OIG Reveals Pervasive Problems in Federal Drug Discounting Program

by K&L Gates LLP

The 340B drug pricing program was created by Congress in 1992 to make prescription medicines more available to low-income and indigent patient populations. The program has been, and likely will continue to be, fertile ground for lawsuits alleging fraud, abuse, and/or noncompliance with program rules, including lawsuits by and against participating pharmaceutical manufacturers. 

Now, 22 years after the program’s inception, the federal government is exhibiting a renewed interest in its administration and oversight. In particular, a recent federal report has called for greater scrutiny of the program and its participants, from providers to contract pharmacies to manufacturers. We discuss below.

A. The 340B Program and the Role of Contract Pharmacies
Section 340B of the Public Health Services Act, [1] which was established by the Veterans Health Care Act, [2] imposes ceilings on the prices that pharmaceutical manufacturers may charge for medications sold to specified health care facilities, known as “federally-qualified health centers.” [3] Those FQHCs, called “340B” or “covered” entities, include public hospitals and community health centers, many of them providers of safety-net services to the poor. [4] Congress intended the savings from 340B-purchased drugs “to enable these entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” [5]

To participate in the 340B program, covered entities must register with the Human Resources and Services Administration (“HRSA”), the agency within the U.S. Department of Health and Human Services (“HHS”) responsible for administering the program. Once approved, 340B providers may purchase covered outpatient drugs - a category of drug products defined by the Federal Food, Drug, and Cosmetic Act - at or below their 340B ceiling price. The 340B price is established using a statutorily defined formula that incorporates manufacturer-reported drug pricing information. Drug manufacturers that participate in the Medicaid program must sell their covered outpatient drugs to covered entities at or below the 340B price. [6]

Participation in the 340B program is voluntary for both covered entities and drug manufacturers, but there are strong incentives to participate. Covered entities can realize substantial savings through 340B price discounts, sometimes as much as 50 percent off the cost of the drugs. [7]

Covered entities participating in the 340B program can and often do contract with pharmacies to dispense drugs purchased through the program on their behalf. [8] Such pharmacies are referred to as “contract pharmacies.” The HRSA requires that entities that establish contract pharmacy arrangements oversee these arrangements to prevent diversion of 340B-purchased drugs to ineligible patients, which federal law prohibits. [9] The law also bars “double dipping” or “duplicate discounts” through Medicaid. [10] “Duplicate discounts occur when a drug manufacturer pays a State Medicaid agency a rebate under the Medicaid drug rebate program on a drug sold at the already-discounted 340B price.” [11]

Since 2010, the number of unique pharmacies serving as 340B contract pharmacies has increased by 770 percent, and the total number of contract pharmacy arrangements has grown by 1,245 percent. [12]  Perhaps in response to the surge in the number of these arrangements and in anticipation of HRSA regulations addressing 340B program elements, including patient definition(s) and contract pharmacy arrangements, [13] HHS’s fraud and abuse watchdog, the Office of Inspector General (“OIG”), issued a Memorandum Report to the HRSA Administrator describing the results of a study of how 30 covered entities operate and oversee their contract pharmacy arrangements. [14]  What the OIG uncovered is eye-opening.

B. 340B’s Troubling Status
The OIG concluded that among the 15 community pharmacies and 15 Disproportionate Share Hospitals (“DSHs”) [15] interviewed, contract pharmacy arrangements frequently created complications in preventing diversion and duplicate discounts in the 340B program. [16] Many of these complications appeared to stem from and reflect a lack of clear regulatory standards for identifying 340B-eligible prescriptions:

Covered entities in our study reported different methods of identifying 340B-eligible prescriptions, and in some cases their determinations of 340B eligibility differ from one covered entity to another for similar types of prescriptions. This suggests a lack of clarity on how HRSA’s patient definition should be applied in contract pharmacy arrangements. Covered entities appear to have differing interpretations of what HRSA guidance requires; some may also have chosen to apply more stringent criteria in the absence of a clear directive.  Regardless, there is inconsistency within the 340B program as to which prescriptions filled at contract pharmacies are treated as 340B-eligible. [17]

Nearly a third of the covered entities reported that they do not offer the 340B price to uninsured patients in any of their contract pharmacy arrangements, leaving uninsured (or underinsured) patients to pay the full, non-340B price for prescriptions filled at those contract pharmacies. [18] Twenty-five of the 30 entities claimed they internally monitored their contract pharmacy arrangements to detect potential diversion or duplicate discounts. [19] The OIG acknowledged, however, that “[a]lthough almost all covered entities reported monitoring their contract pharmacy arrangements, the extent of such monitoring varies,” and that “most covered entities in our study do not conduct all of the oversight activities recommended by HRSA.” [20] Incredibly, seven of the covered entities use administrators that do not determine 340B eligibility until after drugs are dispensed, which means that their contract pharmacies do not know at the point of sale whether patients’ prescriptions are 340B-eligible. [21] More troubling still is that we are told nothing about if or how any of the DSHs and community health centers the OIG sampled track and allocate their 340B pharmacy profits. This is hardly news, however. In 2011, the U.S. Government Accountability Office alerted Congress that “because the 340B program has no requirements on how 340B revenue can be used, stakeholders, such as drug manufacturers, have raised questions about covered entities’ generation of revenue and whether they are using it in ways consistent with the purpose of the program.” [22]

The February 4 Memorandum Report paints a worrisome picture of an assistance program designed to help the neediest patients access pharmaceuticals. What the OIG found underscores the absence of consistent standards for identifying whether and when entities must make drugs available at their discounted 340B price. Time will tell whether and how the HRSA responds to the calls from government and industry for better 340B program oversight and tighter participation requirements. The HRSA’s forthcoming regulations, we know, will address the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site facilities. [23] The regulations thus demand the industry’s close attention. K&L Gates will analyze and report on the regulations and any further federal guidance involving the 340B program.

[1] 42 U.S.C. § 256b.

[2] P.L. 102-585 § 602 (1992).

[3] See Astra USA, Inc. v. Santa Clara Cnty., Cal., 131 S. Ct. 1342, 1345 (2011). Federally-qualified health centers (“FQHCs”) are community-based health care providers that receive government funds to provide primary care services in underserved areas. They are eligible to purchase 340B discounted drugs. See “Federally Qualified Health Centers,” http://www.hrsa.gov/opa/eligibilityandregistration/healthcenters/fqhc/.

[4] 42 U.S.C. § 256b(a)(4). 

[5] H.R. Rep. No. 102-384(II) at 9 (1992).

[6] 42 U.S.C. § 256b(a)(1).

[7] See “Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement” (GAO-11-836), at 2, http://www.gao.gov/new.items/d11836.pdf.

[8] See 75 Fed. Reg. 10272, 10277 (Mar. 5, 2010) (“[T]he covered entity is free to choose to. . . pay contract pharmacies for their services or for extra services such as delivery. . . .”).

[9] See 42 U.S.C. § 256b(a)(5)(B) (“With respect to any covered outpatient drug that is subject to an agreement under this subsection, a covered entity shall not resell or otherwise transfer the drug to a person who is not a patient of the entity.”).

[10] See 42 U.S.C. § 256b(a)(5)(A)(i) (“A covered entity shall not request payment. . . for medical assistance . . . with respect to a drug that is subject to an agreement under this section if the drug is subject to the payment of a rebate to the State under [the federal Medicaid rebate program].”).

[11] See “Contract Pharmacy Arrangements in the 340B Program” (OEI-05-13-00431), at 4, http://oig.hhs.gov/oei/reports/oei-05-13-00431.pdf (the “OIG Memorandum Report”).

[12] See id. at 2.

[13] See “340B Drug Pricing Program: Important Benefit, Significant Responsibility,” http://www.hrsa.gov/opa/update.html (“HRSA is currently working to formalize existing program guidance through regulation, designed to cover a number of aspects of the 340B Program. . . . We expect to publish this proposed regulation, which will be open for public comment, by June 2014.”).

[14] See id. at 6; 7-8. The 30 covered entities in the final sample represent contract pharmacy arrangements with 199 unique contract pharmacies. See id. at 8.

[15] Public and nonprofit Disproportionate Share Hospitals are FQHCs that “serve[] a significantly disproportionate number of low-income patients . . . .” See 42 U.S.C. § 1395ww(d)(5)(F)(i).

[16] See OIG Memorandum Report at 16.

[17] See id.

[18] See id. at 14.

[19] See id.

[20] See id. at 16.

[21] See OIG Memorandum Report at 14.

[22] See footnote 7, supra, at 3.

[23] See footnote 13, supra.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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