It has been more than four years since manufacturers first obtained success in defending their unilaterally instituted contract pharmacy restrictions under the 340B Drug Pricing Program. In response, hospital systems and other 340B covered entities have responded in kind, seeking to utilize a variety of different “workarounds” to continue to capture 340B savings through contract pharmacies. Among the methodologies that has grown in usage and adoption is the “alternative distribution model” (ADM).
What Is an Alternative Distribution Model?
Under an ADM, covered entities purchase 340B-priced drugs directly from the manufacturer or primary wholesaler, and take physical possession of the drugs (either at an on-site pharmacy, warehouse, or secure storage location), then physically transfer them to one or more contract pharmacies for use in dispensing prescriptions to eligible patients.
This approach differs significantly from traditional replenishment-based models, which typically involve a virtual inventory tracked through split-billing software, with the product drop-shipped directly from the wholesaler to the pharmacy under a bill-to/ship-to arrangement. As a result, all (or nearly all) of the 340B purchases still flow through a site owned/operated by the covered entity. In contrast, ADMs centralize purchasing and handling under the covered entity, with nearly all 340B transactions flowing through an entity-owned site.
While ADMs have provided some relief (albeit with additional regulatory risk and compliance burden), manufacturers have taken notice, and have raised a number of challenges to the frameworks. Apart from contending that they improperly circumvent the manufacturers’ policies limiting contract pharmacies, manufacturers have also raised 340B program compliance concerns, alleging product diversion and complaining of increased risk of duplicate discounts.
Manufacturers’ Responses to ADMs
In reaction, manufacturers have implemented several strategies to curb ADM use:
- Tightening Contract-Pharmacy Policies
Manufacturers have repeatedly updated their policies—e.g., limiting contract pharmacies, imposing short “lookback” windows, and requiring extensive claims-level data (sometimes within 45 days) as a condition of access. Recent examples include Sanofi’s 45-day timelines and Genentech’s 2025 policy update for hospitals. These practices make it more difficult, practically speaking, to properly account for 340B inventory that is moved through an ADM to a contract pharmacy, then dispensed to an eligible patient.
In perhaps the most direct attack on ADMs, in its “Notice to Covered Entities of Modification to Exelixis’ 340B Program Integrity Initiative,” Exelixis explicitly states that “covered entities may receive 340B drugs only through Exelixis-authorized distribution channels and only to the location of actual dispense of the 340B drug,” and that “[c]overed entities are prohibited from participating in alternative distribution models for any Exelixis product.”
- Denied 340B Chargebacks
When transactions appear inconsistent with standard distribution flows, such as when a purchase/ship-to looks like an ADM (e.g., bill-to Covered Entity (CE) but ship initially elsewhere, even to an entity-owned facility, then transfer), wholesalers/manufacturers have treated these as outside policy and denied chargebacks, pending reconciliation—practically cutting off the price advantage.
- Increased “Manufacturer Inquiries” and Formal Audits Targeting ADMs
Certain hospitals and other covered entities have noted a surge in manufacturer questions and audits over the last 12–18 months, specifically scrutinizing ADMs where drugs are delivered to the covered entity first and then routed to a contract pharmacy.
- Pushed Select Products Into Rebate-Style Pilots to Control Claims
A growing manufacturer response is to move away from at-invoice discounts toward a rebate model. In such an arrangement, the covered entity submits claim-level data, and only then is the “340B benefit” paid. Multiple manufacturers, including Sanofi, have publicly advanced these models, and even HRSA has noticed and has introduced a limited rebate-pilot concept tied to drugs covered by the Inflation Reduction Act.
- Continued Litigation and State-Law Battles
Manufacturers have sued to block state laws that require honoring contract pharmacy dispensing. Courts hearing the issues so far have had split ruling (e.g., West Virginia’s law was preliminarily enjoined in December 2024, while Maine’s law survived a preliminary-injunction bid on September 23, 2025). This unsettled backdrop encourages manufacturers to hold the line on policies while cases play out.
- Leveraged HRSA Processes and “Limited Distribution” Notices
Manufacturers continue to publish distribution/price notices via HRSA and rely on limited-distribution plans that constrain where products can be shipped—another friction point for ADMs that depend on unconventional ship-to paths. Meanwhile, HRSA’s ADR rule (effective June 18, 2024) gives covered entities a venue to challenge overcharges tied to these restrictions.
Practical Implications for Covered Entities and Contract Pharmacies using ADMs
Covered entities engaging in ADMs should anticipate increased scrutiny and prepare accordingly:
- Expect scrutiny and slow/no chargebacks. If the wholesaler setup or routing indicates an ADM, plan for denied chargebacks and back-and-forth reconciliation with the manufacturer/distributor. Mitigation may be possible through careful structuring with the covered entity’s wholesalers.
- Prepare for audits and refund exposure. Maintain meticulous documentation of patient eligibility, location-of-care, and inventory movement.
- Track the legal landscape. State laws may help or hurt, depending on venue and posture. In addition to taking full advantage of enacted legislation, covered entities should become active in state level policymaking and legislative processes.
- Use ADR strategically. HRSA’s ADR pathway is now active, and if you face overcharge denials linked to alleged ADM activity, ADR is one option alongside litigation and negotiation.
How Frier Levitt Can Help
Frier Levitt represents hospitals and health systems and other 340B covered entities in navigating the complexities of ADM arrangements. The firm assists with structuring compliant ADM arrangements, responding to manufacturer challenges and pursuing remedies under HRSA’s ADR process. Frier Levitt also assists covered entities in pushing back against manufacturer contract pharmacy restrictions, or 340B ordering limitations. Contact us to speak with an attorney about how we can help protect your 340B program interests.
