August 2018: Where Are We Now With 340B?

By | August 1, 2018

It seems like every week, there are multiple new developments in the 340B Drug Discount Program. In just the last few weeks, we have seen a new Senate hearing, a new GAO Report, a new House hearing, and introduction of more than a dozen new bills in Congress that would impact 340B.

To understand where things may be going, it helps to understand where we have been.

General Background on 340B

The 340B Drug Discount Program was created in 1992. Through the 340B Program pharmaceutical manufacturers provide discounted outpatient prescription drugs to qualifying safety net providers serving uninsured and indigent patients. The actual discounted 340B “ceiling price” is confidential but is estimated to run upwards of 50 percent off the Average Wholesale Price (AWP) of the drug at issue.

The 340B Program is administered by the federal Health Resources and Services Administration (HRSA), which until 2012, largely took a hands-off approach to 340B Program oversight. Since 2012, multiple factors converged to focus attention on 340B, including:

  • Expansion of the types of safety net providers who qualify as 340B entities through the Affordable Care Act.
  • Explosive growth in the number of 340B drugs dispensed by qualifying entities and even more explosive growth in the number of contract pharmacies dispensing 340B drugs.
  • A 2011 U.S. Supreme Court decision limiting the ability of any person or entity other than HRSA or a pharmaceutical manufacturer to enforce 340B program requirements, and a 2015 federal court ruling invalidating specific HRSA rules. The ruling effectively limited HRSA’s ability to regulate 340B in the absence of specific congressional authorization.
  • Public criticism and congressional oversight, including a September 2011 U.S. Government Accountability Office report calling for increased government oversight over 340B and a February 2013 report by a consortium of pharmaceutical, pharmacy and medical associations calling for major 340B Program reform.

The 340B statute requires registered safety net providers, termed “covered entities,” to ensure that 340B drugs are only provided to actual 340B “patients” and that the drugs are not subject to diversion. Covered entities are also charged with “preventing duplicate discounts” by ensuring that 340B drugs are exempt from Medicaid Drug Rebate invoicing. Through a 1996 Federal Register notice, HRSA defined a patient of a 340B entity eligible to receive a 340B drug as a person who:

  • Has an established relationship with the covered entity, such that the entity maintains the individual’s medical records;
  • Receives outpatient health care services from a health care professional employed by the covered entity or under a contract or arrangement such that responsibility for the person’s medical care remains with the entity; and
  • Receives outpatient health care services from the covered entity that are consistent with the services or range of services for which the entity receives funding

The patient definition is vague and more than twenty-five years after the 340B Program was created, has led to much debate over the actual purpose for creating the 340 Program. And that debate frames the current pressures for 340B Program reform.

Pharmaceutical manufacturers and other industry groups assert that the 340B Program was the natural outgrowth of the 1990 Medicaid Drug Rebate Program, through which states obtained rebates based on the manufacturers’ reported “best prices” for the drugs covered by Medicaid. Because “best price” was defined to include discounts, drug manufacturers were in essence discouraged from offering discounted drugs as a form of charity for AIDS treatment programs, nonprofit clinics and other safety net providers. Thus, according to this view, the 340B Program was created to increase needy patients’ access to prescription drugs by requiring manufacturers to offer discounts to qualified safety net providers while exempting those discounts from “best price” reporting for Medicaid rebate purposes. Industry groups find support for this view by the fact that covered entities are charged with preventing duplicate discounts for Medicaid-covered 340B drugs, and manufacturers and HRSA are authorized to audit covered entities both to ensure that 340B drugs are not diverted to non-340B patients and that 340B drugs are not subject to duplicate discounts.

Hospitals, clinics and other institutional providers believe that the 340B Program was created to allow providers to access deeply discounted drugs in order to enable the entity to stretch limited resources and treat as many patients as possible. They find support for this view in the preamble to the legislation and the fact that the definition of 340B “patient” does not specifically exclude individuals covered by Medicare or private insurance, meaning that covered entities should be able to generate additional revenues through the 340B to support patient services.

Senate Hearing and the 340B Database

On June 19, 2018 the Senate Committee on Health, Education, Labor & Pensions (HELP) held its third in a series of hearing on 340B. The only witness to testify at this hearing was Captain Christa Pedley of HRSA. Captain Pedley’s testimony largely mirrored her testimony to the House in July 2017, reciting HRSA’s Program Integrity efforts in 340B while stating that “specific legislative authority to conduct rulemaking for all provisions in the 340B statute would be more effective for facilitating HRSA’s oversight over, and management of, the 340B Program.”

But not everything at the June 2018 hearing was a rehash. In her July 2017 to the House, testimony, Captain Pedley was asked about the HRSA 340B ceiling price verification system for covered entities that was mandated by ACA. In 2017, Captain Pedley testified that HRSA was “getting close” to implementing the requisite system, but would not commit to it being fully operational before the end of 2017. At the June 2018 hearing, Senator Murray asked about the status of that ceiling price verification system. Captain Pedley testified that the system was now fully operational but is currently only available for internal HRSA use.

In addition to the ceiling price verification system, the ACA also requires HRSA to adopt rules that would penalize manufacturers for overcharging covered entities for 340B drugs. Those rules were finalized as of January 5, 2017 but the Trump Administration has delayed the effective date of the penalty rules multiple times. The earliest effective date for the penalties is now July 2019. According to Captain Pedley’s testimony at the June 2018 hearing, HRSA views these two ACA legislative mandates in tandem and will not release the ceiling price verification system for covered entity use until the ceiling price penalty rules take effect.

The GAO Report on Contract Pharmacies

A June 2018 GAO Report regarding federal oversight of 340B contract pharmacies found that hospital systems are more likely to use contract pharmacies than other types of 340B covered entities. While some hospitals use only a handful of contract pharmacies, some contract with hundreds of individual pharmacies – the average number of contract pharmacies per hospital is twelve.

In the Report, GAO is critical of HRSA’s oversight of 340B contract pharmacies. GAO also focused on the lack of specific guidance regarding the extent to which covered entities must pass on the discounted purchase price of 340B drugs to low-income or uninsured patients – a concern that is exacerbated when drugs are dispensed through a contract pharmacy. GAO acknowledged that most covered entities surveyed passed on 340B discounts to low-income patients in some manner, but the extent and procedures varied. For covered entities whose contract pharmacies do not offer discounts on 340B drugs to low-income patients, those entities reported they provided other types of charity care services.

GAO was also critical of HRSA’s lack of specific guidance on the risk of prohibited duplicate discounts on contract pharmacy arrangements involving drugs provided through Medicaid Managed Care plans. Given that an overwhelming majority of Medicaid beneficiaries now receive services through Medicaid Managed Care, and given that federal law mandates that states invoice drugs provided through Medicaid Managed Care for Medicaid Drug Rebates, GAO seems to have little patience for the lack of federal guidance on this point.

GAO had specific recommendations for HRSA to increase oversight of the 340B Program, including imposing data collection requirements on contract pharmacy arrangements and more comprehensive compliance auditing protocols. HRSA did not concur with a number of the GAO recommendations, believing the requirements would be overly burdensome to the covered entities and to HRSA.

340B Legislative Proposals

In advance of a July 11, 2018 hearing, the House Energy & Commerce Committee released more than a dozen bills and “discussion drafts” of legislation specific to 340B. A number of the bills have common themes, including giving HRSA regulatory authority over 340B, and imposing some type of reporting obligations on HRSA and 340B covered entities. One bill would codify the existing HRSA definition of a 340B “patient” that critics believe is too vague. Some of the more controversial proposals include:

  • H.R. 2889 would legislatively limit the “orphan drug exclusion” from 340B discounts to drugs prescribed or used for the rare, orphan condition.
  • H.R. 4392 would legislatively rescind the Medicare Part B reimbursement cut for 340B drugs paid for through the Outpatient Prospective Payment System (OPPS). Under the OPPS, effective January 1, 2018 CMS had reduced the Part B reimbursement for most drugs paid for through OPPS, from Average Sales Price (ASP) plus 6% to ASP minus 22.5%.
  • A discussion draft proposed by Representative Burgess would prohibit covered entities acting directly, or indirectly through a third party such as a contract pharmacy, from charging low-income or uninsured persons a price above the 340B ceiling price for a drug purchased through 340B.
  • The most controversial proposal is a discussion draft from Representative Collins that would adopt a new, limited definition of a 340B “patient.” Specific provisions in the bill would clearly exclude from the definition of an eligible patient the inmates of a correctional facility, as well as situations where “the primary relationship between the individual and the covered entity is one of employment.”

House Energy and Commerce Committee

On July 11, 2018 the House Energy and Commerce Committee convened a hearing entitled Opportunities to Improve the 340B Drug Pricing Program. The Committee heard from Dr. Debra Draper of GAO, who reiterated her concerns about the inadequacy of HRSA oversight and need for legislation. The Committee also heard from witnesses associated with an assortment of covered entities, and received statements from many more.

The hearing included a number of legislators touting their individual proposals to reform 340B. But listening to the questions posed by the legislators, and the tone of those questions, left one with a sinking feeling. In light of what is going on in the Capitol, it is hard to see any sort of bipartisan consensus for legislative changes to 340B moving forward.

And That’s Not All

In the weeks since the July 11, 2018 hearing, shoes continue to drop in 340B world.

On July 17, 2018 the U.S. Court of Appeals dismissed a lawsuit brought by multiple parties challenging the almost 30% CMS Medicare Part B OPPS reimbursement cut for many outpatient drugs purchased through 340B that went into effect January 1. The Court ruled that because the lawsuit was filed in advance of processing any actual claims under the new reimbursement formula, any challenge was theoretical in nature.  The plaintiffs needed to have actual claims that were submitted and processed under the new reimbursement formula, and exhaust any administrative appellate rights on those claims, before a court challenge can be filed and heard.  It is important to note that the ruling was based on procedure, not merit. There was no ruling on the question of whether or not CMS exceeded its authority with the reimbursement cut, just that the challenge was filed prematurely.

I have previously commented on the fact that the Trump Administration’s Blueprint to Lower Drug Prices and Secretary Azar’s accompanying Request for Information (RFI), claim the OPPS Medicare Part B reimbursement cut for 340B drugs as a “victory” against high drug prices. And I postulated that Medicare, and to a lesser extent Medicaid reimbursement, may well be the vehicle for future attempts at 340B reform. So it is not surprising to me that now, after the comment period on the RFI has closed and the Court of Appeals dismissed the challenge to the CMS Medicare OPPS reimbursement cut, another shoe has dropped. On July 25, 2018, CMS released the 2019 OPPS proposed rule. Among the provisions in the proposal is an extension of the Part B reimbursement cut for drugs dispensed through 340B to non-exempted off-campus provider-based department.

Where Are We Going?

My crystal ball in somewhat cloudy these days. Nevertheless, I am going the share some predictions on the future of 340B.

  • Congress will be unable to muster any sort of bicameral, bipartisan agreement to enact legislative reform in 340B before the 2018 elections.
  • Now that Medicare claims have actually been processed under the new CMS OPPS reimbursement formula for 340B drugs, health care providers will file new challenges to CMS’ authority to impose the cut in the absence of congressional authorization. Courts will have to consider whether CMS’ broad authority to enact changes in Medicare reimbursement trumps HRSA’s limited authority to impose changes in 340B.
  • CMS will continue to flex its authority in Medicaid and Medicare to find ways to impose further limitations on government reimbursement within the 340B Program.

About the Author: Ellyn Sternfield is Special Counsel in the health section of Mintz Levin. She regularly blogs on 340B issues on Mintz Levin’s blog,  Prior to joining Mintz Levin, Ellyn spent more than 15 years as the director of the Oregon Department of Justice’s Medicaid Fraud Control Unit.