Background
Congress enacted Section 340B of the Public Health Service Act as part of the Veterans Healthcare Act of 1992, creating the 340B Drug Pricing Program. The program requires pharmaceutical manufacturers participating in Medicaid and Medicare Part B to sell outpatient drugs at federally set ceiling prices to designated healthcare providers known as “covered entities”—primarily federally qualified health centers, family-planning clinics, and other safety-net institutions serving low-income and uninsured patients. The statute imposes various restrictions on covered entities, including prohibitions on duplicate discounts and drug diversion, but Congress left unaddressed the logistics of how drugs must be distributed or the role pharmacies play in that distribution.
Many covered entities lack in-house pharmacies, particularly in rural and underserved areas. To bridge that gap, HRSA issued guidance in 1996 permitting covered entities to contract with a single outside pharmacy for drug dispensing. In 2010, HRSA dramatically expanded that guidance to allow all covered entities—including those with their own pharmacies—to partner with unlimited contract pharmacies. Following this expansion, manufacturers began adopting policies restricting covered entities’ use of contract pharmacies, concerned that contract pharmacies were profiting from the discounted drugs rather than merely dispensing them for patients. After HHS issued an advisory opinion in 2020 requiring manufacturers to deliver discounted drugs to contract pharmacies acting as agents of covered entities, the Third Circuit and D.C. Circuit rejected that agency position, holding that Section 340B does not mandate contract pharmacy delivery.
In response, Louisiana enacted Act 358 in 2023, joining other states in attempting through state law what HHS had attempted through federal agency guidance. The statute bars manufacturers from denying, restricting, or interfering with the acquisition or delivery of 340B drugs to pharmacies under contract with covered entities. Three pharmaceutical manufacturers and a trade association challenged Act 358 on preemption grounds and additional constitutional theories. The district court granted summary judgment for Louisiana on all claims, and the manufacturers appealed.
The Court’s Holding
The Fifth Circuit affirmed, holding that Act 358 is not preempted by Section 340B. The court began with the strong presumption against preemption, particularly where state police powers over public health and consumer protection are implicated. It held that Act 358 does not regulate the 340B Program itself but rather regulates pharmacy distribution logistics—areas Congress conspicuously left silent in Section 340B. The court emphasized that the statute does not single out 340B manufacturers; non-participating manufacturers receive the same treatment under Louisiana law. Relying heavily on its recent decision upholding Mississippi’s materially identical statute in AbbVie v. Fitch, the court found no field preemption because Section 340B’s regulatory scheme, while comprehensive on pricing and covered-entity eligibility, leaves no “clear and manifest” congressional intent to exclusively regulate drug distribution methods.
The court similarly rejected conflict preemption arguments. It noted that covered entities—not contract pharmacies—purchase and maintain title to 340B drugs, receiving the federal discount, while contract pharmacies merely dispense them to eligible patients. Therefore, Act 358 does not “expand” the universe of entities receiving 340B discounts. The court also found no conflict with Congress’s enforcement scheme because the two regimes operate in distinct spheres: HHS enforces duplicate-discounting and diversion violations under Section 340B, while Louisiana’s Attorney General enforces Act 358’s prohibition on interference with contract pharmacy distribution. The court rejected the manufacturer’s argument that federal agency silence on what HHS may command should limit state authority, reasoning that a federal agency’s lack of statutory power does not constrain a state’s historic police powers—the two operate on separate legal tracks.
The court further held that Act 358 does not violate the Takings Clause (manufacturers have no vested property interest in a particular distribution method), the Contracts Clause (the PPAs between manufacturers and HHS are uniform statutory agreements, not bargained-for contracts subject to contract-impairment protection), or the Due Process Clause’s prohibition on vagueness (the statute’s material terms are sufficiently clear and definite).
Key Takeaways
- State pharmacy regulation laws that address Section 340B drug distribution through contract pharmacies do not face preemption by federal law, as Section 340B itself leaves this subject unregulated.
- Congressional silence in a comprehensive federal regulatory scheme does not transform into an implied prohibition on state regulation in traditionally state-regulated areas.
- A federal agency’s lack of delegated statutory authority to mandate certain conduct does not limit a state’s separate police power to regulate the same conduct.
- Covered entities’ use of contract pharmacies does not violate the 340B Program because covered entities—not pharmacies—purchase and own the discounted drugs; pharmacies act solely as dispensing agents.
- Manufacturers do not have a protected property interest in any particular distribution method, nor do uniform statutory PPAs receive heightened Contracts Clause protection.
Why It Matters
This decision validates state efforts to ensure that the Section 340B Program achieves its core purpose—stretching scarce healthcare dollars for vulnerable populations in safety-net institutions—even after federal courts rejected HHS’s attempt to mandate contract pharmacy delivery at the agency level. The court’s reasoning affirms that states retain independent authority to regulate pharmacy and drug distribution, and that manufacturers cannot use preemption arguments to escape state-imposed obligations that align with the federal program’s underlying goals. With other circuits having upheld similar state statutes and the Fifth Circuit now joining them, a clear national trend favors state authority in this domain, making preemption challenges to these “state 340B” laws increasingly unlikely to succeed.
For covered entities and patients, this decision removes legal uncertainty surrounding contract pharmacy arrangements, ensuring that rural clinics and urban safety-net providers can continue to partner with independent pharmacies to deliver discounted medications to underinsured and uninsured populations. For manufacturers, the decision forecloses a significant avenue for blocking state-level regulation of drug distribution, though it does not resolve underlying policy disputes about whether unlimited contract pharmacy networks generate legitimate profits for pharmacies or represent cost-containment measures necessary for the program’s viability.