Reported / Citable
Background
The 340B Drug Pricing Program, enacted as part of the Veterans Healthcare Act of 1992, requires pharmaceutical manufacturers participating in Medicaid and Medicare Part B to sell outpatient drugs to designated “covered entities”—such as federally qualified health centers, clinics, and hospitals serving low-income and uninsured patients—at statutory ceiling prices. Many covered entities lack in-house pharmacies, particularly in rural and underserved areas, and therefore contract with independent pharmacies to dispense 340B drugs to their patients. For decades, manufacturers accepted this arrangement, but beginning around 2020, some manufacturers adopted policies restricting or prohibiting covered entities’ use of contract pharmacies, viewing the arrangement as an “arbitrage opportunity” rather than a necessary distribution mechanism.
In 2023, Louisiana enacted Act 358, which prohibits manufacturers and distributors of 340B drugs from denying, restricting, or interfering with covered entities’ ability to acquire or obtain delivery of 340B drugs through contract pharmacies authorized under such contracts. Violations are enforceable under Louisiana’s Unfair Trade Practices and Consumer Protection Law. Three pharmaceutical entities—AbbVie, AstraZeneca, and the Pharmaceutical Research and Manufacturers of America (PhRMA)—filed separate suits challenging Act 358 as preempted by federal law and as violating the Takings Clause, Contracts Clause, and Due Process Clause’s vagueness requirement. The district court rejected all claims and granted summary judgment in favor of Louisiana and the Louisiana Primary Care Association.
The Court’s Holding
The Fifth Circuit affirmed, holding that Act 358 is neither field preempted, conflict preempted, nor obstacle preempted by the 340B Program. The court applied a presumption against preemption, particularly appropriate given that Act 358 implicates traditional state police powers over public health and consumer protection and pharmacy regulation. Critically, the court found that while 340B extensively regulates pricing ceilings, eligible covered entities, anti-diversion safeguards, and audit mechanisms, Congress explicitly left unaddressed “the distribution of drugs to patients” and “the role of pharmacies in this distribution.” Act 358 operates precisely in these gaps, regulating conduct (denying or restricting delivery) rather than pricing.
The court rejected the manufacturers’ strongest argument—that if HHS lacked statutory authority to mandate contract pharmacy delivery, Louisiana cannot impose such requirements. The court held that the absence of agency authority under federal law does not constrain state police power. A federal agency’s delegated power and a state’s inherent regulatory authority “run on separate tracks.” To treat federal silence as an implied prohibition on state regulation would invert the presumption against preemption by converting congressional silence into an affirmative bar. Act 358 presents no conflict with the 340B enforcement scheme because Act 358 addresses delivery logistics (silent in 340B), while HHS enforces pricing through the 340B framework and its Alternative Dispute Resolution process. The court noted that covered entities, not pharmacies, retain title to 340B drugs and receive the discount; pharmacies merely dispense to eligible patients, and Act 358 does not expand the class of entities receiving discounts.
Key Takeaways
- States retain police power to regulate pharmacy conduct and drug distribution logistics even in areas touched by comprehensive federal programs, so long as Congress has not clearly and manifestly occupied the field.
- Federal agency silence on an issue does not preempt state authority; the absence of federal agency power does not set a ceiling on state regulatory power.
- A statute regulating conduct (denying or restricting delivery to contract pharmacies) is distinguishable from one regulating pricing, even if pricing may indirectly correlate with the regulated conduct.
- Multiple enforcement regimes can coexist without conflict if they address different subject matter: HHS enforces 340B pricing and anti-diversion; states can enforce contract pharmacy access.
Why It Matters
This decision provides significant support for state-level protections of the 340B Program’s beneficiaries. It validates Louisiana and other states’ efforts to prevent manufacturers from circumventing Congress’s express goal—stretching scarce healthcare dollars and delivering essential medicines to vulnerable populations—through contract pharmacy restrictions. The decision aligns with a developing consensus across federal circuits (Eighth, Third, D.C., and now Fifth) that Section 340B’s silence on delivery logistics leaves room for state supplementation and that neither HHS’s regulatory limitations nor a federal agency’s inability to regulate pricing constrains state authority.
For manufacturers, the decision forecloses preemption as a viable challenge to state contract pharmacy statutes and signals that federal courts will apply a meaningful presumption against preemption in this context. For covered entities and advocates for affordable medications, the ruling protects state-law remedies ensuring access to 340B discounts through practical distribution channels in areas where in-house pharmacies are unavailable or infeasible. The Fifth Circuit’s reasoning may influence pending disputes in other jurisdictions and may signal the trajectory of future appellate review.