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Case number 25-5177, at out.

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Novartis Pharmaceuticals Corporation, at balance, versus Robert F. Kennedy Jr.

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in his official capacity as Secretary, United States Department of Health and Human Services, at out.

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Ms.

[00:00:14] Speaker 01:
Stetson, for the Novartis, at balance.

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Mr. Handwerker, for Bellin-Johnson and Johnson Health Care Systems, in.

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Mr. Boldy, for the at police.

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Mr. Schultz, for the intervener, at police.

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Ms.

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Stetson, good morning.

[00:00:27] Speaker 04:
Good morning.

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I heard that we had lost you to academia, but I'm glad to know that's not altogether true.

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I appreciate that, Your Honor.

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Thank you.

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Good morning, Your Honors.

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May it please the court?

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My name is Kate Stetson.

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I represent the appellants BMS, Lilly, and Novartis.

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This is a case about the limits on an agency's statutory authority, not just whether the agency can exercise authority, but how it must do it.

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The agency here, HRSA, prohibited pharmaceutical makers from implementing 340B pricing with discounts or rebates, I should say, claiming that any rebate arrangement required preapproval.

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But HRSA doesn't have roving statutory preapproval authority.

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HRSA wishes to prescribe a particular rebate process or discount process, the statute supplies one way for HRSA to do it, and that's through the pharmaceutical pricing agreements or PPAs with the manufacturers.

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There are no prescriptions in the PPAs for a particular rebate process or discount process.

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Therefore, manufacturers are entitled to implement customary business practices just as they would with other purchasers, just as this court suggested in Novartis would be the case as long as the terms of an offer were reasonable.

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That should end this case.

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What the secretary relies on is this provision in the statute that contains a parenthetical phrase as provided by the secretary.

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So this is 340B A1.

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And I want to emphasize sort of the sandwich of words before and after that parenthetical.

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You have a header that says requirements for agreement.

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You have the first line, the secretary shall enter into an agreement.

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The second line under which the amount required to be paid parens taking into account any rebate or discount as provided by the secretary to the manufacturer does not exceed an amount equal to the average manufacturer price reduced by the rebate percentage.

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I'm short-handing.

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So that entire provision has to do with the pharmaceutical pricing agreement.

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And that makes sense, of course, because as we know from other cases, Congress was almost notoriously stingy with the authority.

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Yes, I'm sorry.

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Sorry.

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Finish your thoughts.

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I'll finish the sentence.

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Stingy with the authority that it gave HRSA.

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Very limited rulemaking authority, limited authority under the PPA in the way that it could exercise its authority.

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So the government has this argument that all this stuff about it has to be in the agreement doesn't get you where you need to go.

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Because in fact, the result would be the agreement does not provide for a rebate mechanism, and so you can't do it.

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So it seems to me that this case is actually about a predicate question of what the statutory baseline is.

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It's either you get to do whatever you want until the secretary says otherwise, or there's some default and you need the secretary's permission.

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Right.

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So just to qualify, the manufacturers wouldn't get to do whatever they want, of course.

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They would have to be, just as this court said in Novartis, in a different circumstance, standard customary business practices.

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Nobody disputes that the rebate processes that we're talking about here are standard business practices.

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Of course they are.

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But on your question, I think the government has actually answered that itself twice.

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The first time it did so, it did so with respect to the AIDS drug assistance programs, ADAPs.

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So if you look in the joint appendix at pages 410 through 413, this is the beginning of volume two, what you'll find are the references to the after the fact request for comment and ultimate Federal Register notice about the ADAP rebates.

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And one of the things that you'll see commenters ask was, what's the process for the rebates?

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How are these rebates going to be implemented?

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And over and over again, Joint Appendix 410, 411, 412, 413, what the agency says is, ADAPs and manufacturers are encouraged to follow standard business practices in designing the contracts and agreements for such a rebate mechanism.

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So that's point one.

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Point two is,

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Government counsel below at Joint Appendix 336 said in response to Judge Friedrich's question about how these rebate processes would be implemented, we wouldn't amend the PPA.

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They would implement them just as with ADAPS.

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So I think that answers the question.

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The PPAs are fine and operative and workable as they are.

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It's only if HRSA takes the unusual step of wanting to prescribe a particular rebate mechanism or discount mechanism in the agreement itself that it would run into the issue where it would have to amend the PPA.

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The default in your formulation, Judge Garcia, is a customary business practice, exactly as this court suggested in Novartis.

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And as I mentioned, no one seems.

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So I think this this parenthetical is confounding for sure in both directions.

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But maybe you can disabuse me of the following, which is it seems like your position is that this means

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that the phrase taking into account any rebate or discount as provided by the secretary means unless prohibited by the secretary.

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And it seems it's at least much closer to taking into account any rebate if allowed by the secretary.

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Right.

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Well, I think there are a couple of things, Judge Garcia, if you'll indulge me to unpack that a little bit.

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the 340B price is a lower price.

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So it's not a question about the secretary needing to put something in the PPA other than what's already there to effectuate the 340B price.

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That's what the rest of that provision under 1A is, how you get to that price.

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So with respect to the PPA not separately providing for a particular rebate or discount mechanism,

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I think that's a tell in a way.

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If you look at the PPA itself, so you can see this adjoined appendix 435 and 438, the PPA actually doesn't include this parenthetical at all.

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It paraphrases A1.

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The manufacturer agrees to charge a price for covered outpatient drugs that will not exceed the average manufacturer price decreased by a rebate percentage.

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So in other words, it says

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the price will not exceed the ceiling price.

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And one view would be that means as a default, you have to charge the ceiling price at the point of purchase.

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And if you want to deviate via a rebate or some kind of creative discount mechanism, you have to go to the secretary for approval.

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There's a specialized understanding in the pharmaceutical industry that price

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can be accomplished in different ways.

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But there's also a plain meaning version of it that says, if the ceiling price is $100, the default is when you say, here's how much for this, you say, it's 100, not 200, but I'll give you a rebate next week.

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Oh, I think it's common parlance to say, this is $100.

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You pay $200, I'll give you the $100 back.

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And more importantly, the 340B price is a lower price.

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It's effectuated by one of two ways, right?

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An upfront discount or a back end rebate.

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So the idea that there is no rebate or discount

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suggested by the current PPAs is a bit of a fiction.

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Of course, there's a discount.

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That's how the 340B price works.

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I guess we can imagine a world where the 340B price is actually the same as the other prices that these manufacturers charge, but it has to be effectuated either by a rebate rate or by a discount.

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We know that both are permissible under the statute,

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The only question remaining is, does the agreement make provision for some particular rebate or discount process that a manufacturer and a covered entity must follow?

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But isn't the point who is the decision maker?

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Is it the manufacturers in the first instance?

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And I hear you, you know, business practices, customary business practices, but there's no, I mean, that's the point in this case is that there isn't an

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necessarily lawful customary business practice of manufacturer-initiated rebates, right?

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It's the providers who initiated it in the state AIDS clinic situation.

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And so that's really the question for us is, who is the decision maker?

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And as I read the statute, it contemplates that the secretary is the decision maker on that.

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Well, Judge Pillard, first of all, I want to pay first attention to the comment you made about these rebate processes not being necessarily lawful customary business practices.

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I don't see any dispute anywhere on this record that these rebate models are anything but customary business practices.

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The question whether they're lawful, of course, is that HRSA's contention here

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that these manufacturers are prohibited from implementing rebates unless or until the manufacturer says yes.

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The question is who decides before it gets implemented.

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So if you just took the position that it was a customary business practice to give a rebate a year later, knowing in advance that that's going to dissuade covered entities from participating,

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I think the whole concern is that maybe the secretary ought to decide that and not the manufacturers.

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Two points.

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And I do want to get back to this who decides question because the statute supplies the answer.

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But the response is the rebates here, we're talking about seven days or 10 days.

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If we had a situation, hypothetically, where a manufacturer said, you'll get your rebate, just stick around for a couple of years and we'll send you the money, that is an egregious, non-standard business practice.

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And the manufacturer would presumably be subject to civil monetary penalties, which of course are one of the few things the agency can prescribe.

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What provision of the statute would it violate?

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Is it the shall offer provision as we...

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What provision would that violate?

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Yeah, I think it maps onto the panel's discussion in Novartis pretty well in that respect.

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There are certain types of standard contract behaviors that are wrapped into the PPA and into the transactions between the covered entities and the manufacturers, just as in any other standard contract.

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So yes, I think it would.

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So what would the remedies be?

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It would be a breach of contract remedy by the providers if

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Oh, no.

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More than seven to ten days.

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I think more to seven.

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Let's say somebody came in and said, I was told seven to ten days and I didn't get my rebate on the morning of the eleventh day.

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I think HRSA would probably exercise its enforcement discretion not to pursue that manufacturer.

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If you had someone come in under Judge Garcia's formulation and said, I was told I'm not going to get my rebate until twenty twenty nine.

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That is something that HRSA presumably could issue civil monetary penalties enforcing.

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it would be enforcing the 340B statutes shall offer provision among other things.

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I think that's probably the best hook for it.

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But I want to get back to this.

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Seven to 10 days?

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I mean, why not?

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six weeks.

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Let me pause because I was about to say that sounds like a standard business practice to me, but that's not in this record.

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What's in this record is that these manufacturers are offering their rebates within a week to 10 days, which is, if anything, a highly favorable business practice vis-a-vis the covered entities.

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I want to make sure I touch on this who decides question though, because I think this is the crux of both of your questions, Judge Piller, Judge Garcia.

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The issue of who decides is also resolved by the statute.

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The statute says taking into account any rebate or discount as provided by the secretary.

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Then the question is provided where?

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You have this entire statute provision that sets out the requirements for an agreement in the header.

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The agreement, such agreement, under the agreement.

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And so under the secretary's argument, what the secretary is suggesting is that that little parenthetical

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actually can exist somewhere outside the agreement.

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But provided where, when, or if the secretary decides to implement a particular rebate process, which it has not done, it may only do so in the PPA.

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Unless or until that happens, it's just a customary business practice.

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As provided by the secretary is a pretty strange way of saying as provided by the agreement.

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If I say as provided by the secretary, it sounds like it's unilaterally decided, whereas agreement is a mutually agreed term.

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I think in some ways, first of all, it's a contest of strangeness.

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I think it's far more passing strange for something to be completely divorced from agreement, agreement, agreement, agreement to suggest that the secretary can elsewhere provide somewhere

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for that particular rebate or discount model.

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But more to the point, if it said as provided in the agreement, that probably would be an express prerequisite that a rebate or discount model be specified in the agreement.

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As provided by the secretary, it leaves discretion.

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So if the secretary wants to do this rebate model pilot program, and what is it that diverges under the secretary's proposed rebate model pilot program from your proposed

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rebate models.

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Would you be satisfied with a rebate model that tracks what the government is currently piloting?

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I think we would be satisfied.

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I have to hesitate because there are a number of different programs that have, my clients have different platforms, software platforms that carry out their rebate models.

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I think to the extent that the manufacturers

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operating rebate model programs throughout the pilot program that look like the rebate models they would implement here, that's fine.

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The problem with the pilot program, of course, is it only applies to manufacturers whose drugs have been chosen for drug price negotiation and only to those drugs.

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That solves only one part of the significant problem that we identified below.

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It solves the immediate impossibility problems created by the MFP and the inflation rebate issues.

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It does not solve the hemorrhaging problem with respect to duplicate discounts and diversion that we're talking about.

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If the secretary just wants to do the pilot program and doesn't want to make a determination about rebates until that pilot is concluded, on your view of the agreement as being the place where the secretary provides, then it would be permissible for HRSA to just

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next week, tomorrow, change the agreements so that rebates would not be permitted except under the pilot unless and until the secretary has made

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a determination based on the data gained.

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Two points.

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I think that change itself would be subject to notice and comment because that's the way that HRSA has proceeded before.

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In that event, we'd have a whole separate issue about it.

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It does the agreements by notice and comment?

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I'm sorry, does the agreement specify?

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No.

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It writes the agreements by notice and comment.

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The one time it's amended the agreements in the past, which was after the Affordable Care Act, it did so through a notice and comment process.

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But the other thing I want to make clear- That was to conform it to the statute, though.

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Yes.

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But typically, if it wants to change something in the agreement, it does a notice and comment.

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I think the one time that it has changed anything, it has been through noticing comment.

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But is it your position that it would have to, I take it your position is that it would have to do that through noticing comment.

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I think it's a I I described it to to the district court as a down the road question.

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Our position is that's the way they've done it before.

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It conforms with the limited statutory authority that HRSA has.

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This is a spending clause provision after all.

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So, giving the manufacturers an opportunity to understand and comment on what they're signing up for is particularly important.

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But let me make one.

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Oh, sorry.

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Just a practical question.

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These are annual contracts.

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Is that right?

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They renew each year.

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They're renewed year on year.

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Yes.

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So at a minimum, separate from notice and comment, if the secretary wanted to insert some new prohibition, it could do it for the upcoming PPA year.

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And then there would be questions about whether that's arbitrary and capricious and all that.

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But it would have that authority.

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It would have that authority subject to the notice and comment issue that we've been talking about, subject to any arbitrary and capricious challenges that way.

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I guess I'm just trying to make sure I understand that if it is the case that the manufacturers lead,

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The question is for how long?

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And so maybe a year, I know there's a 60 day notice provision, but okay.

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Right, right.

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And I think that that triggers the other point that I wanted to be sure I made in response to Judge Pillard's question, which is no one is saying not even the government is saying.

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that a particular rebate or discount process must be implemented through the PPA.

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Remember, at Joint Appendix 336, government counsel said below, if we conclude that these rebate models, subject to our pre-approval authority, are valid, of course, there is no such authority, then we wouldn't amend the PPAs.

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We would just do it just as we did the ADAPs.

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So it's only if

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The secretary concludes that it wants to prescribe a particular rebate or discount model in the PPA itself that you get into this whole question about amending the PPA.

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Other than that, what both the secretary and we were talking about below is you just implement this as you did with the aid apps, which is we trust

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that the parties to this agreement and the covered entities are going to engage in standard business practices.

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No one disputes, as I said earlier, that these rebate models are standard and customary business practices.

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So if this court concludes, as it should, that there's no roving pre-approval authority or that the pre-approval authority is only underneath the PPA, then the answer is these letters should be vacated and the manufacturer should be permitted to

[00:19:39] Speaker 02:
implement their standard rebate practices.

[00:19:43] Speaker 06:
I understood, well, please.

[00:19:45] Speaker 02:
Go ahead.

[00:19:46] Speaker 06:
I understood there's maybe a third argument that even if there is a roving pre-approval authority, these letters were arbitrary and capricious.

[00:19:54] Speaker 06:
It seemed like your strongest argument on that was that the letters did not address the non-assertion of a pre-approval authority in the ADAP or product replenishment situations.

[00:20:03] Speaker 06:
And usually a relevant question, if we got all the way to that question, would be,

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Did your clients ever bring that past practice to the agency's attention and say, for example, you should not assert a pre-approval authority here because you did not in these two prior instances before the letters were issued?

[00:20:27] Speaker 02:
The short answer is yes.

[00:20:29] Speaker 02:
And let me give you some sites.

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Lilly argued it at Joint Appendix 119 and 491 to 492 and Joint Appendix 623.

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I think those are all Johnson and Johnson arguments.

[00:20:43] Speaker 02:
VMS argued it at Joint Appendix 716 and 725.

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Novartis argued it at Joint Appendix 815.

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Same with product replenishment.

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Joint Appendix 119, Lilly, 725, VMS, 816, Novartis.

[00:20:57] Speaker 02:
So the argument certainly was made.

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You're also right, Judge Garcia, that the only reason we get to that kind of part of the drop down menu is if you conclude that there was pre-approval authority, that it doesn't need to be located in the PPA despite that

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sandwich of the rest of the statutory provision.

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And then I think the question is, HRSA plainly didn't explain itself when it came to not pre-approving aid apps.

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And it certainly didn't explain itself when it came to sort of permitting this product replenishment post-hoc rebate regime to grow up.

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So at the very least, in those circumstances, you'd have to go back and demand that the agency reconcile those positions.

[00:21:45] Speaker 02:
But you don't even need to get to that if you agree with us with what the statute says.

[00:21:50] Speaker 04:
I've got a question about the first Navardis case.

[00:21:55] Speaker 04:
And when I read it, I thought, well, we've given them a whole lot of, I mean,

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manufacturers, a whole lot of running room.

[00:22:04] Speaker 04:
Why?

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Because the statute is silent.

[00:22:09] Speaker 04:
And Judge Katzis begins by saying, statutory silence implies that private parties may act freely.

[00:22:17] Speaker 04:
But here, we have agency silence because we don't, the statute says, as provided by the secretary, rebate and discount.

[00:22:28] Speaker 04:
And then we have HRSA, which has just never done anything with that.

[00:22:38] Speaker 04:
So I guess my question is, how much can we rely on the first Novartis?

[00:22:47] Speaker 02:
I think Novartis is not, I would say, controlling here, precisely for the reason that you point out.

[00:22:56] Speaker 02:
It's a close cousin though, because I think the point Novartis reached, which is the Novartis panel reached, which is the statute

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unless it says otherwise, permits manufacturers simply to engage in customary business practices.

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We are confident the courts can sensibly adjudicate questions down the road if they need to.

[00:23:18] Speaker 02:
That is the part that I think is particularly important here.

[00:23:23] Speaker 02:
Because here, where you have the agency able to, but has not yet implemented something in the PPA, the only place it can do it, prescribing a particular rebate mechanism, discount mechanism, then that Novartis fallback, I think, is where you land.

[00:23:40] Speaker 02:
which is customary business practices.

[00:23:43] Speaker 02:
We all understand that this is how it has worked.

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This is how it should work here.

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When you have a situation where eligibility is determined after the fact, the normal business process is for there to be a rebate.

[00:23:56] Speaker 02:
That's normally how it's done.

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And I think the statute here prescribes one way for HRSA to exercise some authority over a rebate or discount process.

[00:24:08] Speaker 02:
When it hasn't, and HRSA has remained silent, Judge Henderson, the manufacturers are able, within reasonable bounds, to implement their own.

[00:24:17] Speaker 03:
So assume, and I know this isn't your position, but assume that the statute grants the secretary the power asserted here.

[00:24:25] Speaker 03:
to limit the mode of price discounting and to exclude the mechanism of rebates until it's concluded further study.

[00:24:37] Speaker 03:
I take it your backup argument is that using that power for the first time required a reasoned explanation of a change in position?

[00:24:48] Speaker 03:
Sorry, go ahead.

[00:24:52] Speaker 03:
Is that right?

[00:24:52] Speaker 03:
Just yes or no on that?

[00:24:54] Speaker 02:
It's kind of an improv answer, yes and.

[00:24:57] Speaker 02:
Yes and it required the reasoned explanation for a change in position, not because of some pre-Loper-Brite interpretive issue, but because the agency has exercised that authority in a differential way.

[00:25:11] Speaker 02:
So it's much more of a classic administrative procedure.

[00:25:13] Speaker 03:
That is assuming that we think that the ADAP is an analogous situation.

[00:25:20] Speaker 02:
You would have to think that the ADAP is an analogous situation and the product replenishment model is analogous.

[00:25:26] Speaker 02:
But I want to make sure we're talking about the same thing when we say analogous, because this is, I think, a point where the district court might have gone a little bit off the rails.

[00:25:35] Speaker 02:
The question is not whether ADAP rebates are similar to these rebates.

[00:25:40] Speaker 02:
The question is, when a rebate is a rebate is a rebate, and the secretary is saying, we get to pre-approve rebates, why did it not pre-approve the ADAP rebates?

[00:25:51] Speaker 02:
So the similarity of the programs is another question kind of beside.

[00:25:55] Speaker 06:
The secretary might be saying, we're going to pre-approve rebates when covered entities object.

[00:26:00] Speaker 06:
And we have never before been presented with the question whether to assert a pre-approval authority when the covered entities object.

[00:26:07] Speaker 06:
Here, we're going to do it.

[00:26:08] Speaker 02:
And that would be a remarkable insertion into the statutory factors or the statutory authority that the agency doesn't have.

[00:26:16] Speaker 02:
The idea that it would favor covered entities' preferences over manufacturers is not something.

[00:26:23] Speaker 03:
Ms.

[00:26:23] Speaker 03:
Tessin, the proposed rebate program

[00:26:26] Speaker 03:
that your clients want dramatically shifts who bears the financial burden in implementing 340B.

[00:26:34] Speaker 03:
And we know the whole purpose of the 340B program is to give these discounts to safety net providers.

[00:26:44] Speaker 03:
And so your client's position requires those providers

[00:26:53] Speaker 03:
to give interest-free loans to manufacturers.

[00:26:56] Speaker 03:
And neither the ADAP nor the product replenishment model does that.

[00:27:01] Speaker 03:
So it just seems that it makes a lot of sense that Congress would have left that choice to the providers, but not left that choice, seen it as a different choice.

[00:27:13] Speaker 03:
if manufacturers want to impose it unilaterally without the secretary's input.

[00:27:20] Speaker 03:
And especially given the language of the statute that says as provided by the secretary.

[00:27:25] Speaker 03:
So my question was, I thought you were making an argument that

[00:27:31] Speaker 03:
that the secretary is using this power for the first time and that it needs to have a reasoned explanation.

[00:27:38] Speaker 03:
And your first answer was, well, it needs to have a reason explanation because it's allowed other actors without express secretarial approval.

[00:27:49] Speaker 03:
to do this.

[00:27:50] Speaker 03:
I mean, that assumes that there needs to be pre-approval as opposed to that the secretary can see somebody doing something and say, no, we don't want that.

[00:28:01] Speaker 03:
We're going to provide that you can't do that.

[00:28:05] Speaker 03:
So I guess the question is, if we assume that the project replenishment and ADAP are materially different,

[00:28:13] Speaker 03:
Are you still arguing that there needs to be reasoned explanation for the agency's fresh use with respect to your clients of the secretary's power to provide the mechanism?

[00:28:28] Speaker 02:
The short answer is yes, but I would like to give my longer answer.

[00:28:31] Speaker 02:
The first is to correct an important factual misunderstanding.

[00:28:35] Speaker 02:
ADAP model, the rebate model and product replenishment both require in the first instance a commercial purchase.

[00:28:45] Speaker 02:
There is no distinction in that regard between ADAP rebates

[00:28:50] Speaker 02:
product replenishment, which of course is precipitated by a commercial price purchase and the kind of rebate model we're talking about here.

[00:28:57] Speaker 02:
That's factual point one.

[00:28:59] Speaker 02:
Legal point two is under the statute, manufacturers are permitted to offer the 340B price through rebates.

[00:29:09] Speaker 02:
That is the text of the statute itself.

[00:29:12] Speaker 02:
Now you'll hear Mr. Schultz in a few minutes talk about how you just

[00:29:15] Speaker 02:
erase that part of the statute, it really should just be discounts.

[00:29:19] Speaker 02:
But the statute itself says rebates.

[00:29:21] Speaker 02:
Rebates mean pay the commercial price, get your money back on the back end.

[00:29:26] Speaker 03:
So then the third point I want to make is with respect subject to the secretary providing otherwise or no.

[00:29:31] Speaker 02:
subject to the secretary in the PPA, which itself would be subject to various administrative procedure processes and challenges, providing otherwise.

[00:29:43] Speaker 02:
Yes.

[00:29:44] Speaker 02:
But third, to your point, I want to make clear that what we're talking about is something that is highly unusual, by which I mean

[00:29:54] Speaker 02:
highly favorable to these covered entities.

[00:29:57] Speaker 02:
We are talking about rebates within 7 to 10 days, which the administrative record also shows might even put money back in the covered entities' hands before they even have to pay the wholesalers for the drugs that they got delivered.

[00:30:11] Speaker 02:
So the kind of scare tactics of the covered entities, which are not reflected, by the way, in the government's reasoning below about them having to carry a huge amount of float, are disproved by the prior practices, which also require float, are permitted under the statute to the extent there's any float.

[00:30:30] Speaker 02:
And there's really no float at all in these circumstances.

[00:30:32] Speaker 03:
I take it that what's an issue here for your clients is data that helps them

[00:30:40] Speaker 03:
determine duplicative claims or overuse.

[00:30:44] Speaker 03:
And I guess one way that Novartis, our Novartis decision bears on this is at least under that decision, your clients can already request as part of their offer to sell products at 340B products to providers at discounted rates.

[00:31:03] Speaker 03:
They can include in those offers requests for reasonable claims data.

[00:31:08] Speaker 03:
And if that's true, then why do you need this rebate program to generate the data?

[00:31:15] Speaker 02:
I think, as a factual matter, that data has, shall I say, not been quickly forthcoming.

[00:31:24] Speaker 02:
There's a lot of kicking and screaming and even litigation about producing data.

[00:31:30] Speaker 02:
But more to the point, what we're talking about here is not just producing data.

[00:31:34] Speaker 02:
It's imposing some order on a process that, as we describe in our brief, is completely run away.

[00:31:41] Speaker 02:
and results in third party administrators, the CVSs and the Walgreens of the world going back weeks or sometimes months and finding what they think are 340B purchases that they can then post hoc get what we're calling a product rebate rather than money back.

[00:31:59] Speaker 02:
So that's what we would like to impose some reason and order on.

[00:32:02] Speaker 02:
That is what produces the real danger of duplicative discounts, and that is what also adds to the danger of diversion.

[00:32:09] Speaker 02:
But for our purposes, it's the duplicative discount issue and the need for data quickly in real time that would actually solve a huge amount of the problems that manufacturers have been operating under for about 15 years.

[00:32:23] Speaker 06:
So, just a question on how the secretary could provide.

[00:32:27] Speaker 06:
I understand the statutory argument that it's only in the agreement and that they lack rulemaking authority, but just separately as a practical matter, it would be completely normal to provide through informal adjudications, right?

[00:32:41] Speaker 06:
If they did have some sort of approval authority.

[00:32:44] Speaker 06:
you would come to them and ask for approval and they would do it.

[00:32:47] Speaker 06:
I mean, that's adjudications.

[00:32:49] Speaker 02:
That's a big if though, because our whole point is that the secretary doesn't have any kind of roving statutory authority.

[00:32:59] Speaker 02:
It's got extreme.

[00:33:00] Speaker 02:
That's why I used the word stingy earlier.

[00:33:02] Speaker 02:
Congress has been extremely stingy with the authority that it's given HRSA.

[00:33:05] Speaker 02:
It can do three types of rules, and it can do the PPAs.

[00:33:09] Speaker 02:
So the idea that Congress would kind of create in this parenthetical is this separate authority that it could do some separate way that it really hasn't specified.

[00:33:18] Speaker 02:
That's the parenthetical wagging the dog, essentially.

[00:33:22] Speaker 02:
This has to come in the PPA if it is to come at all.

[00:33:26] Speaker 02:
And what you've already heard the agency say below is we don't see the need to amend the PPA.

[00:33:33] Speaker 02:
We would just do this just as we did with the ADAPS.

[00:33:35] Speaker 02:
And that's an easy solution.

[00:33:37] Speaker 02:
We agree with that.

[00:33:38] Speaker 02:
Customary business practices, you just implement them.

[00:33:41] Speaker 02:
Life goes on.

[00:33:42] Speaker 02:
No one has to amend the PPA at all.

[00:33:44] Speaker 06:
Well, I think they would say what they did with the ADAPS was decide that the concept is allowed and leave the details to the industry.

[00:33:51] Speaker 02:
What they did with the ADAPS was decide after the fact that the concept was allowed and leave the details to the industry.

[00:33:58] Speaker 02:
Our point is they don't get to decide upfront the concept is allowed.

[00:34:03] Speaker 02:
We get to implement our customary practices and the agency, if it wants to prescribe something different and particular, it can go back into the PPA and do it, but it need not go into the PPA.

[00:34:15] Speaker 02:
The default is just as in any other contract, standard customary business practices.

[00:34:24] Speaker 03:
So I just wondered if the Amiki State and Regional Hospital Associations argue that there's not any real conflict between the maximum fair price and the product replenishment model.

[00:34:43] Speaker 03:
You can do the maximum fair price prospectively.

[00:34:46] Speaker 03:
Does that solve your issue?

[00:34:49] Speaker 02:
No, it doesn't.

[00:34:51] Speaker 02:
I mean, the maximum fair price to the extent that manufacturers want to effectuate it through a rebate, they have to do that rebate in 14 days.

[00:34:59] Speaker 02:
And that's specifically provided for by CMS.

[00:35:03] Speaker 02:
Note that the whole problem here, as we described in our briefs and our briefing below, is that the manufacturers have been put to this impossible task of trying to effectuate an MFP rebate within a certain period of time with no idea about whether a new claim for a purported 340B rebate is going to come down the pike for that same purchase in six weeks or three months.

[00:35:25] Speaker 02:
That's the issue.

[00:35:30] Speaker 03:
So you can move quickly in, I'm a little bit confused factually about you're saying you would process rebates very quickly, but not

[00:35:48] Speaker 03:
not if you've given upfront discounts.

[00:35:53] Speaker 02:
Oh, no, I think the problem is who's moving at what speed.

[00:35:58] Speaker 02:
Under our rebate programs, the manufacturers would give rebates directly to the covered entities within 7 to 10 days, full stop.

[00:36:05] Speaker 02:
When we're talking about the MFP rebates,

[00:36:08] Speaker 02:
manufacturers are required to rebate the difference back to the government purchasing authority within 14 days max.

[00:36:18] Speaker 02:
The problem crops up because of the belated weeks later, months later, almost resuscitation

[00:36:26] Speaker 02:
of a claim that purports to be for a 340B patient.

[00:36:30] Speaker 02:
And that's the algorithm that we call the black box algorithm that the third party administrators, CVS and Walgreens all make their business and make a fair amount of money going back and finding prescriptions from past dispensations.

[00:36:47] Speaker 03:
Aren't your clients wanting to just do their inverse version of the same thing?

[00:36:51] Speaker 03:
No.

[00:36:51] Speaker 03:
Our clients are just wanting to duplicate.

[00:36:53] Speaker 03:
They want to de-duplicate.

[00:36:54] Speaker 03:
So everybody's looking for what they think they're entitled to.

[00:36:59] Speaker 03:
So the question is, should the secretary look at that and decide the best system?

[00:37:04] Speaker 03:
And you're saying, well, don't stop us from doing what we're doing.

[00:37:09] Speaker 03:
Well, it does that.

[00:37:10] Speaker 03:
And I'm not sure I see that the secretary lacks power to do what he's doing or the sense in allowing this

[00:37:20] Speaker 03:
New process, I know you say it's the customary process, but the rebates is relatively new under 340B.

[00:37:34] Speaker 02:
So were conditions on delivery to contract pharmacies.

[00:37:38] Speaker 02:
Those were relatively new under 340B and similarly grew up because of the abuses of the 340B program.

[00:37:43] Speaker 02:
So I don't think the newness has any bearing on whether these are actual customary business practices.

[00:37:49] Speaker 02:
If anything, the unusual, highly unusual practice here is for

[00:37:54] Speaker 02:
covered entities to seek an in-kind product rebate months after the fact for stuff they purchased months ago that they now say they're truing up to a 340B purchase.

[00:38:05] Speaker 02:
That's, I think, the issue.

[00:38:06] Speaker 02:
But I want to answer the point that you made about the secretary having authority to do this.

[00:38:11] Speaker 02:
Again, the secretary's authority is limited by the statute.

[00:38:15] Speaker 02:
It always is.

[00:38:16] Speaker 02:
The statute says it can do so only in the agreement.

[00:38:20] Speaker 02:
It doesn't have some kind of free-floating authority in that parenthetical to do something outside the agreement that makes no logical sense whatsoever.

[00:38:27] Speaker 06:
Do you dispute that in the agreement they could say no rebates allowed?

[00:38:31] Speaker 02:
I don't dispute that they could say it in the agreement.

[00:38:34] Speaker 02:
What I would want to reserve judgment on is whether that would be subject to its own challenge, the statute talks about.

[00:38:39] Speaker 06:
But it wouldn't be subject to a statute.

[00:38:41] Speaker 06:
My question is, would that be subject to statutory challenge or just arbitrary?

[00:38:45] Speaker 02:
I mean, if I were thinking kind of academically about whether it could be subject to a statutory challenge, I would argue if the secretary in the PPA said only discounts, no rebates, I would come in and say the statute says any rebate or discount.

[00:39:00] Speaker 02:
But that's a down-the-road problem if the secretary chooses to implement their authority in the PPA only by selecting discounts.

[00:39:08] Speaker 02:
And the other problem, of course, it would have is what we've talked about at length in our briefing below, which is this is the cleanest, quickest, most efficient way to get money back into the hands of the covered entities.

[00:39:22] Speaker 02:
So the fact that the secretary would, in your hypothetical, Judge Garcia,

[00:39:26] Speaker 02:
be prioritizing a discount system that is notoriously opaque and produces the kind of duplication and diversion risks and actual occurrences that we've been talking about would suggest that it would have a significant arbitrary and capricious problem on its hands as well.

[00:39:46] Speaker 02:
OK.

[00:39:46] Speaker 03:
If there are any questions.

[00:39:47] Speaker 03:
Thank you.

[00:39:49] Speaker 03:
So I'm sorry.

[00:39:50] Speaker 03:
Ms.

[00:39:50] Speaker 03:
Desson?

[00:39:56] Speaker 03:
Is your view that the regulations approving the ADAP rebate models that were already in effect?

[00:40:07] Speaker 03:
were necessary?

[00:40:08] Speaker 03:
In other words, that those models were operating unlawfully until then?

[00:40:12] Speaker 02:
No, I think the models were operating perfectly lawfully.

[00:40:17] Speaker 02:
Who knows what was going on in 1998 and why the agency felt like it wanted to put a finer point on the issue?

[00:40:27] Speaker 02:
Maybe the comments and questions shed some light on that.

[00:40:30] Speaker 02:
Because a lot of the comments and questions, as I said, were directed to this issue of, well,

[00:40:35] Speaker 02:
How do these rebates work?

[00:40:37] Speaker 02:
What are the mechanisms?

[00:40:38] Speaker 03:
So it was an information gathering.

[00:40:40] Speaker 03:
It filled an information gathering function for the agency, but in your view, what weren't necessary?

[00:40:45] Speaker 03:
The regulatory?

[00:40:46] Speaker 02:
I don't think they were necessary.

[00:40:47] Speaker 02:
They are instructive, though, because where the agency ultimately landed was to say, and that's Joint Appendix 410 to 414, look, all these questions about the particulars of the rebate program, we are going to leave it to the manufacturer and the covered entity to work out the details.

[00:41:04] Speaker 02:
And that's all we're asking for here.

[00:41:06] Speaker 04:
Thank you.

[00:41:09] Speaker 04:
Thanks.

[00:41:09] Speaker 04:
Thank you.

[00:41:11] Speaker 04:
Mr. Handwerker.

[00:41:19] Speaker 07:
May it please the court?

[00:41:20] Speaker 07:
Jeff Handwerker for Appellant Johnson & Johnson.

[00:41:22] Speaker 07:
I want to start by responding to some of the questions that you asked to my friend, Ms.

[00:41:28] Speaker 07:
Stetson.

[00:41:29] Speaker 07:
The PPA here is a unique type of contract.

[00:41:34] Speaker 07:
The Supreme Court in the Santa Clara case said that the PPA is a statutory opt-in.

[00:41:40] Speaker 07:
So it's a contract that enables manufacturers to opt into the statutory scheme.

[00:41:46] Speaker 07:
Because of that, Judge Henderson, my answer to your question about the difference between agency silence and statutory silence is there is no difference in this case.

[00:41:57] Speaker 07:
The agency's silence in the PPA is the equivalent of statutory silence because the PPA is essentially part of the statutory scheme per the Supreme Court's holding in the Santa Clara case.

[00:42:13] Speaker 07:
A number of points flow from that.

[00:42:17] Speaker 07:
This court's decision in Novartis becomes significant.

[00:42:22] Speaker 07:
In that case, as the court knows, you evaluated whether statutory silence on delivery conditions allowed manufacturers to proceed freely using customary business practices and answered the question in the yes.

[00:42:39] Speaker 07:
The same is true here.

[00:42:41] Speaker 07:
If you look at the PPA, as my friend noted, Section 2A, which is JA 436, specifically hews very closely to the language of A1 in the statute.

[00:42:55] Speaker 07:
And as Judge Garcia noted in his questions, it specifically says manufacturers must charge a price no higher than the ceiling price.

[00:43:04] Speaker 07:
HRSA could have gone on and said something about the parenthetical.

[00:43:08] Speaker 07:
It could have said manufacturers.

[00:43:12] Speaker 06:
It's a little confusing because everything you're saying just confirms that this whole case just turns on what it means to charge the ceiling price.

[00:43:22] Speaker 06:
And nobody talked about that in their brief.

[00:43:25] Speaker 06:
You assume that there is no statutory default and it's just customary business practices.

[00:43:31] Speaker 06:
The government assumes that there is some other statutory default that you need permission to diverge from.

[00:43:39] Speaker 06:
And again, maybe the other Novartis case is helpful to us, but it does not discuss this statutory language and whether there is a baseline default pricing mechanism.

[00:43:51] Speaker 06:
It is not informative on that question.

[00:43:54] Speaker 07:
The ceiling price is a statutory formula that derives from the Medicaid rebate statute.

[00:44:01] Speaker 07:
The formula is the average manufacturer price minus the Medicaid unit rebate amount.

[00:44:07] Speaker 06:
So one conceivable reading of this statute would be.

[00:44:11] Speaker 06:
When the ceiling price is $100, you must go to the covered entity and say, you can buy my drug for $100.

[00:44:19] Speaker 06:
You cannot go to them and say, buy my drug for $200, and I'll give you $100 next week.

[00:44:26] Speaker 06:
And we need to know which reading is the right one.

[00:44:29] Speaker 06:
So why is the right reading that you get to charge $200?

[00:44:34] Speaker 07:
In the pharmaceutical pricing context,

[00:44:37] Speaker 07:
The transaction price is the list price net of discounts or rebates.

[00:44:44] Speaker 07:
That is a standard business practice in the pharmaceutical industry.

[00:44:48] Speaker 07:
It's recognized in a number of contexts.

[00:44:51] Speaker 07:
For example,

[00:44:52] Speaker 07:
In the Pharma versus David case, the court specifically said in evaluating what prices needed to be disclosed under a California transparency law, that it was price, net of discounts and rebates.

[00:45:05] Speaker 07:
In the Robinson-Patman context, when you're evaluating whether a price discrimination has occurred in the pharmaceutical space, you look at the price, net of discounts or rebates.

[00:45:15] Speaker 07:
under the Medicaid rebate statute.

[00:45:18] Speaker 06:
So this is, I appreciate all of that and common usage.

[00:45:21] Speaker 06:
If I were, I'm not saying this is correct, but if I were to just stare at these words, the amount required to be paid, you're either going to, the argument would be you're going to require them to pay 100 or 200.

[00:45:33] Speaker 06:
And then there's a parenthetical that says taking into account any rebate or discount

[00:45:40] Speaker 06:
And it's a little bit odd to say amount required to be paid on its own envisions using a rebate and then having a parenthetical that says maybe you can use a rebate.

[00:45:54] Speaker 06:
It suggests that the preceding term doesn't envision the use of a rebate, doesn't it?

[00:45:59] Speaker 07:
Well, I think it does.

[00:46:00] Speaker 07:
I think it suggests that the amount required to be paid could take into account a rebate or a discount.

[00:46:06] Speaker 06:
If allowed by the secretary.

[00:46:08] Speaker 07:
Well, it says as provided by the secretary, right?

[00:46:11] Speaker 07:
Not as approved or allowed, but as provided.

[00:46:14] Speaker 07:
Yes, you're correct.

[00:46:17] Speaker 07:
There's a second sentence in A1 that I think is important.

[00:46:22] Speaker 07:
And it's, as you all noted when my friend was speaking, it's the shall offer provision.

[00:46:27] Speaker 07:
The shall offer provision was interpreted by this court to mean make a bona fide offer.

[00:46:35] Speaker 07:
And the court parsed the words price and offer and reached the conclusion that offers could include various terms.

[00:46:46] Speaker 07:
The court also went on to say that manufacturers are free to impose reasonable conditions on their offers so long as those conditions do not result in a covered entity paying a price

[00:47:01] Speaker 07:
higher than the amount required to be paid, higher than the 340B ceiling price.

[00:47:07] Speaker 07:
In the context of a rebate, here the rebates are being paid within 7 to 10 days.

[00:47:14] Speaker 07:
J&J's proposed rebate model in this case had a 7-day commitment

[00:47:19] Speaker 07:
It also has a technological feature that would allow payment of the rebate upon purchase rather than upon dispense.

[00:47:28] Speaker 07:
So it's not the situation like what the interveners are suggesting, that there could be six months or longer between the time they purchase a drug and the time they paid the rebate.

[00:47:39] Speaker 07:
That compares with the current discount model.

[00:47:43] Speaker 07:
And I just want to explain this a little bit for the court.

[00:47:46] Speaker 07:
Under the current discount model,

[00:47:48] Speaker 07:
drugs are purchased through wholesalers and then sold through to pharmacies.

[00:47:57] Speaker 07:
The pharmacy then would dispense to a patient of a 340B entity and then at some point after the fact that sale would be recognized as a 340B eligible sale and there would be an invoicing process back to effectuate the 340B price.

[00:48:16] Speaker 07:
That takes a much more significant period of time than the rebate models that are proposed in this case.

[00:48:24] Speaker 07:
So as my friend noted, the actual impact of the rebate models here on covered entities will be significantly less than under the standard wholesaler payment terms, as we note in our brief.

[00:48:40] Speaker 07:
With respect to the other questions that were asked, the must offer provision plays an extremely important role in this case.

[00:48:49] Speaker 07:
The must offer provision provides a limiting principle on the impact of rebates

[00:48:56] Speaker 07:
on covered entities.

[00:48:58] Speaker 07:
If there is a situation where a rebate model results in a covered entity paying more than the 340B price, the covered entity has remedies under the statute.

[00:49:10] Speaker 07:
They could pursue an alternative dispute resolution.

[00:49:13] Speaker 07:
HRSA could impose civil monetary penalties.

[00:49:16] Speaker 07:
There are significant consequences to manufacturers if they do that.

[00:49:20] Speaker 07:
So this is not a case.

[00:49:22] Speaker 06:
Isn't this kind of their whole view of this case?

[00:49:26] Speaker 06:
You say, no big deal, rebate, it'll be easy.

[00:49:28] Speaker 06:
And they're saying, no, this is a huge change, and we don't have the money to do it.

[00:49:33] Speaker 06:
And we don't trust that you're going to give it to us in seven days.

[00:49:37] Speaker 06:
So that's exactly why the secretary has to kind of come in and settle for the speaker.

[00:49:43] Speaker 07:
So there are a few points to unpack from that Judge Garcia.

[00:49:51] Speaker 07:
First, the claims data that are required to be produced here, the record is replete with information about this, our standard claims data that covered entities

[00:50:02] Speaker 07:
collect and provide in transactions in other contexts.

[00:50:08] Speaker 07:
They have provided similar claims data with respect to contract pharmacy sales per the Novartis case.

[00:50:14] Speaker 07:
So this is not an undue burden on covered entities.

[00:50:18] Speaker 07:
Second, the rebates.

[00:50:21] Speaker 03:
If they're providing it as a standard matter, I have the same question that I had of Ms.

[00:50:26] Speaker 03:
Stetson about if we've already held a Novartis that you can request reasonable claims data as part of your offer to sell, then why do you need this rebate program to get the data?

[00:50:38] Speaker 07:
So the challenge is under the current system, Your Honor, the claims data are not available in a timely fashion.

[00:50:46] Speaker 07:
Rebate models will enable data to be provided in real time, which is extremely important, especially when you think about the Inflation Reduction Act deduplication requirements that my friend mentioned.

[00:51:01] Speaker 07:
So the rebate models provide for a faster turnaround of that data, which allows for the deduplication that is needed.

[00:51:11] Speaker 03:
And if you over deduplicate, the remedy for the providers is what?

[00:51:18] Speaker 07:
So the deduplication will occur not in the 340B program.

[00:51:23] Speaker 07:
So the 340B providers are going to receive the 340B price through the rebate.

[00:51:28] Speaker 07:
If there is a deduplication, it would be to other purchasers, not to the 340B entities.

[00:51:37] Speaker 07:
So there's two sides to the deduplication, Your Honor.

[00:51:39] Speaker 07:
There's the 340B.

[00:51:42] Speaker 07:
discount and then there's a discount to someone else like the the mfp or another party and Any deduplication here would occur not in 340b, but rather with the other party So the covered entities are going to be made whole with the rebate within the 10-day window seven to 10-day window All right, thank you Mr. Ball

[00:52:19] Speaker 08:
May it please the court, Maxwell Baldy for the government.

[00:52:26] Speaker 08:
The 340B program exists to enable safety net healthcare providers to stretch their scarce resources in order to serve some of the nation's most vulnerable and underserved populations.

[00:52:36] Speaker 08:
The secretary is conscious that suddenly upending the system covered entities have relied on for three decades, risk imposing additional costs and burdens on providers and consequently reducing patients access to care.

[00:52:48] Speaker 08:
As I think the court has recognized this morning, this is a dispute over whether the secretary may take steps before this happens, whether he may take steps to study and address these concerns before manufacturers may switch from upfront discounts to rebates.

[00:53:02] Speaker 08:
Plaintiff's position is that they may unilaterally implement rebates for whichever providers and drugs they choose on largely whatever terms they choose, and the secretary is not reserved to the power to review, disapprove, or condition the rollout of any rebates.

[00:53:16] Speaker 08:
So consistent with that view, each plaintiff gave the secretary a short fuse ultimatum.

[00:53:21] Speaker 08:
Eli Lilly, for example, after the system operated the way it has for 30 years, demanded a response to this proposal within 19 days and proposed to implement its model 39 days later.

[00:53:30] Speaker 08:
And then when it didn't get immediately what it wanted immediately, it sued.

[00:53:34] Speaker 08:
But Section 340B permits rebates and discounts only as provided by the Secretary, and the Secretary has not made provision for the rebates plaintiffs propose.

[00:53:43] Speaker 08:
Therefore, the statute prohibits plaintiffs from rolling out rebate models until the Secretary signs off.

[00:53:48] Speaker 08:
I have six reasons why our statutory interpretation is correct.

[00:53:58] Speaker 08:
I think that's where the meat of this dispute lies.

[00:54:01] Speaker 08:
I'd start with the text which says that the secretary must provide, he must make provision.

[00:54:07] Speaker 08:
the, you, you have, so yes, there are rebates and discounts, but the secretary has to provide for them.

[00:54:15] Speaker 08:
He has provided for every other form of rebate or discount or payment method that has occurred before this point, but he has not provided for the ones collectively proposed.

[00:54:24] Speaker 06:
Can I, sorry?

[00:54:25] Speaker 06:
Please.

[00:54:26] Speaker 06:
Is your position that there is a statutory default pricing mechanism?

[00:54:31] Speaker 06:
So if the statute secretary never provided for anything, what are the manufacturers supposed to do?

[00:54:37] Speaker 08:
No, our position is that what the statutory requires for the secretary to make some provision before to enable 340B pricing to occur.

[00:54:48] Speaker 08:
And if you were to look at, for example, Congress passes this in 1992.

[00:54:58] Speaker 08:
It sets an effective date in 1992.

[00:55:00] Speaker 08:
The pricing agreement comes out later.

[00:55:03] Speaker 08:
And the first guidance comes out both in early 1993.

[00:55:07] Speaker 08:
nothing has happened to this date.

[00:55:08] Speaker 08:
And the agency has to say, OK, here's how it's going to work.

[00:55:11] Speaker 08:
You need to true up for everything between the effective date and when you sign your agreement.

[00:55:15] Speaker 08:
And then going forward, the agency described this sort of upfront discount scheme.

[00:55:21] Speaker 08:
But at every point, the agency said, this is how you're going to do it.

[00:55:27] Speaker 03:
So it seems like HRSA has previously exercised its power exposed.

[00:55:35] Speaker 03:
It doesn't seem to me it's necessarily essential to your position that the secretary must pre-clear any program in order to provide for it.

[00:55:46] Speaker 03:
For example, with the state aid apps,

[00:55:49] Speaker 03:
They were doing it, and then it was approved, ex post, and that would suggest that the statute does not require ex ante

[00:56:04] Speaker 03:
the providing for the program.

[00:56:08] Speaker 03:
By the same token, it could provide, and I take it has provided, that it's not going to allow the rebates of the petitioners here.

[00:56:19] Speaker 03:
It's going to do a pilot program, study it, and then decide whether to provide for it.

[00:56:25] Speaker 03:
So how much is really riding on this notion that

[00:56:33] Speaker 03:
The secretary has to pre-clear any program in order to provide for it.

[00:56:38] Speaker 08:
Our central argument is that the secretary has to make provision.

[00:56:42] Speaker 08:
That could be, as he's done with cash, with upfront discounts, saying,

[00:56:48] Speaker 08:
This is the default system, go and run with it.

[00:56:50] Speaker 08:
I would dispute the premise that the secretary has done retroactive approvals.

[00:56:56] Speaker 08:
If you were to look at the ADAP guidance, it makes clear, this is the 1997 guidance, quote, most ADAPs have drug purchasing systems that prevented their participation in the Section 340B discount program.

[00:57:10] Speaker 08:
So they were not participating in 340B.

[00:57:12] Speaker 08:
They were negotiating sort of program to manufacturer discounts that would replicate what they could get if they could get into 340B.

[00:57:19] Speaker 08:
But the guidance makes clear, we've pointed to sort of contemporaneous agency documents that say they're outside the program and they're being undercompensated by millions of dollars because they don't have all of the

[00:57:31] Speaker 08:
agreements with all the providers.

[00:57:33] Speaker 08:
And the secretary said, this system, this sort of informal system that you've come up with seems to be working.

[00:57:40] Speaker 08:
I'm going to take it from being outside 340B and bring it inside the 340B fold and then recognize it and then allow it to go forward for all ADAPs.

[00:57:49] Speaker 08:
But that is not a retroactive approval because it was happening sort of outside a program that the ADAPs could not access.

[00:57:55] Speaker 06:
What's the answer to the similar question about the product replenishment model?

[00:57:58] Speaker 08:
Yeah, so I would point you to what the secretary said in 1994, which is that there's no requirement for separate inventories.

[00:58:05] Speaker 08:
And in 1996, again, there's no requirement for separate parentheses physical inventory because a separate data system will be used to verify property dispensing.

[00:58:15] Speaker 08:
The product or punishment model is essentially the combination of two things.

[00:58:18] Speaker 08:
It is a combination of fungible inventory and upfront discounts.

[00:58:25] Speaker 08:
It is not in any meaningful way, I don't believe, a rebate program.

[00:58:31] Speaker 06:
So you would say that was approved in the 1993 guidance, if we approve the, if we read the 1993 guidance to say, I provide for a discount program.

[00:58:42] Speaker 08:
Yeah, 94 and 96 saying that we don't have to, the inventory is fine, 93 saying the basic model is discounts.

[00:58:51] Speaker 08:
Again, I think the secretary has discretion in how much control he wants to exercise.

[00:58:56] Speaker 08:
So you could say something like with ADAPT, like the system you seem to have works by bringing you inside the fold, do what you think makes sense, or he could provide more detail, as he did, for example, with the

[00:59:10] Speaker 08:
pilot program.

[00:59:11] Speaker 08:
I just want to make clear, the pilot program, I think, you know, as of now, BMS, Janssen and Novartis are all participating with their negotiation program covered drugs.

[00:59:24] Speaker 08:
And so that solves some of their concerns.

[00:59:27] Speaker 08:
But the secretary is not sort of

[00:59:29] Speaker 08:
said how the pilot program affects whether and when and what he's going to do with the proposals that are still before them.

[00:59:36] Speaker 08:
So that has not changed our position onto the finality of any decision that the secretary just hasn't made on what to do with these remade proposals.

[00:59:51] Speaker 06:
So how could, so one of the, as you go down the chart of arguments, one of the arguments is that the secretary didn't adequately, first I didn't actually explain why it was intervening here when it hadn't in the past.

[01:00:06] Speaker 06:
Yes.

[01:00:07] Speaker 06:
And I take it

[01:00:10] Speaker 06:
at least as to, for ADAP, the answer is it wasn't 340B.

[01:00:14] Speaker 06:
And for product replenishment, it's not even a rebate program.

[01:00:19] Speaker 06:
But that's not in the letters, right?

[01:00:22] Speaker 08:
So the discussion of why the product replenishment structure is different is discussed in the letters.

[01:00:30] Speaker 08:
The Johnson & Johnson letter at 455 has a couple of sentences saying,

[01:00:36] Speaker 08:
ongoing purchases after this initial sort of purchase is at the 340B price, distinguishing it.

[01:00:42] Speaker 08:
As for the ADAP, the administrative record contains the 1997 letter, which explains sort of everything I told you.

[01:00:50] Speaker 08:
It's not in the letter itself, but this is an informal, whatever this is, it's an informal adjudication.

[01:00:56] Speaker 08:
So we're in Overton Parkland, and you just need a discernible path from the record to what the secretary said.

[01:01:01] Speaker 08:
But I'd also say the agency's position is one of consistency, that this is what we have always required.

[01:01:07] Speaker 08:
And Fox versus FCC says that if you change your position, you have to have a heightened standard for explaining it.

[01:01:16] Speaker 08:
But the converse of that is if you're just acting consistently, you don't need to explain every time why you're being consistent.

[01:01:24] Speaker 08:
The agency's view is that this is how this is important.

[01:01:29] Speaker 06:
I had not read the 1993 guidance to say, I will provide that the only way of pricing is going to be through an upfront discount and nothing else is required.

[01:01:42] Speaker 06:
Is there a citation for somehow where we can look to discern that?

[01:01:47] Speaker 08:
So I would say, if you were to look at 58 Federal Register at 27291, the secretary says, quote, a manufacturer must sign an agreement with the department agreeing to charge a covered entity a price for covered outpatient agreeing not to charge a covered entity a price exceeding a bunch of words that mean the ceiling price.

[01:02:06] Speaker 08:
um, retroactive to the date of the bill.

[01:02:08] Speaker 08:
So I think that's describing, as the secretary said, I think in 1996, like that, or sorry, in 1997, that describes only the sort of discount process.

[01:02:17] Speaker 06:
But put aside what the, they definitely said the backhanded thing in 96 or 97.

[01:02:21] Speaker 06:
Right.

[01:02:21] Speaker 06:
But the 90s, the language you read runs right into the argument that they are making, which is that charge the ceiling price itself assumes that you might do so through a rebate or a discount.

[01:02:32] Speaker 06:
And that that is common practice in the pharmaceutical industry is that

[01:02:36] Speaker 06:
your response directly to that argument?

[01:02:39] Speaker 08:
I think our response is that if you were to look at sort of what the agency has done consistently, for example in the 90s taking the position that like

[01:02:47] Speaker 08:
ADAPs could not access 340B pricing through rebates and recognizing that as a real problem and producing reports trying to figure out how to deal with that problem.

[01:02:57] Speaker 08:
That is just inconsistent with the idea that rebates are permitted and that they can just do it.

[01:03:02] Speaker 06:
Let me ask it this way.

[01:03:03] Speaker 06:
Yeah.

[01:03:04] Speaker 06:
If the following sentence,

[01:03:08] Speaker 06:
The amount required to be paid shall not exceed the ceiling price.

[01:03:12] Speaker 06:
If that language, which is essentially what you read to me, prohibits a rebate model, then the statute prohibits a rebate model.

[01:03:20] Speaker 06:
And you told me that the statute does not set a default pricing mechanism.

[01:03:25] Speaker 08:
Right.

[01:03:25] Speaker 08:
Because the statute says, if the statute does not prohibit a rebate model, it expressly contemplates a rebate model.

[01:03:30] Speaker 06:
It does say, amount required to be paid shall not exceed the ceiling price.

[01:03:36] Speaker 06:
Right.

[01:03:36] Speaker 06:
Parentheses.

[01:03:37] Speaker 06:
Yes.

[01:03:38] Speaker 06:
taking into account.

[01:03:39] Speaker 06:
Confusing words.

[01:03:40] Speaker 06:
But the point is, in the guidance, the language you quoted just says, it doesn't reference rebate or discount.

[01:03:49] Speaker 06:
It just says, you shall not charge a price above the ceiling price.

[01:03:55] Speaker 08:
Right.

[01:03:56] Speaker 08:
And I think that silence is an indication that

[01:04:00] Speaker 08:
you have to do the normal method, which is like the rebate, you have to do something different.

[01:04:05] Speaker 08:
And maybe, your honor, you could take that to say that there is a that that means that discounts are the normal the default.

[01:04:12] Speaker 08:
I don't when you asked me that question before, I took you to be asking, did the secretary have to authorize have to make provision for discounts?

[01:04:21] Speaker 08:
And our answer to that is yes.

[01:04:24] Speaker 08:
You know, whether you would want to read that as sort of the ordinary way and rebates require more.

[01:04:27] Speaker 08:
I don't think a lot turns on that.

[01:04:31] Speaker 03:
I wonder if you could respond to Mr. Handwerker's argument that there's no feasible way of ensuring deduplication between the 340B discounted price and the IRA discount, given the timeline of the IRA discount and the current structure of the 340B program.

[01:04:51] Speaker 03:
What would it mean for manufacturers to give the MFP prospectively

[01:04:58] Speaker 08:
I'm not sure, Your Honor.

[01:04:59] Speaker 08:
My answer to that question is that the pilot program solves it.

[01:05:03] Speaker 08:
When the opening briefs were filed, there was a problem.

[01:05:07] Speaker 08:
By the time that we filed our brief and the replies were filed, I think that problem disappeared.

[01:05:12] Speaker 03:
But the pilot program is only for a certain part of that market, right?

[01:05:16] Speaker 08:
Well, but it's for drugs covered by the negotiation program, which is where this deduplication program exists.

[01:05:24] Speaker 04:
OK.

[01:05:25] Speaker 08:
So there were 10 drugs in the initial year.

[01:05:28] Speaker 08:
And that's what what's over here.

[01:05:32] Speaker 08:
Okay.

[01:05:34] Speaker 08:
I want to talk for a second about these pricing agreements and how they function and what they are.

[01:05:41] Speaker 08:
My friend Mr. Stetson pointed to the fact that we said that we wouldn't amend the pricing agreement to implement rebates.

[01:05:47] Speaker 08:
And that's exactly right, because as the Supreme Court explained in ASCRA, they are a regulatory opting device.

[01:05:52] Speaker 08:
They aren't setting substantive terms or limits on how this works.

[01:05:58] Speaker 08:
And they're not certainly the exclusive regulatory device.

[01:06:02] Speaker 08:
And so yes, the agency's position is that unless the court were to read this provision very differently, to say that everything has to appear in the agreement, which has never been understood, no amendment to the agreement would be required.

[01:06:17] Speaker 08:
It is simply this means of opting into the ski.

[01:06:22] Speaker 08:
But I think the idea of shoving everything in the manufacturing agreement doesn't work either for a couple of reasons.

[01:06:29] Speaker 08:
First of all,

[01:06:30] Speaker 08:
The agency has tinkered with a little bit of language here and there over the years, but it has made only one substantive change, and that was after the Affordable Care Act said the second sentence of A1, these things must expressly be in the agreement to the agency.

[01:06:49] Speaker 08:
asked for viewpoints on what the language should say, and then it asked manufacturers assigned an addendum, because that's what the statute then required.

[01:06:58] Speaker 08:
There have been other changes that Congress has made to the statute that have not gone into the agreement, because those are not, there was no language saying, and you must put these in the agreement.

[01:07:12] Speaker 08:
The agency's views of manufacturers are still bound by those, but I don't know what their view would be, if everything has to be in the agreement.

[01:07:18] Speaker 03:
And it's also when you say there are other changes that has made to the agreement without.

[01:07:24] Speaker 03:
There are other changes they've made without putting them in the agreement.

[01:07:33] Speaker 03:
What are you thinking of?

[01:07:34] Speaker 08:
So there are.

[01:07:37] Speaker 08:
All in section 340-256B.

[01:07:42] Speaker 08:
Subsection D1B, Romanettes 2 and 4, has an obligation for manufacturers to provide rebates in certain circumstances.

[01:07:49] Speaker 08:
That's a statutory obligation, not the agreement.

[01:07:52] Speaker 08:
D1B, Romanette 5, requiring manufacturer audits in certain circumstances.

[01:07:57] Speaker 08:
D1B, Romanette 6, a different type of civil model of the area penalties.

[01:08:01] Speaker 08:
D3A, a different dispute resolution than what the agreement contemplates.

[01:08:05] Speaker 08:
This is all the stuff that Congress has done over the years.

[01:08:09] Speaker 08:
The agency has not gone and changed its agreement because it's never viewed it as a device where it's anything more than an opt-in.

[01:08:16] Speaker 03:
Are they making a distinction between something that entails secretarial discretion and something that is just required?

[01:08:26] Speaker 03:
I'm not sure.

[01:08:26] Speaker 03:
So for example, as provided by the secretary, the secretary is making a choice, and they're saying, well, that has to be through the agreement.

[01:08:35] Speaker 03:
Are the provisions that you're citing provisions in which there's similarly some kind of discretion on the part of the secretary?

[01:08:48] Speaker 03:
Or does that not matter?

[01:08:52] Speaker 08:
I want to look at the text more closely before I definitively said there's no discretion involved.

[01:08:57] Speaker 08:
I certainly don't want to foreclose the Secretary's decision.

[01:09:00] Speaker 03:
They're not really making that argument.

[01:09:02] Speaker 08:
Yeah, but that's not, I don't think that makes much of a difference.

[01:09:06] Speaker 08:
I mean, to the extent that their argument that it requires discretion so they need notice, I think we think the notice comes from the statute because that's where the obligation comes from.

[01:09:14] Speaker 08:
I'll also point out that

[01:09:15] Speaker 08:
you know, everyone came to the agency first with some varying levels of asking for permission versus saying we're going to do it.

[01:09:22] Speaker 08:
But no one said, thought, like, if we just were totally allowed to do this, if we just sort of start doing it, let's see what happens.

[01:09:29] Speaker 08:
I think it's understood that this is something that the agency is going to have to weigh in on to some extent.

[01:09:37] Speaker 06:
At some of our questions, we're getting at this sort of big picture statutory question of who leads and who decides.

[01:09:44] Speaker 06:
And on one view, you would assume the secretary decides first.

[01:09:48] Speaker 06:
But another reasonable view would be that industry comes up with innovations and new ways of trying things, and they are constrained by the duty to give bona fide offers.

[01:10:01] Speaker 06:
And if they stray too far, they'll face

[01:10:04] Speaker 06:
various penalties and suppose you could even find cause and terminate the agreement.

[01:10:09] Speaker 06:
Why is that?

[01:10:10] Speaker 06:
I mean, maybe your argument just doesn't hinge on this, but do you think it would be absurd and bad to have the manufacturers lead?

[01:10:18] Speaker 06:
And why?

[01:10:20] Speaker 08:
Yeah, I think it'd be inconsistent with the scheme Congress designed.

[01:10:24] Speaker 08:
If we were to look at Astra, right, this is a case about whether covered entities are third party beneficiaries of the contract.

[01:10:30] Speaker 08:
Court's reasoning turned out two things.

[01:10:32] Speaker 08:
One, it's not that kind of contracting.

[01:10:34] Speaker 08:
Two, the secretary is in charge of this process.

[01:10:37] Speaker 08:
To the extent that the court finds it helpful, the legislative history, the House report at 12 says that price reductions will be implemented at the discretion of the secretary as either point of purchase, discount, or rebate, or other mechanism.

[01:10:48] Speaker 08:
If you look at the text, which says, as provided by the secretary, that's there.

[01:10:54] Speaker 08:
But I'd also look sort of the,

[01:10:57] Speaker 08:
potential practical consequences here.

[01:10:59] Speaker 08:
The view that the plaintiffs have put forward in their letters to the secretary and their briefing here, I think at the podium here, is that

[01:11:07] Speaker 08:
They don't, is that it would be, it's not a relevant legal consideration what impact this has on covered entities.

[01:11:14] Speaker 08:
So if you look at the Johnson and Johnson letter and they say, the secretary's first question is, have you studied the impact of this proposal on the scope and breadth of healthcare access?

[01:11:22] Speaker 08:
And Johnson and Johnson starts their letter saying, we don't think any of this is legally relevant.

[01:11:26] Speaker 08:
We don't think you can consider this, but here are your answers.

[01:11:30] Speaker 08:
So I think there's a real problem where you have essentially two industries with competing interests and an agency in the middle to say that despite Congress's design, we're going to turn it over and just let one half of the equation regulate itself.

[01:11:50] Speaker 08:
You know, the agency is not saying, has not said rebates are good or bad.

[01:11:55] Speaker 08:
We haven't said these proposals should go forward or shouldn't.

[01:11:59] Speaker 08:
But what the agency has said in their letters, in these lists of questions they put forward is we have concerns and we want to study them before you can move forward.

[01:12:07] Speaker 08:
And the record can take, you know,

[01:12:10] Speaker 08:
The record contains at least enough evidence to say these are concerns that should be addressed.

[01:12:14] Speaker 08:
There's the letter from 340B Health saying that, you know, there are smaller entities operating on razor-thin margins that couldn't handle these costs.

[01:12:21] Speaker 08:
There's a letter in the record at JA891 from 189 bipartisan members of Congress warning that the model would reduce resources available for providing services to patients' communities.

[01:12:32] Speaker 08:
Yeah, the 340B program contains some major hospital systems.

[01:12:35] Speaker 08:
It also contains small community health centers that don't necessarily have the ability to turn on a dime.

[01:12:41] Speaker 08:
The secretary's view is that he has to consider these things and figure them out.

[01:12:46] Speaker 08:
And whatever decision he makes, one group or the other is probably going to sue, and I'll have to justify it.

[01:12:49] Speaker 08:
But the framework is that he can mediate these things and prevent a sudden change so that, you know,

[01:12:57] Speaker 08:
after 30 years of the way something's operated, 58 days later it all changes with whatever consequences.

[01:13:08] Speaker 06:
This is a record specific question, but when I asked you earlier whether there is a response in the letters to this claim that there was a departure from the ADAP and product replenishment approach, you cited the J&J letter and that is that's true.

[01:13:26] Speaker 06:
But the other letters do not respond to the product replenishment example.

[01:13:33] Speaker 06:
For example, does that mean we have to

[01:13:37] Speaker 06:
vacate and remand those letters for more explanation?

[01:13:41] Speaker 08:
I don't think so for two reasons.

[01:13:43] Speaker 08:
One, if I recall correctly, the second J&J letter at the very least was posted online.

[01:13:49] Speaker 08:
The agency's position was known.

[01:13:50] Speaker 08:
And the position that the government took.

[01:13:53] Speaker 06:
We should just read that as applying to the other.

[01:13:55] Speaker 08:
The position the government took in district court and that both sides abused to their advantage or disadvantage is that there's one administrative recorders considering all these things together and sort of read things across the letters.

[01:14:08] Speaker 08:
If that's the position, if you want to reband with instructions for the agency to put that paragraph in the letters, you could do that.

[01:14:15] Speaker 08:
But I don't think that's going to help very much.

[01:14:17] Speaker 08:
I want to make two more points quickly.

[01:14:21] Speaker 08:
The first is plaintiffs have put a lot of weight on the shall offer language.

[01:14:25] Speaker 08:
I'll note that was added in 2010.

[01:14:27] Speaker 08:
So by their reading, Congress created a scheme that from 1992 to 2010, they actually could have just done whatever they wanted without these good faith obligations.

[01:14:35] Speaker 08:
And that doesn't seem to make sense of,

[01:14:37] Speaker 08:
of the scheme together.

[01:14:38] Speaker 08:
The second point, I want to get back to something I was saying about the manufacturer's agreement, which is just say, what amending the manufacturer's agreements over the objections of the price agreements, over the objections of the manufacturers, what that would mean is just sort of uncharted territory.

[01:14:58] Speaker 08:
My friend Ms.

[01:14:59] Speaker 08:
Setzen called these down the road problems, but if this court issued a decision saying that manufacturers can do what they want and we'll figure it out later,

[01:15:09] Speaker 08:
You know, the agency has never tried to amend these agreements over the objections of the manufacturers.

[01:15:16] Speaker 08:
I'm really not sure exactly how that would work.

[01:15:19] Speaker 08:
I'm not taking the position they can't do it, but I'm saying there's a lot.

[01:15:22] Speaker 08:
There will be open questions there about how this whole process works and what's required and what factors they have to consider, what process they have to use.

[01:15:29] Speaker 08:
And so we're looking at, you know, a difficult process and lots of litigation and potentially manufacturers just sort of taking over the secretary's regulatory role for years while we sort this out.

[01:15:40] Speaker 08:
I understand the plaintiff's position to be that if in 1992, when he was only contemplating, or 1993, when he was only contemplating discounts, if the secretary had put in the agreement the words, use discounts or rebates, but only rebates if you ask me first, this would all be fine.

[01:15:58] Speaker 08:
And I think saying that this whole system turns on like a potential oversight that was made 30 years ago at a time when no one was contemplating this problem, because it's not in the agreement, even though

[01:16:08] Speaker 08:
the structure and the text of the statute doesn't make clear that it has to be in the agreement.

[01:16:12] Speaker 08:
I think if your statutory interpretation is getting you to that point, you should look at it with a new set of eyes.

[01:16:17] Speaker 08:
All right.

[01:16:20] Speaker 04:
Thank you.

[01:16:21] Speaker 04:
Thank you.

[01:16:22] Speaker 04:
Shultz.

[01:16:34] Speaker 00:
May it please the court, Bill Shultz for the interveners.

[01:16:39] Speaker 00:
There are three aspects of the drug company's programs which make them unlawful.

[01:16:46] Speaker 00:
First, under these programs, the drug companies will decide whether the 340B drug is being purchased for a lawful use.

[01:16:56] Speaker 00:
And this is something that really was not mentioned, but it's critical, but not mentioned by the plaintiffs.

[01:17:05] Speaker 00:
Second, the discount is paid for by a rebate rather than upfront.

[01:17:09] Speaker 00:
And third, the drug companies would require the providers to provide data to be used to make this determination.

[01:17:18] Speaker 00:
And there doesn't seem to be any limit as to how much data could be required.

[01:17:23] Speaker 00:
I'd like to address each of these.

[01:17:26] Speaker 00:
First, under the rebate plans, the drug companies decide whether the provider's claim for a rebate is valid.

[01:17:36] Speaker 00:
whether it is for a 340B patient and they decide that before providing the rebate.

[01:17:44] Speaker 00:
They would do this by reviewing the data provided by the 340B covered entity and only if it's satisfied that their test is met

[01:17:56] Speaker 00:
would they pay the rebate?

[01:17:58] Speaker 00:
In essence, and this is, I think, the most critical point I want to make, the drug companies will be taking over enforcement of the law and enforcing the law before the discounts are provided.

[01:18:13] Speaker 00:
or in their case rebates, rather than after the fact.

[01:18:17] Speaker 00:
And this, we think, is flatly inconsistent with the way the 1992 statute is structured and the way it has always been interpreted and applied.

[01:18:30] Speaker 00:
Today, under Section 340B,

[01:18:33] Speaker 00:
The providers purchase the drugs from the drug companies at 340B prices.

[01:18:39] Speaker 00:
The provider keeps records.

[01:18:42] Speaker 00:
And any questions about the legitimacy of that purchase are answered after the fact by audits conducted by HRSA or by the manufacturers.

[01:18:54] Speaker 06:
I have a sort of a threshold question about these issues, which those arguments might be persuasive.

[01:19:00] Speaker 06:
But why are they ripe for decision now?

[01:19:03] Speaker 06:
HRSA's position is they have not made a final decision on whether to approve or not this rebate program.

[01:19:10] Speaker 06:
And your arguments would suggest that they shouldn't approve them, can't approve them.

[01:19:17] Speaker 06:
But isn't it premature to resolve those questions?

[01:19:20] Speaker 06:
Well, the difference we- You might be denied on a different ground.

[01:19:23] Speaker 00:
The difference we have with HRSA is we don't think there is authority to approve these rebate programs.

[01:19:37] Speaker 06:
Absolutely.

[01:19:38] Speaker 06:
And my point would be you could certainly file a lawsuit challenging the pilot program on that basis, but I'm curious whether this is the wrong time and wrong vehicle to make that argument because HRSA hasn't

[01:19:54] Speaker 06:
Or maybe they have.

[01:19:55] Speaker 06:
They haven't really taken a definitive position on these models.

[01:20:00] Speaker 00:
Well, I mean, I think the posture of the case is HRSA has said to the companies, you can't go ahead with these programs without our approval.

[01:20:13] Speaker 00:
And the companies have come back and said, no, no, we don't need your approval.

[01:20:19] Speaker 00:
And what we're saying is there is an authority to do these programs anyway.

[01:20:24] Speaker 00:
And I want to get to the rebate point that we don't think they can do rebates, but this is a different point, and it's one that really wasn't discussed previously, but it's the key point because the whole point of these programs is not whether it's paid through a discount or rebate, it's whether the companies get to decide

[01:20:47] Speaker 00:
whether the 340 claim is legitimate.

[01:20:50] Speaker 00:
Is this a legitimate 340B patient?

[01:20:53] Speaker 00:
Is this something we should pay?

[01:20:55] Speaker 00:
And if they decide no, then they don't pay the discount or rebate.

[01:21:00] Speaker 00:
And that's a huge shift.

[01:21:03] Speaker 00:
And what we're saying is it's inconsistent with the statute.

[01:21:07] Speaker 00:
because the statute set up a fairly elaborate system of audits that happen after the fact.

[01:21:15] Speaker 00:
And those audits would be unnecessary.

[01:21:17] Speaker 00:
Essentially, the companies are getting the information up front, and they're really flipping the script and deciding.

[01:21:25] Speaker 00:
I also want to point out, I think this is contrary

[01:21:31] Speaker 00:
to the Supreme Court's decision in Astra versus Santa Clara County.

[01:21:35] Speaker 00:
In there, you had providers, not the companies, but providers pursuing the companies about the discounts.

[01:21:45] Speaker 00:
And they were saying, you're not complying with the statute.

[01:21:48] Speaker 00:
And they had a third party beneficiary theory based on these provider agreements that we've been talking about.

[01:21:56] Speaker 00:
And the Supreme Court said, even though you're a beneficiary of the contracts, that Congress set up a system where HHS was supposed to do the enforcement, or HRSA was supposed to do the enforcement.

[01:22:11] Speaker 00:
And it said to the providers, you now want to enforce the statute, but under the statute, HRSA does it.

[01:22:20] Speaker 00:
the manufacturers are doing it on the other side here and essentially they're saying we're going to enforce the statute.

[01:22:25] Speaker 00:
We're going to decide whether these are 340B patients and basically take that away from HRSA.

[01:22:36] Speaker 00:
The second reason

[01:22:39] Speaker 00:
in our view that the plan to violate the statute is we think that rebates are unlawful.

[01:22:46] Speaker 00:
And they have been since 2010.

[01:22:48] Speaker 00:
In 2010, as part of the Affordable Care Act, Congress expanded and strengthened 340B.

[01:22:56] Speaker 00:
It included provisions to ensure the accuracy of ceiling prices calculated by the manufacturers, included the Civil Money Penalty Authority, but it also

[01:23:08] Speaker 00:
amended the first paragraph of the first subsection of the statute, that's A1, by adding a second sentence.

[01:23:18] Speaker 00:
And that sentence says that manufacturers participating in the 340B program, quote, that the agreements for the manufacturers, quote, shall require that the manufacturer offer each covered entity

[01:23:38] Speaker 00:
covered outpatient drugs for purchase at or below the applicable ceiling price.

[01:23:45] Speaker 00:
In other words, the offer has to include the discount.

[01:23:48] Speaker 00:
It has to be at or below the applicable ceiling price.

[01:23:52] Speaker 00:
And that language, we think, doesn't leave room for rebate.

[01:23:57] Speaker 00:
It really codified the way the whole system had been structured and run

[01:24:03] Speaker 00:
up to that point.

[01:24:05] Speaker 00:
The one exception is the ADAPS.

[01:24:07] Speaker 00:
And I want to talk about that in a minute.

[01:24:09] Speaker 00:
But this is the way it had always been done.

[01:24:11] Speaker 00:
And Congress codified it in language that we think plainly does not leave room for a rebate and doesn't leave room for debate.

[01:24:29] Speaker 03:
And would it outlaw the inventory

[01:24:34] Speaker 03:
control model, you know, the... I'm forgetting the exact... Oh, the replenishment model.

[01:24:39] Speaker 03:
The replenishment model, right.

[01:24:42] Speaker 00:
No, and let me explain why.

[01:24:45] Speaker 00:
In the replenishment model, essentially the

[01:24:52] Speaker 00:
The hospital, if it's a hospital pharmacy or the pharmacy, sells the drug to the patient and then the provider, the hospital or the provider goes and every time purchases the drug at the 340B price, there's no rebate involved there.

[01:25:11] Speaker 03:
The only thing is that the notion that they are buying them not at or below the applicable ceiling price in the first instance to get that thing rolling.

[01:25:19] Speaker 03:
And I guess it's not true if it's a contract pharmacy, but if it's the provider and their

[01:25:26] Speaker 03:
they have in inventory the covered drugs that they purchase at retail price, then they are in effect buying the matter above the... I mean, that's the argument that the drug companies make, but once they sell the drug to the patient,

[01:25:52] Speaker 00:
and it's a 340B drug, then after they sell it, they go buy it at the 340B price.

[01:26:00] Speaker 00:
Under this model, they're not buying it before they sell it.

[01:26:02] Speaker 00:
But once they sell it, they go back and buy it at the 340B price.

[01:26:08] Speaker 00:
And they do that every time.

[01:26:10] Speaker 00:
And so there's no rebate, really, that's involved in that.

[01:26:15] Speaker 00:
It seems to me very different from a rebate.

[01:26:20] Speaker 00:
And the only other way to do it would be to buy it in advance.

[01:26:28] Speaker 00:
But it doesn't seem to me to matter whether you buy it in advance or after the fact.

[01:26:32] Speaker 00:
The point is, when they buy the drugs, they're buying them at the 340B price.

[01:26:38] Speaker 00:
Maybe I should say a word about the ADEFs, too.

[01:26:42] Speaker 00:
Because there, the key difference there is that it's voluntary.

[01:26:49] Speaker 00:
In other words, the statute says that the manufacturers have to make the drugs available at the 340B price.

[01:27:02] Speaker 00:
And then if a provider comes, in this case it's the ADAFs, and they came because, I can explain why, but it's totally impractical.

[01:27:11] Speaker 00:
to do upfront discounts because they only had one pharmacy and the adepts are for the whole state.

[01:27:17] Speaker 00:
And so they voluntarily work in an agreement with the drug companies where

[01:27:24] Speaker 00:
So drugs are purchased, and then after the fact, they can get the rebates.

[01:27:28] Speaker 00:
That's very, very different from what's being imposed here.

[01:27:32] Speaker 00:
And obviously, the costs are very different as well.

[01:27:36] Speaker 00:
On the point that the statute prohibits rebates, HRSA acknowledged this in their letter to Sanofi in this whole back and forth here.

[01:27:48] Speaker 00:
And it's cited in Judge Friedrich's opinion at JA 399.

[01:27:54] Speaker 00:
The courts below, both courts below said that this second sentence, if you read it to say no rebates, it would be inconsistent with the parenthetical language that we've been talking about in the first sentence, taking into account any rebate or discount as provided by the secretary.

[01:28:16] Speaker 00:
But the problem with that is that Paran modifies amount required to be paid.

[01:28:24] Speaker 00:
In other words, the first sentence is the secretary enters into an agreement under which the amount required to be paid

[01:28:33] Speaker 00:
taking into account any rebate or discount as provided by the secretary.

[01:28:37] Speaker 00:
So this is not how the money is paid rebate or discount.

[01:28:41] Speaker 00:
It is what the amount is.

[01:28:43] Speaker 00:
And this paren gave the secretary authority, presumably for good reasons, to adjust that amount.

[01:28:51] Speaker 00:
And as we pointed out,

[01:28:53] Speaker 00:
There are two times back in history when the secretary has exercised that authority and adjusted the amount once for new drugs for which there was no average sales price and once for drugs where inflation was so great that the actual discount amount exceeded the price.

[01:29:17] Speaker 00:
And so that resulted in the penny pricing policy.

[01:29:23] Speaker 00:
Finally, I want to say a word about the data requirements.

[01:29:29] Speaker 00:
That's the third sort of piece of all of this.

[01:29:33] Speaker 00:
As has been pointed out in the Navartis case, the DC Circuit said data requirements could be imposed, but it said it understood that in that situation, the burden was minimal.

[01:29:50] Speaker 00:
and part of ordinary business practices.

[01:29:53] Speaker 00:
There, the requirements were imposed on the pharmacies here.

[01:29:56] Speaker 00:
As I understand, what the companies are proposing would be data requirements, not just from the pharmacies, but from the hospitals and other providers.

[01:30:05] Speaker 00:
And I think the record shows

[01:30:07] Speaker 00:
they can be very burdensome.

[01:30:09] Speaker 00:
They can require hiring different people and compiling different data and so on.

[01:30:15] Speaker 00:
And I think as George Contreras pointed out, it's unclear if rebates aren't permitted, what they would use the data for anyway.

[01:30:28] Speaker 00:
The data is very much connected to the rebates, which as I've argued are not permissible.

[01:30:36] Speaker 00:
If there are no further questions, thank the court.

[01:30:42] Speaker 04:
Why don't you take five minutes?

[01:30:56] Speaker 02:
Thank you, Your Honors.

[01:30:57] Speaker 02:
I'd like to make three quick points.

[01:31:00] Speaker 02:
The first is, in the last five seconds of Mr. Baldi's argument, you heard him say something that he had not said before, which is that the statute permits the secretary to make this provision outside the PPA.

[01:31:14] Speaker 02:
That was the statement that I'd been waiting for for the entire argument.

[01:31:17] Speaker 02:
He made it right before he sat down.

[01:31:20] Speaker 02:
Maybe the reason is that there really is no statutory support for that principle.

[01:31:26] Speaker 02:
As we discussed when I was last up here, the statute talks about the requirements for an agreement, the secretary entering into an agreement, the price under the agreement.

[01:31:35] Speaker 02:
So the only way that this court could conclude that that parenthetical taking into account any rebate or discount as provided by the secretary

[01:31:45] Speaker 02:
actually empowers the secretary to do something completely outside the agreement is by saying the secretary has some power that is otherwise constrained to within the agreement in that provision.

[01:31:57] Speaker 02:
Just not that parenthetical part.

[01:31:59] Speaker 02:
And I didn't even hear Mr. Baldy making that argument today.

[01:32:03] Speaker 02:
Point number two.

[01:32:05] Speaker 02:
Mr. Baldy spent a lot of time talking about how the secretary was acting consistently when it came to, for example, the product replenishment program.

[01:32:17] Speaker 02:
The first thing is I want to make very clear, Mr. Baldy talked about how back in the 1990s,

[01:32:24] Speaker 02:
the agency approved a certain type of commingling inventory.

[01:32:29] Speaker 02:
We are not complaining about shelving processes.

[01:32:34] Speaker 02:
What we are complaining about is this new system that the covered entities and their contract pharmacies and the third party administrators have developed in going back weeks or months and purchasing at 340B prices to make up for product long since dispensed.

[01:32:54] Speaker 02:
That is what we are complaining about not shelving and if that is something that is.

[01:33:03] Speaker 02:
even pounce as a rebate or a discount, questionable, then if the agency presumes to be acting consistently, I would expect to see the same kind of public notice threatening covered entities with termination from the program unless they get pre-approval for their product replenishment systems.

[01:33:23] Speaker 02:
Third and finally, this question about amendment of the PPAs.

[01:33:28] Speaker 02:
I think I hear all of us in vehement agreement

[01:33:32] Speaker 02:
that the agency does not need to amend the PPAs.

[01:33:36] Speaker 02:
The manufacturers can simply do what they do as reasonable contracting entities, which is impose standard business practices, including rebates, including discounts as the parties, as the manufacturers choose.

[01:33:52] Speaker 02:
But here's the kicker.

[01:33:54] Speaker 02:
What you heard at the beginning of Mr. Baldi's argument was

[01:33:57] Speaker 02:
the manufacturers are suggesting that the secretary can't review or disapprove what the manufacturers are doing.

[01:34:05] Speaker 02:
Of course it can.

[01:34:07] Speaker 02:
If the secretary concludes that the manufacturers are not acting reasonably, if they are implementing crazy rebate programs, if they're implementing something that is simply outside the pale, the secretary has all sorts of nuclear artillery available to it to punish that manufacturer for doing what it's doing.

[01:34:26] Speaker 02:
But on this record, what the manufacturers are doing is extremely well within standard business practices, quite beneficial to the covered entities, in fact.

[01:34:37] Speaker 02:
And on this record and under this court's decision and Novartis and under the plain text reading of the statute, the manufacturers should be allowed to implement those rebate programs.

[01:34:50] Speaker 06:
Guys, one question.

[01:34:52] Speaker 02:
Yes.

[01:34:52] Speaker 06:
We set aside the first argument, which I know you don't want me to, but I now take the government to be saying that our early guidance, the combination of them, it's not just that they talked about shelving.

[01:35:04] Speaker 06:
It's that they only, they affirmatively provided for a discount model.

[01:35:10] Speaker 06:
That's why you've been allowed to do a discount model for the last 30 years.

[01:35:14] Speaker 06:
And we have not provided for a rebate model.

[01:35:19] Speaker 06:
It's as simple as that.

[01:35:20] Speaker 02:
Right.

[01:35:21] Speaker 02:
So a couple of answers.

[01:35:23] Speaker 02:
The first is a lot of this is post hoc rationale.

[01:35:27] Speaker 02:
And this is not just, as Mr. Baldy said, kind of shedding more light on the path they followed.

[01:35:32] Speaker 02:
This is just new stuff going into the record on appeal.

[01:35:36] Speaker 02:
But more importantly, when you talk about approving a discount model, if that in fact is what it does, I think you pointed out it's not like they said, we approve the discount model.

[01:35:45] Speaker 02:
You have to read between and underneath the lines to get that.

[01:35:49] Speaker 02:
But even so, the product

[01:35:51] Speaker 02:
replenishment model is nothing approaching an upfront discount model.

[01:35:57] Speaker 02:
So if the secretary has approved a discount model, then the covered entities have a real current problem with the way that they've been doing business.

[01:36:06] Speaker 02:
If there are no further questions.

[01:36:08] Speaker 02:
Thank you.

[01:36:08] Speaker 02:
Thank you.

[01:36:09] Speaker 04:
Let's see, Mr. Aren't you take two minutes?

[01:36:16] Speaker 07:
Oh my goodness.

[01:36:18] Speaker 07:
I'll be quick, Your Honors.

[01:36:20] Speaker 07:
I just want to respond briefly to some of the points made by my friend Mr. Schultz for the interveners.

[01:36:26] Speaker 07:
First, J&J's rebate model at issue in this case simply validates whether a purchase has been made and a dispense has been made by the 340B entity.

[01:36:39] Speaker 07:
It does not look into whether it's an eligible patient or not.

[01:36:43] Speaker 07:
And I just wanted to clarify that.

[01:36:44] Speaker 07:
The J&J model at issue in this case does not change the universe of eligible claims under the 340B program.

[01:36:53] Speaker 07:
Second, the intervener's argument here would read out the word rebate from A1 in the statute completely.

[01:37:03] Speaker 07:
Their only response to that is to point to the penny pricing guidance from HRSA, as well as the new drug guidance.

[01:37:11] Speaker 07:
Neither of those

[01:37:13] Speaker 07:
documents, neither those guidances or regulations refers back to A1 as the source of authority for its promulgation.

[01:37:21] Speaker 07:
The penny pricing was under their civil monetary penalty authorization from Congress, and the new drug did not assert any authority at all in the statute.

[01:37:34] Speaker 07:
So there's nothing that they have pointed to that suggests that the word rebate in A1 means anything other than its plain meaning of rebate.

[01:37:44] Speaker 07:
I would also note that their argument, if accepted, would invalidate the ADAP rebate program.

[01:37:50] Speaker 07:
They have no response to that other than to suggest that ADAPTs are voluntarily and manufacturers are voluntarily participating in a rebate model.

[01:38:00] Speaker 07:
But that's beside the point.

[01:38:01] Speaker 07:
If a rebate was not permitted in the statute, they wouldn't be allowed to do it.

[01:38:06] Speaker 07:
Finally, just a quick word about the pilot program.

[01:38:11] Speaker 07:
J&J is participating in the pilot.

[01:38:14] Speaker 07:
We appreciate that HRSA has done this.

[01:38:16] Speaker 07:
I note that the pilot is time limited.

[01:38:19] Speaker 07:
It is testing a new technology.

[01:38:22] Speaker 07:
And our expectation would be that if the pilot is successful and HRSA decides to roll it out, that they would do so through a PPA amendment.

[01:38:32] Speaker 07:
Unless the court has any questions, I will conclude.

[01:38:36] Speaker 07:
Thank you.