J&J plans unilateral reform of drug rebate program 340B

Diving certificate:

• A major pharmaceutical company is once again stirring up controversy in the 340B drug rebate program with an impending change in the way it awards discounts on eligible drugs.
• Johnson & Johnson told hospitals last week that it would no longer offer upfront discounts on two of its drugs eligible for rebates under 340B — the treatment for plaque psoriasis. Stelara and the blood thinner Xarelto. Instead, the pharmaceutical company will require hospitals to pay full price for the drugs starting October 15 and will give them a discount later, according to the letter from J&J to hospitals seen by Healthcare Dive.
• The main hospital lobby in the area, 340B Health, says the policy change violates the law and will raise costs for cash-strapped hospitals by forcing them to compete with the drugmaker for rebates. The Health Resources and Services Administration, the HHS agency that oversees 340B, also said it is inconsistent with federal law.

Diving insight:

Drug manufacturers and providers have been at odds over Act 340B, which was enacted three decades ago to ensure that hospitals serving large numbers of low-income or otherwise needy patients could afford life-saving drugs. The program requires drug manufacturers to provide discounts on eligible outpatient drugs at qualified hospitals and clinics. Discounts under the program can be substantial — typically 20 to 50 percent below a drug's list price.

As a result, drug companies strongly oppose the program because it cuts into their profits, while social security hospitals say 340B is a financial lifeline for their cash-strapped facilities. Disputes between hospitals and drug manufacturers over 340B are nothing new, but have intensified in recent years as rebates have increased, leading to more drug manufacturers refusing to pay rebates owed to hospitals.

J&J's novel payment policy opens up a new line of attack for the pharmaceutical industry.

On August 23, the New Jersey pharmaceutical giant told hospitals it would not disclose 340B prices until they submitted data on their cost estimates, which would be reviewed for program compliance. Currently, drugmakers are required to disclose the 340B price at the time of purchase.

Hospital officials are concerned that the rebate arrangement will give J&J the ability to deny post-sale rebates. Moreover, instead of saving money on drug purchases, hospitals will be forking over revenue to drug manufacturers until they approve rebates. The financial burden could force some high-value facilities, many of which operate on thin margins, to close, according to 340B Health.

“This move undermines the foundations of the 340B program,” Maureen Testoni, president and CEO of 340B Health, said in a statement. “Moving to a rebate system would violate the 340B Act's requirement that drug manufacturers offer eligible drugs 'for purchase at or below the applicable maximum price,' and would be inconsistent with HRSA's longstanding interpretation of that language, which requires upfront rebates.”

340B Health has submitted a formal request to HRSA to stay J&J's policy change.

According to an HRSA spokesperson, the agency informed J&J that its proposal was inconsistent with Act 340B, which requires the HHS Secretary to approve new payment models.

“The Secretary has not approved J&J's rebate model. HRSA has forwarded this information to J&J and will take the necessary actions,” the spokesman said.

If J&J's policy goes into effect, hospitals that buy Stelara and Xarelto will disproportionately buy the drugs at wholesale prices from wholesalers before submitting claims data to an online platform. The platform, called Beacon, will verify that the drug was dispensed at a 340B-approved location and that the claim was submitted on time before J&J applies discounts equal to the difference between the wholesale price and the 340B price.

Disproportionately large hospitals, that is, facilities that serve a high proportion of low-income patients, make up about half of 340B facilities but purchase the majority of drugs under the program.

In its letter to hospitals, J&J explained that the change is intended to reduce waste and abuse in 340B.

“We believe this update will significantly improve the integrity of the program,” J&J wrote in its letter to hospitals.

J&J is the first drugmaker to actually try to implement rebates in 340B. However, another drugmaker, Kalderos, filed a lawsuit in 2021 challenging HRSA's claim that drugmakers could not enforce rebates under the drug rebate program. That lawsuit has been stayed pending final appeal in a DC district court.

Kalderos' lawsuit is one of numerous lawsuits filed by pharmaceutical companies challenging various aspects of Act 340B that they say allow hospitals to pay more than they are entitled to.

As of 2020, several pharmaceutical companies, including J&J, refused to grant 340B rebates if the drugs were dispensed through contract pharmacies rather than through the hospitals' in-house pharmacies.

Several pharmaceutical companies filed suit after HRSA attempted to stop the practice and recently won in court. In response, some states have passed laws preventing pharmaceutical companies from prohibiting hospitals from using contract pharmacies.

The 340B program now covers more than a third of U.S. hospitals. At the same time, the volume of 340B drugs is increasing: According to HRSA, drugs purchased under the program increased by almost a quarter to around $54 billion between 2021 and 2022.

Research on hospitals' use of 340B funds is mixed. Some studies have found that hospitals use the program's revenue to expand health services and subsidize uncompensated care. Others have used it for purposes unrelated to patient care, such as acquiring physician practices. Likewise, audits of affected facilities have found that many providers fail to meet 340B requirements, such as refraining from reselling discounted drugs.

Congress is currently considering possible reforms to the 340B program, including requiring hospitals to account for what they do with the revenue from this program.