8th Circuit panel upholds ruling on drug discounts for hospitals
A three-judge panel with the 8th U.S. Circuit Court of Appeals has upheld a ruling by an Arkansas federal judge that a state law requiring drug manufacturers to extend federal drug discounts to hospitals that contract with third party pharmacies does not run afoul of federal law.
In October 2021, the Pharmaceutical Research and Manufacturers of America (PhRMA), filed a lawsuit against Alan McLain in his official capacity as Arkansas Insurance Department Commissioner seeking to block implementation of Act 1103 of 2021 — the 340B Drug Pricing Nondiscrimination Act — saying the law would force drug manufacturers to provide 340B pricing to any Arkansas pharmacies that enter into contractual agreements with hospitals under 340B in direct conflict with federal regulations that govern 340B and the pharmaceutical pricing agreements negotiated on behalf of the hospitals.
The 340B drug pricing program requires drug manufacturers to sell outpatient drugs at discounted prices to covered entities (including certain types of hospitals) for the manufacturers’ drugs to be covered by Medicaid.
In its complaint, PhRMA contended that Act 1103 inappropriately regulated and altered the Federal 340(B) Program, imposed conflicting requirements on the program and regulated commercial transactions taking place entirely outside of Arkansas and argued that in doing so, Act 1103 violated both the Supremacy and Commerce clauses of the U.S. Constitution.
On Dec. 29, 2022, U.S. District Judge Billy Roy Wilson dismissed the complaint with prejudice, meaning the claim cannot be refiled in the same court.
In its ruling on Tuesday, the panel — Circuit Court Judges Lavenski Smith of Little Rock; Michael Melloy of Cedar Rapids, Iowa; and Ralph Erickson of Fargo, N.D.
— turned aside several arguments put forth by PhRMA in its attempts to block implementation of the law. The panel said that PhRMA’s argument that Act 1103 impermissibly interferes with 340B’s “closed system” by adding pharmacies to the enumerated list of covered entities eligible to receive 340B pricing on drugs misconstrues what Act 1103 does. Rather than pharmacies being the end purchasers, the ruling said the hospitals purchase and maintain ownership of the 340B discounted drugs that are then dispensed through the contract pharmacies to the patients.
A second argument — that Act 1103 contravenes the federal Health and Human Services agency’s exclusive jurisdiction over Section 340B by allowing the state to penalize manufacturers who refuse to distribute to contract pharmacies — conflates the state and federal statutes. The panel said that Section 340B addresses discount pricing and gives HHS jurisdiction over disputes regarding pricing, overcharges, refunds and drug diversion. Act 1103, it said, ensures the ability of covered entities in Arkansas to utilize contract pharmacies and authorizes the Arkansas Insurance Division to penalize manufacturers who deny 340B drugs to covered entities.
The panel ruled that rather than creating an obstacle for manufacturers to comply with 340B, Act 1103 acts as a deterrent to prevent drug manufacturers from interfering with contractual arrangements between a covered entity and a contract pharmacy and does not pose any obstacle to the manufacturers’ ability to comply with both federal regulations and state law.
Dr. Lanita S. White, the chief executive officer of Community Health Centers of Arkansas, Inc., hailed the ruling and praised the General Assembly for its passage of the law in 2021.
“Arkansas is proud to be the first state in the nation to pass a law to regulate distribution of 340B-discounted drugs,” White said. “We are now followed by nearly 20 other states who know what we always knew and what [the] 8th Circuit Court of Appeals determined today – that the states have a right, and we think an obligation – to protect the state safety net and our citizens from drug industry’s attempts to limit access to care by cutting off patient access to discounted drugs.”
John Vinson, CEO of the Arkansas Pharmacists Association, also applauded Tuesday’s ruling, which he said will provide continuing relief from high drug prices to some of Arkansas’ most economically vulnerable citizens by allowing hospitals and the pharmacies many of them contract with to continue a practice he said has been ongoing for more than 25 years.
Community health centers and nonprofit hospitals have a disproportionate share of Medicaid-eligible patients, Vinson said, and had contract pharmacies been cut out of the ability to participate through the hospitals they contract with, health outcomes throughout the state would be put at risk. He said the Section 340B program helps to offset the costs to those health care entities of treating uninsured and under-insured patients.
“That rocked along until the middle of the pandemic when the manufacturers started unilaterally saying, ‘No, you can’t use a contract pharmacy or if you do they have to meet these criteria that we unilaterally set,’” Vinson said. “They made all kinds of hoops and difficulties that disrupted the revenue these 340B entities had been receiving that helped them to operate. … With no change in federal law they just started making up their own rules.”
Because the matter of contract pharmacies was not addressed in the federal Section 340 Program legislation, Vinson said, the General Assembly took up the issue in 2021 when it passed Act 1103.
“So the state did it and the manufacturers sued the state saying they couldn’t do that because it’s a federal program,” Vinson said. “Well, the federal court and the 8th Circuit upheld the state law, they said it doesn’t conflict with federal law and the state has every right to regulate when it’s trying to protect the public health and welfare of its citizens.”