Federal judge upholds state law that requires pharmaceutical companies to provide discounted drugs

Prescription drugs are seen in North Andover, Mass. in this June 15, 2018 file photo. (AP/Elise Amendola)

In what is being hailed as a major victory for Community Health Centers and their patients, a federal judge has upheld a state law that requires pharmaceutical manufacturers to provide access to discounted drugs to contract pharmacies in the state under the 340B Drug Pricing Program.

U.S. District Judge Billy Roy Wilson issued an order this week rejecting the first of two constitutional challenges by the pharmaceutical industry regarding Act 1103 of 2021, which was passed to shield Arkansas CHCs and other safety net health care providers from drug manufacturers' policies that had locked contract pharmacies out of the discount drug program. The industry has been blocking access to low-cost drugs that the providers would otherwise be entitled to purchase and dispense under the 340B Drug Pricing Program.

Arkansas Act 1103 of 2021 -- the 340B Drug Pricing Nondiscrimination Act -- requires drug manufacturers to provide 340B pricing to any Arkansas pharmacies that enter into contractual agreements with entities covered under 340B, regardless of whether those pharmacies are in-house or third-party pharmacies contracting services to providers. The state law is the first of its kind nationally.

"This is wonderful news for CHCs, hospitals and patients across this great state," said Dr. Lanita S. White, chief executive officer of Community Health Centers of Arkansas, in a press release issued by CHCA.

"This has been a long and difficult fight, but we're in this for the long haul. We're thankful the Arkansas Legislature passed Act 1103 to hold the pharmaceutical industry accountable."

CHCs are nonprofit organizations funded by patient revenue and federal grants meant to expand health care access for low-income, minority, and rural populations. CHCs provide many services including primary care, dental, behavioral health, and health education. Community Health Centers of Arkansas provides advocacy, training, and support for CHCs in Arkansas.

The 340B Drug Pricing Program was established by federal law in 1992 to help hospitals and clinics serving large numbers of uninsured and under-insured patients obtain the medications they need at no cost to taxpayers.

In 1996, the Health Resources and Services Administration issued guidance on 340B, saying that covered entities could have the option of contracting with one pharmacy of its choice to purchase covered outpatient drugs. In issuing the guidance, the agency noted that only 500 0f the then 11,500 covered entities used in-house pharmacies. In 2010, the agency expanded upon that guidance by allowing covered entities to enter into more complex arrangements that include multiple pharmacies.

An advisory ruling issued Dec. 30, 2020, by the U.S. Department of Health and Human Services reiterated the department's position that the use of contract pharmacies by covered entities is permissible and said that if such arrangements were not allowed, Congress "would have used language affirmatively precluding the use of contract pharmacies as arms in the distribution channel, but it did not." The Department of Health and Human Services ruling sparked a number of lawsuits around the country from pharmaceutical companies that said the department's latest advisory opinion exceeded its authority.

Starting in the summer of 2020, pharmaceutical manufacturers placed multiple conditions on the sale of 340B drugs across the country, which critics said not only harm patients but cut revenue from CHCs and certain hospitals. According to the press release from CHCA, the funds from 340B are used to operate medical programs that benefit at-risk and rural Arkansans.

In response to the manufacturers' actions, the Legislature passed, and Gov. Asa Hutchinson signed, Act 1103 of 2021. Community Health Centers of Arkansas, the Arkansas Pharmacists Association, and the Arkansas Hospital Association all supported the legislation.

Specifically, the law requires manufacturers to ship 340B drugs to community pharmacies that have been contracted by 340B hospitals and CHCs to dispense the low-cost drugs on their behalf.

In September 2021, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed suit against the state. PhRMA seeks to strike the section in Act 1103 that protects 340B distribution to the contract pharmacies.

CHCA intervened in the lawsuit last March to protect the interests of CHCs and their patients. CHCA was joined in the motion by Piggott Community Hospital, a critical access hospital dependent on contract pharmacies to serve its patients.

"This decision by Judge Wilson offers a path forward for states across the country struggling with how to protect CHCs, hospitals, and their patients from the unilateral and unlawful restrictions adopted by a growing number of drug manufacturers," said William von Oehsen, an attorney representing CHCA and Piggott Community Hospital, in the release. "This is a victory for hospitals and CHCs, not just in Arkansas, but everywhere."

PhRMA claimed that Act 1103 wrongly asserts state authority over aspects of a federal program.

Wilson rejected PhRMA's argument and sided with CHCA, Piggott Community Hospital, and the Arkansas Insurance Department in defense of Act 1103.

Next, Wilson will consider PhRMA's second constitutional claim against Act 1103, that the statute violates the federal Commerce Clause. The judge has asked the parties to propose a briefing schedule for addressing the second claim. CHCA said in its release that the Insurance Department and the intervenors are already preparing their responses.

Last month, Act 1103 of 2021 was used for the first time when an Arkansas hospital filed a complaint with the Insurance Department asking the agency to invoke its new investigatory and enforcement powers against a drug manufacturer.

The complaint was filed by White River Medical Center, a hospital in Batesville, against Novo Nordisk Inc. of Plainsboro, N.J. According to the complaint, Novo Nordisk in January 2021 began restricting distribution of drugs under the 340B program through pharmacies that contracted with White River Medical Center, which is part of White River Health.

The hospital said it has lost more than $1 million in contract pharmacy revenue as a result of Novo Nordisk's restrictions, which it said has forced patients to either change medications or change pharmacies.