A federal appeals court has halted a Trump administration health policy that judges say would shift billions in financial burden onto low-income and rural hospitals while favoring pharmaceutical manufacturers.
In a unanimous decision issued Wednesday, the 1st U.S. Circuit Court of Appeals ruled that the Department of Health and Human Services (HHS) is barred from moving forward with a pilot drug rebate program that alters the long-standing structure of the federal 340B Drug Pricing Program. The court found the initiative likely violates the Administrative Procedure Act (APA), which governs how federal agencies implement major policy changes.
The ruling keeps in place a preliminary injunction previously ordered by a lower court, preserving the existing system under which safety-net hospitals receive upfront discounts on prescription drugs.
The legal challenge was brought by the American Hospital Association alongside several regional hospitals, which argued the Trump administration’s plan was designed to advance pharmaceutical industry interests at the expense of hospitals serving vulnerable communities.
Last summer, HHS announced it would restructure the 340B program, replacing upfront discounts with a rebate-based system. Under the new model, hospitals would be required to pay full market prices for drugs and later seek reimbursement from manufacturers after submitting extensive claims data.
In a 65-page lawsuit filed in December 2025, plaintiffs warned the change would impose severe financial strain.
“Under this approach, safety-net providers would be forced to initially pay drug companies full market price and then seek reimbursement for the discounted difference after administering the drugs to patients and providing detailed claims data to drug companies,” the complaint reads. “Such a change would inflict hundreds of millions of dollars’ worth of annual costs on hospitals and other covered entities.”
U.S. District Judge Lance E. Walker, appointed by Trump during his first term, sided with the hospitals on Dec. 29, 2025, issuing a preliminary injunction. The appeals court said Walker correctly determined that HHS failed to account for hospitals’ reliance on the existing system and underestimated the risk of irreparable harm.
“In a careful and thorough decision, the district court granted the preliminary injunction,” the appellate panel wrote. “It determined that the federal government had failed to consider the hospitals’ reliance interests and other important aspects of the problem in enacting the new program and that the hospitals would face irreparable harm, including potential closure, without an injunction during the course of the litigation.”
After Judge Walker denied the government’s request for a stay, HHS appealed directly to the 1st Circuit. The appellate panel rejected that request, sharply criticizing the policy’s design and justification.
The court described the proposal as “upending a decades-long practice of providing safety-net hospitals — which serve rural and low-income communities — with upfront discounts to purchase prescription drugs.”
While acknowledging that HHS may have sought to address rare instances of drug manufacturers being “subjected to duplicative pricing concessions,” the panel concluded the chosen remedy was deeply flawed.
“To avoid this duplication problem, the Rebate Program requires safety-net hospitals to pay to the drug manufacturers upfront prices far exceeding the amounts that they actually owe — essentially functioning as an interest-free loan from the hospitals to the manufacturers — and then wait for a rebate,” the ruling states.
The judges further concluded that HHS acted “arbitrarily and capriciously,” a legal standard under the APA used when agencies fail to consider critical factors or provide adequate reasoning for major policy shifts.
“The federal government has not carried its burden to justify a stay,” the court ruled. “To begin, we agree with the district court that the administrative record previewed below is devoid of evidence that the federal government considered the hospitals’ significant reliance interests — a critical factor in the analysis of an arbitrary-and-capricious claim.”
The panel emphasized that the 340B program has operated under the same framework for more than three decades, and that the proposed changes could saddle hospitals with “hundreds of millions of dollars’ worth of new costs.”
“It does not contain any evidence showing that the federal government considered the hospitals’ reliance interests, which all parties agree are significant,” the court added. “Indeed, in its briefing to the lower court, the federal government conceded that it was ‘currently examining’ the hospitals’ increased administrative costs from the Rebate Program.”
The case now returns to the lower court for further litigation, with the injunction ensuring that the existing 340B system remains in place for the foreseeable future.
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