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“Don’t Forget Child Sites Under The 340B Omnibus Guidance”

Law360 By Alyce C. Katayama and Elizabeth R. Gebarski

As summer weather comes and goes, so does the comment period on the proposed 340B Drug Pricing Program Omnibus Guidance that rocked the world of 340B key stakeholders on Aug. 28, 2015. On Oct. 28, 2015, the comment period will be closed and there will be nothing left to do but sit back and wait, perhaps for years, to find out what the U.S. Department of Health and Human Services Health Resources and Services Administration will make of the comments.

First, some background. The 340B Drug Pricing Program mandates that participating manufacturers, which includes every manufacturer who participates in Medicaid, provide steep discounts on covered outpatient drugs to covered entities (CEs). CEs include, disproportionate share hospitals, children's hospitals, critical access hospitals, free standing cancer hospitals, federally qualified health centers and HRSA grantees such as sexually transmitted disease clinics, Ryan White HIV/AIDS Program grantees and comprehensive hemophilia diagnostic treatment centers, among others. The goal is that savings realized by the CEs through the 340B Program will be used by the CEs "to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services."

The proposed guidance touches on almost every aspect of the 340B Program, including CE eligibility; the patient definition; Group Purchasing Organization prohibitions; contract pharmacies; duplicate discounts; and CE audits. It also includes enhanced program integrity requirements for CEs, contract pharmacies and pharmaceutical manufacturers participating in the 340B Program. The proposed guidance is significant because Section 340B of the Public Health Service Act (PHSA) is relatively brief and most of the 340B Program’s implementation is left to HRSA. Because HRSA’s ability to promulgate legislative type rules is quite limited, as reinforced in two recent federal district court rulings, the program has been managed, since 1992, primarily through the issuance of published guidance.

This article will focus on an aspect of the 340B Program that could undergo significant changes under the proposed guidance — child sites. What are we talking about here? Currently and under the proposed guidance, all off-site outpatient facilities, clinics, eligible off-site location or associated health care delivery sites (collectively referred to as “off-site facilities”) not located at the same physical address as the “parent” CE must be registered in the 340B Program, if the off-site facilities intend to purchase and use 340B drugs for their eligible patients. Easy enough. But, as tends to be the case in the 340B Program, the devil lies in the details.

Determining just which off-site facilities are eligible to register in the 340B Program can be quite a headache. For nonhospital entities, a facility is an eligible child site if it receives Federal funds and is performing services within the scope of the parent's grant. "For example, if a ... STD [grantee] clinic demonstrates that an off-site location receives Federal funds and is performing services within the scope of [the STD grantee clinic's grant, HRSA] will list that [off-site] location on its database as a child site of the main clinic."

Hospitals, on the other hand, demonstrate child site eligibility by showing that each eligible child site/facility is listed on a line of the parent hospital's Medicare cost report that is reimbursable under Medicare and that the services provided at each of the facilities have associated outpatient costs and charges on the cost report. This procedure is slightly different for children's hospitals, which do not file Medicare cost reports. Children's hospitals that do not file Medicare cost reports must demonstrate that the requested outpatient facility: "(1) is an integral part of the hospital, and (2) would be correctly included on a reimbursable line with associated Medicare costs and charges on a Medicare cost report, if filed."

Every child site must be registered separately and by each service line it offers. This means that when a parent CE has an off-site location that is a separate hospital or medical center, the off-site location must separately register each service the off-site location offers. As one can imagine, the registration process could get quite burdensome in this situation, requiring the CE to register, for example, the oncology, radiology, surgery and anesthesiology departments of the off-site location separately.

Concerned stakeholders may be able to influence this process. The proposed guidance indicates that HRSA has been struggling with the issue of child site eligibility specific to hospitals. HRSA mentions several options: requiring such sites to obtain provider-based status designation and alternatively, the use of CMS Form 855A (Medicare Enrollment Application for Institutional Providers). HRSA's preamble to the proposed guidance states that it is actively seeking comments on alternatives to demonstrating such eligibility.

Another significant change the proposed guidance makes regarding child sites is that it permits a child site to enter into its own contract pharmacy agreement independent of its parent. It is difficult to see how this will advance one of the stated objectives of the proposed guidance, namely to increase the integrity of the 340B Program. While this presents a business opportunity for contract pharmacies, it could create a compliance nightmare for parent CEs. Under the 340B Program, the buck stops with the parent CE in that it retains ultimate responsibility for program compliance of all child sites (and contract pharmacies as well). Worst case, if a child site, in the course of its relationship with a contract pharmacy, violates the 340B Program, even the parent's own eligibility could be in jeopardy. If this proposed guidance becomes final, parent CEs would need to craft internal policies that clearly define whether child sites may enter into contracts with contract pharmacies (CE policies could choose to override the proposed Guidance) and, if the CE allows child sites to contract, what those contracts must look like. Parent CEs would also have to engage in monitoring, and perhaps auditing, to ensure their child sites follow 340B Program requirements.

Alyce Katayama is a partner in Quarles & Brady's Milwaukee office and is an active peer-reviewed research scientist in the field of assisted reproductive technology. Elizabeth Gebarski is an associate in Quarles & Brady's Milwaukee office.