Op-Ed: States creating legal turmoil with hospital drug discount program

Original article can be found here.

If you walk into a non-profit hospital, there’s a good chance it participates in a federal safety-net program that many have never heard of: 340B. Created by Congress in 1992, the 340B program was designed to help safety-net hospitals and clinics purchase prescription drugs at a reduced cost to serve low-income patients. This well-intentioned program should be a lifeline for Americans who face rising healthcare costs and affordability concerns. Instead, 340B is now facing a legal crisis as state legislatures across the country expand and manipulate the program.

New state laws are rewriting the terms of the federal 340B program and distorting the original deal that Congress made with drug makers to offer drugs to safety-net hospitals and clinics at a reduced cost. The terms allowed drugmakers to access Medicaid and Medicare Part B in return for offering steep prescription drug discounts to a defined list of safety-net providers. But as more states pass their own laws for the program, it has upset the delicate balance Congress carefully crafted and tipped the scale in favor of for-profit pharmacies, rather than patients.

The result is that state laws are currently embroiled in litigation across several circuits, where drugmakers have challenged them for unconstitutionally rewriting a federal program.

It’s no surprise that states are now forced to defend these laws in court. Most state laws add terms to the 340B program that Congress never set and impermissibly target participants in the program, including the drugmakers that agreed to offer the drugs at a lower rate. A state law that singles out participants in a federal program and adds to their obligations is an attempt to circumvent Congress and change the program. The Supremacy Clause bars states from rewriting the terms of a federal program this way.

The cascading legal issues with state 340B laws don’t stop there. States are forcing drugmakers to sell prescription drugs at set federal discount prices, sometimes pennies, in sales that federal law lets them decline. Pharmacies and hospitals benefit from the discounted pricing, but the savings are not necessarily given to low-income patients. Hospitals and their contract pharmacies can sell the drugs at full price and pocket the difference.

This arrangement distorts the purpose of 340B to help the underserved, and it violates the Takings Clause. The Constitution allows the government to take private property only for public use. But many state 340B laws prohibit drugmakers from denying a pharmacy’s “acquisition” of their drugs at the federal 340B price, effectively commanding companies to sell at that price whenever a pharmacy asks. That compelled transfer benefits hospitals and pharmacies, not the public.

Patients do not necessarily benefit from this state intrusion into the 340B program. Nothing in the program or most of the new state laws require hospitals or contract pharmacies to pass drug discounts to patients. Instead, contract pharmacies typically dispense drugs from their own inventory at full price and then restock their inventory at the 340B price for qualifying transactions. But many state 340B laws prevent drugmakers from requiring the claims data they need to identify abuse.

State efforts to expand and manipulate 340B have created a regulatory patchwork that further convolutes the program’s implementation. Drug companies sell through national wholesalers under nationwide contracts, and every new state law adds another set of rules they must account for and comply with in each of those contracts.

These laws also potentially violate the Dormant Commerce Clause, which bars a state from directly regulating transactions that take place entirely in other states. Drugmakers settle 340B discounts with national wholesalers, which are often based outside the state and bill the drugmaker for each discount after the sale. By banning drugmakers’ conditions on those discounts, a state dictates how much one out-of-state company sells to another, and at what price. Earlier this year, a federal court struck down North Dakota’s 340B law on this ground.

No matter how well-intentioned, state 340B laws are unconstitutional intrusions on the federal 340B program that invite legal turmoil rather than truly helping patients. States should instead petition the federal government to make any needed changes to the program and honor the deal that Congress struck when 340B was created.