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Unilateral Imposition of Rebate Model for the 340B Program is a Non-Starter

By Ted Slafsky

If things were not difficult enough already for 340B providers, hospitals woke up on Friday morning to an announcement that one of the world’s biggest drug manufacturers was moving forward with a plan to convert the 340B program to a rebate model—rather than an upfront discount—for two of its top-selling prescription drugs.

On Aug. 23, Johnson & Johnson (J&J), the New Jersey-based giant, which topped all drug manufacturers with over $85 billion in revenue in 2023, told the approximately 1,200 disproportionate share hospitals (DSH) in the program that starting Oct. 15 they would only be able to access 340B discounts for the blood thinner, Xarelto, and the plaque psoriasis treatment, Stelara, after submitting claims data to a third party J&J has hired to evaluate the data to ensure compliance.

Under the new policy, which was first reported by 340B Report, DSH hospitals must purchase the two drugs at full commercial prices and submit detailed information, including extensive medical claims data, within 45 days of the purchase in order to receive the 340B discount through a rebate.

Dramatic and Troubling Departure

This requirement, which would force hospitals to purchase J&J products at much higher prices than 340B acquisition cost and then have to wait for a rebate, would be a dramatic and troubling departure from how the 340B program has worked since 1992. 

As William Schultz, who previously served as general counsel for the Department of Health and Human Services (HHS) during the Obama administration, eloquently explained in a letter to Health Resources and Services Administration (HRSA) Administrator Carole Johnson, the 340B program “has been administered exclusively as a discount program since 1992, with only one very narrow exception to accommodate” state AIDS Drug Assistance Programs (ADAPs). This exception, which the HHS secretary approved after notice and comment, came about to ensure that ADAPs could utilize the 340B program. Some ADAPs reimburse pharmacies for drugs and do not purchase the products directly. Therefore, the secretary approved “an optional alternative means of accessing section 340B discount pricing.” As Schultz pointed out, “HRSA made clear that it was not authorizing a rebate option beyond ADAPs.”

Government Response

Kudos to HRSA for quickly informing J&J that “their proposal to implement a 340B rebate model is inconsistent with the 340B statute, which requires Secretarial approval of any such proposal,” agency spokesperson David Bowman told 340B Report and other news outlets. “The Secretary has not approved J&J’s rebate model. HRSA has communicated this information to J&J and will take appropriate actions as warranted,” he added.

It is unclear what specifically HRSA intends to do next to ensure that J&J (and other drug companies) don’t follow suit in trying to impose a rebate model. The agency will likely need to take a more aggressive and visible stance than it has so far. I understand that HHS informed J&J in writing prior to the announcement that that their actions were impermissible, but the manufacturer moved forward anyway. The agency will likely need to send a cease-and-desist letter to J&J and post a notice on the Office of Pharmacy Affairs’ website warning other drug companies of severe consequences if they try to follow J&J’s lead. 

While there are strong arguments on both sides of the debate about whether drug manufacturers can place restrictions on 340B contract pharmacy use, the government has a clear-cut case when it comes to the rebate model. A drug manufacturer cannot unilaterally take an action that is such a fundamental deviation from how the 340B program works. If a company has concerns about a covered entity’s compliance to prevent duplicate discounts or drug diversion, it should use HRSA’s Administrative Dispute Resolution process to pursue the dispute.

This is not the first time that a drug manufacturer has tried to implement a rebate model. In fact, when the pharmaceutical industry vendor Kalderos could not get HRSA to approve its service to let drug companies provide 340B pricing as a post-purchase rebate rather than as a discount, the company sued the government. In its complaint, Kalderos said it had been reaching out to HRSA for approval for two-and-a-half years with no formal response. Kalderos said it had multiple manufacturers that wanted to go forward, but HRSA’s position against placing restrictions on the program prevented their clients from proceeding. That case is currently on hold as the legality of the contract pharmacy program continues to wind through the courts.

Where Congress Stands

As far as where lawmakers stand on the permissibility of a drug manufacturer imposing rebates, Congress has made it clear that it does not approve this approach. A bipartisan group of 217 House lawmakers, a remarkable showing considering how difficult it is for both political parties to work together, wrote to former Trump Administration HHS Secretary Alex Azar in November 2020 asking him to stop Kalderos and drug companies from changing 340B from a discount to a rebate program.

“The End of their 340B Programs”

Not only are rebates impermissible without the secretary’s approval, but the model would also create an enormous weight on 340B providers that many could simply not afford.

“This shift would impose massive financial and administrative burdens on 340B hospitals, which serve vulnerable patients and underserved communities” said 340B Health President and CEO Maureen Testoni.

Health centers are rightly concerned that manufacturers would soon try to extend the rebate requirement to them.

“For most community health centers, converting 340B to a rebate model will mean the end of their 340B programs, making them unable to provide their medically underserved patients with affordable medications and other health services,” longtime health center advocate and former HRSA official Colleen Meiman told 340B Report. “Community health centers simply lack the necessary cash reserves to purchase drugs at market price and wait for rebates, or to undertake the massive administrative and data burdens that this rebate model would impose.”

“For over 32 years,” the 340B program “has provided upfront discounted medications to safety net providers, allowing them to stretch increasingly scarce federal resources and reinvest in patient care,” Vacheria Keys, associate vice president for policy and regulatory affairs at the National Association for Community Health Centers, told 340B Report. “Replacing these critically needed discounts with rebates represents a significant departure from the intent of the statute.” 

The drug industry should heed these warnings rather than risk not only government sanctions but an unprecedented public relations headache. 

Ted Slafsky is the Publisher and CEO of 340B Report, the only news and intelligence service exclusively covering the 340B program.  Slafsky, who has over 25 years of leadership experience with the 340B program, is also Founder and Principal of Wexford Solutions.  Ted can be reached at ted.slafsky@340Breport.com.