Arkansas Law Prohibiting Manufacturer 340B Contract Pharmacy Restrictions Upheld by 8th Circuit

March 25, 2024By Faraz Siddiqui

As drug manufacturers battle the Health Resources and Services Administration (“HRSA”) in federal courts over the role of 340B contract pharmacies, an Eighth Circuit decision to uphold a 2021 Arkansas law may render those cases inconsequential in that state.

The 340B contract pharmacy dispute involves several manufacturers who are refusing to provide 340B discounts to covered entities if they requested 340B drugs to be delivered to, and dispensed from, a network of contract pharmacies. The drug manufacturers claim that their statutory obligation to offer 340B discounts to covered entities does not require them to deliver the 340B drugs to an unlimited number of contract pharmacies. They argue that the 340B statute had never intended to give contract pharmacies such an outsized role in the program, in part because their proliferation stretched HRSA’s enforcement capacity and resulted in widespread noncompliance. HRSA disagrees, arguing that manufacturers are violating their duty to provide covered entities access to 340B prices based solely on the delivery location. HRSA also argues that Congress’ silence regarding pharmacies and delivery rendered the statute ambiguous, and dictates deference to the agency’s position. In 2021, HRSA threatened to impose penalties and the drug manufacturers sued to enjoin the agency.

The Arkansas Law

Against this backdrop, in May 2021, Arkansas enacted a law prohibiting manufacturers from interfering in a covered entity’s agreement with a contract pharmacy. Under this law, manufacturers may not deny contract pharmacies access to a covered entity’s 340B drugs, or deny 340B drug pricing to covered entities who use contract pharmacies for distribution. See Ark. Code Ann. § 23-92-604(c)(1), (2) (Act 1103). The Pharmaceutical Research and Manufacturers Association (“PhRMA”) immediately challenged the law at the agency level, and in September of that year, sued Arkansas on the theory that the law was preempted by the federal 340B statute and the Federal Food, Drug, and Cosmetic Act (FDCA), and was unconstitutional under the dormant commerce clause because of its effect of regulating commerce occurring wholly outside that state’s borders. Two 340B covered entities joined the litigation as intervenors arguing to uphold the law.

The Eastern District Court of Arkansas reviewed PhRMA’s arguments for field preemption, obstacle preemption and impossibility preemption (the parties asked the court to stay the dormant clause question pending the outcome of the preemption issue). On December 12, 2022, the district court granted intervenors’ motion for summary judgment, holding that federal law did not preempt the Arkansas statute under any theory. On March 12, 2024, a three-judge panel of the Eighth Circuit affirmed.

The 340B Statute Does Not Preempt the Field

PhRMA first argued that the 340B Program preempts Act 1103 through field preemption. Field preemption applies when federal regulation occupies the regulated area so pervasively that it leaves no room for states to supplement it, even if the state law is consistent with the federal law. PhRMA argued that Congress established the 340B drug discount program, imposed ceilings on prices drugmakers may charge certain healthcare facilities, specified what those facilities are, and provided compliance and enforcement mechanisms for manufacturers and covered entities.

However, the court found that the 340B Program is not so pervasive that it left no room for states to supplement it. Pharm. Rsch. & Mfrs. of Am. v. McClain, No. 22-3675, 2024 U.S. App. LEXIS 5840 (8th Cir. 2024) at 13 (“Decision”). The 340B statute is silent about delivery and distribution of pharmaceuticals by pharmacies to patients even though pharmacies are essential and a legally required part of the drug distribution chain. Decision at 8-9. This silence contrasts with 340B’s provisions that directly address distribution by another third-party—wholesalers. Id. at 12. The court held that Congress’s decision not to legislate the issue of pharmacy distribution indicates that Section 340B is not intended to preempt the field, and the state’s traditional police powers should prevail. See id. at 5, 12.

The court also noted that the practice of pharmacy is an area traditionally left to state regulation. The federal government has long maintained that state law offers an additional, and important, layer of consumer protection that complements federal regulation. Id. at 12-13. Further, the court believed Congress was aware of the role of pharmacies and state pharmacy law when it enacted the 340B Program, and its decision to still stay silent indicated that it did not intend to preempt the field.

PhRMA also argued that Act 1103 impermissibly interfered with 340B’s “closed system” by adding pharmacies to the enumerated list of covered entities eligible to receive 340B-discounted drugs. However, the court noted that contract pharmacies neither purchase 340B drugs, nor receive the 340B price.  They merely dispense 340B drug to the patients of covered entities, while covered entities purchase and maintain title to the drugs. PhRMA next argued that the oversight and enforcement mechanism of Act 1103 contravenes HHS’s exclusive jurisdiction to implement and enforce the program. Again, the court clarified that HHS and Arkansas would have jurisdiction over different disputes: the federal government addresses pricing, overcharging, refunds, and diversion of 340B drugs, while the state law would act only if a manufacturer denied 340B drugs to covered entities’ contract pharmacies.

Act 1103 Does Not Conflict with the 340B Statute’s Purpose

PhRMA also argued that the 340B Program preempts the Arkansas statute through obstacle preemption. The court examined whether the operation of Act 1103 would frustrate the 340B statute’s purpose and intended effects in its chosen field. The court held that the Arkansas statute does not create an obstacle for manufacturers to comply with 340B.  On the contrary, it assists in fulfilling the purpose of 340B. Id. at 15-16. The court explained that Act 1103 does not require manufacturers to provide discounts to contract pharmacies, so the delivery of covered entities’ drugs to contract pharmacies for dispensing should create no obstacle to fulfilling the 340B statute’s purposes. Additionally, Act 1103’s penalties are aimed at activities that fall outside the purview of 340B; the state law is simply deterring manufacturers from interfering with a covered entity’s contract pharmacy arrangements. Id. at 16.

Act 1103 Does Not Make it Impossible for Drugmakers to Comply with the FDCA

PhRMA also argued that Act 1103 is preempted by the Federal Food, Drug, and Cosmetic Act through impossibility preemption. Impossibility preemption exists when it is physically impossible for a private party to comply with both state and federal law. Id. at 17. According to PhRMA, Act 1103 will make it impossible for manufacturers of drugs subject to Risk Evaluation and Mitigation Strategies (REMS) to comply with the restrictive distribution requirement the REMS program imposes—for example, that only certain pharmacies may qualify to receive and dispense REMS drugs.

The court disagreed that Act 1103 would make it impossible for manufacturers to comply with a REMS program. Id. at 17-18. The covered entity would bear the responsibility of seeking out and contracting with a pharmacy that meets the REMS requirements. According to the court, “[j]ust because a medication is subject to multiple legal requirements does not make it impossible to comply with Act 1103. PhRMA alleges no circumstances where a covered entity’s contract pharmacy arrangement has made simultaneous compliance with state and federal law impossible.” Id. at 18. As such, the court held that FDCA does not preempt Act 1103.

The Road Ahead for the 340B Contract Pharmacy Dispute

In January 2023, the Third Circuit handed the manufacturers a victory in one of their lawsuits against HRSA challenging covered entities’ unrestricted use of contract pharmacies.  Other decisions are expected at the D.C. and the Seventh Circuit Courts, and if there is a circuit split, we may see the question reach the Supreme Court. However, the Eight Circuit decision upholding the Arkansas law may encourage 340B entities to lobby state legislatures to adopt similar laws, and potentially circumvent those decisions altogether.