The 340B Program and State Mandates

The federal 340B program has been widely criticized in recent years for its lack of transparency, fraud and failure to pass savings along to the patients it was designed to help. 340B is a federal program through which drug manufacturers provide highly discounted drugs to eligible hospitals and entities that serve low income and uninsured patient populations. Some hospitals or other providers that do not have in-house pharmacies contract with independent pharmacies to provide those drugs.

These “contract pharmacies” are where much of the controversy surrounding the program has come from. The term “contract pharmacies” appears nowhere in the federal statute, and the practice of using contract pharmacies has come from regulatory guidance letters. Prior to 2010, most manufacturers allowed covered entities without in-house pharmacies to contract with one independent pharmacy for 340B drugs. Problems arose when HHS released a guidance letter in 2010 that allowed covered entities to contract with an unlimited number of pharmacies for 340B prices.

Some hospitals, pharmacy benefit managers (PBMs) and third party payers have been buying drugs at highly discounted 340B prices and charging regular prices to insurers and cash payers. The savings are not being passed on to patients. Several states have debated legislation to stop this practice and stop hospitals, PBMs and pharmacies from profiting from the program in this way.

Unfortunately, many legislators on both sides of the aisle are pursuing government price fixing, which will only exacerbate this problem. In 2021, Arkansas passed a law mandating drug manufacturers sell to all contract pharmacies at the 340B price. Mississippi and Utah have also debated similar measures. As explained in ALEC’s Essential Policy Solutions for 2023, these bills are problematic not only because they are price fixing – which costs us cures, innovation, and research – but because 340B is a federal program  states have no jurisdiction over. Contract pharmacies appear nowhere in the federal statute, and the practice of using contract pharmacies has come from regulatory guidance letters.

The number of contract pharmacies has increased more than 4,000% since 2010, but the number of pharmacies in low income and minority neighborhoods has declined. The result is large for-profit pharmacy chains, hospitals and PBMs are profiting from a program designed to help the uninsured and those entities that provide charity care.

History has repeatedly shown that fixing the price of any good or service does not achieve the intended goal—no matter how well intentioned. These bills are creating a whole new class of 340B covered entities that are not contemplated in either the text or the intent of the federal statute. Fixing the price manufacturers can sell to these pharmacies at the 340B rate is not going to benefit patients.

Multiple lawsuits have been filed to clarify the legality of these issues. Most recently, the Third Circuit Court of Appeals ruled in favor of pharmaceutical manufacturers. A three-judge panel ruled the manufacturers can limit the sale of 340B drugs to contract pharmacies, stating the federal law does not mention contract pharmacies and that “legal duty does not spring from silence.” As these battles continue to be fought in court, states should be wary of mandates that allow the hospitals, PBMs and pharmacies to game the system.

In Depth: Health

There has never been a time when both federal and state jurisdictions have been more in control of American’s healthcare than it is today. Implementation of the Affordable Care Act is well in motion, and each state has considered how to address provisions of the federal law as it has…

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