Subsidies for low-income healthcare providers hotly disputed at First Circuit

BOSTON (CN) — Laws in nearly two dozen states that help subsidize nonprofit healthcare providers for low-income patients — but that drug manufacturers claim encourage fraud and abuse and unfairly benefit large pharmacies such as CVS and Walgreens — came under fire in no fewer than six cases in the First Circuit Tuesday and Wednesday. Despite nearly five hours of argument before two different panels, it wasn’t clear what the result would be.

The cases involved the “340B program,” a federal requirement that drugmakers who want their products to be reimbursed by Medicare and Medicaid offer them at reduced prices to certain nonprofit healthcare providers serving low-income communities. The drugmakers have a very strong incentive to participate in 340B inasmuch as Medicare and Medicaid account for $100 billion in drug sales a year, or almost half of all drug sales in the country.

Starting in 2010, the number of covered nonprofit healthcare providers was expanded, and many of the new ones began contracting with multiple pharmacies to handle the drug sales — a move that greatly increased their revenue and allowed them to expand their programs at the expense of manufacturers that were forced to sell far more drugs at reduced prices. By 2020, the average provider was working with 22 different pharmacy chains, often passing along a share of their revenue from buying drugs at a steep discount and selling them at full price.

Both CVS and Walgreens have stated publicly that this revenue-sharing has become an important part of their bottom lines.

The drugmakers cried foul, demanding the providers limit themselves to one pharmacy chain and also tell them who the patients and prescribers are so they can audit the system for fraud and abuse — demands upheld under federal law by the Third and D.C. Circuits.

But a large number of states became concerned because they liked the idea of expanding low-income residents’ healthcare and having the drugmakers pay for it, so they passed laws prohibiting the manufacturers from making such demands.

The First Circuit heard challenges to two such laws — in Maine and Rhode Island — in which lower courts rejected separate requests for preliminary injunctions by Novartis, AbbVie and a trade association.

At oral argument, the three plaintiffs took different approaches. Novartis argued the state laws were preempted by 340B, either because they conflicted with it or because Congress had occupied the field to the exclusion of state authority.

Rhode Island’s lawyer pushed back on this. “Just because Congress has passed a program doesn’t mean the states can’t add additional requirements or impose additional obligations,” argued James Arguin, who noted Congress was silent about multiple pharmacies.

But, “Silence is not a license to add additional terms,” responded Novartis’ lawyer, Jessica Ellsworth of Hogan Lovells in Washington, D.C.

U.S. Circuit Judge Julie Rikelman was skeptical Congress had occupied a large field. “What if I say, Congress didn’t prevent this, but it just didn’t act, and states can fill the gap?” she asked.

“The field is narrow and leaves lots open to the states. Why am I wrong?” the Joe Biden appointee added.

Ellsworth complained that the federal program had exploded in scope, but U.S. Circuit Judge Seth Aframe, another Biden appointee, wasn’t sure that mattered. “How do we know if that’s good, bad or indifferent?” he asked. “The nub of it is, did Congress really want that? And I haven’t heard.”

AbbVie’s lawyer took a different tack, claiming the state laws were an unconstitutional “taking” because the manufacturers were required to sell additional drugs at lower prices without just compensation.

“We agreed to the 340B program, not the Maine statute,” said Matthew Owen of Kirkland & Ellis in Washington, D.C. “There’s no additional benefit in return for that obligation. We can participate in Medicare with one pharmacy. Maine adds nothing.”

That’s “a pretty strong argument,” Aframe commented.

Rikelman asked if the takings argument was based on preemption, and Owen — perhaps sensing that the preemption theory was generating a lot of pushback — said no, that regardless of preemption, the state still had to obey the Constitution. He said the Rhode Island law was comparable to a law that said “anyone in Rhode Island who participates in a federal program has to allow warrantless searches and seizures.”

This led into a complex discussion of congressional intent and whether federal lawmakers wanted states to have a role. But arguing for the trade group, Erin Murphy said congressional intent was irrelevant because “states can insert themselves into federal programs only if Congress clearly and unambiguously allowed them to do so.”

“States simply don’t have any inherent or presumptive power to regulate the terms of programs that originate from, are governed by, and terminate according to federal law,” said Murphy, of Clement & Murphy in Washington, D.C. “The Supreme Court has held that for more than two centuries,” she added, citing a famous 1819 case involving the country’s first national bank.

Arguin claimed the state laws were merely broad police-power regulations that were traditionally applicable. But the drugmakers’ lawyers countered that the state laws were limited to 340B and were entirely “parasitic” on the federal statute.

“If 340B went away tomorrow, what would your law still do?” asked Rikelman skeptically.

The federal government, which participated as an amicus, argued on behalf of the drugmakers. It claimed that if states could impose onerous additional requirements on manufacturers, they would drop out of the program, and Congress’ intent would be thwarted.

“If the costs outweigh the benefits, these programs are going to collapse,” warned Maxwell Baldi of the Justice Department. “That’s a real concern,” he said, noting one drug company had already left the program.

Baldi argued that if the states won, then any state that wanted to undermine a federal policy could do so simply by “targeting” participants or beneficiaries. States could undermine Social Security by imposing a huge surtax on recipients or stop federal low-income housing by blocking it with zoning regulations.

It’s unclear how the court will handle the fact that the exact same issue is before two different panels in cases arising from two different states. In addition to Aframe, the Maine cases were argued before U.S. Circuit Judge O. Rogeriee Thompson, a Barack Obama appointee, and Joshua Dunlap, who was appointed by Donald Trump. The Rhode Island cases were before Rikelman, Dunlap and U.S. District Judge María Antongiorgi-Jordán, a Biden appointee from the District of Puerto Rico sitting by designation.