The 340B Drug Pricing Program has been making headlines. Two recent developments are difficult to square with one another.

First, the Health Resources and Services Administration (HRSA), the federal agency that administers the 340B Drug Pricing Program, released guidance late last month formally revoking a COVID-era policy that had afforded participating hospitals greater flexibility to use 340B-purchased drugs at newly established outpatient clinic locations before such locations were eligible to be registered under the 340B Program. In a Notice published Oct. 27, 2023, HRSA reiterated decades-old 340B Program eligibility policies and "remind[ed]" covered entities that off-site outpatient facilities must be registered as a "child sites" in order to dispense or administer 340B-purchased drugs to covered entity patients. In so doing, the agency affirmed statements it made back in May 2023 reversing course on certain child site registration flexibilities the agency had endorsed at the start of the COVID-19 pandemic. The Notice establishes deadlines in January 2024 for off-site outpatient locations to be registered and/or disclosed to HRSA. Notably, the Notice also outlines registration pathways to ensure uninterrupted access to 340B drugs at existing outpatient locations during the pre-registration period, but reverts to HRSA’s pre-COVID advance registration requirement for newly established child sites.

Second, the U.S. District Court for the District of South Carolina has rendered an opinion at long last in a closely watched, long-running case involving a covered entity's challenge to HRSA's interpretation of "patients" eligible to receive drugs purchased at 340B-discounted prices. The holding in that case, Genesis Healthcare v. Becerra, adds a new layer to the debate surrounding 340B prescription eligibility that arguably is at odds with HRSA's newly reinvigorated child site registration policy.

This Holland & Knight alert discusses the Oct. 27 Notice along with the history of HRSA's child site registration requirement, the "patient" definition and the recent holding in Genesis Healthcare, and how these issues intersect. The alert also explores some of the twists and turns that have occurred to this point and offers thoughts on where things may go from here.

Background

The 340B Drug Pricing Program is a drug discount program established in 1992 as Section 340B of the Public Health Service Act (340B Statute). Under the 340B Statute, drug manufacturers whose pharmaceutical products are covered by Medicaid are required to sell certain "covered outpatient drugs" at deeply discounted prices to eligible providers – 340B "covered entities" – including certain disproportionate share hospitals (commonly called "DSH"), among others. Covered entities, in turn, may resell and dispense drugs purchased under the 340B Program only to their own eligible patients.

Child Site Registration Requirement

Since the inception of the 340B Program, stakeholders have debated and much ink has been spilled to define the parameters of covered entities' entitlement to 340B Program discounts. Longstanding HRSA guidance from 1994 addresses the boundaries of a "hospital" eligible to participate in the 340B Program. In the 1994 guidance, HRSA recognized that hospitals often provide services through outpatient facilities located outside their four walls and sought to establish ground rules for when such facilities are properly considered part of the "hospital." The 1994 guidance contemplated that these off-site outpatient facilities would be "eligible for" 340B discount pricing only if they are an "integral part" of the hospital. According to the guidance, such facilities must be both 1) included as a reimbursable facility with outpatient costs and charges on the hospital's Medicare cost report and 2) added to HRSA's "master list of eligible and participating covered entities," which is now maintained in HRSA's 340B Office of Pharmacy Affairs Information System (OPAIS). Only then, said HRSA, would these off-site facilities – commonly called "child sites" – be "able to access" 340B discount pricing.

This requirement for a child site to first be included as a reimbursable cost center on a filed Medicare cost report and then be registered in OPAIS often creates lengthy delays in a hospital's ability to utilize its 340B-discounted drugs at new off-site outpatient facilities. Medicare cost reports are generally due five months after the close of a hospital's fiscal year, and OPAIS registration windows are open for only two weeks at the start of each calendar quarter. As a result, if a hospital opens a new outpatient clinic early in its cost year, the applicable Medicare cost report may not be filed until up to 17 months later. Then the hospital may have to wait up to three months for the next quarterly OPAIS registration window, and even then, the new child site would not be eligible under the 340B Program until the beginning of the following calendar quarter, roughly three months after registration. Adding all this up, it can sometimes take almost two years (up to 23 months) for a new child site to get up and running under the 340B Program.

HRSA's "Patient" Definition: Genesis Healthcare

Another fraught issue under the 340B Program concerns the identification of covered entity "patients" who are eligible to receive drugs purchased by the covered entity at 340B-discounted prices.

The 340B Statute provides that "a covered entity shall not resell or otherwise transfer the [340B] drug to a person who is not a patient of the entity," but offers no definition of the word "patient." HRSA crafted its own definition of "patient" in a 1996 guidance document that stakeholders have grappled with ever since. The 1996 "patient" definition, as applied to DSH hospitals, provides that (paraphrasing):

An individual is a "patient" if:

• the covered entity has an established a relationship with the individual, such that the covered entity maintains records of the individual's healthcare, and
• the individual receives healthcare services from a healthcare professional employed by or contracted with the covered entity, such that responsibility for the care provided remains with the covered entity

An individual is not a ''patient,'' however, if the only healthcare service received by the individual from the covered entity is the dispensing of a drug for subsequent self-administration or administration at home

Over the intervening years, HRSA has tried at intervals to further qualify this definition. For example, in now-withdrawn guidance from 2015 (the proposed "Mega-Guidance" or "Omnibus Guidance"), HRSA had proposed that to qualify for 340B pricing, the prescription at issue must actually originate from a patient encounter with the covered entity. This particular issue was challenged in a court case filed in 2018 in the U.S. District Court for the District of South Carolina by Genesis Healthcare (Case No. 4:19-cv-01531). Genesis is a federally qualified health center in South Carolina that argued that attempts by HRSA to impose additional restrictions on the definition of a 340B-eligible "patient" are inconsistent with the plain language 340B Statute.

On Nov. 3, 2023, in a clear win for covered entities, the U.S. District Court for the District of South Carolina sided with Genesis Healthcare and granted, in material part, its motion for summary judgment. Looking to dictionaries and other sources to interpret the plain meaning of "patient," the district court rendered a declaratory judgment prohibiting HRSA from enforcing a narrower patient definition that would contravene the statutory purpose as reflected in Congress' broad and unqualified use of the term. In a thorough, 30-page opinion, the district court examines the history of the 340B Program and applicable HRSA guidance and concludes that the 340B Statute is deliberately broad, imposing few restrictions on the interpretation of covered entity "patients" eligible to receive 340B drugs.

As discussed further below, the "patient" definition and the child site registration policy are closely intertwined. When the Genesis court's broad reading of a covered entity's 340B-eligible patient population is juxtaposed against HRSA's time-consuming and burdensome child site registration requirement, certain inconsistencies emerge.

HRSA's COVID Response: The 2020 FAQ

Near the beginning of the COVID-19 public health emergency, hospitals were scrambling to expand their capacity and relocate services quickly to assure ongoing patient access to care. In response to calls from covered entities seeking to preserve and expand their access to 340B-discounted drugs during this extraordinary period, HRSA took steps to help mitigate the bottleneck created by the lengthy child site registration process.

HRSA authorized frequently asked questions (FAQ) guidance that was published by HRSA's 340B prime vendor, Apexus, in June 2020, in which HRSA offered an interpretation of the "patient" definition that afforded covered entities greater flexibility. The 2020 FAQ explained that under certain circumstances, covered entity hospitals could utilize 340B drugs at new outpatient locations even before the new locations appeared on the cost report and were eligible for OPAIS registration. The June 2020 guidance (former Apexus FAQ 4301) provided, in relevant part (emphasis added):

In order to register for the 340B Program and be listed on the 340B Office of Pharmacy Affairs Information System (340B OPAIS), HRSA must first verify that the offsite, outpatient facility is listed as reimbursable on the hospital's most recently filed Medicare cost report and has associated outpatient costs and charges.

HRSA notes that for hospitals who are unable to register their outpatient facilities because they are not yet on the most recently filed Medicare Cost Report, the patients of the new site may still be 340B eligible to the extent that they are patients of the covered entity. View more information on HRSA's patient definition guidance.

These situations should be clearly documented in the covered entity's policies and procedures. In addition, a covered entity is responsible for demonstrating compliance with all 340B Program requirements and ensuring that auditable records are maintained for each patient dispensed a 340B drug.

In short, this 2020 FAQ recognized that, to the extent that a patient seen at a covered entity's new outpatient facility is truly a "patient" of the hospital itself, the hospital may dispense or administer 340B drugs to such individuals even before the facility is officially registered as a child site. In this way, the 2020 FAQ does not appear to have been a registration “waiver,” so much as an interpretation of the term “patient” that enabled covered entities to respond more quickly to shifting care needs.

At the time, this FAQ provided much-needed flexibility to providers and even seemed to be a welcome acknowledgement by the agency of the tension between the child site registration requirement and a covered entity's ability to dispense 340B drugs to its "patients." That is to say, when a hospital establishes a new off-site clinic as a "provider-based" outpatient department of the hospital (in Medicare parlance), that location, by definition, must be administratively, clinically and financially integrated with the hospital, such that patients seen at the provider-based department are hospital patients. Moreover, an outpatient clinic can be sufficiently integrated to be "provider-based" for Medicare enrollment and billing purposes long before it appears on the hospital's cost report. For this reason, some providers have argued that the 340B Program authorizes the furnishing of 340B drugs to all "patients," including hospital patients seen at newly established – as yet unregistered – provider-based outpatient departments. And indeed, this viewpoint is supported by the 2020 FAQ excerpted above. Put simply, if the outpatient facility patients are already hospital patients, the argument goes, it is not immediately apparent why each individual outpatient department would need to be separately registered as a "child site" to be afforded its own independent "access" to the same 340B purchasing authority already bestowed on the covered entity itself by the 340B Statute.

When covered entity representatives sought to validate their interpretation above and asked whether this FAQ was a temporary COVID-era flexibility or constituted more permanent guidance, stakeholders received repeated assurances from Apexus that the FAQ was not COVID-dependent and was intended to be permanent. Since the 2020 FAQ was not a registration waiver but an interpretation of “patient,” this answer made good sense.

HRSA's Policy Reversal: "Flexibility" Rescinded

Then, in early May 2023, HRSA did an about-face and told stakeholders, as reported by 340B Report, that "the flexibility that allowed hospitals to use 340B [drugs] in offsite outpatient facilities not yet listed as reimbursable on a hospital's Medicare cost report will no longer be available when the public health emergency expires. (emphasis added)." Around this same time, Apexus removed the 2020 FAQ from its website.

This was a significant move by the agency: HRSA had stopped representing the 2020 FAQ guidance as an interpretation of the 340B Statute's "patient" requirement, and begun characterizing it instead as a temporary flexibility, a COVID-19 "waiver" that was doomed to expire. HRSA's May 2023 announcement effectively returned the 340B child site registration policy to the pre-COVID status quo.

Nevertheless, uncertainty lingered for providers continuing to grapple with the "patient" definition and seeking to draw some lines around their patient population. There also remained the question of what to do with these newer, as-yet-unregistered hospital outpatient facilities that had been using 340B-discounted drugs since the release of the 2020 FAQ.

HRSA's Oct. 27, 2023, Notice

Given this historical context, HRSA's Oct. 27, 2023, Notice is, in many ways, unsurprising, albeit disappointing, to covered entities hoping for a reprieve from HRSA's recently reinvigorated child site registration policy. The Notice generally confirms the agency's policy reversal (announced in May) that the child site registration requirement is alive and well. HRSA reiterates its position that off-site outpatient facilities must be registered as a "child sites" in order to be authorized to dispense or administer 340B drugs to patients, which in turn requires that the locations first appear as reimbursable cost centers on a filed Medicare cost report.

In HRSA's words, the Notice was issued "to provide clarity to stakeholders" while also providing a runway for covered entities to bring their existing off-site outpatient facilities into compliance with the registration requirement. Indeed, the Notice does both of these things.

The Notice provides two pathways for unregistered off-site outpatient facilities to comply with 340B child site registration requirements. First, facilities that are already listed on the hospital's most recently filed Medicare cost report are permitted to continue using 340B drugs, provided they are registered in OPAIS during the upcoming quarterly registration period (Jan. 1-16, 2024).

Alternatively, off-site outpatient facilities not yet listed on the hospital's most recently filed cost report are permitted to continue using 340B drugs, provided that all of the following requirements are met:

• the facility was open and began using 340B drugs before Oct. 27, 2023 (i.e., the date the Notice was published)
• the covered entity emails HRSA (at 340Bcompliance@HRSA.gov) by Jan. 25, 2024 (i.e., 90 days after publication of the Notice) to provide: 1)the name of the facility or facilities at issue, 2) the date on which they will be listed on the hospital's next filed Medicare cost report with reimbursable outpatient costs and charges and 3)the date the covered entity will register the site(s) in OPAIS
• the covered entity then satisfies the registration timeline laid out in its notification email to HRSA

If a given off-site facility cannot meet either category above, it must cease using 340B drugs no later than Jan. 25, 2024 (i.e., after a 90-day "grace period") in order to avoid audit and compliance action.

The Bigger Picture

In light of the recent decision in Genesis Healthcare, a natural next question is whether HRSA has authority to impose a child site registration requirement that has the effect of significantly restricting the population of covered entity "patients" eligible to receive 340B drugs. As the district court observed, the 340B Statute deliberately does not restrict the meaning of "patient," and HRSA's 1996 "patient" definition is similarly broad and flexible. It is an open question whether a court might conclude, if asked, that a burdensome and attenuated child site registration requirement contravenes the 340B Statute by imposing unsupported restrictions on the 340B-eligible patient population.

In the Genesis Healthcare court's words:

Congress's intent in enacting the 340B statute was, in part, to protect "covered entities" from prescription drug price increases and allow "covered entities" to increase their profit margins so that they could stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services." If there is a desire to restrict the 340B Program and limit the ability of "covered entities" to remain profitable in the face of prescription drug price increases, Congress is the appropriate entity to take the necessary action. It is not the role of HRSA to legislate and limit the 340B program by restricting the definition of the term "patient," thereby frustrating the ability of the 340B statute to accomplish its purpose. HRSA's restrictive definition of the term "patient" limits the scope of the 340B Program, limits the profitability of "covered entities," and frustrates the goal of the 340B statute[.]

Ultimately, it seems possible – perhaps even likely – that HRSA may again revisit, or potentially be dragged into court to defend, its child site registration requirement. It the policy were to be challenged, its fate is unclear.

Notwithstanding this potential vulnerability, the potential penalties for covered entities that divert 340B drugs to non-patients or dispense them from unauthorized locations can be steep, ranging from required refunds of discounts received (which can be significant) up to and including expulsion from the 340B Program with time-barred reentry restrictions (if the conduct is found to be systematic and egregious). Thus, as a practical matter, covered entities are likely to be reluctant to press the bounds of the child site registration policy.

Next Steps for Covered Entities

Immediate next steps for covered entities to comply with HRSA's Oct. 27 Notice include 1) notifying HRSA by Jan. 25, 2024, regarding any unregistered outpatient facilities that were using 340B drugs prior to Oct. 27, and/or 2) taking necessary steps to get all such facilities registered as child sites at the earliest opportunity.

For help with this process, or for more information on child site registration requirements or 340B Program compliance generally, please contact the author or another member of Holland & Knight's Healthcare Regulatory Compliance or Healthcare & Life Sciences Policy teams.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.