Novartis, the Swiss pharmaceutical giant with nearly $6 billion in operating income, has filed a federal lawsuit against Rhode Island to prevent a new state law from taking effect that would restrict drugmakers' ability to limit which pharmacies can dispense discounted medications under the 340B Drug Pricing Program.
The complaint, filed August 12 in Rhode Island District Court against Attorney General Peter Neronha and state auditor general David Bergantino, seeks a preliminary injunction to stop Chapter 288 from going into effect October 1. Novartis claims the law will cause "irreparable harm" to the company, leading to the "loss of Novartis's constitutional rights and unrecoverable administrative costs."
Legal Battle Over Federal Drug Discount Program
At the center of the dispute is the 340B Drug Pricing Program, created by Congress in 1992 through the Veterans' Health Care Act. The program allows qualifying safety-net providers—including community health centers, Ryan White HIV-AIDS clinics, children's hospitals, and certain hospitals serving disproportionate shares of Medicare or Medicaid patients—to purchase drugs at discounted prices.
Rhode Island's Defending Affordable Prescription Drugs Costs Act, known as Chapter 288, prohibits "certain discriminatory actions related to reimbursement of 340B covered entities and 340B contract pharmacies." The law prevents drugmakers from restricting pharmacies contracted with 340B facilities from accessing their medications and prohibits health insurers and pharmacy benefit managers from reimbursing 340B facilities at lower rates than other facilities.
Financial Stakes and Program Growth
The financial implications are substantial. In 2024, Thundermist, a Rhode Island community health center, lost $5 million in potential 340B Program income due to manufacturer restrictions—money that could have prevented 150 employee layoffs, according to a Thundermist executive. Other community health centers and hospitals in Rhode Island have reported similar multimillion-dollar losses.
The 340B Program has experienced dramatic growth, with spending rising from $6.6 billion in 2010 to nearly $44 billion in 2021, according to a Congressional Budget Office report. The CBO attributed one-third of this increase to market trends in drug spending, particularly expensive drugs, while hospital-clinic integration, growth in participating facilities after the Affordable Care Act, and expansion of contract pharmacies also contributed.
Competing Arguments
Novartis argues in its complaint that the 340B Program "has recently ballooned from a niche safety-net program affecting a small minority of healthcare providers into the largest healthcare program most people have never heard of." The company claims growth has been fueled by "a cottage industry of middlemen" that help medical facilities exploit the program, with contract pharmacies not being part of the original program design.
The pharmaceutical company contends that savings often don't reach patients, with medical facilities simply "pocketing the difference." According to the complaint, "The purported 'patients' often do not know they have 'participated' in the program at all. In short: The only beneficiaries of contract pharmacy arrangements are covered entities, contract pharmacies, and the third-party administrators who service them."
Rhode Island's attorney general counters these claims in a responsive memo, noting that hospitals participating in the 340B Program have much higher rates of low-income patients than non-participating hospitals. The memo emphasizes that medical facilities in the program cannot resell or transfer medications to non-patients of the facility.
"Contrary to Novartis' portrayal of the 340B Program as unbounded absent its own unilaterally imposed restrictions, covered entities are required to ensure that 340B discounts are only claimed for qualifying 'patients of the [covered] entity,'" the memo states.
Federal Authority Debate
The legal dispute centers on whether states have authority to regulate aspects of the federal 340B Program. Novartis argues that because the 340B section doesn't explicitly mention contract pharmacies, it can place reasonable restrictions on them, and Rhode Island is overstepping its authority over a federal program.
Rhode Island's attorney general argues that the federal statute's silence on contract pharmacies gives states police powers over health and safety to "fill in [that] silence." The memo contends that "Novartis attempts to convert Section 340B's silence into an affirmative authorization under federal law to restrict the use of contract pharmacies."
Congressional Reform Efforts
The dispute reflects broader national tensions over the 340B Program. On September 10, Representatives Earl L. "Buddy" Carter (R-Georgia) and Diana Harshbarger (R-Tennessee) introduced legislation to reform the program. The proposed bill would officially recognize contract pharmacies while imposing restrictions, limiting participating medical facilities to contracts with up to five pharmacies—a significant reduction from the hundreds some currently use, according to the Novartis complaint.
The legislation would also require participating medical facilities to help low-income and uninsured patients afford medications and impose additional eligibility standards for hospitals and restrictions on for-profit entities.
Philip Chan, chief medical officer of Open Door clinic in Providence, emphasized the program's importance for safety-net providers: "The program allows many clinics to support and provide care for people that may be uninsured or underinsured. Without funding through 340B, many clinics would only be able to provide care to people who could pay for services or who had commercial insurance."
A hearing on Novartis's request for an injunction is scheduled for September 30, with the law set to take effect October 1 if the court doesn't intervene.
