Notice & Comment

D.C. Circuit Review – Reviewed: Contractual Limits on the Distribution of Discounted Drugs

The D.C. Circuit published one administrative-law opinion last week: Novartis Pharmaceuticals Corp. v. Johnson. Section 340B of the Public Health Service Act requires drug manufacturers to sell certain drugs to certain healthcare providers at a steep discount. Many of these providers contract with pharmacies to help distribute the discounted drugs to their patients. But those contracts create the potential for abuse: for example, many of these pharmacies wind up selling discounted drugs to ineligible patients. To deal with this problem, two manufacturers (Novartis Pharmaceuticals Corp. and United Therapeutics Corp.) began to impose contractual terms on providers, which limited the number and types of pharmacies that could help distribute drugs. But the agency responsible for administering the section 340B program, the Health Resources and Services Administration, sent enforcement letters to Novartis and United, asserting that the Act prohibited manufacturers from imposing any conditions on how healthcare providers distributed the drugs.

The D.C. Circuit, in an opinion by Judge Katsas, rejected the agency’s interpretation. Section 340B requires that manufacturers “offer each covered entity covered outpatient drugs for purchase” at or below a specified “price.” But section 340B doesn’t say anything about contractual conditions. As the court explained, “this silence preserves—rather than abrogates—the ability of sellers to impose at least some … conditions.” The court acknowledged that some conditions might violate the Act—for example, onerous conditions that effectively raised the price above the statutory cap—but that wasn’t the case with the conditions that Novartis and United had imposed. The court therefore affirmed the district court’s decision setting aside the agency’s enforcement letters.

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