Dive Brief:
- Johnson & Johnson is suing the Biden administration for blocking a controversial change to how the pharmaceutical company divvies out drug discounts to hospitals in a federal savings program.
- This summer, J&J unveiled a plan to give hospitals after-the-fact rebates for two medications in the program, called 340B, instead of upfront discounts, but paused implementation following threats of government sanctions. The lawsuit filed Tuesday in a district court seeks a ruling finding J&J’s plan legal and allowing the drugmaker to roll out the model.
- It’s the latest salvo in a monthslong clash between the New Jersey-based drugmaker and hospitals backed by regulators in Washington over the plan, which J&J defends as necessary for program integrity and hospitals slam as a thinly veiled attempt to reduce their 340B discounts.
Dive Insight:
In August, J&J proposed giving hospitals rebates for two widely prescribed medications in the 340B program: plaque psoriasis treatment Stelara and blood thinner Xarelto. Currently, drugmakers are required to provide the 340B price to hospitals at the time of purchase.
J&J’s plan only applied to disproportionate share hospitals, which make up less than half of all 340B hospitals — but are responsible for almost 80% of purchases, according to industry and government data.
Hospitals quickly cried foul, arguing the change would allow J&J to seriously delay discounts and potentially avoid paying them altogether. The rebate plan also violates 340B statute, they said.
The Health Resources and Services Administration, the HHS subagency that oversees 340B, agreed, warning J&J it could face steep fines (and potentially be booted from Medicare and Medicaid) if it went through with the rebates. In addition, nearly 200 members of Congress wrote a letter in late September expressing opposition to the plan.
J&J dropped the proposal in late September. But now, the drugmaker is turning to the courts for assistance in resuscitating the idea.
340B statute doesn’t lay out a particular pricing mechanism for how drugmakers issue discounts, J&J’s complaint argues. Because of that, the company shouldn’t be prohibited from moving from the current discounting model to a rebate model instead.
In addition, rebating 340B savings will have “substantial” program integrity benefits by giving J&J an opportunity to verify a hospital’s purchasing and dispensing record for a 340B drug before that hospital receives a rebate, according to the suit.
“The Rebate Model that J&J intends to launch represents a limited but significant step toward remedying the dysfunction and abuse that pervades today’s 340B program,” J&J’s complaint reads. “Neither the universe of eligible 340B claims nor the amount of the 340B price to [disproportionate share hospitals] would change.”
HRSA declined to comment. But J&J’s interpretation of the key statutory language at play — that drugmakers provide eligible drugs “for purchase at or below the applicable ceiling price,” or the maximum 340B cost — flies in the face of HRSA’s. HRSA has long read that language as requiring upfront discounts.
Turning 340B into a rebate program would be “disastrous,” according to Maureen Testoni, CEO of 340B Health, an association that represents hospitals in the discount program.
“This shift would impose massive financial and administrative burdens on 340B hospitals … [forcing] these financially strapped hospitals to incur significant costs and float revenue to drug companies by paying full price for 340B-eligible drugs,” Testoni said in an emailed statement.
340B was created in 1992. The program requires drugmakers to give discounts on qualifying outpatient drugs to hospitals and select clinics that serve high volumes of uninsured and low-income patients. The discounts can be steep — generally 25% to 50% off the cost of a drug, but occasionally higher — cutting into drugmakers’ profits.
The program has ballooned in the past three decades, with prescription drugs purchased in 340B reaching $66.3 billion in 2023, up more than 23% from 2022, according to HRSA.
That growth has amplified criticisms from the pharmaceutical industry that hospitals are gaming the program to increase their discounts, and spurred calls for increased transparency and oversight. Some audits have found providers aren’t complying with 340B requirements like not accepting duplicate discounts on the same drug, or not reselling drugs they bought at a discount.
Research is also mixed on hospitals’ use of 340B funds. Some studies have found hospitals use revenue from the program to expand healthcare services and subsidize uncompensated care, while others use it for purposes unrelated to patient care, like acquiring physician practices.
Drugmakers have taken some unilateral action to restrict 340B discounts when hospitals purchase the medications through contract pharmacies instead of in-house pharmacies. Those restrictions have sparked a number of lawsuits and led some states to pass laws stopping drugmakers from limiting hospitals’ use of contract pharmacies.
J&J is the first pharmaceutical manufacturer to actually try to implement rebates in 340B. However, three years ago a drug discount manager, Kalderos, filed a lawsuit challenging HRSA’s assertion that drugmakers can’t impose rebates.
That litigation has been stayed pending final appeals in a Washington, D.C. district court — the same court where J&J has now lodged its suit.
