Deep Dive: Why States Are in the Driver’s Seat on 340B and Contract Pharmacies

Established by Congress in 1992, the 340B Program requires pharmaceutical manufacturers to sell outpatient drugs at a discount to qualifying providers. By enabling these providers to pay lower prices for certain prescription drugs, the intent is to enable them to spend the savings realized from the 340B program to serve more patients and provide more comprehensive services. 

In July, 340B providers, pharmacies, and stakeholders gathered in the Washington, D.C. area for their annual summer coalition conference. In most years, the conference is an effort for providers to visit the Hill and promote the merits of the 340B program with Congress. At this year’s conference, 340B covered entities wanted to talk about action in the states. In recent months, two court decisions (and one in 2023) have uniquely positioned states as the regulator of issues pertaining to the 340B federal program, specifically relating to how pharmaceutical manufacturers must engage with 340B contract pharmacies.

Make no mistake – 2024 was the busiest year yet for state legislatures to opine on how manufacturers may engage with a 340B covered entity’s contract pharmacies. More than 20 state legislatures introduced bills that would prohibit or limit manufacturers’ ability to not extend 340B pricing to contract pharmacies. Six states (Kansas, Maryland, Minnesota, Mississippi, Missouri and West Virginia) enacted those bills into law, with Virginia Governor Glenn Youngkin opting to veto such a bill when it hit his desk. Looking ahead to 2025, the pace of legislative activity is only expected to increase.

How and Why Did We Get Here?

As authorized under statute, 340B qualifying providers, referred to as covered entities, include hospitals, Federally Qualified Health Centers (FQHCs), and specialized clinics that serve a high proportion of low-income and safety net populations. Historically, 340B covered entities were limited in dispensing 340B prescription drugs at only the site of the covered entity and one contract pharmacy (i.e., a contracted retail pharmacy with the 340B covered entity). However, in 2010, the U.S. Department of Health and Human Services (HHS) issued new guidance authorizing covered entities to enter into agreements with multiple contract pharmacies. Unsurprisingly, the number of retail pharmacies in a 340B contract arrangement increased from less than 1 percent of all retail pharmacies in 2010 to more than 40 percent of all retail pharmacies by 2022. Spending on the 340B program also increased 19 percent annually from 2010 to 2021, partially related to the increase in contract pharmacies and expanded covered entity eligibility from the Affordable Care Act. This resulted in a massive increase in the amount of prescription drugs manufacturers had to sell at a discounted price while significantly increasing the potential for 340B covered entities and retail pharmacies to realize more savings.

Now, as the use of contract pharmacies increases, some manufacturers question whether 340B prices extend beyond the covered entity. Eventually some manufacturers made the decision that, no, 340B pricing was never meant to be extended to this new and unending universe of contract pharmacies. 

Fast forward to 2021 and HHS issued violation letters, with a threat to impose monetary penalties on several manufacturers for not providing the 340B discounted prices to contract pharmacies. As you would expect, manufacturers sued to block the agency from issuing violation letters. In 2023 and 2024, the Third and D.C. Circuits found that HHS can’t issue violation letters, nor is it clear that 340B pricing was intended to extend to contract pharmacies. This led to a decisive win for manufacturers: HHS had little to no authority to issue violation letters for manufacturer pricing policies pertaining to 340B contract pharmacies.

State Take Action on 340B

As the question of HHS regulatory oversight played out in the Courts, one state took action. The Arkansas Legislature enacted Act 1103, which prohibits manufacturers from denying contract pharmacies access to prescription drugs or access to 340B drug pricing. Again, manufacturers sued. Arguing, in part, that state prohibitions in law were preempted by the federal 340B statute (PhRMA v. McClain). Apart from Louisiana enacting a law in 2023 similar to Arkansas, every other state avoided tackling this question until the Courts weighed in on the Arkansas law. In March 2024, the Eighth Circuit affirmed a lower court’s ruling finding that the federal 340B law does not preempt Arkansas’s law, aligning with an opinion of the Third Circuit that the 340B program is “silent about delivery and distribution of pharmaceuticals to patients.” Following that decision, the door was open for states to enact their own similar laws.

Based on the findings of the D.C., Third and Eighth Circuits, a unique policy environment is set into motion. HHS lacks the authority to regulate how manufacturers engage with contract pharmacies until Congress provides statutory clarity. In the interim, states are the lone actor to determine whether manufacturers should be required to extend 340B pricing to a covered entity’s contact pharmacies dependent on the needs of their own residents.

What's Next for States and Protections for 340B Contracted Pharmacies

Adding to the six states enacting protections for 340B contracted pharmacies, it’s likely that robust conversations to extend these protections will happen in Kentucky, Ohio, Nebraska, Rhode Island, and Oklahoma, among others, in 2025. States will continue to introduce legislation that establish boundaries for how pharmacy benefit managers (PBMs) and health insurers must engage with 340B providers, but manufacturers now are likely to be a focal point, too, particularly as it relates to contract pharmacies. 

However, even with all of this state legislative activity, the fight in the Courts is still ongoing. The Eighth Circuit still has not issued a ruling on one element of the industry’s complaint with regard to the Commerce Clause. The industry argued that Arkansas’s law is invalid as it regulates commerce wholly outside of its borders, which necessitates invalidation under the dormant Commerce Clause doctrine. Additionally, there’s a separate case before the Seventh Circuit that seeks to answer similar questions that were before the Third and D.C. Circuits. If the Seventh Circuit splits with the Third and D.C., it would create a patchwork structure where HHS could regulate manufacturer policies in one region of the Country but not elsewhere. Additionally, manufacturers are and will continue to pursue legal remedies for the most recently enacted legislation from 2024 in the aforementioned six states. 

Couple the outstanding legal activity with the increasingly likely activity at the state level in 2025 and Congress might find itself in a position where they have to take action. While the Gang of Six has issued a discussion draft back in February 2024 of potential 340B reform, it’s highly unlikely that any resolution would come in a Presidential election year in a divided Congress. Instead, we’re waiting for 2025 at the earliest and states certainly move more quickly than Congress.

Influence Health Care Policy

The ever-evolving state health policy landscape will continue to influence how health care organizations make business decisions. MultiState’s team pulls from decades of expertise to help you effectively navigate and engage. MultiState’s team understands the issues, knows the key players and organizations, and we harness that expertise to help our clients effectively navigate and engage on their policy priorities. We offer customized strategic solutions to help you develop and execute a proactive multistate agenda focused on your company’s goals. Contact us to learn more about our Health Care Policy Practice.