Appeals court affirms Arkansas law against drugmakers' 340B contract pharmacy restrictions

A federal appellate court upheld an Arkansas law prohibiting drugmakers from restricting 340B drug discounts for providers using contract pharmacies, potentially setting up other states to pass similar legislation.

The ruling was handed down Tuesday by the U.S. Court of Appeals for the Eighth Circuit’s three-judge panel. The judges disagreed with a pharmaceutical industry group’s argument that Arkansas’ 340B Drug Pricing Nondiscrimination Act passed in 2021 is preempted by existing federal law outlining the program, which requires drug manufacturers to sell drugs at a discount to safety-net providers.

Pharmaceutical Research and Manufacturers of America (PhRMA) argued in its 2021 complaint that 340B is a “completely federal program,” and that the state law’s requirements for manufacturers “conflict with explicit requirements in both the federal 340B statute” as well as the agreement manufacturers strike with the Department of Health and Human Services (HHS).

The judges disagreed, noting that Congress was aware of pharmacies and state pharmacy law when implementing 340B and that its silence on the issue “indicates that Congress did not intend” to override related state legislation.

The judges also wrote that Arkansas’ law—which raises monetary incentives for drugmakers’ compliance—does not create any new obstacles for drugmakers to comply with the program.

“Rather it does the opposite [and] assists in fulfilling the purpose of 340B,” they wrote. “… Arkansas is simply deterring pharmaceutical manufacturers from interfering with a covered entity’s contract pharmacy arrangements. There is no obstacle for pharmaceutical manufacturers to comply with both [Arkansas’ law] and [the federal 340B law] heading off recent years’ spate of restrictions.”

In a statement, PhRMA Deputy Vice President of Public Affairs Nicole Longo said the group disagrees with the decision but did not specify whether it is planning to file an appeal. 

"Contract pharmacies are dominated by large, publicly traded companies like many major for-profit chain pharmacies and [pharmacy benefit managers] that have found a way to siphon off money that should be used to lower costs for low-income and vulnerable patients," she said in an emailed statement. "This abuse is contrary to the goals of the federal 340B program and is one of the reasons why federal policymakers need to step in to fix this vital safety-net program."

PhRMA’s case listed the Arkansas Insurance Department, Community Health Centers of Arkansas and Piggott Community Hospital as defendants. The American Hospital Association (AHA), Arkansas Hospital Association and 340B jointly filed a friend of the court brief supporting the state law and criticizing drug companies’ “unprecedented assault on Arkansas’s healthcare safety net” last April.

The American Society for Health-System Pharmacists (ASHP) described the court’s decision as “a step in the right direction.” It noted that 28 states either have or are considering similar legislation and said that the ruling “may bolster” those efforts.

“Today’s decision is an important victory for patients and safety net providers,” Tom Kraus, ASHP’s vice president of government relations, said in a statement. “The court’s ruling rightfully affirms the ability for states to bridge regulatory gaps that are not addressed in federal law and states’ ability to regulate drug distribution and the practice of pharmacy.”

The 340B drug discount program has proven to be controversial. Pharmaceutical companies and other critics have pointed to the safety-net program’s substantial growth in recent years as a sign that health systems are abusing the program for greater revenues.

In 2020, individual drug manufacturers began implementing restrictions prohibiting covered entities from contracting with third-party pharmacies. Those restrictions triggered Arkansas’ law and have led to dozens of drugmakers implementing similar restrictions, with several rulings on the policies split between the companies and HHS.

Some lawmakers have voiced similar concerns to the drugmakers and have launched investigations into “how certain hospital systems” may be spending the funds they’ve saved through the program.

These claims have been repudiated by the hospital lobby—just this week, the AHA highlighted a report (prepared by Healthsperien on AHA’s behalf) that the 340B program remains a small share of drug company revenue despite its growth. It also credited the program for allowing covered entities to provide more safety-net care.

The program also has its defenders in Congress. On Tuesday, Rep. Doris Matsui, D-California, introduced new legislation that would more clearly outline the inclusion of contract pharmacies in the program and prohibit drugmakers from imposing restrictions on their use, with noncompliance punished with a penalty of up to $2 million per day. It was endorsed by several hospital and provider groups.

“For nearly four years, a growing number of some of the world’s largest drug companies have been refusing to provide 340B discounts to safety-net hospitals, health centers and clinics that use pharmacy partners to expand access to needed drugs and services for their patients,” 340B Health, which represents over 1,500 hospitals that participate in the program, said in a statement on the legislation. “These actions have stripped billions of dollars from the safety net and harmed patient care. … We call on lawmakers and congressional leaders to support this vital legislation for the millions of patients whose lives and health are better because of 340B.”