Johnson & Johnson Health Care Systems Inc. v. Becerra
Opinion
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
JOHNSON & JOHNSON : HEALTH CARE SYSTEMS INC., : Plaintiff, : : v. : : Civil Action No.: 24-3188 (RC) ROBERT F. KENNEDY, JR., : Secretary of Health and Human : Re Document Nos.: 18, 21, 22, 23, 25 Services, et al., : 28, 33, 38, 39, 41 Defendants, : 54 : and : : 340B HEALTH, et al., : Intervenor-Defendants. :
MEMORANDUM OPINION
RESOLVING THE PARTIES’ MOTIONS FOR SUMMARY JUDGMENT
I. INTRODUCTION
In November 2024, Plaintiff Johnson & Johnson Health Care Systems Inc. (“J&J”) filed
suit against the Department of Health and Human Services (“HHS”), HHS’s Health Resources
and Services Administration (“HRSA”), and the heads of those agencies 1 regarding the 340B
Drug Pricing Program, 42 U.S.C. § 256b. The 340B Program requires pharmaceutical drug
manufacturers that participate in Medicaid and Medicare Part B, like J&J, to sell drugs to certain
statutorily covered healthcare providers at lower prices. J&J sells drugs to covered entities at a
discount. But in June 2024, J&J contacted HRSA to discuss J&J’s plan to implement a rebate
model, whereby covered entities would purchase certain drugs at full price and receive a rebate
1 Pursuant to Federal Rule of Civil Procedure 25(d), these officials have been substituted for their successors. at a later date. After HRSA informed J&J that it had not approved its rebate model, J&J sued. In
January 2025, two hospitals that receive benefits under the 340B program, UMass Memorial
Medical Center (“UMass”) and Genesis HealthCare System (“Genesis”), and an organization
that advocates for covered entities, 340B Health (collectively, “Intervenors”), filed a motion to
intervene as defendants. The Court granted that motion. Plaintiff J&J has moved for summary
judgment on its single cause of action brought under the Administrative Procedure Act (“APA”),
5 U.S.C. § 706. Defendants and Intervenors filed cross motions for summary judgment. The
parties’ summary judgment motions are now fully briefed. For the reasons stated below, J&J’s
motion for summary judgment is denied, and Defendants’ and Intervenors’ motions for summary
judgment are granted.
II. BACKGROUND
A. Statutory and Regulatory Background
In 1992, Congress enacted Section 340B as an amendment to the Public Health Service
Act. Veterans Health Care Act of 1992, Pub. L. No. 102-585 § 602, 106 Stat. 4943, 4967–71.
Section 340B “imposes ceilings on prices drug manufacturers may charge for medications sold
to specified health-care facilities.” Astra USA, Inc. v. Santa Clara Cnty., 563 U.S. 110, 113
(2011). To encourage manufacturer participation, Congress conditioned coverage of a
manufacturer’s products under Medicaid and Medicare Part B on participation in the 340B
Program. 42 U.S.C. § 1396r-8(a)(1), (5).
In 2010, the Affordable Care Act amended Section 340B by “expand[ing] the list of
covered entities eligible to participate in the program and add[ing] several new provisions aimed
at improving compliance with program requirements.” Novartis Pharms. Corp. v. Johnson, 102
F.4th 452, 455–56 (D.C. Cir. 2024) (citing Pub. L. No. 111-148, tit. VII, §§ 7101–02, 124 Stat.
2 119, 821–27). That amendment also added the requirement that manufacturers must “offer each
covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if
such drug is made available to any other purchaser at any price.” Pub. L. No. 111-148, tit. VII,
§§ 7102, 124 Stat. 119, 827; 42 U.S.C. § 256b(a)(1). This provision has been interpreted to
require that manufacturers make a “bona fide offer,” a limitation on the conditions manufacturers
can impose when offering their 340B drugs for sale. See Novartis, 102 F.4th at 462.
The 340B Program “was intended to enable certain hospitals and clinics ‘to stretch scarce
Federal resources as far as possible, reaching more eligible patients and providing more
comprehensive services.’” Am. Hosp. Ass’n v. Hargan, 289 F. Supp. 3d 45, 47 (D.D.C. 2017)
(quoting H.R. Rep. 102-384, pt. 2, at 12 (1992)). Since the early years of the 340B Program,
HRSA has recognized that “Section 340B does not limit the pricing behavior of covered
entities.” Notice Regarding Section 602 of the Veteran Health Care Act of 1992, 61 Fed. Reg.
43549, 43551 (Aug. 23, 1996). “While some may pass all or a significant part of the discount to
their patients, others may set the price slightly higher than the actual acquisition cost plus a
reasonable dispensing fee, using the savings [i.e., profits] to reach more eligible patients and
provide more comprehensive services.” Id.
“Drug manufacturers opt into the 340B Program by signing a form Pharmaceutical
Pricing Agreement (PPA) used nationwide.” Astra, 563 U.S. at 113. These PPAs are “not
transactional, bargained-for contracts,” but are “uniform agreements that recite the
responsibilities § 340B imposes.” Id. Under the statute, “the amount required to be paid (taking
into account any rebate or discount, as provided by the Secretary) to the manufacturer for
covered outpatient drugs . . . purchased by a covered entity . . . [must] not exceed an amount
equal to” a “ceiling price,” the formula for which is provided in the statutory scheme. 42 U.S.C.
3 § 256b(a)(1). As mentioned, this pricing rule applies to all covered drugs “made available to any
other purchaser at any price.” Id.
Congress identified two potential misuses of the 340B Program: duplicate discounts, 42
U.S.C. § 256b(a)(5)(A), and diversions, id. § 256b(a)(5)(B). See H.R. Rep. No. 102-384, pt. 2,
at 16–17 (1992). Duplicate discounts occur when a covered entity receives a discount or rebate
for a unit of a drug under the 340B Program and a rebate under a Medicaid program. 42 U.S.C.
§ 256b(a)(5)(A). Diversions occur when drugs are sold or transferred “to a person who is not a
patient of the entity,” thereby defeating the purpose of affording the covered entity the benefit of
that status, such as providing “safety-net services to the poor.” Id. § 256b(a)(5)(B); Astra, 563
U.S. at 113.
To “assure the integrity of the drug price limitation program,” including these
prohibitions, Congress provided for “auditing” by the Agency or drug manufacturers as a
“requirement[] for covered entities.” H.R. Rep. No. 102-384, pt. 2, at 16; 42 U.S.C.
§ 256b(a)(5)(C). Noncompliance with the prohibitions against duplicate discounts and
diversions is sanctionable, including with liability to the manufacturer for underpayment for the
drugs. Id. § 256b(a)(5)(d). Sanctions are levied “after audit as described in subparagraph (C)
and after notice and hearing.” Id. And “[i]f a dispute concerning the audit findings and
recommendations arises, the parties may file a request for dispute resolution” with HRSA.
Manufacturer Audit Guidelines and Dispute Resolution Process, 61 Fed. Reg. 65406, 65410
(Dec. 12, 1996).
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
JOHNSON & JOHNSON : HEALTH CARE SYSTEMS INC., : Plaintiff, : : v. : : Civil Action No.: 24-3188 (RC) ROBERT F. KENNEDY, JR., : Secretary of Health and Human : Re Document Nos.: 18, 21, 22, 23, 25 Services, et al., : 28, 33, 38, 39, 41 Defendants, : 54 : and : : 340B HEALTH, et al., : Intervenor-Defendants. :
MEMORANDUM OPINION
RESOLVING THE PARTIES’ MOTIONS FOR SUMMARY JUDGMENT
I. INTRODUCTION
In November 2024, Plaintiff Johnson & Johnson Health Care Systems Inc. (“J&J”) filed
suit against the Department of Health and Human Services (“HHS”), HHS’s Health Resources
and Services Administration (“HRSA”), and the heads of those agencies 1 regarding the 340B
Drug Pricing Program, 42 U.S.C. § 256b. The 340B Program requires pharmaceutical drug
manufacturers that participate in Medicaid and Medicare Part B, like J&J, to sell drugs to certain
statutorily covered healthcare providers at lower prices. J&J sells drugs to covered entities at a
discount. But in June 2024, J&J contacted HRSA to discuss J&J’s plan to implement a rebate
model, whereby covered entities would purchase certain drugs at full price and receive a rebate
1 Pursuant to Federal Rule of Civil Procedure 25(d), these officials have been substituted for their successors. at a later date. After HRSA informed J&J that it had not approved its rebate model, J&J sued. In
January 2025, two hospitals that receive benefits under the 340B program, UMass Memorial
Medical Center (“UMass”) and Genesis HealthCare System (“Genesis”), and an organization
that advocates for covered entities, 340B Health (collectively, “Intervenors”), filed a motion to
intervene as defendants. The Court granted that motion. Plaintiff J&J has moved for summary
judgment on its single cause of action brought under the Administrative Procedure Act (“APA”),
5 U.S.C. § 706. Defendants and Intervenors filed cross motions for summary judgment. The
parties’ summary judgment motions are now fully briefed. For the reasons stated below, J&J’s
motion for summary judgment is denied, and Defendants’ and Intervenors’ motions for summary
judgment are granted.
II. BACKGROUND
A. Statutory and Regulatory Background
In 1992, Congress enacted Section 340B as an amendment to the Public Health Service
Act. Veterans Health Care Act of 1992, Pub. L. No. 102-585 § 602, 106 Stat. 4943, 4967–71.
Section 340B “imposes ceilings on prices drug manufacturers may charge for medications sold
to specified health-care facilities.” Astra USA, Inc. v. Santa Clara Cnty., 563 U.S. 110, 113
(2011). To encourage manufacturer participation, Congress conditioned coverage of a
manufacturer’s products under Medicaid and Medicare Part B on participation in the 340B
Program. 42 U.S.C. § 1396r-8(a)(1), (5).
In 2010, the Affordable Care Act amended Section 340B by “expand[ing] the list of
covered entities eligible to participate in the program and add[ing] several new provisions aimed
at improving compliance with program requirements.” Novartis Pharms. Corp. v. Johnson, 102
F.4th 452, 455–56 (D.C. Cir. 2024) (citing Pub. L. No. 111-148, tit. VII, §§ 7101–02, 124 Stat.
2 119, 821–27). That amendment also added the requirement that manufacturers must “offer each
covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if
such drug is made available to any other purchaser at any price.” Pub. L. No. 111-148, tit. VII,
§§ 7102, 124 Stat. 119, 827; 42 U.S.C. § 256b(a)(1). This provision has been interpreted to
require that manufacturers make a “bona fide offer,” a limitation on the conditions manufacturers
can impose when offering their 340B drugs for sale. See Novartis, 102 F.4th at 462.
The 340B Program “was intended to enable certain hospitals and clinics ‘to stretch scarce
Federal resources as far as possible, reaching more eligible patients and providing more
comprehensive services.’” Am. Hosp. Ass’n v. Hargan, 289 F. Supp. 3d 45, 47 (D.D.C. 2017)
(quoting H.R. Rep. 102-384, pt. 2, at 12 (1992)). Since the early years of the 340B Program,
HRSA has recognized that “Section 340B does not limit the pricing behavior of covered
entities.” Notice Regarding Section 602 of the Veteran Health Care Act of 1992, 61 Fed. Reg.
43549, 43551 (Aug. 23, 1996). “While some may pass all or a significant part of the discount to
their patients, others may set the price slightly higher than the actual acquisition cost plus a
reasonable dispensing fee, using the savings [i.e., profits] to reach more eligible patients and
provide more comprehensive services.” Id.
“Drug manufacturers opt into the 340B Program by signing a form Pharmaceutical
Pricing Agreement (PPA) used nationwide.” Astra, 563 U.S. at 113. These PPAs are “not
transactional, bargained-for contracts,” but are “uniform agreements that recite the
responsibilities § 340B imposes.” Id. Under the statute, “the amount required to be paid (taking
into account any rebate or discount, as provided by the Secretary) to the manufacturer for
covered outpatient drugs . . . purchased by a covered entity . . . [must] not exceed an amount
equal to” a “ceiling price,” the formula for which is provided in the statutory scheme. 42 U.S.C.
3 § 256b(a)(1). As mentioned, this pricing rule applies to all covered drugs “made available to any
other purchaser at any price.” Id.
Congress identified two potential misuses of the 340B Program: duplicate discounts, 42
U.S.C. § 256b(a)(5)(A), and diversions, id. § 256b(a)(5)(B). See H.R. Rep. No. 102-384, pt. 2,
at 16–17 (1992). Duplicate discounts occur when a covered entity receives a discount or rebate
for a unit of a drug under the 340B Program and a rebate under a Medicaid program. 42 U.S.C.
§ 256b(a)(5)(A). Diversions occur when drugs are sold or transferred “to a person who is not a
patient of the entity,” thereby defeating the purpose of affording the covered entity the benefit of
that status, such as providing “safety-net services to the poor.” Id. § 256b(a)(5)(B); Astra, 563
U.S. at 113.
To “assure the integrity of the drug price limitation program,” including these
prohibitions, Congress provided for “auditing” by the Agency or drug manufacturers as a
“requirement[] for covered entities.” H.R. Rep. No. 102-384, pt. 2, at 16; 42 U.S.C.
§ 256b(a)(5)(C). Noncompliance with the prohibitions against duplicate discounts and
diversions is sanctionable, including with liability to the manufacturer for underpayment for the
drugs. Id. § 256b(a)(5)(d). Sanctions are levied “after audit as described in subparagraph (C)
and after notice and hearing.” Id. And “[i]f a dispute concerning the audit findings and
recommendations arises, the parties may file a request for dispute resolution” with HRSA.
Manufacturer Audit Guidelines and Dispute Resolution Process, 61 Fed. Reg. 65406, 65410
(Dec. 12, 1996). Similarly, HHS has provided a process for adjudicating claims that a covered
entity has been overcharged by a manufacturer. See 42 C.F.R. § 10.21(a).
4 B. 340B in Practice
Since its inception, covered entities have primarily received the benefit of the lower
prices guaranteed by the 340B Program through up-front discounts. See Defs.’ Mem. of P. & A.
in Supp. of Cross Mot. for Summ. J. (“Gov’t MSJ”) at 3, ECF No. 41-1. One exception to this
norm occurred in 1998 when HRSA published guidance allowing for rebates for drugs sold to
AIDS Drug Assistance Programs (“ADAPs”), but HRSA explicitly limited its guidance to
ADAPs at that time. Notice Regarding Section 602 of the Veterans Health Care Act of 1992—
Rebate Option, 63 Fed. Reg. 35239, 35241–42 (June 29, 1998). While discounts have
consistently dominated, the processing of those discounts has changed in two major ways.
First, covered entities often outsource distribution of drugs to outside pharmacies, also
known as “contract pharmacies.” See Novartis, 102 F.4th at 455, 457. Though HRSA issued
guidance in 1996 permitting each covered entity to contract with a single outside pharmacy to
dispense drugs at a single location, in 2010, HRSA “swerved” and “opined that covered entities
may contract with an unlimited number of outside pharmacies.” Id. at 456–57 (comparing 61
Fed. Reg. at 43549–50, with Notice Regarding 340B Drug Pricing Program—Contract Pharmacy
Services, 75 Fed. Reg. 10272, 10272–73 (Mar. 5, 2010)). Since 2010, use of contract
pharmacies has rapidly increased. See U.S. Gov’t Accountability Off., GAO-20-212, 340B Drug
Discount Program: Oversight of the Intersection with the Medicaid Drug Rebate Program Needs
Improvement 2 (Jan. 27, 2020) (2020 GAO Report), https://www.gao.gov/assets/gao-20-212.pdf
(noting an increase in contract pharmacies “from about 1,300 at the beginning of 2010 to around
23,000 in 2019”).
Second, covered entities have widely adopted a “replenishment model” to purchase
discounted drugs. See Novartis, 102 F.4th at 457. “While some contract pharmacies maintain
5 separate inventories of section 340B drugs, most fill prescriptions from inventories that
intermingle discounted and non-discounted drugs.” Novartis, 102 F.4th at 457. This method has
been blessed by HRSA since at least 1996. See 61 Fed. Reg. at 43554 (describing the
requirement of a separate inventory as a “wasteful concept with respect to time, space and
money” because the “covered entity is required to monitor dispensing and inventory records”).
Under this model, the drug inventory is typically purchased at full price, and then, after the
covered entity dispenses, or “accumulates,” a package worth of units of a discount-eligible 340B
drug, the covered entity purchases another package to “replenish” its inventory at the discounted
340B price. See AR 60, 196, 203; Compl. ¶ 12, ECF No. 1; Brief of 340B Health, UMass
Memorial Medical Center, and Genesis HealthCare System (“Intervenors’ MSJ”) at 8–10, ECF
No. 53.
C. Factual and Procedural Background
J&J has previously participated in the 340B Program by offering covered entities drugs at
discounted prices. Compl. ¶¶ 2, 78. Under the discount model status quo, J&J contends that
“abuse of the 340B program by covered entities has become rampant and well documented.”
Mem. in Supp. of Pl.’s Mot. for Summ. J. (“J&J MSJ”) at 11, ECF No. 18-1. In 2024, J&J
noticed significant increases in 340B utilization. J&J MSJ at 13; AR 157. J&J sought to audit
several covered entities that had sizable increases in their 340B purchasing, and those audits
were the subject of a collection of related cases before this Court. See, e.g., Or. Health & Sci.
Univ. v. Engels, No. 24-cv-2184, 2025 WL 1707630 (D.D.C. June 17, 2025).
As the audit dispute was beginning, J&J moved forward with developing “a rebate model
to effectuate 340B pricing.” J&J MSJ at 14. J&J met with HRSA on July 24, 2024 to discuss its
“Rebate Model Solution.” See AR 154, 156. J&J raised concerns that “it has little to no
6 visibility into the claim-level data necessary to validate 340B claims,” and that it was facing
challenges with upcoming obligations that would be imposed when relevant provisions of the
Inflation Reduction Act (“IRA”), Pub. L. No. 117-169, 136 Stat. 1818 (2022), 2 become effective
in 2026. J&J MSJ at 15; AR 157, 166–67. HRSA requested that J&J submit its “legal support
for the rebate model,” which J&J did on July 31, 2024, in a letter that also provided details about
its rebate model. AR 55–63. Under J&J’s rebate model, covered entities would purchase
products at wholesale acquisition cost, and rather than accumulating claims to place a
replenishment order, would submit a rebate claim on J&J’s platform. AR 60. J&J anticipates
that the data it requires would “be information the covered entity already collects and keeps in
the normal course of business” and that it would be able to pay valid rebated claims within ten
days of submission. AR 61. J&J intended to implement its rebate model for two of its drugs,
STELARA and XARELTO, starting on October 15, 2024. AR 62.
But that plan was thwarted. On August 14, 2024, HRSA sent J&J a letter explaining that
“[t]o date, the Secretary ha[d] not provided for such rebate as proposed by J&J” and that
“implementing such a proposal at this time would be inconsistent with the statutory requirements
for the 340B Program.” AR 66. HRSA also posed a series of questions about J&J’s rebate
model. See AR 66–68. Two days later, J&J responded, disagreeing with HRSA’s statutory
interpretation and answering HRSA’s questions. AR 72–84. J&J further responded to HRSA’s
August 14 letter on September 12, 2024. AR 191–200.
2 The IRA will require manufacturers to sell certain drugs for Medicare beneficiaries at or below a “maximum fair price” negotiated with the Secretary (or his delegate). 42 U.S.C. §§ 1320f(c)(2), 1320f-2(a). If a dispensed drug is eligible for a reduced price under both the IRA and the 340B Program, then the covered entity is entitled to the lower price of the two. Id. § 1320f-2(d). Duplicate discounts are prohibited. Id. § 1320f-(2)(d)(2).
7 On September 17, 2024, HRSA responded by letter, 3 reiterating its prior position that J&J
could not implement its rebate model without prior approval. AR 202. HRSA also distinguished
J&J’s rebate model from replenishment models on three grounds: (1) under a replenishment
model, a covered entity typically makes only an initial purchase at a higher price, rather than
continually; (2) rebate models are explicitly subject to prior approval under the 340B statute; and
(3) covered entities voluntarily choose to use replenishment models. AR 203. HRSA reminded
J&J that implementation of its rebate model would violate the 340B statute and could lead to
termination of J&J’s PPA. AR 203.
J&J responded on September 19, 2024, maintaining its positions. AR 207–11. And on
September 27, 2024, HRSA again responded, emphasizing that J&J had not yet requested the
required Secretarial approval. 4 AR 214. On September 30, 2024, J&J acquiesced to HRSA’s
demand not to implement its rebate model, but maintained its positions regarding the need for a
rebate model with support including a Government Accountability Office Report noting
significant rates of duplicate discounts and diversions in the Program. AR 216–17.
After further communications failed to result in HRSA approval of J&J’s rebate model,
J&J filed this suit on November 12, 2024, alleging a single claim under the APA. Compl.
¶¶ 130–36. The Complaint seeks declaratory and injunctive relief, and asks the Court to vacate
and set aside HRSA’s August 14, September 17, and September 27 letters, and declare that J&J’s
rebate model is lawful under the 340B statute. Id. at 49. On January 30, 2025, 340B Health,
3 HRSA published this letter on its website. See HRSA Letter to Johnson and Johnson (Sep. 17, 2024), https://www.hrsa.gov/sites/default/files/hrsa/opa/sept-17-2024-hrsa-letter- johnson-johnson.pdf [https://perma.cc/R677-R2KC]. 4 HRSA also published this letter on its website. See HRSA Response to J&J’s September 18, 2024 Letter (Sep. 27, 2024), https://www.hrsa.gov/sites/default/files/hrsa/opa/ sept-27-24-hrsa-letter-johnson-johnson.pdf [https://perma.cc/2G74-G42H].
8 UMass, and Genesis moved to intervene as defendants, and the Court granted that motion. 340B
Health, UMass Memorial Medical Center, and Genesis HealthCare System’s Mot. to Intervene,
ECF No. 14; Order Granting Mot. to Intervene, ECF No. 49.
On February 3, 2025, J&J moved for summary judgment, arguing that HRSA lacks
authority to mandate a pricing mechanism under the 340B statute, and that HRSA rejected its
rebate model without required procedure and in an arbitrary and capricious way because of its
inconsistent treatment of rebate and replenishment models. See J&J MSJ at 1–3. Defendants
and Intervenors opposed that motion, and cross-moved for summary judgment. See Gov’t MSJ;
Intervenors’ MSJ. Defendants argue that the 340B statute requires that HRSA pre-approve a
rebate model, and that its position that J&J could not implement its rebate model without Agency
approval was not arbitrary and capricious. Gov’t MSJ at 1. Intervenors argue that the 340B
statute requires discounts rather than rebates and that enforcing this requirement does not violate
the APA. Intervenors’ MSJ at 14, 31. These motions for summary judgment are now fully
briefed and ready for review.
Many 340B Program stakeholders have submitted proposed amicus briefs in this case,
and the Court thanks each of them for providing helpful context and additional perspectives. 5
None of these motions is opposed. Because the Court believes that each proposed amicus “has
unique information or perspective that can help the court beyond the help that the lawyers for the
parties are able to provide,” the Court will grant the motions for leave to file amicus briefs. 6 See
5 These stakeholders include patient advocacy groups, pharmaceutical research and manufacturing associations, and hospital associations. 6 J&J moves to strike portions of an amicus brief that contain results from a survey of covered entities. See Plaintiff’s Motion to Strike Portions of Proposed Amicus Brief, ECF No. 39 (moving to strike portions of Amici Curiae Brief of American Hospital Association, National Association of Children’s Hospitals, Inc., D/B/A/ Children’s Hospital Association, Associations of American Medical Colleges and America’s Essential Hospitals in Support of
9 Jin v. Ministry of State Sec., 557 F. Supp. 2d 131, 137 (D.D.C. 2008) (quoting Ryan v. CFTC,
125 F.3d 1062, 1063 (7th Cir. 1997)).
III. LEGAL STANDARD
Under Federal Rule of Civil Procedure 56, a “court shall grant summary judgment if the
movant shows that there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “[H]owever, when a party seeks review
of agency action under the APA, the district judge sits as an appellate tribunal” and assesses the
entire case as “a question of law.” Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C.
Cir. 2001). When doing so, “it is black-letter administrative law that . . . a reviewing court
‘should have before it neither more nor less information than did the agency when it made its
decision.’” Hill Dermaceuticals, Inc. v. Food & Drug Admin., 709 F.3d 44, 47 (D.C. Cir. 2013)
(quoting Walter O. Boswell Mem’l Hosp. v. Heckler, 749 F.2d 788, 792 (D.C. Cir. 1984)).
Defendants, ECF No. 33-1). J&J would like these surveys stricken because they “are not part of the Administrative Record for the agency action in this case” and because it believes they “are unreliable and inconsistent with other evidence properly made part of the record.” Id. at 1–2. These Amici disclaim any attempt to supplement the Administrative Record, and explain that they seek to provide the Court with an important perspective as it applies the legal standard to the record in this case. Proposed Amici’s Response to Plaintiff’s Motion to Strike Portions of Proposed Amicus Brief that Rely upon Extra-Record Material at 2–3, ECF No. 40. This Court “has broad discretion to allow amicus briefs when they provide ‘unique information or perspective’ that ‘can help the [c]ourt beyond the help that the lawyers for the parties are able to provide.’” Wash. All. of Tech. Workers v. U.S. Dep’t of Homeland Sec., 50 F.4th 164, 193 (D.C. Cir. 2022) (alteration in original) (quoting 518 F. Supp. 3d, 448, 453 n.2 (D.D.C. 2021)). When evaluating the Agency’s actions in this case, the Court limits its review to the record before the agency. See Hill Dermaceuticals, Inc. v. Food & Drug Admin., 709 F.3d 44, 47 (D.C. Cir. 2013). Because the Court does not rely on the extra-record material and considers this brief only for its unique perspective in this complex area of law, the Court will exercise its discretion to deny J&J’s motion to strike. See Wash. All. of Tech. Workers, 50 F.4th at 193–94 (affirming district court’s denial of motion to strike amicus briefs where the district court did not rely on any material outside the administrative record).
10 Under the APA, courts can set aside agency actions found to be “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law;” or “in excess of statutory
jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(A), (C).
“[A]n agency acts arbitrarily or capriciously if it ‘has relied on factors which Congress has not
intended it to consider, entirely failed to consider an important aspect of the problem, offered an
explanation for its decision that runs counter to the evidence before the agency, or is so
implausible that it could not be ascribed to a difference in view or the product of agency
expertise.’” Am. Wildlands v. Kempthorne, 530 F.3d 991, 997–98 (D.C. Cir. 2008) (quoting
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). “Where
the question is whether the agency action was consistent with statutory authorization, our task is
to determine whether the agency acted consistently with the ‘best reading’ of the statute.” Vanda
Pharms., Inc. v. FDA, 123 F.4th 513, 521 (D.C. Cir. 2024) (quoting Loper Bright Enters. v.
Raimondo, 603 U.S. 369, 395 (2024)). The court must use all relevant interpretive tools to
determine whether the statute “‘delegates discretionary authority’ to the agency and whether the
agency ‘engaged in reasoned decisionmaking within [the] boundaries’ of that statutory
delegation.” Id. (alteration in original) (quoting Loper Bright, 603 U.S. at 395). “In the business
of statutory interpretation, if it is not the best, it is not permissible.” Loper Bright, 603 U.S.
at 400.
IV. ANALYSIS
Because the parties dispute the proper interpretation of the 340B statute, the Court first
analyzes the text, structure, purpose, and history of that statute. These tools of statutory
construction all support Defendants’ interpretation: the parenthetical phrase “taking into account
any rebate or discount, as provided by the Secretary” gives the Secretary the discretion to
11 provide for a rebate model, or not. See 42 U.S.C. § 256b(a)(1). Next, the Court turns to the
legality of HRSA’s determination that it had not provided for J&J’s rebate model. The Court
rejects J&J’s argument that the APA required HRSA to conduct notice-and-comment rulemaking
to reach its conclusion; rather, HRSA exercised its discretion delegated by the statute when it did
not provide for J&J’s rebate model here. And similarly, the Court rejects J&J’s argument that
HRSA acted arbitrarily and capriciously by treating J&J’s rebate model and replenishment
models differently. Because the two models are completely different mechanisms for
effectuating 340B discounts, HRSA’s reliance on those differences was neither arbitrary nor
capricious. Lastly, the Court is satisfied that HRSA’s determination was reasonable and
reasonably explained—HRSA was not required to address every concern J&J had raised to
determine it had not approved rebates broadly. Because Defendants have the better argument on
these points as discussed below, their motion for summary judgment is granted.
A. Statutory Interpretation
The statutory interpretation question in this case is two-fold: (1) Does the 340B statute
allow for both rebate and discount models? (2) If so, who has the authority to determine which
model should be used? The plain and unambiguous text of the statute answers these questions,
“yes, the Secretary.” 7
1. Text and Structure
“Courts must ‘interpret statutes, no matter the context, based on the traditional tools of
statutory construction.’” Pac. Gas & Elec. Co. v. FERC, 113 F.4th 943, 947 (D.C. Cir. 2024)
(quoting Loper Bright, 603 U.S. at 403). As always, “we begin with the text” and “look to the
7 The Court notes that another judge in this District has reached the same conclusion in a series of related cases. See, e.g., Eli Lilly & Co. v. Kennedy, No. 24-cv-3220 (DLF), 2025 WL 1423630, at *9–11 (D.D.C. May 15, 2025).
12 ordinary meaning of its key terms.” Id. at 948 (first quoting City of Clarksville v. FERC, 888
F.3d 477, 482 (D.C. Cir. 2018); then quoting Novartis, 102 F.4th at 460). And courts “must
enforce plain and unambiguous statutory language according to its terms.” Hardt v. Reliance
Standard Life Ins. Co., 560 U.S. 242, 251 (2010).
Here, the 340B statute provides:
The Secretary shall enter into an agreement with each manufacturer of covered outpatient drugs under which the amount required to be paid (taking into account any rebate or discount, as provided by the Secretary) to the manufacturer for covered outpatient drugs . . . purchased by a covered entity . . . does not exceed [the “ceiling price,”] an amount equal to the average manufacturer price for the drug under title XIX of the Social Security Act [Medicaid] in the preceding calendar quarter, reduced by the rebate percentage described in paragraph (2). Each such agreement . . . shall require that the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price.
42 U.S.C. § 256b(a)(1) (emphasis added). The parties dispute the meaning of the parenthetical
phrase “taking into account any rebate or discount, as provided by the Secretary.” See id. On
one end of the spectrum, J&J argues that HRSA cannot direct a pricing mechanism and that
manufacturers retain discretion to choose the pricing mechanism they see fit. J&J MSJ at 1, 36;
Pl.’s Br. in Opp’n to Defs.’ Cross-Mot. for Summ. J. and Reply in Supp. of Summ. J. (“J&J
Reply”) at 29, ECF No. 44. On the other end of the spectrum, Intervenors argue that the statute
requires that manufacturers use a discount mechanism to effectuate the 340B price. Intervenors’
MSJ at 1–2, 14–25. In the middle, Defendants argue that the statute allows the Secretary
(through HRSA) to provide for either a rebate or discount model. Gov’t MSJ at 8, 13. The text
clearly supports Defendants’ interpretation.
Based on a plain reading, “as provided by the Secretary” modifies the phrase immediately
preceding it, “any rebate or discount.” See 42 U.S.C. § 256b(a)(1). To “provide” is “to make
something available to,” or “to have as a condition” or “stipulate.” Provide, Merriam-Webster’s
13 Collegiate Dictionary 940 (10th ed. 1993); Provide, 12 Oxford English Dictionary 713 (2d ed.
1989) (defining “provide” as “[t]o make it, or lay it down as, a provision or arrangement; to
stipulate that”). So, the parenthetical means that HRSA can make available to manufacturers—
or provide for—rebates, discounts, or both. And when determining the ceiling price to be paid
for a 340B drug, that price is not simply the sticker price, but should “tak[e] into account any
rebate or discount.” See 42 U.S.C. § 256b(a)(1).
The phrase “taking into account” causes some confusion for J&J. It argues that the
phrase “as provided by the Secretary” modifies “the entire rest of the parenthetical—‘taking into
account any rebate or discount.’” J&J MSJ at 28 (quoting 42 U.S.C. § 256b(a)(1)). Even were
that correct, the result is the same. J&J does not explain why the Secretary, in determining how
to take account of any rebate or discount, could not choose to allow for only one or the other.
See, e.g., J&J MSJ at 28–29; J&J Opp’n at 12–13. In fact, that discretion would seem to be the
exact authority the statute grants the Secretary. After all, no party argues the Secretary, in
accounting for a discount, could change the value of that discount and effectively change the
statutorily provided ceiling price for a drug. See J&J Opp’n at 11; Defs.’ Reply Further Supp.
Mot. Summ. J. (“Gov’t Reply”) at 3, ECF No. 46; J&J’s Second Reply at 6. So then if not the
provision, or making available, of either a rebate or discount, what could be taken account of?
J&J responds with a narrow reading of “taking into account,” that is limited to how the
pricing mechanism is implemented, or even more literally, the types of “accounting records” that
must be maintained. J&J MSJ at 29. Though J&J insists that the statute “merely authorizes
Defendants to direct in the PPA that manufacturers must use appropriate records, recordkeeping
procedures, or accounting mechanisms to account for the rebates or discounts they choose to
provide,” the statute’s text makes no mention of manufacturer recordkeeping or financial
14 accounting. See id. at 27. Fortunately, the Court need not strain to understand the plain text of
the statute. The more natural reading of “taking into account” would be “considering.”
Consider, Merriam-Webster’s Collegiate Dictionary 246 (10th ed. 1993) (defining “consider” as
“to take into account”); Considered, 3 Oxford English Dictionary 768 (2d ed. 1989) (defining
“considered” as “being taken into account”). And “[considering] any rebate or discount, as
provided by the Secretary” clearly means the Secretary has discretion to provide for rebates,
discounts, or both. 42 U.S.C. § 256b(a)(1).
Undeterred, J&J and Intervenors each propose constructions that would violate the
“cardinal principle of statutory construction that [courts] must ‘give effect, if possible, to every
clause and word of a statute.’” Williams v. Taylor, 529 U.S. 362, 404 (2000) (quoting United
States v. Menasche, 348 U.S. 528, 538–39 (1955)); Cares Cmty. Health v. U.S. Dep’t of Health
& Hum. Servs., 944 F.3d 950, 960 (D.C. Cir. 2019) (“[T]he canon against surplusage ensures
‘that effect is given to all [statutory] provisions, so that no part will be inoperative or
superfluous, void or insignificant.’” (second alteration in original) (quoting Rubin v. Islamic
Republic of Iran, 583 U.S. 202, 213 (2018))). J&J reads “as provided by the Secretary” out of
the statute entirely. Rather, in reading the statute to make manufacturers “free to offer the ceiling
price to covered entities via a rebate or discount at [their] discretion,” J&J appears to replace “as
provided by the Secretary” with “as provided by the manufacturer.” See J&J MSJ at 33; Gov’t
MSJ at 9. That cannot be right. Unsupported by the text, J&J turns to Novartis, see J&J MSJ
at 33, in which the D.C. Circuit held that “statutory silence implies that private parties may act
freely,” Novartis, 102 F.4th at 460. But that is beside the point; here, the statute’s grant of
authority to the Secretary is explicit, not silent.
15 Intervenors, on the other hand, read “rebate” out of the statute, and argue that “[b]ecause
manufacturers must offer to sell covered drugs at this maximum ceiling price, any attempt to sell
covered drugs to 340B Providers above this price in the first instance would, by definition, run
afoul of the statutory language.” 8 Intervenors’ MSJ at 14, 17. In doing so, they limit the “ceiling
price” to the amount paid at the moment of purchase. See Intervenor Defs.’ Reply in Supp. of
Cross Mot. for Summ. J. (“Intervenors’ Reply”) at 2–3, ECF No. 57. This would seem to render
the word “rebate” surplusage because rebates are only paid if the purchaser has initially paid
above the ceiling price. See Williams, 529 U.S. at 404. To justify this result, Intervenors limit
the applicability of the disputed parenthetical to circumstances when the Secretary needs to
“make[] adjustments to achieve a 340B discount that is different from the ceiling price
calculation in the 340B statute,” such as when a drug is new to the market or when the statute’s
formula results in a 340B price of $0 or less. Intervenors’ MSJ at 15. But if Congress intended
for the parenthetical to be read so narrowly, it left no clues in the text of that sentence, which
establishes the general price-setting function of the 340B Program. This, too, cannot be right.
Defendants have the best interpretation. Based on the plain and unambiguous language
of the 340B statute, HRSA has the authority to provide for rebates, or not.
J&J argues in the alternative that “even if HRSA were correct that the best reading of the
statute is that the Secretary has discretion to direct a pricing mechanism . . . the only regulatory
vehicle through which HRSA could possibly implement such a mandate is the PPA.” J&J MSJ
at 33. But the provision that instructs the Secretary to “enter into an agreement” does not limit
how the Secretary can provide for rebates or discounts. If it did, the parenthetical phrase “as
8 To the extent HRSA took this position in its September 17, 2024 letter to J&J, AR 202– 03, HRSA appears to have abandoned it in this litigation, see Gov’t MSJ at 13–14.
16 provided by the Secretary” would be rendered surplusage—rebates or discounts would already
be “provided by the” PPAs, not the Secretary. Thus, the statute’s language does not support
J&J’s proposed limitation.
Zooming out, J&J notes that the relevant provision appears in a “subsection of the
statute . . . titled ‘Requirements for agreement with Secretary.’” J&J MSJ at 33 (quoting 42
U.S.C. § 256b(a)). The persuasive effect of this argument is diluted, however, by the relevant
provision appearing in a sub-subsection titled, “In general,” which J&J fails to mention, let alone
explain, in its briefing. See 42 U.S.C. § 256b(a)(1). Moreover, as the Supreme Court has
recognized, “PPAs are not transactional, bargained-for contracts” but are instead “uniform
agreements that recite the responsibilities § 340B imposes.” Astra, 563 U.S. at 113. To the
extent the PPA does change, see J&J Opp’n at 28, it does so based on changes to the 340B
statute, see Gov’t Reply at 5–6 (discussing the 2016 PPA Addendum as responding to additional
requirements of the Affordable Care Act). While PPAs may include additional terms, as J&J
notes, neither the 340B statute’s text nor Agency practice—including providing for ADAP
rebates through notice and comment, not separate PPAs—limits the Secretary’s method of
providing for rebates or discounts to PPAs. The better reading is that the statute provides for the
requirements of the 340B Program, which is implemented through PPAs, but not exclusively
delineated by them. See, e.g., Manufacturer Audit Guidelines and Dispute Resolution Process,
61 Fed. Reg. 65406 (Dec. 12, 1996) (providing procedures for initiating manufacture audits
pursuant to 42 U.S.C. § 256b(a)(5)(C), another provision of subsection (a) not exclusively
contained in PPAs).
Because the 340B statute’s language is plain, the Court’s statutory analysis could stop
here. See Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004) (“It is well established that ‘when the
17 statute’s language is plain, the sole function of the courts—at least where the disposition required
by the text is not absurd—is to enforce it according to its terms.’” (quoting Hartford
Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000))). But even were the
Court to consider the statute’s purpose and legislative history, those further support the plain
meaning of the text.
2. Purpose and History
The 340B program “was intended to enable certain hospitals and clinics ‘to stretch scarce
Federal resources as far as possible, reaching more eligible patients and providing more
comprehensive services.’” Am. Hosp. Ass’n v. Hargan, 289 F. Supp. 3d 45, 47 (D.D.C. 2017),
aff’d sub nom. Am. Hosp. Ass’n v. Azar, 895 F.3d 822 (D.C. Cir. 2018) (quoting H.R. Rep. 102-
384, pt. 2, at 12 (1992)). And since its beginning, the 340B price reductions were to be
“implemented, at the discretion of the Secretary, either by a point-of-purchase discount, a rebate,
or other mechanism.” H.R. Rep. 102-384, pt. 2, at 12 (1992); id. (stating manufacturers “would
have to enter into an agreement with the Secretary of HHS to provide price reductions (whether
through a discount, rebate, or other mechanism) to these ‘covered entities’ on covered outpatient
drugs”); see also Guidance Regarding Section 602 of the Veterans Health Care Act of 1992;
Limitation on Prices of Drugs Purchased by Covered Entities, 58 Fed. Reg. 27289, 27290
(May 7, 1993) (stating that the act creating the 340B Program is “an attempt to provide Federal
purchasers with a process whereby they will receive drug discounts or rebates”). As the House
Report stated:
The Committee bill does not specify whether “covered entities” would receive these favorable prices through a point-of-purchase discount, through a manufacturer rebate, or through some other mechanism. A mechanism that is appropriate to one type of “covered entity,” such as community health centers, may not be appropriate to another type, such as State AIDS drug purchasing programs. The Committee expects that the Secretary of HHS, in developing these agreements, will use the
18 mechanism that is the most effective and most efficient from the standpoint of each type of “covered entity.”
H.R. Rep. 102-384, pt. 2, at 16 (1992). 9 This would tend to support the Secretary’s discretion.
But the Court need not stop there. “[A]lthough an agency’s interpretation of a statute
‘cannot bind a court,’ it may be especially informative ‘to the extent it rests on factual premises
within [the agency’s] expertise.’” Loper Bright, 603 U.S. at 402 (second alteration in original)
(quoting Bureau of Alcohol, Tobacco and Firearms v. FLRA, 464 U.S. 89, 98, n.8 (1983)). And
“the longstanding practice of the government—like any other interpretive aid—can inform a
court’s determination of what the law is.” Id. at 386 (cleaned up) (quoting NLRB v. Noel
Canning, 573 U.S. 513, 525 (2014).
“Initially, HRSA guidance for the section 340B program described only a discount
process. Covered entities generally preferred a discount system, because they could negotiate
lower prices and needed less initial outlay of drug purchasing money.” Notice Regarding
Section 602 of the Veterans Health Care Act of 1992 Rebate Option, 62 Fed. Reg. 45823, 45824
(Aug. 29, 1997). But as the statute’s House Report expected, HRSA has exercised its authority
and expertise to determine “the most effective and most efficient” mechanisms for implementing
340B pricing. See H.R. Rep. 102-384, pt. 2, at 16. In fact, HRSA invoked that authority in its
1997 Notice, 62 Fed. Reg. at 45824, which after notice and comment resulted in a Final Notice
recognizing the availability of a “rebate option for State AIDS Drug Assistance Programs
(ADAPs) . . . as an optional alternate means of accessing section 340B discount pricing,” 63 Fed.
9 J&J quotes the final sentence of this passage to support its theory that PPAs are the exclusive means by which HRSA can choose not to provide for rebates. See J&J Opp’n at 24. As discussed above, nothing in the statute itself hamstrings the Secretary’s exercise of discretion. And read in context, the Court reads this sentence as emphasizing the discretion delegated to the Secretary rather than confining that discretion to PPAs.
19 Reg. 35239, 35239 (June 29, 1998). At the time, “most ADAPs ha[d] drug purchasing systems
that ha[d] prevented their participation in the section 340B discount program.” 62 Fed. Reg.
at 45824. So HRSA approved a rebate option for ADAPs, and only ADAPs. 63 Fed. Reg.
at 35241–42. In response to a comment urging “that HRSA not consider any further expansion
[of the rebate mechanism] to other categories of entities,” HRSA responded, that “[a]t this time,
we agree,” and “only recognize[d] a rebate option for the State [ADAPs].” Id. Thus, HRSA’s
previous exercise of discretion to “provide” for a rebate option for particular covered entities
further supports the Court’s plain reading of the statute.
J&J pieces together unrelated quotes from that Final Notice to suggest the 340B statute
requires the Secretary to allow for rebates. According to J&J, the Final Notice “confirmed that
HRSA was not ‘propos[ing] a specific mechanism for accessing [340B] rebates’ in order to
‘allow maximum flexibility’ between the state ADAPs and manufacturers.” J&J MSJ at 8–9
(quoting 63 Fed. Reg. at 35239, 35241); see J&J’s Opp’n at 24 n.4. To the extent J&J argues
that these two HRSA quotes refer to manufacturer access to rebates generally, context rebuts that
suggestion. In the first quote, HRSA rejected a request that the guidelines provide for a
standardized rebate process because the “Federal Register notice requested comments only on
the recognition of a rebate option and did not propose a specific mechanism for accessing such
rebates.” 63 Fed. Reg. at 35239 (emphasis added). For the second quote, in response to a
request that HRSA develop a “comprehensive and enforceable contract between the State ADAP
program and the manufacturer” that would include specific data elements, HRSA responded that
it would prefer to afford those parties “maximum flexibility” in “reaching such agreements.” Id.
at 35241. In context, neither of these quotes supports that manufacturers should be able to
implement rebate models for non-ADAPs without prior approval of the Secretary. And as
20 Defendants aptly point out “nothing in the legislative history suggests that Congress
contemplated a system where manufacturers would unilaterally decide whether to offer rebates
or discounts without any role for the Secretary.” Gov’t Reply at 4. The Court agrees.
In sum, based on the plain and unambiguous language of the 340B statute, and supported
by its purpose and history, HRSA has the authority to “provide” for discounts, rebates, or both.
This conclusion defeats J&J’s claim that HRSA lacked the authority to require prior approval of
J&J’s rebate model. See J&J MSJ at 31. So, the remaining issue is whether HRSA exercised its
authority lawfully.
B. Legality of HRSA’s Letters
J&J provides two main theories as to why HRSA’s “rejection” of its rebate model was
unlawful: (1) HRSA was required to conduct notice-and-comment rulemaking before rejecting
J&J’s rebate model, which it contends was a legislative rule; and (2) HRSA’s differential
treatment of covered entities’ replenishment models and J&J’s rebate model was arbitrary and
capricious. J&J MSJ at 39–45. In J&J’s final brief, it also argues that “in rejecting J&J’s Rebate
Model, HRSA disregarded key aspects of the problem that J&J had raised.” Pl.’s Br. in Resp. to
Br. of Intervenors and Reply in Supp. of Pl.’s Mot. for Summ. J. (“J&J Second Reply”) at 15,
ECF No. 52. None of these arguments has merit.
1. Required Procedures
Unlike legislative rules, which “have the ‘force and effect of law’ and may be
promulgated only after public notice and comment,” interpretive rules do not require those
procedures under the APA. Nat’l Min. Ass’n v. McCarthy, 758 F.3d 243, 250 (D.C. Cir. 2014)
(quoting INS v. Chadha, 462 U.S. 919, 986 n.19 (1983)); see 5 U.S.C. § 553(b)(A). An
interpretive rule “is one that ‘derive[s] a proposition from an existing document,’ such as a
21 statute, regulation, or judicial decision, ‘whose meaning compels or logically justifies the
proposition.’” Nat. Res. Def. Council v. Wheeler, 955 F.3d 68, 83 (D.C. Cir. 2020) (alteration in
original) (quoting Cath. Health Initiatives v. Sebelius, 617 F.3d 490, 494 (D.C. Cir. 2010)).
“[I]nstead of creating legal effects,” an interpretive rule “puts the public on notice of pre-existing
legal obligations or rights.” Id.
That is precisely what happened here. As discussed at length above, any rebate or
discount must be “provided by the Secretary.” 42 U.S.C. § 256b(a)(1). In correspondence with
J&J, which HRSA published on its website, HRSA interpreted the 340B statute and informed
J&J that because HRSA had not provided for J&J’s rebate model, implementation of that model
would violate the 340B statute and the PPA. See AR 48, 66, 202. Specifically, J&J faults HRSA
for stating that “implementing a rebate proposal without Secretarial approval would violate
Section 340B(a)(1),” J&J MSJ at 2, but that is a near restatement of the plain text of the statute,
see 42 U.S.C. § 256b(a)(1). And even applying the legislative-versus-interpretive factor J&J
considers “most pertinent” here, the Court has little doubt that there would be “an adequate
legislative basis for [an] enforcement action,” even had HRSA not sent J&J its letters reiterating
that the Secretary had not provided for J&J’s rebate model. J&J Opp’n at 30 (quoting Am.
Mining Congress v. Mine Safety & Health Admin., 995 F.2d 1106, 1112 (D.C. Cir. 1993)).
Further, as the Agency points out, there are other sources of law to support HRSA’s
threat to terminate J&J’s PPA. See Gov’t Reply at 8. First, the PPA itself permits termination
“for a violation of the Agreement or other good cause.” See AR 42. And second, the Medicaid
statute also permits “terminations of agreements described in section 256b(a)(1).” See 42 U.S.C.
§ 1396r-8(b)(4)(B)(v). Here, rather than announcing any new rule, HRSA merely reminded J&J
that violation of its 340B obligations, such as implementation of an unapproved rebate model,
22 could result in termination from the 340B Program. That statement did not announce a
legislative rule, so the APA did not require notice and comment.
2. Arbitrary-and-Capricious Review
Arbitrary-and-capricious review is “highly deferential” and “presumes agency action to
be valid.” Am. Wildlands, 530 F.3d at 997 (quoting Ethyl Corp. v. EPA, 541 F.2d 1, 34 (D.C.
Cir. 1976)). As mentioned above, “an agency acts arbitrarily or capriciously if it ‘has relied on
factors which Congress has not intended it to consider, entirely failed to consider an important
aspect of the problem, offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a difference in view or the
product of agency expertise.’” Am. Wildlands, 530 F.3d at 997–98 (quoting State Farm, 463
U.S. at 43). Further, “[i]t is a fundamental principle of administrative law that agencies must
treat like cases alike.” Grayscale Invs., LLC v. Sec. & Exch. Comm’n, 82 F.4th 1239, 1242 (D.C.
Cir. 2023). But “[a] necessary component of any claim that an agency acted arbitrarily and
capriciously in this respect is that the differently treated entities are, in fact, ‘similarly situated.’”
Vanda Pharms., Inc. v. Food & Drug Admin., No. 1:22-CV-01432, 2023 WL 6035663, at *14
(D.D.C. Aug. 2, 2023), aff’d sub nom. Vanda Pharms., Inc. v. U.S. Food & Drug Admin., 123
F.4th 513 (D.C. Cir. 2024). J&J has articulated two theories for why HRSA’s “rejection” of its
rebate model was arbitrary and capricious: (1) differential treatment and (2) failure to consider an
important aspect of the problem.
a. Differential Treatment
J&J argues that HRSA’s “inconsistent treatment of rebate and replenishment models”
constitutes arbitrary and capricious agency action. See J&J MSJ at 42–45. But, as HRSA
explained, J&J’s new rebate model and historically used replenishment models have material
23 differences that justify their disparate treatment. In HRSA’s September 17, 2024 letter, it
specifically addressed these differences:
First, under a typical replenishment structure, a covered entity generally makes an initial purchase at a higher price, then subsequent, ongoing drug purchases are at the 340B price. By contrast, under the J&J proposal, covered entities would be forced to pay a higher price point up front for every purchase. This would create significantly higher up-front costs for covered entities. Second, the 340B statute explicitly limits rebate models to those that have been approved by the Secretary. Third, covered entities voluntarily choose to use replenishment processes; J&J’s proposal is not voluntary for covered entities.
AR 203. This explanation for different treatment is both “reasonable and reasonably explained
for purposes of the APA’s deferential arbitrary-and-capricious standard.” FCC v. Prometheus
Radio Project, 592 U.S. 414, 417 (2021).
First, HRSA emphasized that though the replenishment model requires an initial full-
price purchase, it functions from that point on as a discount model. See AR 203. The rebate
model, in contrast, requires continuous purchasing at the Wholesale Acquisition Cost. See J&J
MSJ at 43. True, J&J asserts that covered entities will “obtain a rebate seven to ten days after
submitting data supporting the 340B purchase,” which it claims is shorter than many wholesaler
standard payment terms. J&J MSJ at 43; J&J Opp’n at 33; AR 208–09. But this theory still does
not account for the possibility that covered entities may store a drug for some time before
dispensing the drug, and only then become eligible for a rebate. See Intervenors’ Reply at 11.
This possibility is supported by the record before HRSA, which contained 340B hospitals’
concerns that they “will be forced to incur higher carrying costs for these drugs, essentially
floating revenue to drug manufacturers” and “reduc[ing] the hospitals’ resources available for
other patient care.” AR 568. Thus, HRSA reasonably concluded that a change from a
replenishment model to a rebate model would be material. And though the Court appreciates
that J&J’s model also “anticipates functionality” with a capped level of rebates paid based on
24 purchase data only, the availability of this functionality on a wide scale would seem to defeat the
stated necessity of a rebate model. See J&J Second Reply at 21. Broad availability of this
limited exception also runs contrary to J&J’s own explanation of its model for STELARA and
XARELTO, which entitles covered entities to rebate “immediately upon dispensing.” Id.
(emphasis added). HRSA’s conclusion was therefore reasonable.
Second, HRSA based its different treatment of J&J’s rebate model and covered entities’
replenishment models on the text of the 340B statute. AR 203. As discussed above, the 340B
statute gives the Secretary discretion to “provide[]” for “any rebate or discount.” 42 U.S.C.
§ 256b(a)(1). This includes the discretion to provide for one and not the other. Replenishment
models are discount models that HRSA has provided for since at least 1996. See 61 Fed. Reg.
at 43554. In contrast, the Court is only aware of one rebate model HRSA has approved, and that
approval was limited to ADAPs. See 63 Fed. Reg. at 35241–42. The statutory distinction
between rebate models and replenishment models supports HRSA’s reasonable conclusion that
they are differently situated.
Third, HRSA distinguished replenishment models based on their voluntary adoption by
covered entities, unlike J&J’s rebate model, to which covered entities have protested. AR 203.
J&J’s response to this reason is confusing: “HRSA’s position thus inexplicably treats one class
of program stakeholders—covered entities—more favorably than another set of stakeholders—
manufacturers.” J&J MSJ at 44; J&J Opp’n at 34. Of course HRSA might treat these two
groups differently; covered entities are the beneficiaries of the lower prices guaranteed by the
340B Program. See H.R. Rep. 102-384, pt. 2, at 12 (1992) (“In giving these ‘covered entities’
access to price reductions the Committee intends to enable these entities to stretch scarce Federal
resources as far as possible, reaching more eligible patients and providing more comprehensive
25 services.”). Assessing the covered entities’ voluntary compliance with a pricing mechanism is
an appropriate consideration that is consistent with the Program’s purpose. See Gov’t Reply
at 10. And giving covered entities the ability to choose between available pricing mechanisms is
consistent with past practice. For instance, when HRSA approved a rebate option for ADAPs, it
rejected a commenter’s request that HRSA mandate a “single mechanism” for pricing because
“[i]t would be difficult to administer a rebate program in which a given State ADAP used both
the discount option and the rebate option.” 63 Fed. Reg. at 35240. Instead, HRSA emphasized
that the “rebate option is an alternate method of accessing 340B pricing” and that while some
ADAPs would use the rebate option, others would “develop systems to access a direct discount.”
Id. Allowing covered entities these choices is not a defect, but by design. This historical
practice further supports HRSA’s distinction based on the voluntariness of covered entities’
participation in J&J’s rebate model. 10
HRSA provided multiple reasons why J&J’s rebate model is different from replenishment
models. Because HRSA reasonably explained key differences that justify different treatment of
the models, J&J’s argument that the differential treatment was arbitrary and capricious is without
merit.
10 Amicus Washington Legal Foundation suggests that HRSA should not have considered the voluntariness of J&J’s rebate model because voluntariness “is irrelevant to whether a pricing mechanism complies with the ‘shall offer’ provision.” Br. of Amicus Curiae Wash. Legal Found. at 19, ECF No. 22-2. Amicus highlights that involuntary distribution conditions were upheld in Sanofi Aventis and Novartis. Id. In those cases, the issue was whether manufacturers’ distribution conditions violated the “shall offer” provision of 42 U.S.C. § 256b(a)(1). Sanofi Aventis, U.S. LLC v. U.S. Dep’t of Health & Hum. Servs., 58 F.4th 696, 706 (3d Cir. 2023); Novartis, 102 F.4th at 464. Here, HRSA distinguished between J&J’s rebate model and replenishment models, a different inquiry than whether the conditions J&J’s rebate model would impose on covered entities are so onerous as to not constitute a bona fide offer. See Novartis, 102 F.4th at 464. Because HRSA was deciding a different issue, and for the reasons discussed above, its consideration of voluntariness was not in error.
26 b. Failure to Consider an Important Aspect of the Problem
J&J argues that “in rejecting J&J’s Rebate Model, HRSA disregarded key aspects of the
problem that J&J had raised, including extensive evidence of widespread noncompliance with
340B program integrity requirements,” as well as “the challenges confronting J&J in adhering to
its dueling obligations under the 340B program and the prescription drug provisions of the
Inflation Reduction Act.” J&J Second Reply at 15–16. Though J&J’s earlier briefing makes
only passing references to this theory, J&J articulates it explicitly for the first time in its brief in
opposition to Intervenors’ motion for summary judgment. See id. at 13–18. This is likely a
result of another court’s grant of summary judgment on this ground to a plaintiff in a related
case, Eli Lilly & Co. v. Kennedy, No. 24-cv-3220 (DLF), 2025 WL 1423630, at *13–14 (D.D.C.
May 15, 2025). 11
To determine whether HRSA considered the important aspects of the problem here, it is
necessary to distill what problem HRSA addressed. In its August 14, 2024 letter, HRSA stated
that “implementing [a rebate] proposal at this time would be inconsistent with the statutory
requirements for the 340B Program, which require the approval of a rebate model such as J&J
has proposed.” AR 66. HRSA’s September 17, 2024 letter reiterated that position, and
differentiated J&J’s rebate model from replenishment models, as discussed above. AR 202–03.
And HRSA’s September 27, 2024 letter emphasized that, at that time and from HRSA’s
perspective, J&J had “not requested Secretarial approval.” AR 214. This makes sense, as J&J’s
position in its letters to HRSA clearly stated J&J’s belief that it did not need HRSA’s approval to
11 In light of the Lilly court’s holding that HRSA’s ongoing consideration of rebate models rendered the court’s review premature, see Lilly, 2025 WL 1423630, at *13, J&J emphasizes the finality of HRSA’s “rejection” of its rebate model, see J&J Second Reply at 13– 15. “As finality is not jurisdictional under the APA,” and Defendants did not raise this issue, the Court “need not decide this matter.” Vanda Pharms., 123 F.4th at 521.
27 unilaterally implement its rebate model. See AR 72, 191–92, 209. After this initial refusal to
approve J&J’s rebate model, J&J continued communicating and meeting with HRSA about its
proposed rebate model, but “given the urgency of the IRA deadlines, J&J . . . file[d] this
lawsuit.” See J&J Second Reply at 15.
Defendants draw a distinction between HRSA’s position regarding J&J’s rebate model as
of September 2024, and the permissibility of rebate models generally. See Gov’t Reply at 13–14.
The Court finds this distinction reasonable, given that J&J’s Complaint challenges HRSA’s
letters dated August 14, September 17, and September 27. See Compl. ¶¶ 130–36. True, these
letters did not address the problems of 340B Program integrity or pending IRA obligations for
manufacturers that J&J described as motivating its proposed shift in pricing models. But that is
because, even in its motion for summary judgment, J&J has focused on HRSA’s “‘Secretarial
approval’ policy” as HRSA’s legal error. See J&J MSJ at 3, 42. Were the Agency’s position
that J&J’s rebate model could never be implemented at all, then J&J would have a strong
argument that HRSA’s explanations are lacking. But because the legal question HRSA
responded to in its letters was whether it had provided for rebates—which would constitute a
departure from HRSA’s past practice in almost all instances for the past three decades—the
Court concludes that HRSA’s assertion of its statutory authority can “reasonably be discerned”
and is sufficiently explained. See Xcel Energy Servs. Inc. v. FERC, 41 F.4th 548, 557 (D.C. Cir.
2022) (quoting State Farm, 463 U.S. 29, 43); AR 202–03.
The Court understands that J&J faces competing constraints on its ability to participate in
the 340B Program and IRA Negotiation Program while protecting the integrity of those
programs. HHS has represented in other litigation that it “continues to carefully evaluate its
options alongside ongoing efforts to address 340B program integrity matters and keeping in
28 mind the approaching effective date of certain Inflation Reduction Act requirements.” Notice,
Eli Lilly & Co. v. Kennedy, No. 24-cv-3220 (D.D.C. May 2, 2025), ECF No. 48. The Court is
hopeful HHS will provide meaningful guidance soon. At the same time, the Court struggles to
understand the necessity of J&J’s rebate model as it relates to program integrity. J&J represents
that a key benefit of its model is access to claim-level data that “covered entit[ies] already
collect[] and keep[] in the normal course of business,” and that with that data, J&J will be able to
process rebates within ten days. AR 61. At the same time, J&J represents that it will be unable
to comply with the 14-day deadline to process rebates under the IRA Negotiation Program. See
Motion to Expedite at 4, ECF No. 19. If all J&J needs is claim-level data, it is unclear why a
rebate model is necessary to obtain that data. See Novartis, 102 F.4th at 463 (supporting that
manufacturers can require standard claims data from covered entities without violating their bona
fide offer obligation). Regardless, based on the record before HRSA as of September 27, 2024,
its position that implementation of a rebate model without approval would violate the 340B
statute was neither contrary to law nor arbitrary and capricious. Accordingly, and for the reasons
discussed above, the Court denies J&J’s motion for summary judgment, and grants Defendants’
and Intervenors’ cross motions for summary judgment.
29 V. CONCLUSION
For the foregoing reasons, Plaintiff’s Motion for Summary Judgment (ECF No. 18) is
DENIED; Proposed Amici’s Motions for Leave to File Amicus Briefs (ECF Nos. 21, 22, 23, 25,
28, 33, 38) are GRANTED; Plaintiff’s Motion to Strike (ECF No. 39) is DENIED; and
Defendants’ and Intervenor-Defendants’ Cross Motions for Summary Judgment (ECF Nos. 41,
54) are GRANTED. An order consistent with this Memorandum Opinion is separately and
contemporaneously issued.
Dated: June 27, 2025 RUDOLPH CONTRERAS United States District Judge
Johnson & Johnson Health Care Systems Inc. v. Becerra (Johnson & Johnson Health Care Systems Inc. v. Becerra) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.