The 340B program permits eligible hospitals and other “safety-net” providers (340B Covered Entities) to purchase outpatient drugs from pharmaceutical manufacturers at significant discounts. To address its fiscal woes, California’s legislature created Section 14105.46 of the California Welfare and Institutions Code, which reduces Medi-Cal reimbursement by requiring 340B Covered Entities to dispense only 340B drugs to Medi-Cal beneficiaries, and to bill at the acquisition cost plus a dispensing fee (Medi-Cal 340B Carve-In Law).

In the case Aids Healthcare Foundation vs. Toby Douglas, Director of the California Department of Health Services et al [PDF], the Aids Healthcare Foundation (AHF), a nonprofit operating HIV/AIDS clinics and AIDS specialty pharmacies in multiple states, sued California over the Medi-Cal 340B Carve-In Law. On May 3rd, 2013, the United States District Court, Central District of California, issued a permanent injunction in favor of AHF preventing the enforcement of the Medi-Cal 340B Carve-In Law. Although the court denied AHF’s claims that the Medi-Cal 340B Carve-In Law resulted in discrimination violating the Equal Protection Clause of the 14th Amendment to the U.S. Constitution, the court found that the law was in conflict with, and preempted by, federal Medicaid regulations that required CMS approval through an amendment to California’s Medicaid State Plan. In addition, the Court found that the State of California did not comply with 42 U.S.C. Section 1396a(30)(A), which required the State to consider the following before enacting the Med-Cal 340B Carve-In Law: (i) factors of efficiency, economy, and quality of care and Medi-Cal beneficiary access to health care services; and (ii) the costs that 340B Covered Entities incur in dispensing drugs to Medi-Cal beneficiaries.

Ober|Kaler’s Comments

Although the court ruled in favor of AHF, the court’s decision suggests that the Med-Cal 340B Carve-In Law would have been enforceable if implemented in a manner compliant with Medicaid law. Thus, the national impact on similar mandatory 340B carve-in provisions enacted or being considered in other states may be limited to putting the states “on notice” that, prior to enactment, it must obtain CMS approval and consider the host of factors set forth in 42 U.S.C. Section 1396a(30)(A).