Drug pricing enforcement action against Lilly blocked by federal court

The federal government’s assertion that Eli Lilly and Co. violated a program to offer low-income Medicaid and Medicare patients discounted drugs was tossed by the U.S. District Court for the Southern District of Indiana in a 65-page opinion, which also hinted that Congress needs to address the problems with the 340B Drug Pricing Program.

In the summer of 2020, Lilly publicly announced that it would no longer honor requests from 340B contract pharmacies. These pharmacies take delivery of the 340B drugs and dispense them to low-income patients on behalf of the medical facilities that qualify for the pricing program.

Lilly claimed it had documented widespread abuses of the 340B program that had been increasing over the past decade. However, in May 2021, the Health Resources and Services Administration issued a violation letter to the Indianapolis-based pharmaceutical manufacturer and instructed it to begin offering the covered outpatient 340B drugs to contract pharmacies again. If it did not comply, Lilly was told it could face civil monetary penalties.

The drug maker refused to change its policy and, instead, asked the federal court to find, in part, that the May letter violated the Administrative Procedures Act and the Constitution, exceeded the agency’s statutory authority and was not in accordance with the law.

Senior Judge Sarah Evans Barker heard oral arguments in July and issued her ruling Oct. 29 in Eli Lilly and Company, et al. v. United States Department of Health and Human Services et al., 1:21-cv-00081.

Barker held the May letter was arbitrary and capricious and, thus, violated the Administrative Procedures Act. Her opinion included an examination of the growth of the 340B program and the proliferation of contract pharmacies, which has created more opportunities for abuse.

She emphasized her ruling was limited to the issues presented in this case but highlighted the frustration that Capitol Hill seems to have abdicated its responsibilities to the federal agencies.

“We have no insight into why there is apparently so much reluctance to promulgate a holistic legislative proposal to bring clarity to the scope of the regulated parties’ obligations and entitlements under the statute with regard to contract pharmacy arrangements rather than engage in piecemeal interpretations and after the fact patchwork characterizing the history of the agency’s attempts to manage this program,” Barker wrote. “What we have come to see, however, is that he 340B program can no longer be held together and implemented fairly for all concerned with non-binding interpretive guidelines and mixed, sometimes inconsistent messaging by the agency regarding the source and extent of its authority to enforce statutory compliance in the area of contract pharmacies.”

Congress created the 340B program in 1992 to expand low-income Americans’ access to affordable prescription medicines. The program requires that pharmaceutical manufacturers who participate in Medicaid and Medicare Part B sell their outpatients drugs at heavily discounted prices to the so-called “covered entities.” These entities include public and not-for-profit hospitals, community centers and other federally funded clinics serving the indigent population.

In 1996, the Department of Health and Human Services issued nonbinding guidance that contract pharmacies could accept and dispense the 340B drugs. The agency held the guidance was necessary because a vast majority of the covered entities did not have their own in-house pharmacies and relied on arrangements with outside pharmacies dubbed “contract pharmacies.”

Drug manufacturers were advised that the statute directs them to sell the medications at the discounted prices to the contract pharmacy.

In 2010, HHS issued supplemental nonbinding guidance allowing covered entities to contract with as many pharmacies as they wanted, even if they had an in-house pharmacy.

From the time the 340B program began and through the guidance issued, the agencies did not initiate any enforcement action against any manufacturer and maintained the guidance they had circulated were not legally enforceable.

However, after Lilly and other manufacturers announced they would no longer deliver to contract pharmacies, HHS general counsel put forth an advisory opinion in December 2020, which the Southern Indiana District Court said “dramatically changed” the requirements on manufacturers. This missive asserted the drug makers in the 340B program were obligated to deliver its covered outpatient drugs to contract pharmacies and charge only the discounted price.

Lilly filed the lawsuit in the Southern Indiana District Court, challenging the advisory opinion.

The court noted that under apparent pressure from Congress, HHS backed off and assured legislators no enforcement action would be taken. HHS eventually withdrew the advisory opinion altogether after Chief Judge Leonard Stark of the U.S. District Court for the District of Delaware vacated the missive on the grounds it was arbitrary and capricious.

Despite the dismissal, HRSA continued its enforcement against Lilly as set forth in the May letter.

Barker cited Cook Cnty v. Wolf, 962 F.3d 208, 230 (7^th Cir. 2020), in noting that when a government agency adopts positions that are “radically different” from previous policy, the agency must show there are “good reasons” for the new policy.

“… (B)ecause HRSA has failed to even acknowledge any change in its position regarding its ability to take enforcement action related to drug manufacturers’ dealings with covered entities through contract pharmacy arrangements, much less provide ‘good reasons’ for such change, the determinations in the May 17 Letter are arbitrary and capricious and must be set aside and vacated and the issues remanded to the agency as actions violative of the APA,” Barker wrote.