Court Upholds Arkansas’ Regulation of 340B Program

Dr. Lanita White, chief executive officer of Community Health Centers of Arkansas. (Steve Lewis)

The Arkansas Insurance Department will start enforcing state legislation to regulate a federal discount drug program that generates millions of dollars for Arkansas hospitals and community health centers.

For two years, the AID had stayed enforcement of 2021 legislation regulating the federal 340B Drug Pricing Program while the Pharmaceutical Research & Manufacturers of America, or PhRMA, challenged it in federal court.

That challenge ended last month after the U.S. Court of Appeals for the 8th Circuit in St. Louis upheld Arkansas’ legislation.

Then last week, drug manufacturer AstraZeneca Pharmaceuticals LP of Wilmington, Delaware, sued the department in a new effort to block the enforcement of Arkansas’ legislation. It said in a 31-page lawsuit filed in U.S. District Court in Little Rock that Arkansas’ legislation is unconstitutional. AstraZeneca is not a member of PhRMA.

“We received the complaint,” Booth Rand, general counsel of the Arkansas Insurance Department, told Arkansas Business. “We are going to answer the complaint and defend the matter.”

The issue is wildly complicated. The 340B program was created by Congress in 1992 to help hospitals get discounts on pharmaceuticals, which they can resell to patients and their insurers at retail prices. Eligible community health centers and about 50 qualified hospitals in Arkansas can then keep the difference, theoretically to benefit low-income patients.

But state law prevents most Arkansas hospitals from having in-house pharmacies, so they contract with outside pharmacies to buy and dispense the discounted drugs.

Pharmaceutical manufacturers complained that the number of contracted pharmacies has skyrocketed nationwide since 2010, which PhRMA considers an abuse of the 340B program. The pharmacies, as well as pharmacy benefit managers enlisted by insurance companies, “have found a way to siphon off money that should be used to lower costs for low-income and vulnerable patients,” Nicole Longo, a PhRMA spokesperson, said in an email statement to Arkansas Business.

After manufacturers balked at giving 340B discounts to some pharmacies contracted by hospitals, the Arkansas General Assembly in 2021 passed the 340B Drug Pricing Nondiscrimination Act. Enacted as Act 1103, it is novel legislation that prevents drug manufacturers from limiting where eligible providers can ship their discounted drugs.

PhRMA promptly filed a lawsuit in federal court in Little Rock challenging the act. The 31-member association, based in Washington, D.C., also alleged that the 340B program had drifted away from its intended safety-net purpose.

In December 2022, U.S. District Judge Billy Roy Wilson of the Eastern District of Arkansas denied PhRMA’s challenge and upheld the constitutionality of the state law. PhRMA appealed, but a three-member panel of the 8th Circuit unanimously upheld Wilson’s ruling.

“Arkansas is simply deterring pharmaceutical manufacturers from interfering with a covered entity’s contract pharmacy arrangements,” the 8th Circuit Court ruling said. The case was heard by Chief Judge Lavenski Smith and Circuit Judges Michael Melloy and Ralph Erickson.

In a statement to Arkansas Business, PhRMA said it disagreed with the appellate court’s decision and that it believes the Arkansas 340B provisions are preempted by federal law. “This abuse is contrary to the goals of the federal 340B program and is one of the reasons why federal policymakers need to step in to fix this vital safety net program,” Longo said.

PhRMA has until April 9 to ask the 8th Circuit for a rehearing. As of Tuesday morning, it hadn’t asked for one.

Meanwhile, other states are considering 340B regulations that mirror Arkansas’. The ruling from the 8th Circuit makes that pending legislation easier to pass, said Larry Burns, president of Contract Pharmacy Insight, a 340B consulting company based in Thayer, Missouri.

He said that some of the hospitals and community health centers wouldn’t be able to stay open without the revenue from the 340B program. “It basically ensures their continued existence,” Burns said. “Otherwise, they’re going to have to close doors in rural areas.”

Jodiane Tritt, executive vice president of the Arkansas Hospital Association, said other states are looking to follow Arkansas’ lead because “they’re all experiencing the same thing. When the pharmaceutical manufacturers are padding their pockets instead of participating appropriately inside the 340B program and at the expense of our rural hospitals, there’s something really wrong with that.”

PhRMA said on its website that Congress needs to fix the broken 340B program. The program has become less about patients and more about boosting the bottom lines of hospitals and for-profit pharmacies and pharmacy benefit managers, the association argues.

“Large hospitals buy deeply discounted 340B medicines and then turn around and charge both uninsured patients and insurance companies higher prices, pocketing the difference — or in some cases splitting it with chain pharmacies and PBMs — with little to no evidence they use that money to help patients,” it said on its website.

The Arkansas Insurance Department has about 14 complaints pending against drug manufacturers and expects to receive more allegations.

“We intend to go forward with administrative enforcement within the next seven to 10 days for those drug manufacturers that are still not going to comply with that act,” the department’s Rand said.

Rand said that the fines are about $50,000 for every six-month period of violation. Burns, of Contract Pharmacy Insight, said the size of the fine is secondary. “Because when a state government fines a drug manufacturer, they have reporting requirements to multiple entities in multiple states,” he said. “So they don’t like fines at any size from a state government.”

Providers Cheer Ruling

Dr. Lanita White, chief executive officer of Community Health Centers of Arkansas, said health centers have struggled in recent years as manufacturers have interfered with revenue from the 340B program.

“They also use those funds to provide services back in their clinics. And so our health centers provide things like dental clinics, dental services, behavioral health services, women’s health services.

“And so it’s been a struggle with providing those services when the money flow for many of those services has been cut or greatly decreased,” she said.

White said a PhRMA win would have been disastrous for community health centers and patients.

Tritt said hospitals also have cut services, including labor and delivery, as a result of missing out on millions of dollars in 340B revenue. “When you’re supposed to be receiving a program benefit, and somebody takes that benefit away, then hospital administrators have to make really hard decisions about what they can afford to still provide,” Tritt said.

But the court victory probably won’t bring back services, she said. “I think hospitals are trying to hold onto what they have right now.”