Background
The Section 340B Drug Pricing Program requires pharmaceutical manufacturers participating in Medicaid to provide discounted drugs to “covered entities”—primarily clinics and hospitals serving low-income and rural patients. Congress established this bargain to stretch healthcare dollars for vulnerable populations. However, many covered entities lack in-house pharmacies, particularly in rural and underserved areas. To fill this gap, covered entities partner with independent contract pharmacies to dispense the discounted drugs.
Beginning around 2010, HRSA guidance permitted covered entities to use unlimited contract pharmacies. Some manufacturers objected, viewing contract pharmacies as profit-taking intermediaries rather than distribution channels serving patients. These manufacturers adopted policies restricting covered entities’ use of contract pharmacies. Louisiana responded in 2023 by enacting Act 358, which prohibits manufacturers from denying, restricting, or interfering with covered entities’ acquisition and delivery of 340B drugs through contract pharmacies.
AbbVie, AstraZeneca, and the Pharmaceutical Research and Manufacturers of America (PhRMA) sued Louisiana’s Attorney General, asserting that Act 358 is preempted by Section 340B and violates the Takings Clause, Contracts Clause, and Due Process Clause. The district court granted summary judgment for Louisiana on all claims. The manufacturers appealed.
The Court’s Holding
The Fifth Circuit affirmed, holding that Act 358 is not preempted by federal law and does not violate any constitutional provision. The court emphasized that the presumption against preemption applies strongly here because pharmacy regulation and drug distribution fall within traditional state police powers. Section 340B, while comprehensive in regulating pricing ceilings and covered-entity eligibility, conspicuously does not address drug distribution to patients or the role of pharmacies in that distribution. Because Congress left these matters unaddressed in an otherwise detailed statutory scheme, they remain subject to state regulation.
The court rejected conflict-preemption arguments, finding that Act 358 and Section 340B operate in separate spheres. The federal program addresses pricing and fraud prevention through HHS enforcement, while Act 358 addresses delivery logistics and manufacturer interference through state enforcement. The manufacturers’ circular reasoning—that Act 358 regulates pricing because it prevents full-price sales—was rejected. The statute regulates conduct (manufacturer interference), not pricing. The court also noted that Act 358 does not single out 340B participants; all manufacturers face the same restrictions on interfering with pharmacy distribution.
Key Takeaways
- Congress’s silence on contract pharmacies and delivery logistics in Section 340B leaves those areas to state supplementation under the presumption against preemption.
- State laws regulating drug distribution and pharmacy conduct do not conflict with federal law merely because they affect 340B drugs; they address matters federal law does not.
- State enforcement of contract-pharmacy delivery does not impermissibly duplicate or interfere with HHS’s exclusive enforcement of pricing and fraud provisions under Section 340B.
- Act 358 survives preemption challenge despite being enacted after federal courts rejected HHS’s advisory opinion requiring the same result, because state police power and federal agency authority operate on separate legal tracks.
Why It Matters
This decision affirms state authority to protect vulnerable patient populations’ access to discounted medications by ensuring covered entities can use contract pharmacies. It validates Louisiana’s response to manufacturers’ restrictions and follows similar decisions from the Eighth Circuit and other courts. The ruling likely emboldens other states considering comparable legislation, potentially creating a patchwork of state-level contract-pharmacy protections. For manufacturers, the decision forecloses a key legal avenue for limiting contract-pharmacy use in states with such laws.
The decision is significant because it resolves a gap in federal law: while the 340B Program guarantees discounted pricing, it does not mandate how drugs must be distributed. States can now fill that gap by requiring manufacturers to support covered entities’ preferred distribution channels, including contract pharmacies in underserved areas. This affects both the drug industry’s business model and the practical availability of affordable medications to safety-net providers and their patients.