Navigating the 340b universe: critical developments and practice points

This year’s conference organized by the California Society for Healthcare Attorneys was a success, as always. Thank you to all who helped put together this event and make it memorable, productive, and fun. Educational sessions covered a vast array of healthcare legal issues, some examples are: current challenges faced by long term care facilities, healthcare litigation update, ethical issues that outside counsel encounters when working with inhouse legal teams, requirements of public hearings, California’s update on involuntary psychiatric holds, and many more.

I was joined by Emily Jane Cook in discussing the updates on the 340b program. Emily is a national expert on the program and was invaluable for this presentation.

The next CSHA conference will take place in Northern California (in beautiful Tahoe). Please help spread the word among your healthcare attorneys practicing in California. This is a tremendous opportunity for healthcare attorneys to learn, socialize, and share their knowledge.

Safety-net providers play a critical role in delivering healthcare services in this country. Recognizing their importance and to help them face escalating drug prices, Congress created the 340B Drug Pricing Program back in 1992. The program, however, is currently undergoing significant changes and facing serious challenges.

On one hand, the program is challenged by drug manufacturers, who argue that the program is being abused by 340B covered entities. On another, Medicare Part B recently challenged payments to 340B providers. In addition, we have multiple pending legal actions and legislation that seek to clarify and challenge the program. No wonder the attention of the healthcare community is glued to the latest developments in the 340B arena.

Medicare reimbursement cut

In 2018, CMS implemented a 28.5% reduction to payments for most drugs purchased through the 340B Program and paid under the Outpatient Prospective Payment System (“OPPS”).

Hospitals subject to the reductions sued the Department of Health and Human Services (“HHS”) in federal district court, alleging that HHS did not have the authority to reduce 340B reimbursement rates. Ultimately, the hospitals prevailed in the Supreme Court. Further litigation related to the remedies for the past payment cuts is continuing in the US District Court for the District of Columbia.

Manufacturers’ restricting use of contract pharmacies

In 2010, the HHS’s issued guidance that covered entities could use unlimited number of contract pharmacies (See 75 Fed. Reg. 10,272 (Mar. 5, 2010). As a result, the use of contract pharmacies increased twentyfold. (Sanofi Aventis U.S. LLC v. United States HHS (3d Cir. 2023) 58 F.4th 696, 700.)

Such growth of the 340B program concerned drug manufacturers who argued that it increased duplicate discounts and diversion. Starting with 2020, certain drug makers commenced implementing restrictions on the use of contract pharmacies. For example, some manufacturers refused to ship to contract pharmacies, some limited distribution to only one 340B pharmacy per covered entity, some placed geographical restriction on where such contract pharmacy could be located; some agreed to ship to contract pharmacies if covered entity provide claims data.

Due to these restrictions, in December 2020, HHS released an Advisory Opinion declaring that such restrictions violate the 340B program requirements. It also sent letters to specific manufacturers stating that their policies were unlawful and ordering the manufacturers to rescind them and reimburse covered entities for any overcharges.  

As a result, several manufacturers sued HHS to invalidate its guidance and interpretation of the 340B program.  District courts, however, issued inconsistent decisions. For example, the District of Delaware held that the HHS Advisory Opinion was arbitrary and capricious because it wrongly called Section 340B unambiguous. (Sanofi Aventis U.S. LLC v. United States HHS (3d Cir. 2023) 58 F.4th 696, 702.)

HHS, however, prevailed in the District of New Jersey. The court, relying on the 340B statute’s purpose and legislative history, held that Section 340B requires delivery to at least one contract pharmacy.
(Sanofi Aventis U.S. LLC v. United States HHS (3d Cir. 2023) 58 F.4th 696, 702.)

The parties appealed to Circuit courts and as of the day of this writing, only the Third Circuit court issued decision. It held for the drug manufacturers explaining that HHS’s efforts to enforce its interpretation of Section 340B are unlawful because the statute is silent on the issue of drug delivery.
(Sanofi Aventis U.S. LLC v. United States HHS (3d Cir. 2023) 58 F.4th 696, 699.)

Two other cases on the same issue are currently pending in the Seventh and D.C. Circuits. While unlikely that these courts interpret requirements of Section 340B differently from the Third Circuit, if they do, the case is likely to head to the U.S. Supreme Court.

New 340B ADR Rule

Under the 2010 amendment to Section 340B, HHS was required to set up the administrative dispute resolution process for drug makers and covered entities to resolve disputes pertaining to 340B program. HHS, however, did not issue a notice or proposed rule-making until 2016. Moreover, after the comment period, it seemed to abandon it. (Sanofi Aventis U.S. LLC v. United States HHS (3d Cir. 2023) 58 F.4th 696, 702.) But in 2020, HHS revived it by responding to the four-year old comments and issuing the final ADR rule. At the end of 2022, HHS introduced a new proposed rule.

In addition to the above mentioned developments, there are state and federal legislation pending impacting the 340B program. For example, on the federal level, we have the Inflation Reduction Act of 2022 that impacts the program by providing for Medicare Part B and Part D rebates.

On the state level, several states have introduces 340B non-discrimination laws prohibiting drug makers/PBM/certain payors from discriminating against 340B entities and treating them differently (such as reducing their reimbursements or refusing to deliver products to such entities).

With such an eventful 2022 and early 2023, we expect to see more developments and changes continuing into 2023 and 2024 (namely: new proposed rules, Circuit court decisions, interpretation of HRSA’s enforcement authority, and new state 340B laws). This will be an interesting topic to monitor and analyze how the new developments impact the 340B clients.

The California Court of Appeal, First Appellate District has just affirmed the holding of a trial court that Optum’s arbitration clause in its manual is unconscionable and unenforceable.

I have previously covered this case here. But in a nutshell, a group of California pharmacies brought a case against Optum alleging misrepresentation, fraud, and breach of contract. Optum filed a motion to compel arbitration (arbitration is a part of Optum’s contract with PSAOs and Optum’s pharmacy manual).

California Superior court in Alameda denied the motion on procedural and substantive unconscionability. The court ruled that Optum had not demonstrated the existence of an enforceable arbitration agreement. The court reasoned that Optum had provider agreements with PSAOs and pharmacies were not provided with copies of the provider agreements, did not sign them and have not even seen them. Therefore, the pharmacies were not party to the provider agreements. In additional to this procedural unconscionability, the court found substantive unconscionability because arbitration provisions unreasonably limited discovery, precluded the presentation of live testimony, imposed costs greater than the cost of a court proceeding.

Optum appealed and lost. The Court of Appeal affirmed that the arbitration provision set forth in an online manual were unconscionable  because they were a part of the document that was not signed or agreed to by the pharmacies and it established procedures that favored Optum over the pharmacies. Among such one-sided provisions were Optum’s unilateral ability to:

– change arbitration terms

– deny the pharmacies remedies that were available to Optum

– impose high arbitration costs on the pharmacies

– limit pharmacies’ ability to engage in discovery.

Click here for the Court’s decision.

The parties will be back in the trial court arguing the merits of the case. This case could be a game-changer for pharmacy reimbursements and PBM industry.

This favorable decision opens the door for other pharmacies to bring actions against Optum in court versus by arbitration. Going forward, Optum is likely to change their practices of contracting with pharmacies and is likely to revise its arbitration clause. Because the case was brought and decided in a state court of appeal, the decision is not binding on other courts, not even other state courts. Still, this decision is a persuasive authority for other courts which are likely to follow the lead.

For a long time, reimbursement for specialty drugs have been a subject of heated debates and controversies.  A reason for this could be a lack of clear definition of  what constitutes a specialty drug. Recently, a Seattle pharmacy brought a case against Express Scripts, Inc. (ESI) revolving around the issue of underpayment for specialty drugs based on unclear definition of what “specialty drug” is.

Kelley-Ross operates long-term care (LTC) and retail pharmacies in Seattle’s urban core to a large population of vulnerable patients. It offers “One-Step PrEp” that uses Truvada (a brand-name drug) and its generic version known as ETDF.

In 2016, Kelley-Ross applied to become ESI’s network provider for specialty therapies. ESI, however, required (and still requires) additional credentialing requirement and contractual terms for its specialty providers. ESI did not inform Kelley-Ross of its reimbursement rates under the new contract for specialty providers. It is still ESI’s practice not to inform pharmacies of its contractual rates until the provider is approved for participation in its network.

Nevertheless, Kelley-Ross decided to proceed with the credentialing and it took years for it to complete the ESI’s specialty provider accreditation process.

Eventually, Kelley-Ross entered into provider agreements with ESI for both the LTC and retail pharmacies. When the parties signed the agreements at issue, only the brand-name drug Truvada was available. In 2020, the generic drug for Truvada – ETDF – became available. Kelley-Ross believed that ESI would reimbursed for ETDF under the specialty drug schedule. Instead, ESI reimbursed the pharmacy under the lower rates available for non-specialty drugs. Kelley-Ross alleged that the amount ESI actually reimbursed it for ETDF was below the amount Kelley-Ross itself was paying to obtain the medication.  Furthermore, Kelley-Ross was also incurring significant additional costs to ensure compliance with all the requirements set forth in the ESI contract (such as patient outreach and monitoring).  According to Kelley-Ross, it was losing over $400 per ETDF prescription it filled.

After the parties failed to come to an understanding about how ETDF prescriptions were reimbursed, Kelley-Ross filed a complaint alleging breach of contract, breach of the covenant of good faith and fair dealing, and violation of the Washington Consumer Protection Act (“CPA”). ESI moved to dismiss for failure to state a claim.

To summarize lengthy legal arguments, the court denied ESI’s motion to dismiss relating to breach of contract but granted ESI’s motion to dismiss based on breach of covenant of good faith and fair dealings and CPA.

The Court explained that because the parties essentially dispute whether ETDF qualifies as a covered specialty medication, the pharmacy has a plausible interpretation of the contract. Kelley Ross’s argument is that ETDF constitutes a covered specialty medication because its brand-name drug is listed on the covered specialty medication table. As a result, the pharmacy is allowed to proceed with the case on this issue but not on the rest of its claims.

Enforcement actions against compounding pharmacy have been headliners for some time. Today’s post focuses on a last year’s action against a L.A. pharmacy for paying illegal kickbacks to marketers and waiving  patients’ copays.  The pharmacy – Fusion Rx Compounding Pharmacy – was improperly paying two marketers for steering expensive prescriptions to the pharmacy.

According to the government press release, the pharmacy and the marketers provided physicians with preprinted prescription script pads that offered “check-the-box” options to maximize the amount of insurance reimbursement for the compounded drugs. From May 2014 to at least February 2016, Fusion Rx received approximately $14 million in reimbursements on its claims for compounded drug prescriptions.

The government also alleged that the pharmacy was routinely waiving patients’ copays to encourage patients to continue using expensive compounds. After a PBM audit, which discovered this failure to collect copays, the pharmacy owner directed its staff to purchase American Express gift cards to pay for certain copays without the patients’ knowledge.

All four defendants – the pharmacy owner, the pharmacy, and the two marketers pled guilty and are facing a prison term. The pharmacy owner and his business were ordered to jointly pay $4,400,525 in restitution. The pharmacy owner, who also acted as the pharmacist-in-charge, had his license revoked by the California State Board of Pharmacy. While independent pharmacies operate in a very competitive environment, proper review and compliance should be conducted prior to engaging into such practices as copay waiving or preparing pre-printed forms for the prescribers.  

Earlier this year, CMS issued its Medicare Part D Final Rule addressing DIR fees, among other things. It is important to remember that the rule does not eliminate DIR fees but moves them to the point of sale. The rule becomes effective January 1, 2024, meaning that the pharmacies will face a DIR cliff when they will be required to pay double DIR fees: one large chunk retroactively at the end of 2023 and starting to pay DIR fees at the point of sale beginning January 1, 2024.

The rule applies only to Medicare claims and it is unclear whether private plans will follow the lead and contractually prohibit retroactive fees.

Ambiguity surrounds the final rule  and there are many unanswered questions. But it seems that PBMs will be paying pharmacies the lowest possible reimbursement at the point of sale, providing pharmacies with the opportunity to earn back additional reimbursements based on future performance. Such a roadmap is open to interpretation and potential PBM abuse.

The reform also requires CMS to develop pharmacy performance measures but it is unclear which metrics CMS will use. Lastly, the rule also appears to mandate that PBMs (or Part D plans) adequately describe DIR fees on their remittance advices.

I – personally – have many concerns with the proposed rule as the rule fails to give solid directions as how it will be implemented. All that we know is that the DIR fees under Medicare plans will be moved to the point-of-sale starting January 1, 2024.

Our firm has represented many pharmacists who were investigated only because they were filling scripts written by “problematic” prescribers, mostly those with a restricted ability to prescribe controlled substances.

Many pharmacists complain that it is often difficult (if not impossible) to know if a prescriber has a suspended DEA registration, any prescribing restrictions, or a discipline that would justify rejecting a script.

While it is true that a pharmacy usually has no means of knowing of an open investigation due to the confidential nature of such investigations, there are several ways to research past records of a prescriber:

  1.    Medical Board’s Records

The most obvious one and the most utilized investigation approach is to research the prescriber’s license on the Medical Board’s website.  It will show past and current disciplines. But usually, you need to read the whole disciplinary record to understand if there are any prescribing restrictions or red flags that would warranty denying a script.

  1.    Board of Pharmacy’s Website

As a pharmacist in California, you need to subscribe to the Board of Pharmacy’s email alerts. The Board periodically emails a list of prescribers with restricted authority for prescribing controlled substances. Also, on the Board’s homepage, under “Important Information for Licensee” you can find a link to prescribers with restricted authority for prescribing controlled substances.

  1.    DEA’s Records

I’ve seen plenty of cases where pharmacists were dispensing scripts from prescribers with suspended or restricted DEA registration. But how can a pharmacist know about these issues? According to a Diversion Investigator (“DI”) from a recent DEA case, a pharmacy can request a current DEA registration from the prescriber. But as we all know, it is often difficult to obtain additional information from a prescriber’s office. According to the same DI, if you are unsuccessful in obtaining a DEA registration directly from the prescriber, you can contact your local DEA office and request a copy of this prescriber’s DEA registration or inquire whether the prescriber is in a good standing with the DEA.

While the above sources may help to determine prescribers with restricted authority to prescribe controlled substances, often there are no means of knowing if a prescriber is on the DEA’s or any other agency’s radar. I had cases where the DEA was investigating pharmacies because they worked with the prescribers with unrestricted prescribing privileges but had a discipline pertaining to controlled substances. The DEA considers it a red flag that has to be resolved.

In another case, the DEA argued that a pharmacy should not have supplied controlled substances to a prescriber for his office use (minimal quantities to alleviate shortages) because the prescriber was implicated in a child pornography scheme. When we argued that the pharmacy had no means of knowing about this investigation which did not relate to the prescriber’s medical practice, the DEA responded that the investigation was covered by a local newspaper and the pharmacy should have been familiar with the allegations and should have stopped working with this prescriber.

In a nutshell, when filling a script from new prescribers it is important to verify their licenses. If there is a disciplinary action based on prescribing controlled substances, pharmacists must use their professional judgment on whether to work with such a prescriber. It is also recommended to obtain a copy of the prescriber’s DEA registration (which is easier said than done). For known prescribers, a good practice is to verify prescriber’s good standings every 6 months. And as always, document your due diligence and keep all documents readily available in case of a DEA or BOP investigation.

Earlier this year, the Senate passed the Inflation Reduction Act (a.k.a. Build Back Better Act) which was heavily covered in press. I will only focus on what the Act has in store for pharmacies and will highlight the most important provisions for the pharmacy industry.

The Act – at its core – gives CMS ability to negotiate drug prices for Medicare and Medicaid plans. By 2026, CMS will directly negotiate prices for selected drugs (initially the 10 most expensive drugs ). CMS does not anticipate that these new prices will result in lower pharmacy reimbursements.


But most importantly for pharmacies, the legislation provided for:

  • a $35 out-of-pocket cap for insulin for Medicare beneficiaries (starting in 2023);
  • a $2,000 cap for Part D out-of-pocket expenses (starting in 2025);
  • free vaccines for Medicare beneficiaries (beginning in January 2023).

Further reading: “Understanding Health Care Provisions in the Inflation Reduction Act,” Kaiser Family Foundation.

Starting January 1, 2023, California pharmacies will be required to have a new written policy and procedure addressing controlled substances inventory reconciliations. The amended California Code of Regulations 1715.65 now requires that pharmacies perform inventory reconciliation report:

– on all federal controlled substances;

– for federal Schedule II drugs at least once every three months;

– for products containing the followings substances in the following strengths per tablet, capsule, other unit, or specified volume, at least once every 12 months:

(A) Alprazolam, 1 milligram/unit.

(B) Alprazolam, 2 milligrams/unit.

(C) Tramadol, 50 milligrams/unit.

(D) Promethazine/codeine, 6.25 milligrams of promethazine and 10 milligrams of  codeine per 5 milliliters of product.

– for any other controlled substances no later than three months after discovery of the reportable loss of that controlled substance;

– for all controlled substances at least once every two years.

The new regulation also explains the record-keeping requirements of inventory reconciliation reports, how such reports should be prepared, and clarifies inventory requirements in hospital setting.

You can purchase this new policy and procedure customizable to your practice at our RxPolicy website. (If you are a subscriber, you should have already received this new policy and procedure from us and you will receive a revised Standard Operational Manual for 2023 – with all the updates and requirements for 2023 – in December 2022).

Under various state laws and DEA regulations, every pharmacist must resolve “red flags” before dispensing a prescription for controlled substances. Most of the pharmacy state boards have published lists of what constitutes such red flags. For example, the California State Board of Pharmacy has published the following list of red flags (other states use the same criteria):


  • Irregularities on the face of the prescription itself
  • Nervous patient demeanor
  • Age or presentation of patient (e.g., youthful patients seeking chronic pain medications)
  • Multiple patients all with the same address
  • Multiple prescribers for the same patient for duplicate therapy
  • Cash payments
  • Requests for early refills of prescriptions
  • Prescriptions written for an unusually large quantity of drugs
  • Prescriptions written for duplicative drug therapy
  • Initial prescriptions written for strong opiates
  • Long distances traveled from the patient’s home to the prescriber’s office or to the pharmacy
  • Irregularities in the prescriber’s qualifications in relation to the type of medication(s) prescribed
  • Prescriptions that are written outside of the prescriber’s medical specialty
  • Prescriptions for medications with no logical connection to an illness or condition.

If any of the above are present, the pharmacist must document how the red flags were resolved. The key word here is “document.” I cannot stress enough the importance of documentation. While representing independent pharmacies in DEA audits and investigations for many years, I have seen large monetary penalties imposed simply because there was no documentation on how pharmacists cleared red flags. For example, I recently had a case where the DEA claimed that the red flags were not resolved and was proposing a multi-million dollar settlement. After interviewing the client, I learned that the pharmacist in fact did resolve the red flags. For example, he spoke to the prescribers regarding medical necessity and to the patients to inquire why they were traveling long distances and paying cash. The pharmacist, however, failed to document these inquires and we had no evidence (besides the pharmacist’s statement) that the pharmacy performed its due diligence in filling these scripts.

Specifically, the DEA has recently been targeting pharmacies with excessive filling or ordering, suspicious drug combinations, and pattern prescribing. Some examples of such drug combinations:

– An opioid, a benzodiazepine, and a muscle relaxer for overlapping days of supply

– An opioid, a benzodiazepine, and a muscle relaxer on the same day, and all the prescriptions were written by the same prescriber

– An opioid and a benzodiazepine within 30 days of one another

– An opioid and a benzodiazepine on the same day, and both prescriptions were written by the same prescriber

In the DEA’s opinion, there is no legitimate medical reason for such combinations.

Some examples of excessive dispensing (from recent cases):

– Pharmacy dispensed two short-acting opioid drugs on the same day

– Pharmacy dispensed an opioid prescription of over 200 MME per day

– Pharmacy dispensed more than 210 “days of supply” of all opioids combined in a 6-month period.

Pattern prescribing example: an opioid was dispensed to at least 4 different patients on the same day and the opioid prescriptions were for the same base drug, strength, and dosage form and were written by the same prescriber.

Recently, the importance to resolve red flags was illustrated by a legal action against Walgreens.  The city and county of San Francisco filed a law-suit against drug manufacturers and Walgreens for contributing to the opioid epidemic in San Francisco. A crucial factor in the court’s holding for the city was its determination that Walgreens failed to document red flags.

San Francisco was able to prove that multiple opioid prescription contained red flags which were not resolved by Walgreens’ pharmacists. According to San Francisco’s expert only 5% of the prescriptions were adequately verified and red flags resolved. Walgreens was not able to present documentation on how its pharmacists resolved red flags (such as long distance, cash payment, and dangerous combination of controlled substances). As a result, Walgreens is facing a multi-million dollar settlement.

(By the way, I encourage you to read the court opinion as it goes over the history of San Francisco’s opioid crisis, discusses red flags and pressure that many chain pharmacists face).

In a nutshell: the presence of a red flag triggers a pharmacist’s duty to perform a reasonable inquiry to determine whether the prescription is legitimate before dispensing it. Pharmacists should document how they resolved such red flags. Prescriptions should not be dispensed if the red flags are not resolved and there is no documentation how the pharmacist resolved them.

Remember a guiding principle of pharmacy: “if you didn’t document it, it didn’t happen.”