Health Law Daily Hospitals’ suit against HHS involving 340B Program may not proceed
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Friday, February 19, 2021

Hospitals’ suit against HHS involving 340B Program may not proceed

By Nadine E. Roddy, J.D.

No private right of action exists under the statutory program, and the hospitals must first pursue administrative dispute resolution before seeking judicial enforcement measures.

An action by hospitals and hospital/pharmaceutical associations (hospitals) against HHS for alleged violations of the Administrative Procedure Act (APA) involving drug manufacturers’ changed policies under the statutory 340B Program was recently dismissed for lack of subject matter jurisdiction by a federal district court sitting in California. No private right of action exists under the statutory framework, and the hospitals’ suit was nothing more than an indirect action against the manufacturers (American Hospital Association v. HHS, February 17, 2021, Rogers, Y.).

340B Program changes. The hospitals brought suit against HHS and its secretary, asserting two claims of APA violations: (1) for an unlawful, arbitrary, and capricious agency action; and (2) for an agency action unlawfully withheld or unreasonably delayed. The claims involved the 340B Program established under the Public Health Service Act and administered by HHS, through which certain hospitals, community health centers, and other safety-net providers (covered entities) that serve low-income patients may receive prescription drug discounts. Drug manufacturers are required to participate in the 340B Program in order to have their drugs covered through Medicaid and Medicare Part B. Under HHS guidelines, covered entities are authorized to hire retail pharmacies (contract pharmacies) to act as their agents in providing pharmaceutical care to their patients. If a covered entity using a contract pharmacy requests to purchase a covered drug from a participating manufacturer, the statute directs the manufacturer to sell the drug at the discounted price.

The Patient Protection and Affordable Care Act (ACA) added new provisions to improve program integrity related to manufacturer and covered-entity compliance, including the imposition of civil monetary penalties on drug manufacturers that knowingly and intentionally overcharged covered entities. The ACA also directed HHS to establish and implement "within 180 days" an administrative process for the resolution of claims by covered entities involving overcharging for drugs purchased under the program. However, a final rule establishing such an alternative dispute resolution (ADR) program was not issued until December 14, 2020. Several months earlier, a number of drug companies had begun notifying 340B Program participants that certain drugs would no longer be provided to covered entities without an in-house pharmacy. Other drug companies limited the program benefits to just one qualifying contract pharmacy—as opposed to the many upon which the covered entities had previously relied. Various covered entities challenged the manufacturers’ new policy, and when informal attempts to resolve the matter with HHS failed, the hospitals brought this action. HHS moved to dismiss for lack of subject matter jurisdiction.

No private right of action. HHS advanced three separate grounds for dismissal: (1) the Supreme Court’s decision in Astra USA, Inc. v. Santa Clara County barred a private action against HHS or the drug companies under the statutory framework of the 340B Program, and the hospitals were required to use the recently adopted ADR process; (2) no final agency action existed upon which an APA violation could be established; and (3) the principles of agency discretion articulated by the Supreme Court in Heckler v. Cheney barred suits seeking to compel discretionary agency enforcement action concerning alleged violations of the 340B Program.

The court agreed that no private right of action exists under Section 340B for covered entities claiming that manufacturers charged them prices over the statutory ceiling. Nor can covered entities assert such claims indirectly by bringing suit against HHS on creative legal theories such as the contract theory advanced in Astra. The court believed that the hospitals’ suit based on the APA was similarly an indirect action against the manufacturers themselves, and thus it was precluded by Astra. Congress had made explicit in the ACA that alleged 340B Program violations are to be first adjudicated by HHS through an established ADR process.

Although dismissal was warranted on this ground alone, the court also determined that no final agency action yet existed upon which to base an APA challenge, and, at least at this juncture, any enforcement measure fell within HHS’s prosecutorial discretion. The court granted HHS’s motion to dismiss without prejudice, noting that the hospitals may be able to maintain a narrower action seeking general enforcement of the statute in the future.

The case is No. 4:20-cv-08806-YGR.

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