We reported two years ago on a Third Circuit opinion holding that the federal government did not have the authority to require drug manufacturers to deliver 340B-discounted drugs to an unlimited number of pharmacies. The D.C. Circuit came to the same conclusion a year later. See Sanofi Aventis U.S. LLC v. HHS, 58 F.4th 696 (3d Cir. 2023); Novartis Pharm. Corp. v. Johnson, 102 F.4th 452 (D.C. Cir. 2024). These opinions are important because the sale of prescription drugs at steep 340B discounts has exploded over the last 15 years, making it significant that the 340B statute itself allows manufacturers to set limits on the delivery of these discounted products.
The federal government thus has backed down, but that is by no means the end of the story. About twenty states have stepped in to pass laws prohibiting manufacturers from limiting the number so-called “contract pharmacies” that can receive delivery of drugs supplied at 340B-discounted prices. In other words, states are passing laws to accomplish what the federal government cannot. Can states do that?
We don’t think so, but the preliminary results have been mixed. You can read a more-complete description of the 340B program in our earlier post, but in a nutshell, if drug manufacturers want to participate in Medicare and Medicaid, they have to offer their drugs at a discount to certain healthcare providers—called “covered entities”—which typically care for low-income and rural populations. The required discounts are steep, but they are not always passed on to patients. Instead, covered entities can claim reimbursement at full price, for example from insurance carriers, allowing them an opportunity to turn a greater profit.
One problem (among others) is the tremendous expansion of the use of contract pharmacies. When Congress first created the 340B program in 1992, few covered entities had in-house pharmacies, so HHS issued a guidance allowing each covered entity to use one external “contract pharmacy” where the covered entity’s patients could fill their prescriptions.
But then, in a guidance issued concurrently with the passage of the Affordable Care Act in 2010, HHS said that covered entities could use an unlimited number of contract pharmacies, which caused the use of contract pharmacies to increase twentyfold. This is a problem and increases the risk of abuse through duplicate discounts and drug diversion. Several drug manufacturers therefore imposed their own pharmacy limits, which federal law allows them to do.
The issue now is whether states can prohibit manufacturers from imposing these limits, and the latest word that we know of is an order from about a month ago. In Novartis Pharmaceuticals Corp. v. Frey, No. 1:25-cv-00407, 2025 U.S. Dist. LEXIS 198943 (D. Me. Sept. 23, 2025), the district court denied a preliminary injunction sought by drug manufacturers against Maine’s new law prohibiting them from “interfering” with delivery of 340B drugs or requiring the submission of claims data. Id. at *15-*17. Provisions like these are common in the various states’ laws, and you might call them a double whammy: Drug manufacturers are allowed neither to limit deliveries to contract pharmacies nor request information establishing eligibility under the 340B program in the first place.
In denying the preliminary injunction, the district court was not writing on a clean slate. In PhRMA v. McClain, 95 F.4th 1136 (8th Cir. 2024), the Eight Circuit ruled that federal law did not preempt Arkansas’s contract pharmacy law; and the Fifth Circuit more recently rejected federal preemption of Mississippi’s contract pharmacy law in AbbVie v. Fitch, No. 24-60375, 2025 U.S. App. LEXIS 23952 (5th Cir. Sept. 12, 2025) (unpublished).
A district court in West Virginia went the other way. In PhRMA v. Morrisey, 760 F. Supp. 439 (S.D. W. Va. 2024), the district court granted a preliminary injunction over West Virginia’s contract pharmacy law on the basis of implied preemption. First, the West Virginia law, like other states’ laws, prohibited manufacturers from requesting claims data supporting eligibility for 340B discounts. The 340B program, however, includes a dispute resolution system that a manufacturer can use only after first conducting an audit. By disabling a manufacturer’s ability to gather information (i.e., conduct an audit), the West Virginia law stood as an obstacle to the federal process. Id. at 450-53. Second, the West Virginia law allowed enforcement by state authorities and under general unfair trade practices laws. That conflicted with federal law granting enforcement power to the federal government, including exclusive control over price. The state argued that West Virginia’s law was about delivery of drugs, not price. But the district court correctly found delivery and price to be inseparable. Under any circumstances, the pharmacies were receiving the products. The only issue was what price—340B or otherwise—the manufacturer could charge. Id. at 453-60.
Back then to the recent order in Novartis v. Frey, where the district court rejected preemption and addressed a number of additional constitutional issues. Invoking the “presumption of preemption,” the district court in Maine rejected field preemption because the 340B statute was silent on where and how drugs should be delivered. The statute requires manufacturers to “offer” drugs to covered entities at or below the cap prices, but beyond that, the federal statute did not preclude state involvement on such issues as where the purchased drugs would be delivered. The court also rejected conflict preemption because the use of multiple contract pharmacies (and the resulting dramatic increase in sales under 340B discounts) was not inconsistent with the objectives of the 340B program. The court also found that claims data was not necessary to audit covered entities and that the proof necessary to obtain an audit was not “onerous.”
The flaw in this conclusion is that the district court is assuming that the contract pharmacies are acting as mere agents of the covered entities, who are the real purchasers of the products. That is a myth. In reality, contract pharmacies fill prescriptions for covered entity patients from their general stock, and then place orders for drugs at 340B-discounted prices based on a retrospective review of dispensing data. The newly purchased drugs are then co-mingled back into the general inventory. This “replenishment model” is the prevailing system, and it reinforces that the issue here is price. Like the district court in PhRMA v. Morrisey, we don’t see how states should be allowed to interfere.
The manufacturers in Novartis v. Frey raised a number of additional constitutional issues, all of which the district court rejected. First, Maine’s contract pharmacy law did not run afoul of the Dormant Commerce Clause because it did not discriminate between substantially similar entities in the same market. The statute discriminated against out-of-state prescription drug manufacturers for the benefit of in-state pharmacies, but those are different businesses. Second, the statute did not enact a taking forbidden by the Fifth Amendment because participation in the 340B program is voluntary. Third, the statute was not impermissibly vague under due process because, although the word “interfere” could be vague, it provided sufficiently reasonable guidance within context and when aimed at professional, sophisticated parties. In addition, a method existed for drug manufacturers to obtain government clarification before facing penalties, and courts are less likely to find a state statute unconstitutionally vague in a pre-enforcement context and where only civil penalties were at stake, not criminal. Finally, facial pre-enforcement vagueness challenges are generally disfavored, except in the First Amendment context.
We could say much more about these issues, but one thing is certain—this litigation will continue. States continue to enact contract pharmacy laws, and multiple orders are on appeal. Moreover, there is a lot at stake, as spending under the 340B program has increased more than tenfold since 2010, reaching an estimated $66 billion in 2024, or more by some estimates. That is why we keep writing about it.