Pharmaceutical Research and Mfrs of America v. Alan McClain

United States Court of Appeals
For the Eighth Circuit
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No. 22-3675
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Pharmaceutical Research and Manufacturers of America
Plaintiff - Appellant
v.
Alan McClain, in his official capacity as Commissioner of the Arkansas Insurance
Department
Defendant - Appellee
Community Health Centers of Arkansas; Piggott Community Hospital
Intervenors - Appellees
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American Hospital Association; Arkansas Hospital Association; 340B Health
Amici on Behalf of Appellee(s)
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Appeal from United States District Court
for the Eastern District of Arkansas - Central
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Submitted: September 20, 2023
Filed: March 12, 2024
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Before SMITH, Chief Judge, 1 MELLOY and ERICKSON, Circuit Judges.
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MELLOY, Circuit Judge.
Pharmaceutical Research and Manufacturers of America (“PhRMA”), an
association representing pharmaceutical manufacturers, initially brought this case
against Arkansas Insurance Department Commissioner Alan McClain in his official
capacity arguing that federal law impliedly preempts Arkansas Code § 23-92-604(c)
(“Act 1103”). PhRMA argues that both the Section 340B Program and the Federal
Food, Drug, and Cosmetic Act (“FDCA”) preempt Act 1103 under theories of field,
obstacle, and impossibility preemption. The district court 2 found that Act 1103 was
not preempted by federal law under any theory. We affirm.
I.
For three decades, many Arkansas health care providers have participated in
the Section 340B Program, a drug pricing program established by Congress in 1992.
42 U.S.C. § 256b(a)(1). Section 340B incentivizes pharmaceutical manufacturers to
provide qualified health care providers, referred to as “covered entities,” with pricing
discounts on certain drugs prescribed to individuals and families whose incomes fall
below the federal poverty level. Since the beginning, covered entities have
contracted with outside pharmacies, referred to as “contract pharmacies,” for the
distribution and dispensation of 340B drugs. This is in large part due to the fact that
building or maintaining a pharmacy is cost-prohibitive for many covered entities.
Additionally, the outsourcing of pharmacy services has allowed for drug
dispensation closer to where low-income patients reside. Furthermore, in some
1
Judge Smith completed his term as chief judge of the circuit on March 10,
2024. See 28 U.S.C. § 45(a)(3)(A).
2
The Honorable Billy Roy Wilson, United States District Judge for the Eastern
District of Arkansas.
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states, like Arkansas, state law prohibits most nonprofit and government-funded
providers from operating their own in-house pharmacies.
For 25 years, drug manufacturers represented by PhRMA distributed 340B
drugs to covered entities’ contract pharmacies. Then, in 2020, drug manufacturers
began implementing distribution policies that limited or prohibited covered entities
from contracting with outside pharmacies for the dispensation of 340B drugs to
patients. This caused covered entities dependent on contract pharmacies to become
unable to serve patients in need. The Arkansas General Assembly responded in 2021
by passing Act 1103, Ark. Code Ann. § 23-92-604(c), which applies to drug
distribution agreements between manufacturers and covered entities in Arkansas.
Act 1103 prohibits manufacturers from limiting covered entities’ ability to contract
with outside pharmacies.
After the passage of Act 1103, PhRMA brought this lawsuit against
Commissioner McClain, the head of the agency charged with enforcing Act 1103.
For purposes of this appeal, PhRMA takes issue with Ark. Code Ann. § 23-92-
604(c), arguing that it is preempted by Section 340B and the FDCA and is therefore
unconstitutional.3 After PhRMA filed suit, Piggott Community Hospital and
Community Health Centers of Arkansas (collectively, “Intervenors”) intervened.
Piggott Community Hospital is a 340B hospital that is owned and operated by the
City of Piggott, Arkansas. Community Health Centers of Arkansas is a nonprofit
comprised of eleven community health centers that all participate in the 340B
Program. PhRMA and Intervenors filed cross-motions for summary judgment,
which the district court granted in favor of Intervenors. PhRMA appeals the district
court’s decision. We affirm.
3
PhRMA also argues that Act 1103 violates the Commerce Clause of the U.S.
Constitution. The district court granted the parties’ joint motion to stay proceedings
on the Commerce Clause issue pending the outcome of the preemption issue.
Accordingly, the Commerce Clause issue is not before us on appeal.
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II.
“Article VI of the Constitution provides that the laws of the United States
‘shall be the supreme Law of the Land; . . . any Thing in the Constitution or Laws of
any state to the Contrary notwithstanding.’” Cipollone v. Liggett Grp., Inc., 505 U.S.
504, 516 (1992) (citing Art. VI, cl. 2). It has long been established “that state law
that conflicts with federal law is ‘without effect.’” Id. (citation omitted); see, e.g.,
M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 427 (1819). “Congress may . . .
pre-empt, i.e., invalidate, a state law through federal legislation.” Oneok, Inc. v.
Learjet, Inc., 575 U.S. 373, 376 (2015). “But even where, as here, a statute does not
refer expressly to pre-emption, Congress may implicitly pre-empt a state law, rule,
or other state action.” Id. Where preemption is alleged, “‘[t]he purpose of Congress
is the ultimate touchstone’ of pre-emption analysis.” Cipollone, 505 U.S. at 516
(quoting Malone v. White Motor Corp., 435 U.S. 497, 504 (1978)). Congress may
impliedly preempt state law “either through ‘field’ pre-emption or ‘conflict’ pre-
emption.” Oneok, Inc., 575 U.S. at 377. Field preemption exists where “Congress
has forbidden the State to take action in the field that the federal statute pre-empts.”
Id. “By contrast, conflict pre-emption exists where ‘compliance with both state and
federal law is impossible,’ or where ‘the state law stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.’” Id.
(quoting California v. ARC Am. Corp., 490 U.S. 93, 100, 101 (1989)) (internal
quotation marks omitted). In either situation, federal law must prevail.
Notwithstanding the supremacy of federal law, “[c]onsideration of issues
arising under the Supremacy Clause ‘start[s] with the assumption that the historic
police powers of the States [are] not to be superseded by . . . Federal Act unless that
[is] the clear and manifest purpose of Congress.’” Cipollone, 505 U.S. at 516
(quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)). Indeed, there
is a “presumption that state or local regulation of matters related to health and safety
is not invalidated under the Supremacy Clause.” Hillsborough Cnty., Fla. v.
Automated Med. Lab’ys, Inc., 471 U.S. 707, 715 (1985).
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PhRMA argues that Section 340B impliedly preempts Act 1103 through field
and obstacle preemption and that the FDCA preempts Act 1103 through
impossibility preemption. “We review de novo the district court’s resolution of
cross-motions for summary judgment, ‘viewing the evidence in the light most
favorable to the nonmoving party and giving the nonmoving party the benefit of all
reasonable inferences.’” Principal Nat’l Life Ins. Co. v. Rothenberg, 70 F.4th 1046,
1052 (8th Cir. 2023) (quoting Dallas v. Am. Gen. Life & Accident Ins. Co., 709 F.3d
734, 736 (8th Cir. 2013)). We will affirm a district court’s grant of summary
judgment when “there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
A.
1.
PhRMA first argues that Section 340B preempts Act 1103 under theories of
field and obstacle preemption. Congress established Section 340B of the Public
Health Services Act as a pharmaceutical pricing program that “imposes ceilings on
prices drug manufacturers may charge for medications sold to specified health-care
facilities.” Astra USA, Inc. v. Santa Clara Cnty., Cal., 563 U.S. 110, 113 (2011); 42
U.S.C. § 256b. These health care providers “perform valuable services for low-
income and rural communities but have to rely on limited federal funding for
support,” and the 340B Program was designed in part to support this work. Am.
Hosp. Ass’n v. Becerra, 596 U.S. 724, 738 (2022). The 340B Program is
administered by the Secretary of Health and Human Services (“HHS”) and
“superintended by the Health Resources and Services Administration” (“HRSA,” an
HHS agency), who help implement and enforce the prices that pharmaceutical
manufacturers charge to covered entities. Astra USA, Inc., 563 U.S. at 113; 42 U.S.C.
§ 256b.
The 340B Program “has three basic parts: (1) a cap on drug makers’ prices,
(2) restrictions on covered entities, and (3) compliance mechanisms” for both
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covered entities and manufacturers. Sanofi Aventis U.S. LLC v. U.S. Dep’t of Health
& Hum. Servs., 58 F.4th 696, 699 (3d Cir. 2023). First, as a condition of participating
in Medicaid, drug manufacturers must “opt into the 340B Program by signing a form
Pharmaceutical Pricing Agreement” with the Secretary of HHS. Astra USA, Inc.,
563 U.S. at 113. The Pharmaceutical Pricing Agreement requires manufacturers to
sell drugs to covered entities at a discounted “ceiling price.” 42 U.S.C. § 256b(a)(1).
The ceiling price is determined by a statutory formula. 42 U.S.C. §§ 256b(a)(2),
1396r-8(c). The second part of 340B mandates that discounted prices are only made
available to covered entities. Id. § 256b(a). Covered entities are defined by statute to
include fifteen different types of public and not-for-profit hospitals, community
centers, and clinics that are “dominantly, local facilities that provide medical care
for the poor.” Astra USA, Inc., 563 U.S. at 115; see also 42 U.S.C. § 256b(a)(4).
Finally, the 340B Program includes compliance mechanisms, penalties for
noncompliance or abuse by manufacturers and covered entities, and a dispute
resolution process through HHS. See, e.g., Astra USA, Inc., 563 U.S. at 115–16;
Sanofi Aventis U.S. LLC, 58 F.4th at 701–02. Manufacturers are required to report
their 340B ceiling prices to the HRSA on a quarterly basis and are subject to
auditing. 42 U.S.C. § 256b(a)(1), (a)(5)(C). Covered entities may only prescribe
340B discounted drugs to patients who qualify and may not request or receive
duplicative 340B discounts and Medicaid rebates for the same drug. Id.
§ 256b(a)(5)(A)–(B). Additionally, covered entities may not engage in diversion of
covered outpatient drugs through “resell[ing] or otherwise transfer[ring] the drug to
a person who is not a patient of the entity.” Id. § 256b(a)(5)(B). Both the Secretary
of HHS and drug manufacturers are authorized to audit covered entities to ensure
compliance with the diversion and duplicate rebate provisions. Id. § 256b(a)(5)(C).
Drug manufacturers and covered entities that fail to comply “can be fined, and
covered entities can be kicked out of the program.” Sanofi Aventis U.S. LLC, 58
F.4th at 700. When payment, pricing, diversion, or discount disputes arise between
manufacturers and covered entities, 340B mandates parties first go through HHS’s
dispute resolution process to resolve the issue. 42 U.S.C. § 256b(d)(3).
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As the Third Circuit has observed, the 340B Program “is silent about delivery”
and distribution of pharmaceuticals to patients. Sanofi Aventis U.S. LLC, 58 F.4th at
703. The pharmaceutical distribution chain is complex, and contract pharmacies are
not the only third parties involved in getting 340B drugs from manufacturers to
patients. Pharmaceutical manufacturers sell their drugs to wholesalers who then
distribute and sell drugs to pharmacies or health care providers. Section 340B
addresses drug wholesalers but does not mention pharmacies or the delivery of drugs
by pharmacies to patients. Yet pharmacies are essential, and legally required, as part
of the drug distribution chain. Thus, pharmacies have always been important
participants in delivering 340B drugs to patients.
Although some covered entities have in-house pharmacies, many do not.
Indeed, early in the 340B Program, HRSA observed that most covered entities relied
on contract pharmacies, while only about four percent of such entities used in-house
pharmacies. Notice Regarding Section 602 of the Veterans Health Care Act of 1992;
Contract Pharmacy Services, 61 Fed. Reg. 43,549, 43,550 (Aug. 23, 1996).
Therefore, since the 1990s, covered entities have contracted with outside pharmacies
to handle the acquisition, distribution, and dispensation of 340B drugs.
When covered entities enter into agreements with contract pharmacies, these
pharmacies do not become beneficiaries of the 340B Program. Rather, HRSA has
clarified that “the use of contract services is only providing those covered entities
(which would otherwise be unable to participate in the program) a process for
accessing 340B pricing” for patients. 61 Fed. Reg. at 43,550. “Covered entities using
contract pharmacies . . . still order and pay for the drugs, but they [are] shipped
directly to the pharmacies.” Sanofi Aventis U.S. LLC, 58 F.4th at 700. Covered
entities maintain legal title to the 340B drugs. 61 Fed. Reg. at 43,552. “The
mechanism does not in any way extend this pricing to entities which do not meet
program eligibility.” Id. at 43,550. This includes contract pharmacies. Instead, the
pharmacy becomes an agent of the covered entity with the authorization to “dispense
340B drugs to patients of the covered entity pursuant to a prescription.” Id.
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2.
In May 2021, the Arkansas General Assembly enacted Act 1103 in response
to the growing practice among pharmaceutical companies of prohibiting or
restricting covered entities from contracting with outside pharmacies. PhRMA
argues that the following section of Act 1103 is preempted:
(c) A pharmaceutical manufacturer shall not:
(1) Prohibit a pharmacy from contracting or participating with an
entity authorized to participate in 340B drug pricing by denying access
to drugs that are manufactured by the pharmaceutical manufacturer; or
(2) Deny or prohibit 340B drug pricing for an Arkansas-based
community pharmacy that receives drugs purchased under a 340B drug
pricing contract pharmacy arrangement with an entity authorized to
participate in 340B drug pricing.
Ark. Code Ann. § 23-92-604(c). Act 1103 defines “340B drug pricing” as “the
program established under section 602 of the Veterans Health Care Act of 1992,”
referring to the 340B Program. Id. § 23-92-602(5). The Arkansas Insurance Division
also promulgated a rule that defines “340B drug pricing” as “the acquisition and
delivery of 340B-priced drugs as established under section 602 of the Veterans
Health Care Act of 1992, Pub. L. No. 102-585.” 003-22-123 Ark. Code R. § II(7)
(West 2022). The first subsection of section 23-92-604(c) prohibits pharmaceutical
manufacturers from interfering in a covered entity’s agreement with a contract
pharmacy by denying the pharmacy access to a covered entity’s 340B drugs. The
second subsection prohibits pharmaceutical manufacturers from interfering in a
covered entity’s agreement with a contract pharmacy by denying 340B drug pricing
to covered entities who use contract pharmacies for distribution.
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3.
PhRMA first argues that Act 1103 is unconstitutional because the 340B
Program preempts the field. In cases where, as here, a statute does not expressly
preempt state law, it may nonetheless do so through field preemption. When a federal
regulatory scheme occupies the field because of its pervasive nature, leaving no
room for state action, field preemption applies. Cipollone, 505 U.S. at 516. Field
preemption also applies when Congress “intend[s] ‘to foreclose any state regulation
in the [regulated] area,’ irrespective of whether state law is consistent or inconsistent
with ‘federal standards.’” Oneok, Inc., 575 U.S. at 377 (quoting Arizona v. United
States, 567 U.S. 387, 401 (2012)). Congress’s intent to preempt a field “can be
inferred from a framework of regulation ‘so pervasive . . . that Congress left no room
for the States to supplement it’” or a “federal interest . . . so dominant that the federal
system will be assumed to preclude enforcement of state laws on the same subject.”
Arizona, 567 U.S. at 399 (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218,
230 (1947)). Neither inference is present here.
First, the 340B Program is not “so pervasive . . . that Congress left no room
for the States to supplement it.” Id. Pharmacies have always been an essential part
of the 340B Program. Yet, the text of 340B “is silent about delivery” of drugs to
patients. Sanofi Aventis U.S. LLC, 58 F.4th at 703. This silence contrasts with 340B’s
provisions that directly address distribution by third-party wholesalers. See, e.g., 42
U.S.C. § 256b(a)(8). Congress’s decision not to legislate the issue of pharmacy
distribution indicates that Section 340B is not intended to preempt the field.
Furthermore, “the practice of pharmacy is an area traditionally left to state
regulation.” Pharm. Care Mgmt. Ass’n v. Wehbi, 18 F.4th 956, 972 (8th Cir. 2021).
Indeed, when it comes to pharmaceuticals, the federal government has “‘traditionally
regarded state law as a complementary form of drug regulation’ and has ‘long
maintained that state law offers an additional, and important, layer of consumer
protection that complements [federal] regulation.’” Lefaivre v. KV Pharm. Co., 636
F.3d 935, 940–41 (8th Cir. 2011) (quoting Wyeth v. Levine, 555 U.S. 555, 578–79
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(2009)). “The case for federal pre-emption is particularly weak where Congress has
indicated its awareness of the operation of state law in a field of federal interest, and
has nonetheless decided to stand by both concepts and to tolerate whatever tension
there [is] between them.” Id. at 940 (citation omitted). We believe Congress was
aware of the role of pharmacies and state pharmacy law in implementing 340B.
Therefore, Congressional silence on pharmacies in the context of 340B indicates that
Congress did not intend to preempt the field.
PhRMA contends that 340B preempts the field because Congress intended to
create a “closed system” with the statute. To support this argument, PhRMA first
asserts that Act 1103 impermissibly interferes with 340B’s “closed system” by
adding pharmacies to the enumerated list of covered entities eligible to receive 340B
pricing on drugs. This misconstrues what Act 1103 does. Pharmacies do not
purchase 340B drugs, and they do not receive the 340B price discounts. Covered
entities purchase and maintain title to the 340B-discounted drugs, while contract
pharmacies dispense these drugs to covered entities’ patients. Sanofi Aventis U.S.
LLC, 58 F.4th at 700.
Second, PhRMA argues that Act 1103 creates its own oversight and
enforcement scheme by empowering a state agency to exact penalties on
manufacturers who refuse to distribute to contract pharmacies. PhRMA argues this
contravenes HHS’s exclusive 340B jurisdiction. Again, PhRMA conflates the two
statutes. Act 1103 ensures that covered entities can utilize contract pharmacies for
their distribution needs and authorizes the Arkansas Insurance Division to exact
penalties and equitable relief if manufacturers deny 340B drugs to covered entities’
contract pharmacies. Ark. Code Ann. § 23-92-604(c). The 340B Program, on the
other hand, addresses discount pricing. Therefore, HHS has jurisdiction over
different disputes: disputes between covered entities and manufacturers regarding
pricing, overcharges, refunds, and diversion of 340B drugs to those who do not
qualify for discounted drugs.
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Pharmacy has traditionally been regulated at the state level, and we must
assume that absent a strong showing that Congress intended preemption, state
statutes that impact health and welfare are not preempted. Pharm. Care Mgmt. Ass’n,
18 F.4th at 972. For these reasons, we conclude that in enacting Section 340B,
Congress did not intend to preempt the field.
4.
PhRMA next argues that Act 1103 is unconstitutional because of obstacle
preemption. “Where state and federal law ‘directly conflict,’ state law must give
way.” PLIVA, Inc. v. Mensing, 564 U.S. 604, 617 (2011) (citation omitted). Obstacle
preemption exists where state law “stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.” Crosby v. Nat’l Foreign
Trade Council, 530 U.S. 363, 373 (2000). What qualifies as “a sufficient obstacle is
a matter of judgment, to be informed by examining the federal statute as a whole and
identifying its purpose and intended effects.” Id. “If the purpose of the act cannot
otherwise be accomplished—if its operation within its chosen field else must be
frustrated and its provisions be refused their natural effect—the state law must yield
to the regulation of Congress within the sphere of its delegated power.” Id. (citation
omitted).
Act 1103 does not create an obstacle for pharmaceutical manufacturers to
comply with 340B, rather it does the opposite: Act 1103 assists in fulfilling the
purpose of 340B. In arguing otherwise, PhRMA presents no evidence of an obstacle.
Instead, PhRMA raises the same arguments it raised with field preemption. We reject
these same arguments again here.
Act 1103 does not require manufacturers to provide 340B pricing discounts
to contract pharmacies. Act 1103 does not set or enforce discount pricing. As such,
the delivery of a covered entity’s 340B drugs to contract pharmacies for dispensing
creates no obstacle. Additionally, Act 1103’s penalties are aimed at activity that falls
outside the purview of 340B: Act 1103 incentivizes compliance through monetary
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penalties and equitable relief. Arkansas is simply deterring pharmaceutical
manufacturers from interfering with a covered entity’s contract pharmacy
arrangements. There is no obstacle for pharmaceutical manufacturers to comply with
both Act 1103 and Section 340B.
B.
PhRMA also argues that Act 1103 is unconstitutional because of impossibility
preemption. PhRMA argues that as to certain highly regulated drugs, Act 1103’s
distribution requirement is at odds with the FDCA’s Risk Evaluation and Mitigation
Strategies (“REMS”) Program. 23 U.S.C. § 355-1. The REMS Program is
administered by the Food and Drug Administration (“FDA”) and regulates high-risk
pharmaceutical products to ensure their safe distribution and use. Through this
statutory scheme, the FDA can attach a REMS requirement to ensure that a
pharmaceutical’s benefits outweigh the risk of harm if not properly distributed or
dispensed. 21 U.S.C. § 355-1. REMS requirements can impose more restrictive
methods of distribution or dispensation to ensure safety. Additionally, the REMS
Program may require pharmacies to become certified to dispense REMS medication,
and REMS may also limit which pharmacies qualify to receive and dispense REMS
drugs. Id. § 355-1(e). As such, “[d]rug makers often comply by limiting distribution
to a few pharmacies that are specially trained to educate and monitor patients.”
Sanofi Aventis U.S. LLC, 58 F.4th at 705.
Act 1103 does not make it impossible for drug manufacturers and wholesale
distributors to comply with the REMS Program, and therefore the FDCA does not
preempt Act 1103. Impossibility preemption exists when it is “impossible for a
private party to comply with both state and federal requirements.” PLIVA, Inc., 564
U.S. at 618 (citation omitted). “The question for ‘impossibility’ is whether the
private party could independently do under federal law what state law requires of
it.” Id. at 620. Impossibility preemption “arises when ‘compliance with both federal
and state regulations is a physical impossibility.’” Hillsborough Cnty., Fla., 471 U.S.
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at 713 (quoting Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142–
43 (1963)).
Act 1103 does not force pharmaceutical manufacturers to violate REMS. Act
1103 prohibits drug manufacturers from denying 340B covered entities the ability
to contract with third-party pharmacies for dispensation of 340B drugs. If a 340B
drug is also subject to REMS safety requirements and the covered entity wants to
contract with a pharmacy for dispensation, the covered entity bears the responsibility
of contracting with a pharmacy that meets the REMS requirements. Providers,
manufactures, and pharmacies are subject to many legal and regulatory requirements
in the area of drug distribution. Just because a medication is subject to multiple legal
requirements does not make it impossible to comply with Act 1103. PhRMA alleges
no circumstance where a covered entity’s contract pharmacy arrangement has made
simultaneous compliance with state and federal law impossible. As such, the FDCA
does not preempt Act 1103.
III.
For the foregoing reasons, Arkansas Act 1103 is not preempted by Section
340B or the FDCA’s REMS Program. We affirm.
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