The Health Resources and Services Administration brandished a formidable and rarely used enforcement tool to deter Johnson & Johnson’s plan to provide 340B rebates to certain hospitals instead of the usual up-front discounts for Stelara and Xarelto.
Key Takeaways
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The Health Resources and Services Administration took an unusually aggressive approach to stopping Johnson & Johnson from shifting 304B price concessions from up front discounts to back-end rebates for Xarelto and Stelara.
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News that J&J was planning to implement the model prompted an outcry from 340B hospitals, which drove a swift response from HRSA.
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J&J suspended implementation and offered to work with HRSA to respond to the agency’s concerns but also warned it “reserves all of it legal rights” in the matter.
HRSA threatened to terminate the company’s 340B Pharmaceutical Pricing Agreement if it implemented its plan, thereby barring all of J&Js drugs from coverage in Medicare Part B and Medicaid. Manufacturers are required by law to sign PPAs agreeing to provide 340B discounts to specific providers as a condition of participating in the two government programs.
J&J announced it planned to implement the rebate model in 340B disproportionate share hospitals (DSH) in mid-August. (Also see "HRSA-J&J Dispute Over 340B Rebate Plan Again Underscores Need For Program Reform" - Pink Sheet, 27 August, 2024.)
Stelara and Xarelto will be subject to Medicare negotiated prices beginning in 2026 and among other things, the rebate model could help ensure the drugs are not subject to 340B discounts in Medicare on top of negotiated prices as the law directs, according to J&J.
Despite urging from manufacturers, the Centers for Medicare and Medicaid Services has declined to take oversight responsibility to prevent duplications between Medicare negotiated prices and 340B discounts. (Also see "The Next 340B Battle: Discount Duplication With Medicare Negotiated Prices" - Pink Sheet, 30 July, 2024.)
J&J’s plan to implement the model ignited an outcry that prompted a swift response from HRSA. Alarm within the provider community reflected concerns that J&J’s program would be expanded over time and that other manufacturers would initiate similar programs, as was the case following Eli Lilly and Company’s implementation of restrictions on 340B discounts to contract pharmacies in 2020. (Also see "Pharma Manufacturers Mobilize Against 340B Discounts At Contract Pharmacies" - Pink Sheet, 20 August, 2020.)
Barring a manufacturer from Medicare Part B and Medicaid “has never been threatened in any 340B dispute in the 31 years over which that program has operated.” – regulatory consultant Bill Sarraille
Potential regulatory enforcement penalties blocking a drug company from participating in government insurance programs are not unheard of. One recent and high-profile example is in the Inflation Reduction Act. Withdrawal of all a company’s drugs from Medicare and Medicaid is the price a manufacturer would pay for not complying with the Medicare price negotiation program.
But such a punishment “has never been threatened in any 340B dispute in the 31 years over which that program has operated,” regulatory and drug pricing policy consultant Bill Sarraille told the Pink Sheet.
“I think this is truly unprecedented and frighteningly anti-patient,” he continued. “The idea that HRSA would threaten access to millions of patients in multiple federal programs because covered entities object to what they think – I think incorrectly – is a few days’ lost float on the funds necessary to purchase heavily discounted drugs before making typically huge profits on those drugs strikes me as incredibly reckless.”
In a 17 September letter to J&J, HRSA told the company it objects to the rebate plan because J&J had not brought it to the agency for preapproval. The agency also indicated the rebate model is undesirable because it would create “significantly higher up-front costs for covered entities” and would essentially be mandatory for providers.
HRSA Troubled By J&J’s ‘Unilaterally Imposed’ Requirements
HRSA highlighted elements of the model that it found particularly troublesome. The company’s notice to hospitals announcing the change “does not commit to an enforceable timeframe for issuing the ‘rebate payment,’” it noted.
In addition, “the notice states the ‘rebate payment’ is subject to J&J’s unilaterally imposed requirements for the timely submission of ‘rebate claim data’ by a covered entity, as well as J&J’s ‘validat[ion]’ of said data,” the agency pointed out. “In short, the notice makes clear that issuance of the ‘rebate payment’ is conditioned on J&J’s prior approval at J&J’s sole discretion.”
Because the rebate proposal “violates J&J’s obligations under the 340B statute, it subjects J&J to potential consequences, such as termination of J&J’s Pharmaceutical Pricing Agreement (PPA),” HRSA asserted. “As stated in the PPA, even apart from ‘a violation of the agreement,’ the [Health and Human Services Department] Secretary may “terminate the agreement” for “other good cause.”
In a follow-up 24 September letter, HRSA doubled down and told J&J that unless it commits to suspending the rebate model by 30 September, the agency “will begin the process outlined in J&J’s Pharmaceutical Pricing Agreement related to terminating the agreement.”
‘Excessive And Unlawful Penalties’
In response, J&J told the agency 30 September that “due to HRSA’s unwarranted threats of excessive and unlawful penalties, J&J has no choice but to forgo implementation of the rebate model pending resolution of these issues.” The company added it “reserves all of its legal rights with respect to this matter.”
J&J “continues to believe that the rebate model is not only legally permissible but sorely needed to improve the integrity of the 340B Program and provide an effective mechanism for manufacturers to comply with their obligations under the Inflation Reduction Act’s de-duplication and 340B price effectuation requirements” as well as prevent duplicating Medicaid rebates and 340B discounts, which are also prohibited by law, the company asserted.
Furthermore, "HRSA approval is not required for the rebate model because the statute provides for rebates," J&J argued. "To the extent HRSA has discretion regarding a specific mechanism through which manufacturers offer the 340B price, that discretion must be exercised through our PPA and HRSA has not done so. We have engaged with HRSA since July in detail and welcomed their views on the 340B rebate model, including responding to significant information requests by HRSA," the company added.
The rebate model “targets duplicate discounts, not 340B-eligible claims,” J&J maintained. HRSA’s own covered entity audits demonstrate the rampant abuse occurring in the program today.” Moreover, “in just the past two years, J&J has identified thousands of transactions in which DSH covered entities received a 340B discount and then submitted or caused to be submitted a claim for a Medicaid rebate in violation of the 340B statute,” the letter continues.
“It is indisputable that the integrity of the 340B program has suffered immense harm in recent years,” J&J maintained. “Duplicate discounts and diversion benefit for-profit entities like pharmacy benefit managers and their affiliates exploiting the 340B program for financial gain.” J&J’s rebate model “is a necessary first step toward … enabling the program to operate efficiently and effectively in today’s complex healthcare system.”