The federal courthouse in Sioux Falls. (John Hult/South Dakota Searchlight)
PIERRE, S.D. (South Dakota Searchlight) -A drugmaker is suing South Dakota over a law that bars the company from limiting drug discounts used to prop up providers who serve Medicaid patients.
The lawsuit is from Chicago-based AbbVie Inc., which sells the wrinkle-remover Botox and the arthritis drug Humira, among other products. The litigation challenges the legality of a bill signed into law by South Dakota Gov. Larry Rhoden on March 11.
Senate Bill 154 bars drug companies from limiting the number of pharmacies that hospitals and clinics can contract with to distribute drugs through the federal 340B program.
The bill’s supporters called 340B a lifeline for rural health care providers and pharmacies. Those providers are kneecapped by Medicare and Medicaid reimbursements too low to keep the lights on, they said, and they need the supplemental income.
The bill’s opponents, however, argued that the way providers use 340B to recoup their expenses — by getting drugs on the cheap and marking them up — is unsustainable, harmful to patients and interferes in the free market.
The Legislature sided with providers.
In its lawsuit, AbbVie Inc. alleges that South Dakota’s new law amounts to an illegal “taking” of the company’s products by forcing it to provide them at a discount through contract pharmacies without any say in which or how many pharmacies are involved.
The company also argues that SB 154 alters the terms of a federal law South Dakota legislators did not write and cannot legally modify, and that it seeks to regulate interstate commerce in a way only Congress has the power to do.
The bill “places an improper thumb on the scale and tilts the bargaining power in favor of in-state pharmacies and covered entities at the expense of out-of-state manufacturers,” the lawsuit says.
Other states have passed similar laws and faced similar lawsuits.
AbbVie filed its lawsuit Thursday in U.S. District Court in South Dakota. Six days ago, a federal judge in Minnesota dismissed a similar case challenging the legality of a similar law in that state.
The Eighth Circuit of Appeals ruled in favor of Arkansas for its version of the law.
The pharmaceutical industry has also won some victories, though. Last summer, in a case filed by United Therapeutics Corporation in Washington, D.C., a three-judge panel upheld a lower court’s ruling that the law behind the 340B program doesn’t bar drugmakers from imposing limitations on how it distributes drugs through the program.
Attorney General Marty Jackley is a named defendant in the South Dakota case, as is Larry Deiter, director of the state Division of Insurance.
Jackley’s office defends state law in court, regardless of Jackley’s status as a named defendant in a case. His spokesman, Tony Mangan, told South Dakota Searchlight on Friday that the state had not yet been served with a copy of the lawsuit.
History, changes to program
The 340B program requires drugmakers who want to participate in Medicaid and Medicare to discount their prices for hospitals, clinics and other providers that serve low-income patients. Those “covered entities” can then sell those drugs at a higher price and use the difference to help fill budget gaps and keep the doors open for patients.
When it became law in 1992, 340B was limited to a small subset of hospitals and clinics, like those serving mostly Medicaid patients. The Affordable Care Act of 2010 expanded 340B to a wider range of providers, roping in places that act as “sole community hospitals” for Medicaid patients who reside in rural geographies. Since then, according to a report from the American Hospital Association, the number of rural providers using it has more than doubled.
What’s also happened, according to the lawsuit from AbbVie, is an expansion of access to lower prices by contract pharmacies.
Commercial pharmacies don’t qualify as “covered entities” under 340B, meaning they don’t have access to discounted drugs unless they contract with a health care provider who does.
The lawsuit paints the agreements between Medicaid-serving providers and their contracted pharmacies as a way to make money on the backs of drugmakers and low-income patients.
“Instead of serving the covered entities’ uninsured and low-income patients, the for-profit contract pharmacies acquire manufacturers’ drugs at the federally discounted price, sell them to patients (including indigent patients) at full price, and pocket the difference,” the lawsuit says.
South Dakota providers: Program keeps us afloat
Lobbyists for South Dakota’s health care systems, rural hospitals and pharmacists offered a different perspective on the arrangements.
Mobridge Regional Hospital Director John Ayoub told lawmakers in February that his nonprofit system serves clients across North and South Dakota.
“We are the only hospital providing obstetrical services and delivering babies, as well as the only hospital providing general and trauma surgery services in at least a 100 mile radius in every direction,” Ayoub said.
Many of its patients qualify for Medicaid, Ayoub said, and low reimbursement rates mean the Mobridge system often operates in the red. It lost $600,000 last year, he said, and $1 million the year before.
Without the financial prop-up of 340B — funded by drugmakers, not taxpayers — some services might have to end and “people will die.”
“This is not hyperbole,” he said. “It’s just a fact.”
Dillon Kjerstad operates independent pharmacies in Philp and Custer. He said the ability to collect a “reasonable fee” through 340B helps him keep the doors open. If drug companies were able to limit contract pharmacies, it might make it impossible for him to continue offering drugs to Medicaid patients.
“Driving 90 miles to Rapid City in the dead of winter just isn’t an option for my pharmacy’s senior diabetic patient who needs medications now,” Kjerstad said Feb. 19.
Drug company lobbyists and the lobbyist for a free-market political organization told lawmakers that the bill seeks to solve a problem that ought to be solved by Congress.
Sen. Sydney Davis, R-Burbank, voted in favor of SB 154. Before casting her vote, though, she offered a nod to the notion that 340B fills a gap created by low federal reimbursement rates.
“Hospitals and clinics and pharmacies are playing the cards that they’ve been dealt,” Davis said. “And Congress needs to take action.”
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