340B litigation remains full speed ahead. Manufacturer and covered entity (CE) disputes, not all of which are being actively litigated, include, but are not limited to, federal and state regulation of contract pharmacies, manufacturer restrictions on contract pharmacies and 340B distribution, CE data submission requirements, and the definition of “patient.” With billions of dollars at stake, it is unlikely that manufacturers or CEs will change course any time soon. And while federal and state legislation has been proposed to address these issues, we cannot know whether such legislation will be enacted.
Most recently, in a consolidated opinion, the District Court for the Western District of Louisiana upheld a Louisiana law prohibiting pharmaceutical manufacturer and distributor interference with contract pharmacy arrangements under the 340B program.
Plaintiffs challenged Louisiana Act 358 on the basis that it is preempted by the federal 340B program in so far as the act improperly extends the benefits of the 340B program to contract pharmacies. However, the court preserved the Louisiana statute, finding that delivery of discounted drugs to contract pharmacies is governed by the contract between 340B-covered entities and individual contract pharmacies—not the requirements of 340B.
Contract Pharmacy Evolution
To contextualize the contract pharmacy dispute, it is important to understand the evolution of CE use of contract pharmacies. At program inception, many CEs could not afford to establish and operate in-house pharmacies. Accordingly, they contracted with independent private pharmacies to dispense discounted drugs to their patients. In a 1996 guidance document, the US Department of Health and Human Services (HHS) permitted covered entities to contract with one outside pharmacy. In 2010, HHS modified its guidance and permitted CEs to contract with an unlimited number of contract pharmacies. This resulted in contract pharmacy increases from approximately 1,300 in 2010 to 33,000 in 2023, and coincidently, the 340B program becoming the second-largest federal prescription drug program, behind only Medicare Part D, exceeding $124 billion in sales in 2023.
As expected, given endless program expansion and costs to manufacturers that subsidize the program, in 2020, manufacturers began imposing restrictions and limitations on the distribution of 340B-discounted drugs to contract pharmacies. This resulted in both additional HHS guidance and rampant litigation.
Requirements of Act 358
Enacted in 2023, the Louisiana Act 358, entitled the Defending Affordable Prescription Drug Costs Act, places prohibitions on certain discriminatory actions related to reimbursement of 340B entities. As relevant to the litigation discussed herein, Act 358 imposes certain prohibitions on the relationships between manufacturers or distributors and contract pharmacies. Specifically, Act 358 restricts manufacturers and distributors from directly or indirectly interfering with the acquisition or delivery of a 340B drug by a pharmacy that is under contract with a 340B entity. A violation of these provisions is considered a violation of the Louisiana Unfair Trade Practices and Consumer Protection Law.
More broadly, Act 358 also restricts health insurers, pharmacy benefit managers (PBMs), and other third-party payors from, for example, reimbursing 340B drugs at a rate lower than the rate paid to non-340B entities for the same drug and imposing certain terms or conditions on any 340B entity that differ from those applied to non-340B entities, among other prohibitions.
Ruling of the District Court
Primarily, the plaintiffs’ argued that Act 358 is preempted by 340B on the basis of three distinct theories of preemption: (1) field preemption, (2) conflict preemption, and (3) obstacle preemption.
Field Preemption
Field preemption is the theory that states are precluded from regulating conduct in a “field” where the US Congress’s regulatory authority exclusively governs. Congress’s authority may be expressly stated or inferred from a scheme of federal regulation so pervasive as to make reasonable the inference that Congress left no room for states to supplement it. Here, plaintiff’s field preemption arguments center on the notion that Congress left no room for Louisiana to exercise its regulatory authority with respect to contract pharmacies.
Plaintiffs argue that “Congress designed 340B to provide a comprehensive and exclusive plan for delivering a unique federal benefit—a substantial drug discount to specific, statutorily defined healthcare providers,” and that “340B works through a carefully calibrated incentive structure,” which can be characterized as a “closed system.” Further, that HHS’s “multifaceted administrative enforcement scheme,” ensures participant compliance with the rules of the program and prohibition on diversion and duplicate discounts.
The district court disagreed, finding that 340B is silent with respect to the relationship between covered entities and contract pharmacies. The court noted the statue does not mention contract pharmacies in defining CEs nor in delineating the obligations of participating manufacturers to CEs. Accordingly, the court reasoned Act 358 does not encroach on the enforcement scheme created by 340B. Notably, the court found that the absence of HHS’s authority “to regulate contract pharmacies under Section 340B does not, however, mean that the statute affirmatively precludes state regulation.”
Conflict Preemption
The theory of conflict preemption applies in scenarios where compliance with both federal and state law is impossible. Plaintiff’s conflict preemption argument hinges similarly on the claim that “Act 358 conflicts with the balance of incentives created by the 340B program, imposes additional obligations on pharmaceutical companies that conflict with their obligations under the federal statute, and conflicts with HHS’ enforcement scheme.”
Again, on the basis that the statute governing the 340B program does not address relationships with contract pharmacies, the district court found that Act 358 inherently cannot conflict with the federal statute. The court stated, “if Section 340B does not address contract pharmacies or the relationship between covered entities and their contract pharmacies, a state statute that specifically addresses contract pharmacies cannot conflict with Section 340B.”
Obstacle Preemption
Obstacle preemption is found where state law creates an “unacceptable obstacle” to the execution of congressional objectives. Under this theory, the plaintiffs rely on the same arguments posited for the theory of conflict preemption.
The court again, however, rejected the plaintiff’s arguments, finding that Act 358 advances rather than hinders the objectives of 340B by allowing covered entities to contract with multiple pharmacies to provide expanded coverage for patients. Notably, that CEs benefit in the form of increased revenues and profits as a result of serving insured and uninsured patients.
Increased CE profits and revenue underpin nearly all manufacturer and CE disputes. And depending on what side of the debate you are on, this is either a benefit or detriment. With billions of dollars at stake, we expect litigation to continue for the foreseeable future.
Key Takeaways
The district court’s holding adds to the growing and increasingly varying state landscape regarding the role that contract pharmacies play in the administration of the 340B program. Manufacturers and CEs would be well advised to ensure they remain compliant with all 340B program requirements.
For additional analysis on 340B challenges in the DC Circuit, please see our prior blog post DC Circuit Affirms 340B Program Does Not Prohibit All Drug Manufacturer Distribution Restrictions.
How We Can Help
Morgan Lewis is well positioned to guide and provide strategic counseling to pharmaceutical drug manufacturers and covered entities navigating complex federal and state government pricing matters, including compliance with Section 340B. Our lawyers stand ready to assist companies in navigating these complex issues.