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In a swift reversal that underscores the high-stakes battle over drug pricing, HHS Ends 340B Drug Rebate pilot efforts following a legal challenge from the nation’s largest hospital association.

The U.S. Department of Health and Human Services confirmed in a filing Thursday in federal court in Maine that it is abandoning — at least for now — a proposed rebate model that would have reshaped how hospitals are reimbursed under the federal 340B drug discount program.

The move came as part of a joint motion with the American Hospital Association and a coalition of hospitals, who in turn agreed to drop their lawsuit contesting the plan.

A Legal Fight Comes to a Halt

The joint filing follows weeks of negotiations between the parties. Earlier, HHS had indicated it was prepared to withdraw its appeal of a First Circuit ruling that upheld a lower court’s temporary block on the rebate initiative.

In their motion, HHS and the AHA signaled that further litigation would likely be futile.

“Defendants do not believe the full administrative record would change the outcome of this litigation at summary judgment,” the parties stated. “As a result, the Parties agree that further motions practice would not be fruitful, and instead, it would serve the best interests of judicial economy and the Parties to vacate the challenged actions with a remand to the Health Resources and Services Administration.”

The filing effectively shelves the rebate pilot unveiled in July by the Health Resources and Services Administration, the HHS subagency overseeing the Section 340B Drug Pricing Program.

What the Rebate Pilot Would Have Changed

Under the long-standing 340B framework, drugmakers provide upfront discounts to hospitals that serve large numbers of low-income and uninsured patients. The proposed pilot would have flipped that model.

Hospitals would have paid full price for medications and later sought rebates — a structural shift that alarmed hospital leaders who argued it would strain already thin margins, particularly in rural and underserved communities.

Pharmaceutical manufacturers have long criticized the current discount structure, contending it invites fraud and abuse. Several drug companies proposed alternative rebate models of their own but were rebuffed by HRSA.

The hospital industry was caught off guard in July when HRSA announced it would pursue its own rebate pilot — a move that triggered swift backlash.

Court Orders and Appeals

The American Hospital Association and several hospitals filed suit in early December, arguing the proposed rebate program violated the Administrative Procedure Act and that the government failed to adequately consider public feedback. The pilot had been slated to take effect Jan. 1.

On Dec. 29, U.S. District Judge Lance Walker issued a temporary injunction halting the program before it could begin. The federal government quickly sought emergency relief from the First Circuit Court of Appeals.

But on Jan. 8, a First Circuit panel declined to pause the injunction, leaving the lower court’s block in place and tightening the legal vise around the agency’s plan.

What Happens Next

As part of the agreement to vacate the challenged actions, HHS pledged that if it revisits a rebate model in the future, it will undertake a formal public comment period. The agency also committed that any new rebate program would not take effect until at least 90 days after public notice of drug approvals tied to the initiative.

Rick Pollack, president and CEO of the American Hospital Association, welcomed the retreat.

“The AHA hopes that through a new regulatory process and careful consideration of comments from 340B hospitals, HHS will recognize that imposing hundreds of millions of dollars in costs on hospitals serving rural and underserved communities is not a sound policy,” Pollack said in a statement.

HHS did not immediately respond to a request for additional comment.

The Legal Teams

HHS is represented by Jason K. Altabet, Michelle R. Bennett and Yaakov M. Roth of the U.S. Department of Justice’s Civil Division, Federal Programs Branch.

The hospitals are represented by Karen L. Dunn, L. Rush Atkinson, Lyle W. Gruby, Jenifer N. Hartley and Tyler T. Mikulis of Dunn Isaacson Rhee LLP, along with Melissa A. Hewey and Jennifer S. Riggle of Drummond Woodsum Attorneys at Law.

For now, the 340B program remains intact in its current form — a fragile equilibrium between hospitals and drugmakers that continues to shape access to medications for millions of low-income Americans.