EXCLUSIVE: Lilly’s Letter to HRSA on Why it Thinks 340B Contract Pharmacy is Unlawful

Your 340B Report for Friday Oct. 30, 2020

A note from Publisher and CEO Ted Slafsky: It was a real pleasure being interviewed for the W20 Group’s Redeeming Value podcast. I touch upon my career, the 340B Report, provide a 340B primer, and answer questions on the current battle regarding 340B use in the contract pharmacy setting. I encourage you to listen to this quick 17 minute interview. Thanks to host Brian Reid, a long-time journalist and health policy wonk, for reaching out to me.

Lilly’s Letter to HRSA on Why it Thinks 340B Contract Pharmacy is Unlawful

Drug manufacturer Eli Lilly and Co. on May 18 gave the U.S. Health Resources and Services Administration (HRSA) 30 days—until June 17—to tell it whether it objected to the manufacturer’s plan to inform drug wholesalers to “discontinue our practice of voluntarily honoring requests” for 340B drug discounts for contract pharmacies on its drug Cialis, a previously private letter from Lilly to HRSA shows. Lilly carried out the plan on July 1.

In a 13-page May 18 letter from Lilly to HRSA obtained by 340B Report, Lilly also spelled out its reasons for ceasing 340B discounts to contract pharmacies on three Cialis NDCs. On Sept. 1, Lilly went a step further and limited distribution on all of its products to 340B contract pharmacies, except insulin, on which it continues providing 340B pricing for contract pharmacies only if the pharmacy does not mark up the drug or charge a dispensing fee.

Lilly told HRSA that the agency’s 340B contract pharmacy guidance

  • violates the 340B statutory prohibition against the resale or transfer of 340B purchased drugs to ineligible patients

  • was beyond HRSA’s authority to issue

  • has created substantial drug diversion and duplicate discount “issues, problems, and violations”

  • interferes with other federal health care programs

  • ignores the Affordable Care Act, “which fundamentally increased the burdens associated with this guidance,” and conflicts with other HRSA guidance.

Lilly said its discontinuation of 340B discounts on Cialis for contract pharmacies “is prudent, reasonable and lawful, particularly in light of the substantial and ongoing expansion of contract pharmacy participation in the 340B program and the now overwhelming evidence demonstrating that contract pharmacy transactions result in 340B duplicate discounts and diversion.” It said it was compelled to act due to the risk that contract pharmacy transactions could become a basis for civil money penalties against Lilly or for “onerous” repayment obligations.

Lilly said HRSA should rescind its contract pharmacy guidance or publicly acknowledge manufacturers’ discretion to ignore it.

AstraZeneca, like Lilly, has ceased 340B pricing on its products shipped to contract pharmacies. Sanofi has ceased such pricing for covered entities that do not give the company their contract pharmacy claims data. Novartis originally said it would do as Sanofi is doing, but has held off on denying 340B discounts to the contract pharmacies of entities that do not comply.


BREAKING: Novartis has just informed 340B Report of major changes to its 340B contract pharmacy policy. We will report on the changes shortly.


Health centers and HIV/AIDS clinics have sued the government over the companies’ actions.

In late September, the top lawyer at the U.S. Health and Human Services Department (HHS) told Lilly that HRSA “has significant initial concerns” about Lilly’s 340B contract pharmacy policy, continues to review the policy, “and has yet to make a final determination as to any potential action.”

“Correspondingly, Lilly cannot and should not view the absence of any questions from the government as somehow endorsing Lilly’s policy,” HHS said.

HHS added that Lilly’s claim that its May 18 letter to HRSA—and a subsequent Sept. 8 letter—were exempt from public disclosure “is fundamentally in error.” The contents of the Sept. 8 letter are still not publicly available.

The reasons Lilly gave in its May letter to HRSA for ending 340B discounts on Cialis (and, presumably, on all of it products) for contract pharmacies include:

  • Lilly said contract pharmacy arrangements violate the 340B statutory prohibition against diversion—reselling or transferring a covered outpatient drug to a person who is not a patient of the entity. Lilly maintains that contract pharmacies are neither covered entities nor patients. Lilly also rejected HRSA previously stated position that contract pharmacies act as covered entities’ agents. “The plain language of the statute forecloses this argument,” Lilly said. Lilly further stated that 340B virtual inventory and retroactive replenishment models that contract pharmacies use “necessarily constitute the transfer of 340B-discounted drugs to non-patients of the covered entity and, accordingly, are statutorily prohibited diversion.” These transactions do not even comply with HRSA’s 340B contract pharmacy guidance, it said.

  • Lilly said HRSA’s 340B contract pharmacy guidance harms it by requiring it to provide unlawful discounts to those pharmacies. The guidance unlawfully results in diversion, duplicate discounts, and “other harm to State and Federal healthcare programs,” Lilly said. It said Congress never gave HRSA rulemaking authority over contract pharmacy; that HRSA ignored Administrative Procedure Act requirements for adopting substantive rules when it issued the contract pharmacy guidance; and that HRSA’s imposition of obligations on Lilly through the guidelines violates a Trump administration executive order and a U.S. Justice Department memo strictly limiting what federal agencies can compel regulated parties to do under sub-regulatory guidance.

  • Lilly said HRSA’s premise when it issued the guidance in 2010 that multiple 340B contract pharmacy arrangements would not result in diversion or duplicate discounts has been shown to be false. It cited federal watchdog agency reports, a 2018 report by Republicans on the U.S. House Energy and Commerce Committee, HRSA covered entity audit statistics, and its own data to demonstrate, it said, that “that contract pharmacies are a frequent source of non-compliance.” It said drug manufacturers should not have to accept ongoing violations of prohibitions against diversion and duplicate rebates involving contract pharmacies “year after year, report after report, and audit after audit.” It said HRSA, at a minimum, should clarify “that manufacturers are not obligated to honor contract pharmacy-related orders for 340B-priced product.”

  • Lilly said identifying and resolving duplicate 340B discounts and Medicaid rebates on drugs dispensed by contract pharmacies is burdensome for states and manufacturers, and can deny Medicaid rebate payments to states for years. Lilly also appeared to suggest that manufacturers might pay millions of dollars more in Medicare Part D rebates if they did not have to pay 340B discounts on prescriptions filled at contract pharmacies.

  • Lilly said HRSA, before issuing its contract pharmacy guidance, should have considered Affordable Care Act language that subjected manufacturers to civil monetary penalties and repayment obligations for misstating their 340B ceiling prices. Lilly also said that, although a HRSA 340B program FAQ says covered entities must request 340B pricing at the time of purchase, and may not reclassify a purchase as 340B eligible after the fact, “this is exactly how contract pharmacies operate.”

The letter concludes with a paragraph stating its contents are confidential and not subject to public disclosure under the Freedom of Information Act. In his Sept. 21 letter to Lilly, HHS General Counsel Robert Charrow said Lilly’s assertion of confidentiality “is fundamentally in error.” He said HHS could find nothing in the letter that protects it from public disclosure on grounds the letters contains trade secrets, commercial confidential information, personnel or medical files, or law enforcement records.