Pharma Attack on Drug Distribution Law Tests States’ Clout

A federal appeals court challenge to an Arkansas law governing drug distribution for certain pharmacies will influence whether more states enact similar regulations.

The Pharmaceutical Research and Manufacturers Association, or PhRMA, contends that federal law preempts the Arkansas statute. The US Court of Appeals for the Eighth Circuit is weighing the case after a district court judge rejected that argument.

The legal battle between PhRMA and the Arkansas Insurance Department involves the use of contract pharmacies under Section 340B of the Public Health Service Act—a federal law that requires drugmakers to discount drugs for qualifying hospitals, clinics, and providers that treat low-income and uninsured patients, known as covered entities.

Contract pharmacies are used to dispense discounted drugs to covered entities that don’t have an in-house pharmacy. Drugmakers in recent years have limited or restricted shipments to some, allegedly for unlawful practices.

Arkansas and Louisiana have enacted laws that prohibit the manufacturers from cutting off contract pharmacies.

“Depending on the outcome of the case, it may encourage, if the state wins, or discourage, if PhRMA wins, other states from pursuing 340B anti-discrimination laws similar to the Arkansas law at issue in the case,” Emily Cook, partner at McDermott Will & Emery LLP, said in an email.

Distribution Gap

The Arkansas law, Act 1103, or the 340B Drug Pricing Nondiscrimination Act, specifically prohibits drugmakers from refusing to supply discounted drugs to contract pharmacies.

The state’s law fills in a regulatory gap not covered under the federal law—drug distribution, Arkansas’ attorneys say.

“If Congress believes the state should perform no roles, even states that are issuing different forms of the law should perform no function in 340B, they need to put that in the legislation,” said Kendall Booth Rand, general counsel of the Arkansas Insurance Department, during the Sept. 20 oral argument in the Eighth Circuit.

The state’s attorneys point to a Third Circuit opinion that held the 340B statute is silent on drug delivery.

In that case, Sanofi Aventis US, LLC v. United States HHS, drugmakers won after the court said manufacturers aren’t required to provide drugs at the 340B ceiling price to an unlimited number of contract pharmacies. The Third Circuit said the 340B statute is silent on drug delivery.

Congress “knew how to impose delivery-related requirements,” the Third Circuit said.

“Congress could have similarly required drug makers to deliver their drugs to certain places. And again, it chose not to,” that court added.

Those areas are within “the state’s police powers to regulate the health and safety of their citizens,” said Ronald S. Connelly, principal for Powers Pyles Sutter & Verville PC and counsel to the Community Health Centers of Arkansas and Piggott Community Hospital during the Eighth Circuit argument.

“Congress has expressed no such clear and manifest purpose to disturb state laws governing contract pharmacies or intrastate drug distribution,” Connelly said.

PhRMA, though, contends the program is “entirely federal,” as it’s “inextricably linked to Medicaid and to Medicare Part B. “

“The state of Arkansas has created a mechanism to try to enlarge the federal subsidy and enforce it through a state agency,” Phil Perry, an attorney Latham & Watkins and lead counsel for PhRMA, told the Eighth Circuit during oral argument.

“They know that this is a uniquely federal program and these questions have to be decided by the federal agency,” Perry added.

PhRMA’s attorneys argue the 340B statute does mention distribution, despite the Third Circuit ruling.

The group also points to a US Supreme Court case Astra USA Inc. v. Santa Clara County, in which the high court said federally funded medical clinics and hospitals can’t bring breach of contract actions against drugmakers that participate in the 340B program.

The group argues that the Eighth Circuit case is similar in that Act 1103 is incompatible with the 340B statutory regime.

“The US Supreme Court has already explained how important the 340B program is and why it has to be controlled by a federal agency at the federal level,” Perry said.

State Moves

Other states like Connecticut, Iowa, and Nevada have enacted legislation relating to the 340B program, but with a focus on the practices of pharmacy benefit managers.

Arkansas and Louisiana are still the only two states with laws focused on prohibiting drugmakers from denying the delivery of 340B drugs at a discount pharmacy.

The American Hospital Association, the Arkansas Hospital Association, and 340B Health, a nonprofit representing program participants, filed an amicus briefin April at the Eighth Circuit backing Arkansas. If drug manufacturers refuse to provide 340B discounts on drugs dispensed through contract pharmacies, hospitals in the state like Ozarks Community Hospital of Gravette and St. Bernards CrossRidge Community Hospital will struggle to keep their doors open, the groups said.

The case involves “the first time a state has exercised its own power,” Chad Golder, deputy general counsel for the American Hospital Association, said about the Arkansas law.

“Congress left this area unregulated—left the area of distribution of drugs and the use of contract pharmacy relationships,” Golder said. “They left that open to the states to regulate, so we will see see what happens nationally.”

The case is Pharmaceutical Research and Mfrs of America v. Alan McClain, 8th Cir., No. 22-3675.