On November 3, 2023, the United States District Court for the District of South Carolina issued its decision in the long-running dispute between Genesis Health Care Inc., a federally qualified health center and 340B-covered entity (“Genesis”), and the Health Resources and Services Administration (HRSA).[1]

In its widely anticipated decision, the court ruled that HRSA cannot enforce its restrictive interpretation of the term “patient” under the 340B statute as described in an audit enforcement letter issued to Genesis. The court’s holding is viewed as favorable to 340B-covered entities and continues the theme, reflected in recent 340B cases involving contract pharmacy restrictions, of raising questions about the limits of HRSA’s authority to enforce and administer the 340B program through its interpretations of the 340B statute.

The 340B Statute’s Prohibition Against Diversion

The 340B statute prohibits the diversion of 340B drugs by proscribing 340B-covered entities from transferring 340B drugs to any individual who is not a “patient” of the covered entity.[2] To provide clarification on the meaning of “patient,” which is not defined in the 340B statute, HRSA issued interpretive guidance in 1996 clarifying the meaning of “patient” of a covered entity by outlining a three-part definition.[3] The Genesis decision, however, addresses HRSA’s interpretation of “patient” that is not expressed in either the 340B statute or the 1996 interpretative guidance. Instead, the case concerns how HRSA interpreted “patient” as defined in a letter to Genesis, which stated that in order for an individual to qualify as a 340B patient, the covered entity must have “initiated the healthcare services resulting from the prescription.” Notably, the interpretation set forth in the letter has also been reflected in HRSA audits and omnibus guidance issued and then subsequently withdrawn by HRSA.[4] The interpretation is significant because it has historically caused covered entities to only dispense 340B drugs that resulted from a service provided by a covered entity at a registered location or under a “referral” arrangement as contemplated by the 1996 guidance.

Holding of the Genesis Decision

This case originated when Genesis filed suit challenging its termination from the 340B program based upon HRSA’s findings in a 2019 audit. While HRSA subsequently vacated those audit findings and reinstated Genesis’s participation in the 340B program, still at issue in the case was HRSA’s interpretation of “patient” in the context of the 340B statute at 42 U.S.C. § 256b. HRSA’s interpretation of “patient of the entity” in the 340B statute is that the covered entity must have “initiated the healthcare services resulting in the prescription.” Genesis took the position that HRSA’s interpretation is contrary to the plain wording of the statute and that it could furnish 340B drugs to its patients even if the prescription did not originate from Genesis or one of its contracted providers.

Specifically, the Genesis court issued four declaratory rulings:

1. The court found that an individual only needs to be a patient of the covered entity for purposes of 340B eligibility.
2. The plain wording of the 340B statute does not require the covered entity to have initiated the health care service resulting in the prescription.
3. The court reiterated that agency interpretations in contradiction of the plain wording of a statute are not entitled to deference and are not enforceable.
4. The court did find that HRSA has the authority to implement its interpretations of the statutory term “patient” in the 340B statute. However, its interpretation in this instance was contrary to the statute.

HRSA has 60 days from the date of the decision to file an appeal to the Fourth Circuit Court of Appeals.

Other Notable Observations in the Genesis Decision

The court agreed with HRSA that the 340B statute requires an ongoing patient relationship between the individual and the covered entity. While the court did not attempt to define “ongoing,” it said that “[w]hile the statute does not require a recent healthcare encounter for an individual to be considered a patient, Genesis voluntarily utilizes a two-year lookback period to determine whether an individual is a patient.” The court also referenced American Medical Association guidelines that consider an established patient to be an individual who received a health care service from a provider within the last three years.

The legislative history of the 340B statute factored heavily into the court’s decision. The court noted that the purpose of the 340B program was to protect certain safety-net providers from drug price increases that resulted from the Medicaid Drug Rebate Program and referenced oft-cited language from congressional reports that the 340B program would “enable [covered entities] to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” The court broadly interpreted this language to mean that the purpose of the 340B program was “a means to make 340B entities profitable.” The court also highlighted that Congress had rejected more narrow patient language that would have prohibited 340B drugs from being dispensed to an individual “who is not receiving the drug or biological as a patient of the covered entity.” The court determined that this legislative history supported a broad meaning for the term “patient” in the statute.

Impact on Interpretation of “Patient”

The court’s declarations prohibit HRSA from enforcing its more restrictive interpretation of the term “patient” against Genesis only and not any other covered entities. Nonetheless, this ruling could be persuasive to other courts that consider similar challenges that HRSA interpreted “patient” as requiring that the covered entity must have initiated the health care service resulting in the prescription. The court’s application of the “plain meaning” of the term “patient” also raises questions regarding HRSA’s ability to enforce its interpretations of other aspects of its “patient” definition (as those interpretations are reflected in the 1996 guidance or otherwise).

340B-covered entities, contract pharmacies, and vendors will surely consider how this ruling impacts various scenarios and structures within the 340B program. The court’s rejection of HRSA’s more restrictive interpretation of “patient,” without additional clarity, could encourage 340B-covered entities to qualify as 340B eligible those prescriptions written by prescribers that are unaffiliated with the 340B-covered entity and not under “referral” arrangements as contemplated by the 1996 guidance. While such approaches may be consistent with the court’s decision, covered entities will also need to consider the unanticipated consequences of removing the nexus between the prescription and a covered-entity encounter. For one, it is not uncommon for a pharmacy to serve as a 340B contract pharmacy for more than one covered entity. Individuals can be patients of multiple covered entities, and without the nexus between a covered entity encounter and the prescription, there could be significant confusion for 340B third-party administrators and contract pharmacies in determining the applicable covered entity for a given prescription. Covered entities should consider the impact any such expansion of the meaning of “patient” will have on their ability to maintain auditable records that demonstrate compliance with all 340B program requirements.

Potential Implications of Ruling

The decision may also create a backlash from drug manufacturers, some of which submitted amicus briefs in support of HRSA’s interpretation of the meaning of “patient” under the 340B statute. In the current environment of manufacturer-imposed restrictions on 340B drug access to contract pharmacies, manufacturers may see an expanded interpretation of “patient” as a reason to impose further restrictions.

In addition, by further shining a light on HRSA’s inability to enforce its interpretations, the Genesis decision could prompt legislative action to increase HRSA’s rulemaking authority, address the meaning of “patient,” and clarify other aspects of the 340B program. The 340B statute has not been modified since the passage of the Affordable Care Act in 2010. Since then, we have seen legislative attempts to amend the 340B statute, none of which have been successful. This decision highlights a simmering tension between Congress’s initial intent, the broad Genesis interpretation of that intent to increase covered entity profits, and recent efforts by Congress to evaluate the magnitude and use of 340B savings by covered entities.