A judge on Tuesday rejected a challenge from major pharmaceutical companies against Washington’s new law trying to reduce prescription drug prices for hospitals.

Governor Bob Ferguson in March signed Senate Bill 5981, one of the most hotly contested policies of this year’s legislative session.

The law, which takes effect Thursday, seeks to add transparency to the federal 340B drug pricing program and to stop drug manufacturers from restricting who can dispense their medications.

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While obscure to many outside of the health care arena, billions of dollars worth of pharmaceutical drugs flow to patients under the 340B program each year. The program’s setup helps to bolster the finances of some hospitals.

Several lawsuits against Washington’s new statute have been consolidated. The companies challenging the law are AbbVie, AstraZeneca, Novartis and Pharmaceutical Research and Manufacturers of America, also known as PhRMA. AstraZeneca is the only one that wasn’t seeking the preliminary block on the law that U.S. District Court Judge David Estudillo denied.

Novartis, AbbVie and PhRMA quickly appealed Estudillo’s decision. The companies didn’t immediately respond to requests for comment.

In an email, attorney general’s office spokesperson Mike Faulk said, “We appreciate the court’s thoughtful review of the arguments,” but otherwise deferred comment to legislators who spearheaded the policy.

The companies believe the state’s new policy is unconstitutionally overriding federal law outlined by Congress, and would cost them millions of dollars every year.

The state counters that legal precedent disagrees, with courts consistently upholding state regulations of the 340B program.

“There is no dominant federal interest in either drug distribution or the 340B program in the Constitution, nor is it a traditional national government responsibility,” Aliana Knoepfler, an attorney for the state, said in court last month.

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Established in 1992, the 340B program requires drug makers to give certain safety-net providers, like those in rural areas or that disproportionately serve low-income patients, hefty discounts on outpatient drugs. Those providers, many of which operate on very thin margins, can then bill insurers for the prescriptions at higher market rates. Pharmaceutical companies have to participate in the program to have their medications covered by Medicaid and Medicare.

In Washington, these include a dental clinic for low-income patients, obstetrics services that disproportionately serve tribal members and pediatric care for children covered by Medicaid, according to court filings. At the Moses Lake Community Health Center, for example, 95% of patients report income below 200% of the federal poverty line.

The goal is to help these hospitals and clinics generate revenue so they can expand care for low-income and uninsured patients. Harborview and the University of Washington medical centers qualify, with the UW Medicine system, which includes both hospitals, expecting $85 million in savings from the law.

Susan Cook, an attorney for Novartis, said that health care providers sometimes use the revenue for expenses that don’t have to do directly with care, like deals for sports facility naming rights or construction of luxury apartment complexes.

Many providers without in-house pharmacies contract with outside pharmacies to distribute medicine to patients, complicating the picture further as the pharmacies can then get a cut of the insurer payments for the discounted drugs.

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This aspect of the 340B program has grown rapidly in recent years, and is a central sticking point with the law. After the passage of the Affordable Care Act in 2010, many more providers qualified to participate in 340B. In 2024, these hospitals and clinics bought $81.4 billion in outpatient drugs under the federal program, up from $44 billion just three years earlier.

Manufacturers have pushed to restrict the contract pharmacy practice, which they see as the key to abusing the federal program.

Like other states, Washington is seeking to prohibit drug manufacturers from limiting the use of contract pharmacies in the 340B program. Similar laws passed in other states in recent years have largely been upheld.

But in April in North Dakota, a federal judge blocked a 2025 law like Washington’s, ruling it is “an infringement on federal programs masquerading as state governance.”

Federal law is silent on setting conditions on drug distribution. Estudillo, the federal judge presiding over the Washington case, reads this as permitting the state to get involved, to the irritation of the pharmaceutical companies that see it as overstepping.

“At this stage, it requires too much of a stretch in assuming Congress’s intent in leaving the matter of 340B drug delivery unaddressed,” Estudillo wrote.

The law also wouldn’t allow manufacturers to require providers or pharmacies to provide data as a condition for acquiring their medication. Companies could use that data to see if pharmacies are diverting drugs away from the patients they were meant for, or if entities are getting duplicate discounts through 340B and Medicaid. Both companies and providers, instead, will need to submit data to the state.

The attorney general could enforce violations of the new law, and hospitals and clinics could bring litigation themselves, as well.