Health Law Daily Wrap Up, PRESCRIPTION DRUGS—D.D.C.: Drug manufacturers may be required to obtain preapproval of rebate proposals, (May 20, 2025)

By Sara Cracau, J.D.

The government did not act contrary to law in requiring drug manufacturers to obtain approval before implementing proposed drug rebate models.

The federal district court in the District of Columbia found that the government did not act contrary to law by requiring the manufacturers to obtain approval before implementing their proposed rebate models and, consequently, denied the manufacturers’ motions for summary judgment and granted the government’s cross-motions for summary judgment. The court denied the manufacturers’ motions and granted the intervenors motions with respect to the claims that the government’s differential application of a preapproval requirement was arbitrary and capricious. The court rejected the arguments of two drug manufacturers that contended that the failure to approve their cash rebate models procedurally and substantively deprived them of property interests in violation of the Fifth Amendment (Eli Lilly and Company v. Kennedy, No. 24-cv-03220 (DLF) (D.D.C. May. 15, 2025); Bristol Myers Squibb Company v. Kennedy, No. 24-cv-03337 (DLF) (D.D.C. May. 15, 2025); Sanofi-Aventis U.S. LLC v. Kennedy, No. 24-cv-03496 (DLF) (D.D.C. May. 15, 2025); Novartis Pharmaceuticals Corporation v. Kennedy, No. 25-cv-00117 (DLF) (D.D.C. May. 15, 2025); Kalderos, Inc. v. U.S., No. 21-cv-02608 (DLF) (D.D.C. May. 15, 2025)).

Four drug manufacturers filed separate actions, asserting claims under the Administrative Procedure Act (APA) and the Due Process Clause of the Fifth Amendment. They alleged that the government unlawfully rejected the manufacturers’ proposed rebate models for effectuating discounts provided under the 340B Drug Pricing Program, in violation of the 340B statute and sought injunctive and declaratory relief. The court granted leave to HHS and certain health care providers to intervene in each manufacturer’s action. The manufacturers moved for summary judgment. The government cross-moved for summary judgment against the manufacturers. The intervenors cross-moved for summary judgment.

Background. Congress enacted the 340B Drug Pricing Program to incentivize manufacturers to offer reduced drug prices to certain safety-net health care providers (“covered entities”). A drug manufacturer that wishes to opt into the program signs a pharmaceutical pricing agreement (PPA) with the HHS and thereby contractually agrees to the price reductions that are established under the statute. Congress conditions the coverage of manufacturers’ products under the Medicaid and Medicare programs on those manufacturers’ participation in the 340B program. Those that participate must offer each covered entity covered outpatient drugs at or below the applicable ceiling price. Safeguards are built into the program and the statute sets forth procedures for manufacturers to audit or dispute discounts. When the manufacturers submitted their proposed cash rebate models, the government informed them that the models required government approval. The manufacturers challenged this requirement, contending that it was inconsistent with the statutory requirements for the 340B program.

Standing. The court rejected the government’s claim that one of the manufacturer’s had no standing and should, therefore, be dismissed from the action finding that such manufacturer had alleged a cognizable injury in the form of economic losses which qualified as an “injury in fact” and that the administrative record showed both causation and redressability. It was clear that the impediments to the proposal hindered revenue generation, and the requested injunctive relief would redress the alleged injury.

Preapproval requirement. The court found that the government did not act contrary to law by requiring the manufacturers to obtain approval before implementing their proposed rebate models and, consequently, denied the manufacturers motions for summary judgment and granted the government’s cross-motions for summary judgment. The statute provides that covered entities were entitled to purchase drugs at or below the statutory price cap. Furthermore, it contemplated that the HHS Secretary would stipulate how rebates or discounts would be accounted for in the price that was ultimately paid by covered entities and the plain text authorizes the agency to regulate implementation of price reductions. In the past, the agency exercised its authority to adjust price reduction obligations in the face of operational challenges. Nor did the agency disclaim that authority by not preapproving other 340B price reduction models. Because the agency had not previously exercised its preapproval authority did not mean that it could not do so. The manufacturers were not immune from the agency’s statutory approval authority merely because their PPAs did not address approval of their current proposals because the PPAs reflect statutory obligations which already exist. Furthermore, the preapproval requirement was not specifically targeted toward covered entities submission of claims data.

Arbitrary and capricious. The court denied the manufacturers’ motions and granted the intervenors motions with respect to the claims that the government’s differential application of a preapproval requirement was arbitrary and capricious. Because the court had decided with respect to one manufacturer without providing adequate justification for such decision, that decision was remanded for further consideration. Final decisions had not yet been made on the other three manufacturers’ rebate proposals. The court agreed that unlawful duplications and diversions and manufacturers’ de facto access to audit procedures are important relevant factors for the government to consider in assessing the manufacturers’ cash rebate proposals. Nonetheless, as the government had not yet made decisions with respect to three manufacturers’ cash rebate proposals the court found it premature to decide whether the government had considered all relevant factors with respect to such proposals.

Due process violations. The court rejected the arguments of two drug manufacturers’ that contended that the failure to approve their cash rebate models procedurally and substantively deprived them of property interests in violation of the Fifth Amendment. Here, the manufacturers voluntarily chose to participate in and offer discounts under the 340B program and Medicaid and Medicare programs which weakened their claim that monetary losses resulting from programmatic inefficiencies amount to protected property under the Fifth Amendment. Accordingly, the court could not determine that those statutory adjudication procedures are so inadequate as to amount to a procedural due process violation and, therefore, denied the manufacturers’ motions for summary judgment and granted the cross-motions on the constitutional claims.

The cases are Nos. 24-cv-03220 (DLF); 24-cv-03337 (DLF); 24-cv-03496 (DLF); 25-cv00117 (DLF); 21-cv-02608 (DLF).

Judge: Friedrich, D.

Attorneys: Catherine Emily Stetson (Hogan Lovells US LLP) for Eli Lilly and Co. and Lilly USA, LLC. Marlan Golden (Hogan Lovells US LLP) for Bristol Myers Squibb Co. Rajeev Muttreja (Jones Day) for Sanofi-Aventis U.S. LLC. Jacob Tyler Young (Hogan Lovells US LLP) for Novartis Pharmaceuticals Corp. Jacquelyn E. Fradette (Sidley Austin LLP) for Kalderos, Inc. John Bardo, U.S. Department of Justice, for Robert F. Kennedy Jr., U.S. Department of Health and Human Services, Carole Johnson and Health Resources and Services Administration.

Companies: Eli Lilly and Co.; Lilly USA, LLC; Bristol Myers Squibb Co.; Sanofi-Aventis U.S. LLC; Novartis Pharmaceuticals Corp.; Kalderos, Inc.; U.S. Department of Health and Human Services; Health Resources and Services Administration

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