What Bismarck Means for 340B

Three stories, one underlying argument. The federal compact that has propped up rural hospital balance sheets for a generation — discounted drugs, generous interpretations, light enforcement — is being rewritten in real time. Critical Access Hospital (CAH) administrators in North Dakota cannot afford to read the Traynor ruling as a one-state news item. It is a window into how the program will be litigated, audited, and ultimately reshaped over the next twenty-four months.

Imagine a rural patient walks into a pharmacy and pays $300 for a prescription. The hospital that wrote the prescription bought the same drug from the manufacturer for less than a dollar. That difference is real money, and it is the foundation of a federal program called 340B.

Thirty-three years ago, Congress made drug companies a deal: if you want Medicare and Medicaid to pay for your drugs, you have to offer those same drugs at deep discounts to safety-net hospitals and clinics that serve low-income patients. What started as a modest subsidy now moves an estimated $80 billion in drugs a year, on rules written largely by federal agency guidance rather than by Congress — and on a statute that nowhere requires the discount to reach the patient. That legal foundation has begun to crack. Last week, a federal judge in Bismarck added North Dakota to a growing list of states whose 340B laws have run into constitutional trouble, striking down House Bill 1473 in its entirety. For rural hospitals, the stakes are not abstract. They operate on margins of one or two percent at the median, and many run negative.²² The spread between what a hospital pays for a 340B drug and what it bills for it is, for most rural facilities, one of the more reliable revenue streams it has — and for hospitals with low volume and high fixed costs, it is what subsidizes the services that don’t pay for themselves: emergency department staffing, obstetrics, charity care, chronic disease management. North Dakota’s 37 Critical Access Hospitals²³ are not the conglomerates the court was describing. But they are part of the same legal architecture, and when that architecture starts to break, every covered entity in the country is affected.¹

Two other 340B stories are running in parallel this spring. In December, a federal court in Maine blocked the federal Health Resources and Services Administration (HRSA) from launching a pilot program that would have required hospitals to pay full price up front for ten high-cost drugs and seek rebates afterward, instead of the discounts they get today. In February the same court sent the program back to HRSA to be redesigned. HRSA opened a Request for Information on a revised version on February 17; comments closed April 20. A new version of the pilot could be announced this quarter.² And the administration's FY2027 budget, released April 3, proposes moving 340B's federal oversight office out of HRSA and into the Centers for Medicare & Medicaid Services (CMS), with a 68 percent increase in its operating budget.³

What 340B Is

The 340B program was created by Congress in 1992 as Section 340B of the Public Health Service Act, named for the section number in the statute that added it.⁴ The mechanic is straightforward. Drug manufacturers who want to sell their products through Medicaid — a market they cannot afford to lose — must agree, as a condition of participation, to sell their outpatient drugs at deeply discounted prices to a defined list of safety-net providers. Those providers are called "covered entities."

The discounts are real. The court took notice of one concrete example from the record: AstraZeneca's Farxiga, a diabetes drug that sells commercially for hundreds of dollars per prescription, dispenses under the 340B program at less than a dollar.⁵ Some products move at a penny per unit. The covered entity then dispenses the drug to its patients. Critically — and this is the structural feature the order returned to repeatedly — the statute does not require the discount to be passed through to the patient. The hospital may bill the patient's insurance at standard rates and retain the spread between the 340B acquisition cost and the reimbursement. The resulting margin is the "340B revenue" that hospital administrators describe as essential to keeping doors open.

Covered entities include disproportionate-share hospitals, Critical Access Hospitals, federally qualified health centers, and a handful of federal grantees serving specific populations. North Dakota's 37 CAHs are all eligible, as are the state's FQHCs and tribal health programs operating under Indian Health Service compacts.

The program has grown — and the growth has been disproportionate. Between 2012 and 2024, the count of registered 340B covered entity sites — parents and their child outpatient locations — tripled, from under 20,000 to more than 60,000. Over a roughly comparable period, contract pharmacy participation went from 1,300 in 2010 to approximately 32,000 in 2024.⁶ That is an approximately twenty-five-fold increase in contract pharmacies against a roughly threefold increase in covered entity sites. Total 340B purchases moved with the contract pharmacy curve, not the covered entity curve: roughly $6.9 billion in 2012, $24.3 billion in 2018, and an estimated $80 billion in 2024.⁷

Where It Broke: The Contract Pharmacy

The contract pharmacy is the fault line in this entire dispute. A covered entity — say, a CAH in central North Dakota — does not necessarily operate its own outpatient pharmacy. To dispense 340B drugs to its patients, it needs a pharmacy that does. In 1996 HRSA issued guidance permitting covered entities to contract with one outside pharmacy for this purpose. In 2010 HRSA expanded the guidance to permit contracts with an unlimited number of pharmacies.⁸ That 2010 change is the proximate cause of every legal dispute now in front of the federal courts.

In practice, almost no covered entity dispenses 340B drugs prospectively. The dominant model is what the order calls "replenishment." The pharmacy fills prescriptions at full price, with no discount visible at the counter. A third-party administrator (TPA) then combs through filled scripts retroactively to identify which were 340B-eligible. Once enough are identified, the pharmacy places a replenishment order at the 340B price, which goes back into general inventory and is dispensed at full price the next time. The wholesaler reconciles the price difference through a chargeback to the manufacturer. HRSA has acknowledged the replenishment model in guidance and Apexus FAQs since the late 1990s, but has never adopted it through formal rulemaking. The TPAs and pharmacies take a percentage or per-script fee. None of this is illegal. None of it pays the patient.⁹

Figure · The Halliday Brief — Replenishment Mechanics  ·  Source: HRSA program guidance & Apexus FAQs; Order ¶¶ 18–20

Beginning in 2020, a series of major manufacturers — Eli Lilly, AstraZeneca, Sanofi, Novartis, Novo Nordisk, Merck, AbbVie, and others — adopted policies limiting contract pharmacy access.²⁴ Most permitted the covered entity one contract pharmacy per service area; some required claims data submission as a condition of shipping. The federal courts, on the whole, sided with the manufacturers. The Third Circuit and the D.C. Circuit both held that the statute does not require manufacturers to deliver to multiple contract pharmacies.¹⁰ "Legal duties do not spring from silence," the Third Circuit wrote, in a phrase Judge Traynor cited approvingly. Once HRSA's enforcement options narrowed, state legislatures stepped in. Arkansas was first, in 2021. More than twenty states have now passed contract pharmacy access laws, with bills pending in another ten state legislatures. North Dakota's HB 1473 is one of the more recent.

The Players

On the covered-entity side: the American Hospital Association, 340B Health, the National Rural Health Association, and state hospital associations. The North Dakota Hospital Association, AHA, 340B Health, and the American Society of Health System Pharmacists filed amicus briefs in the Bismarck case. They lost. Their position is that contract pharmacy access is essential where covered entities do not operate their own pharmacies, and that 340B revenue is one of the few sources of cross-subsidy keeping safety-net services available.

On the manufacturer side: PhRMA — the Pharmaceutical Research and Manufacturers of America — and the major brand-name companies individually. AbbVie and AstraZeneca were the lead plaintiffs in North Dakota; the same companies, sometimes joined by Eli Lilly, Bristol-Myers Squibb, Sanofi, Merck, and Novartis, are the lead plaintiffs in essentially every state contract pharmacy lawsuit. Their position is that 340B has expanded far beyond what Congress intended, that the contract pharmacy model funnels discounts to commercial chain pharmacies and PBMs rather than patients, and that nothing in the statute requires them to fulfill orders at any location a covered entity designates.

On the federal regulatory side: HRSA's Office of Pharmacy Affairs (OPA) currently administers 340B. The agency does not have rulemaking authority — it issues guidance documents and enforces them through audits.¹¹ HRSA audits roughly 200 covered entities per year out of more than 60,000 covered entity sites — about one-third of one percent.¹² The administration's FY2027 budget would move OPA to CMS and raise its funding from $12.2 million to $20.5 million. Audit cadence under CMS will not look like one-third of one percent.

And then there is the court itself. Judge Traynor's order is unusual not for what it holds — federal preemption rulings against state contract pharmacy laws have come from other district courts before — but for the framing. The opinion is not written in the dry register of a typical preemption case. It is written, in places, as an argument:

Whether or not the Eighth Circuit eventually sustains this language on appeal, that sentence will be quoted in 340B reform debates for years. CAH administrators should be ready for it.

What Just Happened in Bismarck

The April 27 order resolves cross-motions for summary judgment in the consolidated AbbVie and PhRMA lawsuits — case numbers 1:25-cv-00081 and 1:25-cv-00204 — together with North Dakota's motion for judgment on the pleadings in the AstraZeneca case, 1:25-cv-00182. The ruling has two independent legal grounds, either of which would be sufficient on its own.

First, the Supremacy Clause. The court held that HB 1473 is field-preempted because the 340B program is structured as a federal spending-power arrangement: manufacturers participate to retain Medicaid and Medicare access, and Congress has set the terms of that participation. By adding state-level criminal penalties, North Dakota was changing the terms of the federal deal. The court accepted as evidence two facts that practitioners should note carefully. Bausch Health withdrew from the 340B program entirely in October 2025 in response to state laws like North Dakota's, with the result that Bausch products are no longer available through Medicare or Medicaid.¹⁴ AbbVie estimated that HB 1473 cost it $10 million in 2025 and would cost $35 million in 2026 in discounted sales it would not otherwise have made.¹⁵ These are not abstractions. They are the kind of program-level evidence that grounds a federal preemption holding.

Second, the dormant Commerce Clause. The court held that even if HB 1473 were not preempted, it would still be unconstitutional because it regulates transactions occurring largely outside North Dakota. The 340B distribution chain runs through a chargeback system: an out-of-state wholesaler ships to a pharmacy, then bills the manufacturer for the difference between the wholesale acquisition cost and the 340B ceiling price. Most of those transactions never touch North Dakota soil. The Eighth Circuit itself struck down a Minnesota generic drug pricing law on the same extraterritoriality reasoning in 2025.¹⁶ Judge Traynor relied on that decision directly.

The state asked the court, in the alternative, to sever the unconstitutional provisions and let the rest of HB 1473 stand. The court refused: the law's entire focus is restricting manufacturer conduct in the federal program, and once that is enjoined, nothing operative remains.

As a practical matter: HB 1473 is unenforceable against AbbVie, its named co-plaintiffs (Allergan, Durata Therapeutics, AbbVie Products LLC, Pharmacyclics, and Allergan Sales), and any PhRMA member meeting the order's enumerated criteria. PhRMA's membership includes essentially every major brand-name manufacturer. The North Dakota Attorney General's office had not announced as of last week whether it will appeal to the Eighth Circuit. Rep. Nelson, who carried the bill, will have the option of returning in the 2027 legislative session with revised language calibrated to the order's reasoning.

The McClain Question

The Eighth Circuit, which would hear any state appeal, ruled in 2024 that Arkansas's 340B contract pharmacy law was not preempted by federal law.¹⁷ That decision, PhRMA v. McClain, is the single most important precedent for North Dakota — and the one that any reading of Judge Traynor's order has to engage with directly.

Judge Traynor does not reject McClain. He distinguishes it on two grounds. The first is that Arkansas formally defined its law as a delivery law — through an Insurance Department regulation that explicitly limited the statute to "the acquisition and delivery of 340B-priced drugs" — and the State briefed McClain accordingly, asserting that "Act 1103 is indubitably an acquisition and delivery statute." North Dakota promulgated no parallel regulation and at points in its briefing argued that HB 1473 in fact regulates pre-sale offer conditions imposed by manufacturers. By the State's own characterization, Traynor held, HB 1473 is not a delivery law. The second ground is that McClain did not address Spending Clause preemption — the theory on which Traynor's preemption holding actually rests.¹⁸

The combination matters. It means the Eighth Circuit on appeal could affirm Traynor without overruling McClain. The state's path back is narrow: argue either that HB 1473 is properly read as a delivery law despite its own briefing, or that Spending Clause preemption is foreclosed by McClain's reasoning even though McClain didn't reach it.

The wider circuit picture is now genuinely split. The Third Circuit (Sanofi v. HHS, 2023) and the D.C. Circuit (Novartis v. Johnson, 2024) both held the federal 340B statute does not require manufacturers to ship to multiple contract pharmacies — federal-law cases that constrain HRSA but do not directly resolve the state-law question. On the state-law question, the lines are drawn. The Fifth Circuit has now ruled twice for the state side: AbbVie v. Fitch in September 2025 (unpublished) and Novartis and PhRMA v. Fitch on April 9, 2026, all affirming denials of preliminary injunctions against Mississippi's law. The Fourth Circuit ruled in the opposite direction on March 31, 2026, in a divided 2-1 panel decision in PhRMA v. McCuskey, finding that West Virginia's 340B law unconstitutionally injects the State into a relationship that is “inherently federal in character.”¹⁹ The American Hospital Association, the West Virginia Hospital Association, 340B Health, and the American Society of Health-System Pharmacists petitioned the full Fourth Circuit for en banc rehearing on April 17. And the Eighth Circuit — the controlling circuit for North Dakota — has another 340B case fully briefed and argued: Novartis v. Hanaway, challenging Missouri's law, argued January 15. A decision is imminent and will set the tone for any North Dakota appeal.²⁰

Read together, the circuits have produced a real and growing split on the state-law question. Two circuits favor manufacturers on related federal claims; the Fourth Circuit (split panel, en banc petition pending) favors manufacturers on the state-law question; the Fifth and Eighth Circuits have favored states. The Eighth Circuit is about to weigh in again. SCOTUS review on this question, while not imminent, has become more plausible than it was a year ago.

The Other Two 340B Stories

In Maine, the U.S. District Court preliminarily enjoined HRSA's 340B Rebate Pilot in December, then vacated and remanded the program to HRSA in February.² The pilot would have permitted manufacturers — initially nine of them, covering ten drugs subject to Medicare's Inflation Reduction Act price negotiations — to provide 340B pricing through after-the-fact rebates rather than upfront discounts. Hospital plaintiffs argued this would create cash-flow disasters for covered entities and would in practice allow manufacturers to slow-walk or deny rebates. The court found HRSA had not adequately considered reliance interests and the substantial administrative burden on safety-net providers. HRSA opened a Request for Information on February 17; the comment deadline was extended once and closed April 20. A revised pilot could be announced this quarter. Covered entities should be modeling cash-flow scenarios for an eventual rebate-based regime, not waiting for a final rule to read.

On the third front: the FY2027 HHS budget, released April 3, proposes transferring OPA to CMS and raising the office's funding from $12.2 million to $20.5 million.³ The proposal still requires congressional action, but it represents the administration's stated direction. For covered entities, the implications are two-sided. Stronger federal posture against manufacturer restrictions is a tailwind. Expanded audit scrutiny — both of manufacturer compliance and of covered-entity compliance — is a headwind. Hospitals that have run their 340B programs lightly under HRSA's traditional one-and-a-half-percent audit cadence may not find the same posture adequate under a CMS that audits Medicare cost reports for a living.

What This Means for North Dakota

With HB 1473 enjoined, North Dakota's 37 CAHs return to the pre-statute baseline: one contract pharmacy per covered entity for products from manufacturers that have adopted restrictions, and continued multi-pharmacy access for products from manufacturers that have not. The Bausch withdrawal is the cautionary tail. When a manufacturer pulls out of 340B entirely rather than navigate a state-by-state regulatory patchwork, it removes its products from Medicare and Medicaid as well — meaning low-income patients who were previously covered for those drugs lose coverage outright. The state-law strategy carries that risk, and it does not show up on a balance sheet until a manufacturer makes the announcement.

The harder question, and the one that deserves attention from CAH boards in the weeks before the Dakota Conference on Rural Health, is what 340B actually does for the hospital. National data suggest concentration: in Minnesota, the state Department of Health’s most recent transparency report — covering 2024 — found that the largest disproportionate-share hospitals, representing about twelve percent of reporting entities, generated more than eighty percent of the state’s $1.34 billion in net 340B revenue, while federally qualified health centers and similar safety-net grantees received less than one percent.²¹ That picture does not look like rural North Dakota. But the structural features Judge Traynor highlighted — the absence of a statutory pass-through requirement, the twenty-five-fold expansion of contract pharmacies, the replenishment model’s effective decoupling of discount from patient — apply to ND CAHs the same as to anyone else.

Judge Traynor's ruling, the Maine Rebate Pilot remand, the FY2027 budget, and the public conversation that has now broken into the federal courts of appeals all point to the same operational conclusion. The 340B program will continue. It will not continue in its current form.