340B Meets the FCA in the Ninth Circuit: What the Pharmaceutical Industry and Investors Need to Know

In a matter of months, the United States Court of Appeals for the Ninth Circuit has issued two major decisions on federal healthcare fraud enforcement. The first, United States v. Schena,¹ which we covered in our initial installment, marked the first time a federal appellate court interpreted the Eliminating Kickbacks in Recovery Act (“EKRA”)² and provided important guidance on referral and compensation arrangements involving laboratories, marketers and clinical testing facilities. The second, United States ex rel. Adventist Health Sys. of West v. AbbVie Inc.,³ answered a question of first impression: whether a covered entity under the Section 340B Drug Pricing Program may bring a qui tam action under the False Claims Act (“FCA”)⁴ to recover losses the government incurred from allegedly fraudulent inflation of drug prices.

We have outlined below several takeaways and practical steps that drug manufacturers, covered entities, and investors can consider to manage their exposure in light of these developments.

* * * * *

Recap: Schena and the EKRA Enforcement Landscape

In September 2025, we published an OnPoint on the Ninth Circuit’s decision in Schena, the first federal appellate ruling to address EKRA’s scope and application. Enacted in 2018 as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (“SUPPORT Act”), EKRA prohibits kickbacks in exchange for referrals to recovery homes, clinical treatment facilities, and medical testing laboratories and, unlike the Anti-Kickback Statute (“AKS”),⁵ it extends to private payor arrangements as well as federal healthcare programs, making it a significantly broader enforcement tool.⁶ Violations carry penalties of up to 10 years in prison and fines of up to $200,000 per violation.⁷

The Schena court upheld the conviction of Mark Schena, a California-based laboratory executive, on nine counts of healthcare and securities fraud, including two EKRA violations arising from commission-based payments to outside marketing agents whose compensation was tied to the volume of testing referrals they generated.⁸ Schena received a 96-month prison sentence and was ordered to pay more than $24 million in restitution.⁹ The Ninth Circuit confirmed that EKRA reaches beyond healthcare providers to marketers without direct patient contact, clarified that percentage-based compensation for marketing is not a per se violation, and held that “induce” requires wrongful causation rather than mere encouragement.¹⁰ The decision also signaled that AKS case law may inform EKRA’s interpretation going forward.¹¹

In March 2026, the Supreme Court denied Schena’s petition for certiorari, leaving the Ninth Circuit’s EKRA interpretation undisturbed.¹²

The Ninth Circuit’s Adventist decision operates in the same enforcement environment and provides for FCA actions by healthcare facilities challenging drug pricing practices. Taken together, these two decisions suggest a Ninth Circuit trend of expanding federal healthcare fraud enforcement theories and narrowing the defenses on which healthcare companies have traditionally relied to limit exposure.

Background: The Section 340B Drug Pricing Program

Section 340B of the Public Health Service Act¹³ was enacted in 1992 as part of the Veterans Health Care Act.¹⁴ The provision established a mandatory discount framework under which drug manufacturers that participate in Medicaid must sell their outpatient drugs to certain qualifying healthcare organizations, designated as “covered entities” under the statute, at or below a statutorily prescribed ceiling price. The program is designed to lower pharmaceutical acquisition costs for providers that predominantly serve economically disadvantaged and uninsured patients, including certain hospitals, federally qualified health centers, and similar facilities, enabling them to redirect the resulting savings into patient care and community health services. In practice, covered entities purchase drugs at the lower 340B ceiling price and may then seek reimbursement from Medicaid and Medicare at standard rates, generating revenue that cross-subsidizes their broader care delivery missions.¹⁵ The program has expanded considerably since its inception, with covered entity purchases surpassing $81 billion in 2024.¹⁶

The ceiling price a manufacturer must charge is determined by a statutory formula: the drug’s average manufacturer price minus a rebate percentage tied to the Medicaid rebate scheme. Where a manufacturer has raised a drug’s price faster than the rate of inflation over time, the formula drives the ceiling price progressively lower and can even reduce it to zero or below. In those circumstances, the program’s “penny pricing” policy, which is reflected in the 2011 written guidance by the Health Resources and Services Administration (HRSA) and codified in a final regulation effective January 1, 2019, requires that the manufacturer charge covered entities no more than $0.01 per unit.¹⁷

Historically, responsibility for enforcing compliance with 340B pricing obligations has rested with HRSA. Under that administrative framework, a covered entity that believes it has been overcharged must pursue relief through the Section 340B Administrative Dispute Resolution (“ADR”) process rather than through the courts. An ADR panel composed of HRSA officials within the Office of Pharmacy Affairs adjudicates the dispute; if a violation is found, HRSA determines what corrective or enforcement action to take, which can include repayment of overcharges and possible civil monetary penalties.¹⁸ In 2011, the Supreme Court held in Astra USA, Inc. v. Santa Clara Cnty.¹⁹ that covered entities have no private right of action to sue manufacturers directly for overcharges under the 340B statute.

The Adventist Decision: A New Front in FCA Enforcement

Adventist arises from a dispute over how certain pharmaceutical manufacturers calculated and applied their 340B ceiling price obligations.²⁰ Adventist Health System, a 340B covered entity operating medical clinics and facilities across multiple states, brought a qui tam action under the FCA against four major drug manufacturers (AbbVie, AstraZeneca, Novartis and Sanofi) and various affiliates alleging that each had systematically charged covered entities prices that, in Adventist’s view, exceeded the amounts permitted under the statutory ceiling price formula, thereby causing Medicare, Medicaid, and government-funded entities to pay more than they otherwise should have.²¹

The central factual dispute concerns how the statutory formula operates for drugs whose prices have increased over time relative to inflation. Adventist alleges that for certain drugs, the ceiling price formula would have produced a ceiling price of $0.00 or $0.01, and that the manufacturers charged materially more.²² The manufacturers have disputed both the computation methodology and the legal significance of pre-2019 HRSA guidance, noting that a binding final regulation formalizing the penny pricing obligation did not take effect until January 1, 2019, and that meaningful regulatory ambiguity existed before that date.²³

The threshold legal question before the Ninth Circuit was whether Adventist’s FCA claims were cognizable at all. The manufacturers moved to dismiss, arguing that because Section 340B provides no private right of action for covered entities to sue over pricing violations, a qui tam FCA action arising from 340B pricing conduct was equally foreclosed. The district court agreed, concluding that Adventist’s FCA claims were “in essence” an attempt to enforce Section 340B and were therefore barred by Astra.²⁴

The Ninth Circuit unanimously reversed on three independent grounds.²⁵ First, Adventist’s action was grounded in the FCA, which provides an independent cause of action. The court held that the absence of an independent enforcement right under Section 340B does not affect the availability of FCA claims.²⁶ Second, Adventist’s suit was structurally different from the type of enforcement action Astra barred. Unlike the plaintiff in Astra, who sought compensatory damages for its own losses as a third-party contract beneficiary, Adventist was pursuing FCA treble damages and civil penalties on behalf of the federal and state governments as a qui tam relator.²⁷ Third, the court declined to imply a 340B carve-out into the FCA, which enumerates the limited categories of claims it excludes.²⁸

The Ninth Circuit also held that Adventist adequately pleaded falsity as to its pre-2019 allegations. The court found it plausible that the statutory formula’s plain text, independent of any implementing regulation, barred prices above $0.01, once the formula yielded a zero or negative result, and that HRSA’s 2011 written guidance reinforced that reading.²⁹

Notably, the United States participated as amicus curiae in support of reversal, contending that the district court fundamentally misread Astra as extending to FCA qui tam suits brought on behalf of the government to recover fraud-related losses.³⁰ The government also argued that the existence of Section 340B’s administrative enforcement framework is no basis for implying a carve-out from the FCA that Congress did not enact. The government made clear, however, that it was expressing no view on the ultimate merits of Adventist’s underlying claims.³¹ The panel’s decision to reverse thus aligned with the government’s own view of the relationship between Section 340B and the FCA.

The full Ninth Circuit denied rehearing.³²

The Ninth Circuit’s holding is confined to the pleading stage. It did not reach scienter, materiality, or the fact-intensive falsity disputes concerning post-2019 compliance, all of which return to the district court on remand.

The Common Thread: Procedural and Statutory Barriers Are Eroding

The Ninth Circuit’s decisions in Schena and Adventist together narrow, in that circuit, several of the procedural and statutory defenses that defendants have historically invoked to limit healthcare and life sciences fraud exposure. In Adventist, the court held that neither Section 340B’s administrative enforcement scheme nor the absence of a 340B private right of action operated as a limitation on FCA qui tam suits. In Schena, the court held that EKRA reaches alleged kickback payments to marketing intermediaries, not merely those who refer patients. In both cases, the court’s reasoning reflects a consistent view that federal healthcare fraud statutes should be read to reinforce one another and broaden the scope of FCA accountability.

Practical Takeaways

Given the Ninth Circuit’s ruling in Adventist, companies participating in the 340B program should consider:

• ensuring the company’s compliance infrastructure can reliably monitor ceiling price obligations on an ongoing basis by having a system that documents the inputs, calculations, and approvals behind every ceiling price and correction; centralizes dispute intake and escalation for consistent responses; and treats recurring corrections as a signal to address potential root causes, such as a flawed data feed or vendor process gap;
• prioritizing review of the drugs most likely to present exposure, such as those with significant price increases, frequent pricing changes, high chargeback volume, or a history of disputes;
• auditing historical ceiling price calculations for each drug, with particular attention to periods in which above-inflation price increases may have driven the statutory ceiling price to zero or below to identify potential exposure to penny-pricing violations;
• running a targeted review of periods in which the ceiling price could have approached zero, confirming how those “penny pricing” periods were handled and reassessing pricing practices; and
• evaluating whether voluntary self-disclosure to the Department of Justice is warranted where an audit identifies a potential penny-pricing or ceiling-pricing violation, given the potentially more favorable resolution terms available for self-reports meeting the Department’s voluntary self-disclosure, cooperation, and remediation requirements.³³

Similarly, private equity firms, strategics, and other healthcare and life sciences investors evaluating companies that participate in the 340B program should consider:

• engaging in portfolio triage and oversight by flagging platforms where 340B issues may impact cost structure or reimbursement margin, pricing, or key counterparties, confirming that past due diligence on prior acquisitions covered litigation and valuation risk, assigning actionable risk ratings, and revisiting exposure regularly and when developments warrant;
• conducting diligence on new deals to assess actual operations, including a review of the operating process; obtaining HRSA audit history, dispute logs, chargeback/pricing-correction exception reports, and pricing-change approvals; tracing third-party touchpoints on pricing; and checking for red flags like repeat disputes, recurring manual fixes, or unclear ownership; and
• building in post-closing oversight by ensuring deal terms reflect real exposure; giving 340B its own line in the 100-day plan; and centralizing legal, compliance, pricing, and finance messaging if an issue arises.

Dechert lawyers bring deep experience in healthcare and life sciences compliance, healthcare and life sciences investigations, regulatory enforcement, civil litigation, and risk mitigation strategies. We are well-positioned to assist with navigating complex compliance challenges, responding to potential enforcement actions, and developing proactive risk mitigation strategies tailored to your organization’s needs.

We will continue to monitor and report on significant healthcare fraud enforcement developments.