Third-Party Beneficiary Status Not Conferred On Safety-Net Hospitals Under 340B Program

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A unanimous U.S. Supreme Court March 29 ruled that federally funded medical clinics and hospitals may not bring breach of contract actions against drug companies that participate in the 340B prescription drug rebate program ( Astra USA Inc. v. Santa Clara County, U.S., No. 09-1273, 3/29/11).

The high court said that allowing public hospitals and other entities covered by the program to sue as third-party beneficiaries of pharmaceutical pricing agreements (PPAs) between drugmakers and the Department of Health and Human Services would be “incompatible with the statutory regime.”

The decision closes the door on efforts by covered entities to recover amounts they claim they were overcharged by drug companies--estimated to top $1 billion nationwide--since 1999, when allegations of drugmaker manipulation of prescription drug prices under the Medicaid program first began to surface.

Since then, according to briefs filed with the high court, drug companies have paid nearly $1 billion to settle charges concerning similar “best price” allegations under the Medicaid Drug Rebate program with both state and federal enforcement officials. However, only a small portion of those settlements have involved the 340B program.

The court, in a decision written by Justice Ruth Bader Ginsburg, said that, notwithstanding evidence of drug company misdeeds and weak HHS enforcement, allowing the covered entities to sue as third-party beneficiaries of PPAs that are not negotiated and that merely incorporate statutory language would be tantamount to allowing them to enforce the statute directly, something Congress declined to allow.

“If 340B entities may not sue under the statute, it would make scant sense to allow them to sue on a form contract implementing the statute, setting out terms identical to those contained in the statute. Though labeled differently, suits to enforce §340B and suits to enforce PPAs are in substance one and the same,” the court said.

The court noted that the parties conceded that the Veterans Health Care Act of 1992, which created the 340B program as an extension of the Medicaid Drug Rebate Program, does not provide for private enforcement. But, the court said, “the absence of a private right to enforce the statutory ceiling price obligations would be rendered meaningless if 340B entities could overcome that obstacle by suing to enforce the contract's ceiling price obligations instead.”

Evidence of Misdeeds.

The court acknowledged that there was evidence suggesting that drug manufacturers had overcharged covered entities by failing to give them the statutorily mandated “best price.” There also was evidence that HHS, through the delegated authority of its Health Resources and Services Administration (HRSA), failed to adequately police drugmaker pricing generally or pursue those claims brought to its attention by covered entities, it said.

Congress was aware of these shortcomings and in implementing the Patient Protection and Affordable Care Act adopted a new enforcement regime designed to strengthen HRSA oversight and compliance efforts, the court said. Congress did not, however, authorize covered entities to sue, it added.

“Congress did not respond to the reports of inadequate HRSA enforcement by inviting 340B entities to launch lawsuits in district courts across the country. Instead, in the PPACA, Congress directed HRSA to create a formal dispute resolution procedure, institute refund and civil penalty systems, and perform audits of manufacturers,” the court said.

The court also noted that allowing covered entities to initiate enforcement of the 340B program could frustrate the enforcement of the Medicaid Drug Rebate Program because of the “interdependent nature” of the two programs' drug pricing requirements. “Far from assisting HHS, suits by 340B entities would undermine the agency's efforts to administer both Medicaid and §340B harmoniously and on a uniform, nationwide basis,” the court said.

The court further observed that HHS is prohibited under the Medicaid Drug Rebate Program from disclosing pricing information in a way that might reveal the prices a manufacturer actually charges for the drugs it produces.

“This ban on disclosure is a further indication of the incompatibility of private suits with the statute Congress enacted. If Congress meant to leave open the prospect of third-party beneficiary suits by 340B entities, it likely would not have barred the potential suitors from obtaining the very information necessary to determine whether their asserted rights have been violated,” the court said.

Providers Disappointed.

Safety Net Hospitals for Pharmaceutical Access (SNHPA) said in a statement that the decision left safety-net hospitals and other health care providers in that participate in the 340B program “without an important remedy to combat overcharging by drug manufacturers.”

The group said that overcharging affects ten of millions of uninsured and underinsured Americans who rely on SNHPA member hospitals, which are legally obligated to treat vulnerable patients regardless of their ability to pay, for their health care. “As a result, our members are entitled to, and are heavily dependent upon, the substantial price discounts on pharmaceuticals made available through the 340B program,” the group said.

“This morning, the Court ruled that our member hospitals cannot seek redress from the judiciary when they believe that they have been overcharged in violation of the nation's laws,” the group said. Safety-net hospitals must rely on HHS and the Department of Justice--both of which sided with drugmakers in the case--for protection from overcharges, the group added.

“The justices' decision puts the onus on HHS and DOJ to investigate evidence of past overcharging, punish wrongdoing, and make 340B providers whole when they have suffered losses,” said William von Oehsen, SNHPA president and general counsel.

The group urged HRSA to use its “informal authority to resolve pending complaints by hospitals and other providers that they have been subject to longstanding and widespread overcharges” and to quickly publish regulations to implement the mandatory dispute resolution and civil monetary penalty provisions called for in PPACA.

However, a spokesperson for the Pharmaceutical Research and Manufacturers of America said, “We think the court made the right decision.”


The high court ruling brings to a close litigation involving provisions of the Medicaid Act that require all drugmakers whose outpatient drugs are covered by Medicaid to enter into contracts with the secretary of health and human services. Those contracts, known as the Medicaid Rebate Agreements, obligate drugmakers to provide drug rebates to the states.

Section 340B required the same drugmakers to enter into PPAs, under which the drugmakers agree to provide deeply discounted prices to certain safety-net health care providers classified as Section 340B entities. The 340B law specifies the formula for the ceiling prices that apply to purchases by Section 340B entities.

In 2005, Santa Clara County, Calif., brought a lawsuit in state court to recover overcharges from a dozen drug manufacturers that allegedly charged county-run Section 340B entities more than the price ceilings outlined in Section 340B and the PPAs. The defendants successfully removed the suit to the U.S. District Court for Northern District of California, which dismissed the case on the ground that the entities had no right to enforce the PPA.

The U.S. Court of Appeals for the Ninth Circuit reversed that ruling, holding that Section 340B entities could sue drugmakers to enforce the PPA's discount provisions and recover reimbursement of excess payments made as a result of drug company overcharges. The appeals court subsequently withdrew that opinion and issued a new opinion Dec. 9, 2009, which reached the same result on the main issue.

After the drugmakers failed to convince the Ninth Circuit to rehear the case, they sought review by the Supreme Court. Review was granted in September 2010. Oral arguments were heard in January.

The drugmakers involved in the case in addition to Astra USA Inc. are AstraZeneca Pharmaceuticals LP, Aventis Pharmaceuticals Inc. (part of Sanofi-aventis), Bayer Corp., Bristol-Myers Squibb Co., Pfizer Inc., Schering-Plough Corp., SmithKline Beecham Corp., TAP Pharmaceutical Products Inc., Wyeth Inc., Wyeth Pharmaceuticals Inc., Zeneca Inc., and ZLB Behring LLC.

The drugmakers were represented in the case by Lisa S. Blatt, of Arnold & Porter LLP, Washington. The federal government was represented as an amicus in support of the drugmakers by Ginger D. Anders, with the U.S. Solicitor General's office, Washington. Santa Clara County was represented by David C. Frederick, with Kellogg, Huber, Hansen, Todd, Evans & Figel, also in Washington.

By Peyton M. Sturges

The court's decision is available at