Health Law Daily Wrap Up, ADMINISTRATION OF MEDICARE/MEDICAID PROGRAMS—D.D.C.: Court refuses to dismiss PHSA Section 340B claims, (Aug 6, 2025)

By Sherri M. Schroeder, J.D.

Three drug manufacturers sued HHS alleging that ineligible clinics were certified as eligible to receive drug discounts, arguing the process and results of the Secretary’s certification decisions were arbitrary and capricious.

The U.S. District Court for the District of Columbia has allowed claims against HHS and its component that administers Section 340B of the Public Health Service Act (PHSA) to proceed. Three drug manufacturers—Amgen, Eli Lilly, and UCB—alleged that HHS’s Secretary improperly certified and recertified nine clinics run by Sagebrush Health Services, which operates a total of 13 clinics across Nevada, Connecticut, and South Carolina, as eligible for 340B discounted drugs because the nine clinics receive funding from state and local governments to treat sexually transmitted diseases (STDs). The drug manufacturers claimed the clinics were not eligible for the program and sued HHS, its Secretary, the Health Resources and Services Administration (HRSA), and its Administrator (collectively, HHS) under the Administrative Procedure Act (APA), alleging that certifying and recertifying the clinics was arbitrary and capricious. After HHS moved to partially dismiss the claims against it for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), the court declined to do so, finding that the drug manufacturers were not required to exhaust administrative remedies before filing suit and that none of their claims were moot (Amgen v. Kennedy, No. 24-3571 (JEB) (D.D.C. Aug. 4, 2025)).

Section 340B. The PHSA’s Section 340B requires pharmaceutical companies to sell their drugs to certain health care providers at a substantial discount. HHS’s Secretary must certify, and periodically recertify, that a provider is eligible for the program. Providers must agree to certain restrictions, including a prohibition against diversion, which is reselling or transferring a discounted drug to a person that is not their patient. If a drug manufacturer suspects a provider is diverting drugs, it can audit the entity’s records and then file a claim for diversion with HHS and eventually appeal an unfavorable decision to HRSA and then a court.

Claims. The drug manufacturers brought five separate counts under the APA against HHS, alleging that certifying and recertifying the Sagebrush clinics was arbitrary and capricious because Sagebrush used its 340B eligibility to get discounts on drugs that treat conditions unrelated to STDs; Sagebrush thereby diverted drugs to non-patients; Sagebrush’s funding was “at best several steps removed” from state or local grants; several Sagebrush clinics received only in-kind grants; and HRSA’s certification/recertification process omitted required safeguards. HHS moved to dismiss some of the claims against it, arguing that the manufacturers cannot bring one of their counts because they have not exhausted administrative remedies and that HHS has decertified some of the disputed clinics so that claims as to them are moot.

Exhaustion. HHS first argued that because the drug manufacturers did not audit Sagebrush and then file a claim for diversion with HHS, they have not exhausted their administrative remedies and cannot bring a claim grounded in diversion. The court disagreed, finding neither jurisdictional exhaustion nor prudential exhaustion barred the claim. “There is no jurisdictional-exhaustion requirement... for parties challenging final agency action,” noted the court, “... because the APA allows parties to seek judicial review of final agency action and clarifies that, as a rule, agency action is final ‘whether or not’ the challenger has filed ‘an application for a declaratory order, for any form of reconsideration, or... for an appeal to superior agency authority.” (citations omitted) As to prudential exhaustion, the court stated, “In suits like this one, where Plaintiffs are aggrieved by final agency action and challenge it under the APA, prudential exhaustion is therefore irrelevant.” This is because Congress already made a policy choice for APA claims by allowing an injured party to skip nonmandatory agency processes and seek immediate judicial review if a final agency action is injuring someone, and “[c]ourts may not revise that choice by adding exhaustion requirements that Congress has not.”

Mootness. Here, the court first noted that after the drug manufacturers filed their complaint, HHS ended seven of the challenged providers’ participation in the 340B program. HHS has since reinstated five of those seven providers, leaving two clinics with disputed eligibility even though they are no longer in the program. The court then went on to disagree with HHS that most of the manufacturers’ claims were moot as to these two. According to the court, two of the requests for relief challenge general certification criteria, not he certification of any particular clinic. Another seeks to bar HHS from certifying the Sagebrush clinics in the future; because enjoining HHS from reinstating them in the future would stave off financial harm and grant the drug manufacturers effectual relief, this claim is not moot. As to the other three claims for relief, the court stated, “Seven challenged clinics are currently certified, so the Court can grant Plaintiffs relief by declaring their certification unlawful, setting it aside, or ordering Defendants to decertify them. While the scope of those orders might expand or contract with the number of clinics involved, the requests for relief are still live.” Therefore, the claims are not moot.

This is case No. 24-3571 (JEB).

Judge: Boasberg, J.

Attorneys: Susan Cook (Hogan Lovells US LLP) for Amgen Inc. Kimberly Stratton, U.S. Attorney's Office, for Xavier Becerra.

Companies: Amgen Inc.

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