Federal Court Vacates HRSA’s 2013 340B ‘GPO Prohibition’ Policy for Replenishment Models

In a March 31 decision issued in Premier, Inc. v. Health Resources and Services Administration, et al., No. 24-3116 (D.D.C.), the district court (1) granted in part and denied in part Premier’s motion for summary judgment, and (2) denied the defendants’ cross-motion for summary judgment. In doing so, the court concluded that HRSA’s policy lacked the reasoned explanation required under the Administrative Procedure Act (APA) and set it aside — raising near-term compliance and enforcement questions and increasing pressure on HRSA to revisit (and better justify) any future approach to group purchasing organization (GPO)-prohibition compliance in mixed-inventory settings.

The Section 340B Drug Pricing Program requires drug manufacturers participating in Medicaid to offer discounted prices on covered outpatient drugs to eligible health care facilities known as “covered entities.” A few categories of covered entities — disproportionate share hospitals, children’s hospitals, and free-standing cancer hospitals — are subject to the so-called “GPO prohibition” enumerated in (42 U.S.C. § 256(a)(4)(L)(iii)). Under the GPO prohibition, the entities may not obtain covered outpatient drugs through a GPO or other group purchasing arrangement as a condition of their eligibility for 340B pricing.

The Premier case centers around a 2013 policy issued by HRSA (the 2013 Policy), which declared that the entities using a “replenishment model” (or virtual inventory model) violate the GPO prohibition. Under the replenishment model, pharmacies fill prescriptions from a commingled inventory of discounted and non-discounted drugs, and only after dispensing do they determine whether individual prescriptions were eligible for the 340B discount. The pharmacy then places a replenishment order at the 340B price. The 2013 Policy stated that the GPO prohibition “is violated upon use of a GPO to obtain covered outpatient drugs and cannot be fixed or cured by subsequently changing the characterization through accounting or other methods.”

Premier challenged the 2013 Policy under the APA, alleging that it was (1) not in accordance with law, (2) arbitrary and capricious, (3) in excess of HRSA’s statutory authority, and (4) unlawful under the Declaratory Judgment Act. Premier sought to have the 2013 Policy declared unlawful and vacated. 

In its March 31 opinion, the court granted Premier’s motion for summary judgment on the arbitrary and capricious claim and denied the defendants’ cross-motion for summary judgment, vacating the 2013 Policy. The remainder of both motions was denied as moot. 

In finding that the 2013 Policy is arbitrary and capricious, the court held that HRSA offered virtually no reasoned explanation for its conclusion that the replenishment model violates the GPO prohibition. The court identified three justifications offered by HRSA and found each to be inadequate.

1. Statutory Text Parroting: HRSA’s first justification was that the GPO prohibition is violated “upon use of a GPO to obtain covered outpatient drugs and cannot be fixed or cured” with the replenishment model. The court found that this assertion merely restated the statute without explaining why the replenishment model falls within that prohibition — i.e., HRSA failed to “connect[] the facts to the conclusion.” 

2. Reliance on “Longstanding Position”: HRSA’s second justification was that its “longstanding position” prohibits using a GPO to purchase covered outpatient drugs “at any point in time.” While HRSA cited its 1994 and 2009 guidance documents, the court found that neither document explicitly addressed the replenishment model or explained at what point drugs become “covered outpatient drugs” in a virtual inventory system. The court further noted that the administrative record suggested that HRSA had previously permitted replenishment models — including through its own prior FAQs and its prime vendor Apexus’ acknowledgment of the practice — yet the 2013 Policy offered no acknowledgment of this apparent change or the significant reliance interests of covered entities. 

3. Lack of Authorization: HRSA’s third justification was that it had not authorized the replenishment model, which the court found was either unreasoned (for the same reasons as the court articulated in response to HRSA’s second justification, above) or irrelevant, because HRSA lacks general rulemaking authority over the 340B Program and the defendants pointed to no statutory provision requiring preapproval for covered entities’ purchasing models.

The court found that, at bottom, HRSA’s justifications “imply that the agency believes Section 340B and its prior guidance foreclose covered entities subject to [the GPO prohibition] from using the replenishment model.” Yet, while HRSA citied statutory language and its 1994 and 2009 guidance documents, “its conclusory justifications do not explain why the statute or the prior guidance documents led the agency to the ultimate determination offered in the 2013 Policy.” The court explained that “HRSA must ‘point to some evidence in the record that reasonably supports where it chose to draw the line’ with respect to the GPO prohibition’s application to the replenishment model,” and that this “remains true even when the relevant choice is HRSA’s interpretation of Section 340B or its prior notices.” Because HRSA failed to adequately do so here, the court concluded that the 2013 Policy is arbitrary and capricious.

The court acknowledged that it is a “close question” whether the 2013 Policy is a legislative rule or an interpretive rule. “Legislative rules” have the force and effect of law, usually bring about a substantive change in existing law or policy, and are subject to notice-and-comment rulemaking (that HRSA did not undertake here). By contrast, “interpretive rules” ordinarily lack the force of law, serve to merely advise the public of an agency’s construction of the statutes and rules which it administers, and are exempt from the notice-and-comment rulemaking requirement. Because the court vacated the 2013 Policy as arbitrary and capricious, it declined to resolve the issue of whether the 2013 Policy is a legislative rule or an interpretive rule, noting that the same deficiencies in HRSA’s reasoning that rendered the policy arbitrary and capricious also made it difficult to determine whether the agency was truly “interpreting” the statute. 

The court additionally declined to reach Premier’s claims that the policy was contrary to the statute or that HRSA’s denial of Premier’s specific exemption request was independently arbitrary and capricious, again finding that it was unnecessary to do so in light of the court’s conclusion that the 2013 Policy itself was arbitrary and capricious.

Finally, the court emphasized that its decision is limited to the determination that “HRSA’s explanation in the 2013 Policy fails to satisfy what the APA requires for reasoned decision[]making.” Importantly, the March 31 opinion does not preclude the agency from reaching the same substantive conclusion in the future, so long as HRSA provides a reasoned explanation that complies with the APA and does not exceed its limited rulemaking authority. The court also clarified that vacating the 2013 Policy does not affect the 1994 guidance, which remains in place.

It is unclear what this decision will mean with respect to the requirement that covered entities subject to the GPO prohibition maintain three separate outpatient inventories. Specifically, it is uncertain whether such covered entities can maintain an inventory of product for (1) inpatient use purchased under a GPO agreement, (2) outpatient use purchased at the 340B price, and (3) outpatient use purchased at a non-340B price and without a GPO, or if such entities are instead permitted to maintain the first and third categories as one single inventory (i.e., utilizing a combined inventory of product for inpatient use purchased under a GPO agreement and for outpatient use purchased at a non-340B price and without a GPO) and maintain a second inventory of product for outpatient use purchased at the 340B price.

If you are interested in more information about this litigation or the 340B program, please contact the authors.