johnson & Johnson Health Care Sys., Inc. v. Kennedy, 2025 U.S. Dist. LEXIS 123021 (D. D.C. 2025).

[6] 340B Program Notice: Application Process for the 340B Rebate Model Pilot Program, Department of Health and Human Services, available at https://340breport.com/wp-content/uploads/2025/07/2025-14619.pdf (published July 31, 2025).

[7] Id.

[8] Id.

[9] Id.

Proposed Rebate Models

In arguably the most significant 340B development this year, several drug manufacturers introduced dramatic changes in their 340B sales model that fundamentally change how 340B covered entities purchase 340B medications and realize the corresponding benefit. Specifically, rather than offer a discounted 340B price to qualifying entities up-front when the purchase is made, these manufacturers would instead implement a rebate model whereby the covered entity would initially purchase the drug at a higher, non-340B price and receive a “rebate” from the manufacturer for the difference between the 340B and non-340B price once certain claim information is submitted by the covered entity to a manufacturer-aligned digital platform.

Manufacturers claim that these rebate models are necessary to curb purported 340B Program abuses by covered entities. For example, in a letter discussing its proposed model, Johnson & Johnson (the first manufacturer to propose a transition to 340B rebate payments) indicated that such a model would allow it “to carry out its 340B obligations while protecting program integrity, consistent with the 340B statute’s prohibitions against duplicate discounts and diversion.”¹ On the other hand, covered entity-aligned stakeholders have starkly criticized these rebate models, pointing to the significant cash flow difficulties many safety nets providers would experience if forced to make up-front drug payments at substantially higher costs. These stakeholders have also criticized lack of defined timeframe for rebate payments from manufacturers, along with the fact that manufacturers would have full control of whether submitted claims qualified for a “rebate” with little to no Health Resources and Services Administration (HRSA) oversight. Notably, the proposed data submission parameters for the rebate request would include the National Provider Identifier (NPI) of the billing provider, allowing manufacturers to disqualify all claims from contract pharmacies that do not align with manufacturer restrictions on contract pharmacy arrangements.

To date, the HRSA/U.S. Department of Health & Human Services (HHS) has rejected these rebate proposals and forcefully stated that operating these models without HHS Secretary approval violates the 340B statute and would both threaten the manufacturers’ continued ability to be reimbursed under Medicare Part B and Medicaid and lead to significant civil monetary penalties.² Unsurprisingly, several manufacturers, including Johnson & Johnson,³ Eli Lilly,⁴ and Bristol-Myer Squibb,⁵ have sued HHS, claiming that its rebate models both comply with the 340B statute and do not require HHS approval before operationalizing. While these cases are all in their infancy, 340B stakeholders will closely monitor these cases due to their potentially significant impact on 340B Program operations for both covered entity and manufacturer-aligned entities.

Ongoing Manufacturer Contract Pharmacy Restrictions

A large number of manufacturers (at least 37 at the time of publication) have continued to significantly restrict 340B pricing available for drugs dispensed via contract pharmacy arrangements. Despite ongoing legal challenges by HRSA, courts have continued to affirm manufacturers’ ability to impose these restrictions. For example, the U.S. Court of Appeals for the District of Columbia sided with manufacturers earlier in the year, unanimously ruling that drug manufacturers may impose at least some limits on how they distribute discounted drugs to 340B providers in the contract pharmacy context. Tracking closely with the reasoning of a January 2023 Third Circuit decision considering many of the same issues, the D.C. Court found that the 340B statute’s silence on distribution conditions preserves manufacturers’ rights to set limits, but notably signaled that some types of restrictions could violate the 340B statute (although no examples were provided).

 Importantly, the U.S. 7th Circuit Court of Appeals is expected to soon release a decision in a separate case regarding the same manufacturer-imposed contract pharmacy restrictions. If decided differently than the other two federal appellate courts, the 7^th Circuit decision could result in a “circuit split” and potentially be taken up by the United States Supreme Court.

In the meantime, the manufacturers appear comfortable keeping restrictions in place pending resolution of the ongoing litigation. In fact, numerous manufacturers have made their contract pharmacy 340B pricing policies even more restrictive over the last 12 months, including broadening applicability to clinic/grantee covered entities and increasing claim reporting obligations necessary to “unlock” 340B pricing for selected contract pharmacy locations.⁶

Proposed Federal Legislation

With HRSA’s authority to enforce its sub-regulatory guidance (such as its contract pharmacy requirements) continuing to erode, it is increasingly likely that new legislation will be required to address areas of ongoing 340B Program uncertainty. Although there are several proposed pieces of federal legislation⁷ that directly or indirectly impact the 340B Program, the 340B SUSTAIN Act seemed to gather the most traction in 2024 and may have the needed momentum for eventual passage. Although the bill has not yet been formally proposed, a draft bill released by its bipartisan group of sponsors signaled an intent to compromise between various stakeholder interests and more clearly define 340B Program parameters. Among other items, the proposed bill is expected to (1) formalize contract pharmacy arrangements within the 340B statute and impose penalty on manufacturers that refuse to offer/impose conditions on 340B pricing availability, (2) establish a neutral, centralized clearinghouse to process claim information submitted by covered entities and state Medicaid agencies to reduce opportunities for Medicaid duplicate discounts, (3) introduce a “user fee” on covered entities to fund 340B Program oversight measures, and (4) clarify the 340B eligible patient definition. While release of the proposed bill has been delayed and likely will not be released until early 2025, this particular bill remains one to watch in 2025.

State-Level Activity

While efforts to address 340B Program issues on the federal level have been slow to develop, state legislatures have stepped in with increasing frequency in 2024.

Contract Pharmacy Access Laws. In direct response to ongoing manufacturer-imposed restrictions in the 340B contract pharmacy space, a growing number of states have enacted laws to protect contract pharmacy access for 340B-participating covered entities. These laws typically require manufacturers to offer 340B pricing to covered entities in the state for an unlimited number of validly registered contract pharmacies. As of late 2024, eight states have enacted contract pharmacy access laws– Minnesota, Kansas, Missouri, West Virginia, Maryland, Arkansas, Mississippi, and Louisiana–with similar bills being introduced in over a dozen others, including several that have secured passage in at least one legislative chamber.

These laws have consistently withstood legal challenge thus far from manufacturers. In the most high-profile example, the 8^th Circuit Appellate Court upheld the validity of Arkansas’s version of the law earlier this year, reasoning that that because 340B statute is silent on 340B drug distribution, states are not preempted from regulating that specific space. Notably, the Supreme Court recently declined to hear an appeal of this decision, further strengthening the law’s validity.

Transparency Initiatives. A handful of states have also enacted laws that introduce covered entity reporting requirements related to 340B savings utilization generated through the 340B Program, ostensibly to improve 340B Program transparency. 2024 provided the first example of a state (Minnesota) releasing a report summarizing the results of this type of reporting.⁸ While the report garnered criticism for lacking context, some 340B stakeholders are concerned that other states may use it as a template for introducing similar reporting requirements in their states.

PBM/Insurers Anti-Discrimination Protections. In a continuing trend, more than half of the states have enacted laws prohibiting PBMs and health insurers from reducing reimbursement for 340B drugs billed, with many also prohibiting additional conditions on 340B-participating pharmacies for network participation. Covered entity-aligned groups continued to push for similar bills in several additional states in 2024, including Missouri and Delaware.⁹

New 340B Alternative Dispute Resolution Process

After a long wait, HRSA issued its revised final rule pertaining to the 340B Administrative Dispute Resolute (ADR) process in mid-2024. The new ADR rule provides a defined process that can be used by covered entities and manufacturers to resolve disputes related to potential overcharges, 340B diversion, and Medicaid duplicate discounts. Notably, the revised version differs from the previously released ADR rule in several key ways:

• Covered entities will be permitted to directly challenge ongoing manufacturer policies restricting 340B pricing availability via contract pharmacy arrangements. The previous version did not allow the ADR process to be used if the disputed issue was actively being litigated.
• The ADR Panel may consider duplicate discount disputes tied to Medicaid fee-for-service (FFS) and Medicaid Managed Care Organization claims (the previous version only allowed for disputes over FFS claims).
• The revised rule removed minimum dollar thresholds necessary to bring forth claims.

Numerous parties have filed claims under the new ADR rule and are currently navigating the updated process. The first decisions by the newly formed ADR panel are expected in 2025.

HRSA Audit Trends

Despite ongoing litigation threatening HRSA’s enforcement authority over requirements contained outside the 340B statute itself, HRSA continues to conduct its audits based on requirements identified in sub-regulatory guidance. For example, HRSA continues to assess claim eligibility based on its historic 1996 eligible patient definition,¹⁰ and also continues to enforce cost report-based child site registration requirements found outside of the 340B Program statute. At this stage, it does not appear that HRSA will modify its audit approach, although continuing to enforce requirements solely found in sub-regulatory guidance could open the door for additional legal challenges to those findings.

Check back in soon for a companion piece covering what to expect in the 340B Program in 2025, detailing how many of the developments discussed in this article will drive activity in the space moving forward.

END NOTES

¹ Johnson & Johnson Health Care Systems Inc. 340B Rebate Model, available here.

² HRSA Letter to Johnson & Johnson, available here.

³ Johnson & Johnson Health Care Systems Inc. v. Becerra et al., available here.

⁴ Eli Lily & Co. v. Becerra et al., available here.

⁵ Bristol Myers Squibb Co. v. Johnson et al., available here.

⁶ See Novo Nordisk: Notice Regarding Revised Limitation on Hospital and Grantee 340B Contract Pharmacy Distribution, available here.

⁷ See 340B ACCESS Act, available here.

⁸ 340B Covered Entity Report, Minnesota Department of Health, available here.

⁹ See Mo. S.B. 1213, available here.

¹⁰ Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and Entity Eligibility, available here. 

Perhaps most notably, the finalized ADR process will permit covered entities to directly challenge ongoing manufacturer policies restricting 340B pricing availability via contract pharmacy arrangements, a move simultaneously celebrated by covered entities and heavily criticized by manufacturers. In a significant departure from the proposed rule, the final ADR rule now permits the consideration of disputes even if the disputed issue is currently being litigated in a federal court. Additionally, covered entities may use the ADR process to resolve allegations that a manufacturer is overcharging for drugs in the context of limiting 340B pricing availability to that covered entity. Read together, these provisions effectively open the door for covered entities to bring challenges to manufacturer contact pharmacy restrictions via the ADR process.

Other key aspects of the finalized ADR process include:

• Directing a panel of Health Resources and Services Administration Office of Pharmacy Affairs subject matter experts (referred to as the “ADR Panel”) to review the covered entity or manufacturer dispute and issue a decision;
• Requiring disputes to be filed within three (3) years of the date of the alleged violation, and requiring the disputing party to support such filings with supporting documentation and proof of prior good faith efforts to resolve the issues with the opposing party;
• Setting forth additional timeframes for document submission and exchange between the parties;
• Setting timeframes that the ADR Panel must follow, including providing a decision within one (1) year from the date of receiving a complete claim;
• Allowing Medicaid duplicate discount disputes tied to Medicaid FFS and Medicaid MCO claims to be considered by the ADR Panel; and
• Permitting a party to initiate a reconsideration request after the ADR Panel has issued its decision.

The rule takes effect sixty (60) days from the date of publishing, making it effective on June 18, 2024.

Covered entities seeking to submit a dispute should carefully review the final rule, paying close attention the filing and timeframe requirements contained in the rule.

Litigation Update

Although 340B stakeholders still await the 7^th Circuit and the DC Court of appeals to weigh in on the permissibility of manufacturer contract pharmacy restrictions, another Appellate Court ruling reinforced the growing efforts on the state level to prohibit these same restrictions imposed against covered entities. On March 12, 2024, the 8^th Circuit Court of Appeals upheld an Arkansas law prohibiting manufacturer restrictions on the acquisition or delivery of 340B drugs to covered entities and their contract pharmacies located within the state. Affirming the District Court’s ruling, the court agreed that Congressional silence within the 340B statute on pharmacies indicates that Congress did not intend to preempt state-level laws related to 340B drug delivery to those pharmacies. The decision is sure to be well-received by 340B covered entities and related advocacy groups.

While Arkansas is one of two states with current laws that bar manufacturer contract pharmacy restrictions (Louisiana is the other), there are at least 19 additional states that have introduced similar proposed legislation. The 8^th Circuit Decision reinforcing the validity of the Arkansas version of these covered entity protections may spur even more states to propose similar legislation in the coming months.

Proposed Federal Legislation

On the legislative front, Senator Doris Matsui introduced the 340B PATIENTS Act, a federal bill that would prohibit manufacturers from restricting 340B pricing availability for contract pharmacy relationships or otherwise imposing conditions on offering 340B pricing via those arrangements. The bill is substantively similar to the numerous state-level laws described above and would formally codify the concept of contract pharmacies (and a covered entity’s ability to receive 340B pricing through those relationships) within the 340B statute itself.

Importantly, federal legislative activity has not been limited to addressing 340B contract pharmacy relationships, as other more comprehensive efforts to address 340B Program uncertainties are also being considered. Most notably, a group of six bipartisan Senators recently released the Supporting Underserved and Strengthening Transparency, Accountability, and Integrity Now and for the Future of the 340B Act (“SUSTAIN Act”), a draft discussion bill addressing many areas of uncertainty that exist in the current 340B Program space. Many 340B stakeholders are viewing the draft SUSTAIN Act as an important initial step to crafting comprehensive “compromise” legislation that better and more clearly defines 340B Program parameters. As the SUSTAIN Act contains benefits and concessions for and from both covered entities and manufacturers, there is a material chance that this legislation may gain traction in Congress.

At a high level, the SUSTAIN Act proposes the following key changes:

• Contract Pharmacy Use: Formalizes covered entity contract pharmacy arrangements within the 340B statute and imposes a penalty on drug manufacturers that refuse to offer or otherwise impose conditions on 340B pricing available for drugs utilized in contract pharmacy arrangements. This provision is similar to the protections within Arkansas’ now upheld Act 1103 and the proposed 340B PATIENTS Act on the federal level, both mentioned above.
• Patient Definition: Includes placeholder for a definition of the term “patient,” allowing stakeholders to propose an appropriate definition. This is particularly relevant in light of the recent Genesis decision, which highlighted the lack of statutory clarity as to who is a “patient” for 340B Program purposes.
• Child Sites: Clarifies child site eligibility criteria and directly ties eligibility to existing Medicare provider-based rules.
• Transparency: Requires covered entities to provide additional reports on the use of the 340B savings generated.
• Program Integrity: Allows for more extensive government oversight and auditing of 340B Program participants.
• Duplicate Discounts: Establishes a neutral, centralized clearing house to process claim information submitted by covered entities and state Medicaid agencies.
• PBM Anti-Discrimination: Enacts federal prohibitions on PBM discrimination against covered entities, in line with similar legislation enacted in a majority of states.
• Miscellaneous Provisions: Introduces a 340B “user fee” on covered entities, facilitates studies and reports regarding duplicate discounts and contract pharmacy dispensing fees, and approves an additional $3 million per year in funding from 2025 to 2029 for 340B Program audits, oversight, investigations, and enforcement activities.

The six Senators included a request for information (“RFI”) in their release, giving interested stakeholders an opportunity to provide feedback on various proposed aspects of the draft bill. Responses to the RFI are due by April 1, 2024.

The RFI gives 340B stakeholders a unique opportunity to weigh in on the SUSTAIN Act and influence what could ultimately serve as the basis for comprehensive and consequential changes to the 340B Program.

Background:

The case originated more than five years ago when Genesis Health Care, a federally qualified healthcare center (FQHC), was temporarily removed from the 340B Program shortly after a formal government audit determined that it was dispensing high volumes of 340B drugs to individuals who were not 340B-eligible “patients” of Genesis (i.e., 340B diversion). Genesis filed suit and argued that HRSA’s interpretation of an eligible “patient” was unduly restrictive and not aligned with the plain wording of the 340B statute. Further detail on the case’s long and winding history can be found here.

The Court’s Analysis:

In its ruling, the District Court largely focused on HRSA’s “current interpretation” of a 340B-eligible patient as reflected in a March 20, 2019 letter to Genesis, which stated that “in order for an individual to qualify as a 340B patient, [the covered entity] must have initiated the healthcare service resulting in the prescription. . . .” Genesis argued in its filings that the 340B statute only states that 340B drugs may not be sold or resold to “a person who is not a patient of the covered entity,” and does not otherwise condition patient eligibility on when or where a specific service was initiated, or to which service a drug order or prescription was tied.

The Court largely agreed with Genesis, stating that because “nothing in the statute conditions an individual’s eligibility as a 340B patient on whether the health care service resulting in the prescription was initiated by the ‘covered entity,’” HRSA’s interpretation of a 340B-eligible patient is “contrary to the plain language of the 340B statute.” In addition to the plain reading of the statutory language itself, the Court pointed to extensive evidence in the legislative history that Congress intended “patient” to be interpreted more broadly and “to have its plain and ordinary meaning: ‘an individual awaiting or under medical care and treatment.’” The Court also noted that HRSA has never provided any specific time limitation as to when the patient must have received services from the covered entity in order to constitute 340B eligibility for prescriptions written for that patient.

Although the Court acknowledged that its ruling could significantly expand the number of patients covered entities could consider 340B-eligible, it stated that a legislative change would be necessary if stakeholders wanted to limit the 340B-eligible patient definition:

“If there is a desire to restrict the 340B Program and limit the ability of ‘covered entities’ to remain profitable in the face of prescription drug price increases, Congress is the appropriate entity to take the necessary action. It is not the role of HRSA to legislate and limit the 340B program by restricting the definition of the term ‘patient,’ thereby frustrating the ability of the 340B statute to accomplish its purpose.”

Ultimately, after stepping through its legal analysis, the Court made the following declarations:

1. “The only statutory requirement for 340B eligibility of a person is that the person be a patient of a covered entity, as clearly stated in 42 U.S.C. § 256b(a)(5)(B).”
2. “The plain wording of the 340B statute does not require the ‘covered entity’ to have initiated the healthcare service resulting in the prescription.”
3. “Agency interpretations in contradiction of the plain wording of a statute are not entitled to deference and are not enforceable.”
4. While HRSA does possess authority to implement its interpretations of the statutory term “patient” in 42 U.S.C. § 256b(a)(5)(B). HRSA’s interpretation of the term “patient” must be consistent with the plain language of the statute and the intent of Congress. As explained above, HRSA’s present interpretation of the term “patient” as reflected in the March 20, 2019 now-voided audit letter is inconsistent with the plain language of the statute and the intent of Congress in passing the 340B statute.

What Comes Next?:

The Court’s decision only provides relief to Genesis specifically by enjoining the enforcement of HRSA’s patient definition in the 2019 letter (as opposed to invalidating HRSA’s guidance more broadly). Nonetheless, this decision provides a strong legal footing for future and broader challenges against HRSA’s eligible patient standards. At this time, it is unclear if HHS will appeal the District Court’s ruling. We will continue to update this article as the situation develops.

If you have any questions about the ruling or how it may impact your entity’s 340B Program operations, please contact your Quarles & Brady attorney or:

• Michael French: (312) 715-5261 / michael.french@quarles.com
• Richard B. Davis: (414) 277-5844 / richard.davis@quarles.com
• Brenda Maloney Shafer: (602) 229-5774 / brenda.shafer@quarles.com

HRSA’s child site registration flexibility effectively allowed covered entity outpatient departments not yet formally registered with HRSA as child sites to participate and benefit from the 340B Program. Historically, HRSA limited 340B eligibility for a child site until that location (1) reported reimbursable outpatient expense and revenue on the hospital’s most recently filed Medicare Cost Report; and (2) was registered on the covered entity’s 340B Office of Pharmacy Affairs Information System (OPAIS) profile.  

Beginning in mid-2020, however, HRSA relaxed these eligibility requirements and allowed off-site hospital locations to participate in the 340B Program if the site served patients of a covered entity and would be listed as reimbursable on the hospital covered entity’s future Medicare Cost Report. Covered entities were still required to align its 340B policies and procedures to support the site(s)’ eligibility and generally comply with all program requirements, including maintenance of auditable records for the 340B drugs dispensed to patients receiving applicable services at these off-site locations. This flexibility ultimately enabled covered entities to begin obtaining 340B benefits for new outpatient departments much earlier (over a year in many cases), which resulted in significant 340B savings for those covered entities.

Despite indicating to various stakeholders in 2020 that the child site registration flexibilities would remain in place permanently post-PHE, HRSA has since changed its stance.  Covered entities will now have to follow HRSA’s historical child site registration requirements ahead of considering an off-site location 340B-eligible or risk sanction by HRSA.

Notably, the Notice introduces several transition periods for registration of locations, which will allow covered entities to continue to obtain drugs at 340B pricing for those yet-to-be registered locations provided the transition criteria are met.

The first transition allowance covers outpatient facilities that are currently listed on the hospital’s most recently filed Medicare Cost Report but are not yet registered on OPAIS. To continue using 340B drugs for patients at these locations, the covered entity must formally register these sites during the next 340B Program quarterly registration period, occurring January 1-16, 2024. If the covered entity fails to register the locations during this time and continues to consider those locations as 340B-eligible, then the covered entity risks audit and/or enforcement action.

The second transition allowance covers outpatient facilities that are not yet listed as a reimbursable department on the covered entity’s most recently filed Medicare Cost Report. Locations in this category may continue to use 340B drugs, provided that the following conditions are met:

1. The outpatient facility was opened and began using 340B drugs prior to October 27, 2023.
2. The hospital covered entity provides to HRSA, via email to 340Bcompliance@hrsa.gov by January 25, 2024 (i.e., 90 days after the Notice was posted) the following information:
   1. The name of the off-site, outpatient facility;
   2. The date the site will be listed on the hospital’s Medicare Cost Report with associated outpatient costs and charges (this must be the next filed Medicare Cost Report); and
   3. The date the covered entity will register the site in OPAIS.

After providing this information to HRSA, the hospital covered entity must also subsequently register the outpatient facilities on OPAIS at the soonest opportunity, but no later than the date listed in the information provided to HRSA as described above. On the other hand, if the covered entity does not provide this information to HRSA within the 90-day time period, then any location not listed on the most recently filed Medicare Cost Report must cease purchase of 340B drugs for use at the facilities until it is formally registered as a child site and has an active OPAIS registration.

Finally, hospital covered entities utilizing outpatient facilities that do not fall in to the two categories described above must cease using 340B drugs at those locations as soon as practically possible, but no later than January 25, 2024 (i.e., 90 days after publication of the notice). After the 90-day grace period, any sites not in compliance with the registration requirements may be subject to audit and enforcement actions by HRSA.  

Covered entities currently relying on HRSA’s previous child site registration flexibilities should carefully analyze the requirements and conditions contained in the HRSA Notice and take steps to comply with the applicable transition period criteria. Covered entities should also consider whether their policies and procedures align with HRSA’s new guidance in this area. If you have questions or would like to discuss potential options, please reach out to your Quarles attorney or:

• Richard B. Davis: (414) 277-5844 / richard.davis@quarles.com
• Michael French: (312) 715-5261 / michael.french@quarles.com
• Madison Hartman: (317) 399-2883 / madison.hartman@quarles.com
• Brenda Maloney Shafer: (602) 229-5774 / brenda.shafer@quarles.com