The South Carolina District Court’s Ruling On the Definition of a 340B Patient

Ken Perez

By Ken Perez, healthcare marketing, strategy and policy consultant

The 340B Drug Pricing Program was created in 1992 to give safety-net providers—those that deliver a significant level of both healthcare and other health-related services to the uninsured, Medicaid, and other vulnerable populations—discounts on outpatient drugs to “stretch scare federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

In brief, the program requires drug makers participating in Medicaid and Medicare Part B to provide discounts on outpatient drugs to 340B providers, which include various types of hospitals and certain federal grantees, such as federally qualified health centers (FQHCs) and comprehensive hemophilia treatment centers. These providers are referred to as covered entities (CEs).

In recent years, there has been much debate regarding the legality of the use of contract pharmacies by 340B CEs. One other, arguably even more fundamental, issue is the definition of a “patient” of a 340B CE who is eligible to receive a 340B drug.

On November 3, the U.S. District Court for the District of South Carolina issued a monumental decision endorsing a broader view of the definition of such a patient. In Genesis Healthcare, Inc. v. Becerra, the South Carolina district court overturned part of the government’s definition of a 340B-eligible patient, ruling in favor of Genesis Healthcare, Inc., a FQHC CE that filed a lawsuit in 2018 challenging a Health Resources and Services Administration (HRSA) audit finding that Genesis violated the 340B statute by using 340B drugs for ineligible patients.

According to the Veterans Health Care Act of 1992, the law which established the 340B Program, CEs are prohibited from transferring or reselling a 340B drug to a “person who is not a patient of the entity.” The definition of a 340B-eligible patient is critical to a CE’s ability to benefit from 340B participation because CEs can generate 340B savings by purchasing outpatient drugs at discounted prices, administering or dispensing them to eligible patients, and receiving payer reimbursement. The scope of the 340B patient definition determines how widely CEs can use 340B drugs and generate 340B savings.

The statute does not define the term “patient,” and HRSA interpreted the statutory term in 1996 guidance. For a CE to provide care to a patient as defined by HRSA, the agency required that the entity have a relationship with the patient, maintain records of patient care, and that the patient received care from a healthcare professional who is employed or contracted with the CE. HRSA’s guidance did not limit 340B use based on where a prescription is initiated, but over the years, HRSA audit enforcement has focused on the prescription’s origination.

In the Genesis audit, HRSA found Genesis committed diversion by using 340B drugs for prescriptions that the CE did not initiate (i.e., were written by outside providers at outside locations unrelated to a CE encounter). Genesis argued that HRSA’s definition of a 340B-eligible patient is inconsistent with the 340B statute because individuals are patients of a CE so long as they have received services from the CE. As such, CEs can use 340B drugs to fill any prescription originating from any source, as long as the individual receiving the prescription has separately received services from the CE.

After Genesis filed its initial lawsuit, HRSA reversed the audit finding, and the district court in South Carolina dismissed the case as moot. Genesis appealed, and the Fourth Circuit Court of Appeals reversed the district court’s dismissal, concluding that a legal controversy still existed because HRSA could issue a new audit finding against Genesis using the same interpretation of a 340B-eligible patient. The Fourth Circuit sent the case back to the district court to evaluate the legality of HRSA’s interpretation, as outlined in the Genesis audit report.

The district court found that the 340B statute and congressional intent behind the 340B program require a broad definition of a 340B-eligible patient, and a CE does not need to initiate a prescription for it to be filled with a 340B drug. The court endorsed an expanded definition of a patient as follows:

Thus, the court endorsed a 340B patient definition that is significantly broader than the definition historically used by HRSA and would allow CEs to use 340B drugs for prescriptions that originated outside the CE. The decision has the potential to allow broader use of 340B drugs, raise questions about HRSA’s ability to oversee the program, and spur more calls for Congress to provide HRSA with authority to limit 340B use.

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