U.S. District Court Little Rock, AR court room
A federal judge in Little Rock, Ark., held that the state's novel 340B anti-discrimination law is not preempted by federal laws.

340B Report Analysis: Federal 340B Law Gives States Room to Regulate their Own Drug Distribution Systems, Judge Rules in Arkansas Contract Pharmacy Case

As we reported on deadline on Tuesday, a federal district court ruled this week that Arkansas’ novel 340B antidiscrimination law is not preempted by federal laws governing the 340B program, a decision that strikes down one of two legal arguments made by drug industry trade group the Pharmaceutical Research and Manufacturers of America (PhRMA) in its lawsuit challenging the law as illegal and unconstitutional.

In its Dec. 12 opinion, the U.S. District Court for the Eastern District of Arkansas gave significant weight to the fact that the 340B statute is silent on the role of contract pharmacies in the 340B program and thus found no conflict with Arkansas Act 1103. The state law prohibits drug manufacturers from denying a pharmacy contracting with a 340B covered entity access to the manufacturer’s drugs or denying the pharmacy 340B pricing.

In denying PhRMA’s motion for summary judgement, U.S. Senior District Judge Billy Roy Wilson said he was not convinced that the 340B program is “a solely federal scheme immune from any type of state regulation …The absence of any reference to ‘pharmacies’ is a strong indication that the [340B] statute does not compel any particular outcome with respect to covered entities’ use of pharmacies.”

Wilson also agreed with defendant Arkansas Insurance Department (AID) and a group of 340B provider intervenors that the state law is focused on drug distribution, not drug pricing. “Even though the title of Act 1103 includes pricing in its name, the effects of the disputed provisions are limited to the distribution of and access to the discounted drugs,” he said. “Act 1103 has no bearing on setting the ceiling price.”

“Wonderful News”

Community Health Centers of Arkansas (CHCA), one of the groups that intervened in defense of Act 1103, called Wilson’s decision “wonderful news” for health centers, hospitals, and patients “in this great state.”

“This has been a long and difficult fight, but we’re in this for the long haul,” said Dr. Lanita White, the group’s CEO. “We’re thankful the Arkansas Legislature passed Act 1103 to hold the pharmaceutical industry accountable.”

“This decision by Judge Wilson offers a path forward for states across the country struggling with how to protect [community health centers], hospitals, and their patients from the unilateral and unlawful restrictions adopted by a growing number of drug manufacturers,” said William von Oehsen, a principal in the Powers Pyles Sutter & Verville law firm who represents the intervenors in the case. “This is a victory for hospitals and CHCs, not just in Arkansas, but everywhere.”

What Comes Next

Proceedings in the case will now turn to PhRMA’s arguments that the state law violates the federal constitution’s Commerce Clause.

AID’s case on the preemption issue was strengthened by the fact that the 340B statute and related federal laws do not expressly prohibit states from enacting their own laws in this area, so federal preemption had to be implied.

In a brief filed with the court in October, PhRMA had argued that the 340B statute “has always been uniquely federal in nature” leaving “no room for states, pharmacies, or other interests to step in and try to supplant” the federal government’s exclusive control over it.

But the judge sided with the state, ruling that the 340B program was not “so pervasive as to make reasonable the inference that Congress left no room for states to protect their specific drug distribution systems.” Wilson also noted that the practice of pharmacy is traditionally left to state regulation.

PhRMA had also argued that Arkansas’ law makes it impossible to comply with both state and federal law since under the 340B statute prohibits covered entities from reselling or transferring drugs to any “person who is not a patient of the entity,” and that contract pharmacy arrangements fit that definition. However, the court disagreed, noting that, under Arkansas law, drug makers ship their products to pharmacies for dispensing to all patients. “At the time of dispensing, the pharmacies do not know whether the prescriptions were written by medical providers at covered entities and qualify for 340B discounts…. The covered entities never physically possess the drugs.”   

Conversely, the court noted that the 340B law’s non-transfer/resale provision refers to situations where drugs are given to individuals not receiving healthcare services from covered entities and that, in any event, illegal diversions are handled through the program’s administrative dispute resolution (ADR) process.

REMS Not Implicated

Finally, Wilson rejected PhRMA’s argument that the Arkansas law is preempted by the Food Drug and Cosmetic Act’s (FDCA) program for potentially dangerous drugs, known as Risk Evaluation and Mitigation Strategies (REMS). He ruled that the federal law does not expressly preempt state laws governing distribution of prescription drugs, and that Act 1103 contains no language preventing manufacturers from limiting the pharmacies that may dispense drugs as required under REMS. “Act 1103 and the FDCA regulate completely different subject matter and activities,” the court said.

Wilson ordered the parties to submit a proposed briefing schedule on the remaining commerce clause issue by Dec. 16 and ordered the Jan. 3 trial date continued pending a revised scheduling.

Last month, an Arkansas health system, White River Medical Center, became the first 340B covered entity to sue to enforce Act 1103 and its implementing law, Rule 123. White River asked AID and the state’s Insurance Commissioner to enforce the law against Danish drug maker Novo Nordisk.

Also in November, a survey conducted by the Manatt law firm showed that, from January 2018 through September 2022, 12 states enacted laws and 22 more states proposed legislation that targets discriminatory practices by insurers and PBMs against 340B providers and/or their contract pharmacies.

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