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T​he 340B Program Mega Guidance: Muddying the Water for All Stakeholders


Ask and ye shall finally receive—the long-awaited proposed 340B Drug Pricing Program Omnibus Guidance (Guidance) was published in the Federal Register on August 28, 2015, by the Health Resources and Services Administration (HRSA), a department of the U.S. Department of Health and Human Services (HHS).

The Guidance has truly made the 340B Program clear as mud. In some instances, the proposed Guidance is a restatement of current practices and/or offers helpful affirmation of those practices. But, aspects at the heart of the 340B Program have been seriously put into question. It is likely, in particular, that many covered entities (CEs) will be forced to seriously re-evaluate the cost-benefit ratio of their participation in the 340B Program.

What is the Guidance and Why Do We Care?

The proposed Guidance aims to add clarity in the marketplace for all 340B Program stakeholders and strengthen the government's ability to administer the 340B Program. 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 Guidance is significant because Section 340B of the Public Health Service Act (PHSA) is relatively brief and most of the Program’s implementation is left to HRSA. Since HRSA’s ability to promulgate legislative type rules is quite limited, the Program has been managed through the issuance of published guidance since 1992.

Covered Entity Eligibility & Registration

Eligibility, Registration & Termination

Only CEs are eligible to participate in the 340B Program. These CEs are both nonhospital (e.g., STD clinic) and hospital (e.g., children's hospital) entities. The Guidance delineates the eligibility elements that have been established by the law, existing regulations, and past guidance. Once an eligible CE registers in the 340B Program, it is listed on the public 340B database. The registration conditions, deadlines, and procedures remain the same as outlined in previous guidance. As is the current practice, CEs must immediately notify HRSA regarding any changes in eligibility and CEs will still be required to annually recertify with HRSA.

Program integrity is a key focus of the proposed Guidance, as will be discussed in more detail in following sections. As part of the annual registration process, CEs are required to certify the accuracy of their database information and their compliance with the 340B Program's statutory requirements. By certifying compliance, a CE attests that it: (1) employs effective business practices to ensure and monitor ongoing compliance, including self audits where appropriate; (2) maintains accurate 340B database information; and, (3) notifies HRSA if it is no longer eligible for the Program or has violated any Program requirement. As always, CEs are responsible for the compliance of "child sites" and contract pharmacies.

Where this Guidance deviates is in regard to re-enrollment in the 340B Program after a CE has lost eligibility. Upon a loss of eligibility, the CE must immediately stop purchasing and using 340B drugs at the terminated site(s). HRSA requests that the CE provide the reason for the loss of eligibility, the effective date for the loss of eligibility, and the date of the last 340B drug purchase for a terminated CE, child site, or contract pharmacy. For example, a disproportionate share (DSH) hospital-CE loses 340B Program eligibility immediately upon filing a Medicare cost report that demonstrates the hospital does not meet the disproportionate share adjustment percentage, which is an element of eligibility for DSH hospitals. The day on which that cost report was filed is the day on which the hospital's participation in the 340B Program is terminated.

The Guidance proposes to allow a CE that has lost eligibility to re-enroll in the 340B Program during the next regular enrollment period after it has satisfactorily demonstrated to HRSA that it will comply with all statutory requirements moving forward and has completed, or is in the process of offering repayment to affected manufacturers, as necessary. HRSA specifically is seeking comments on what type of information a CE would submit to HRSA to demonstrate compliance to re-enroll in the 340B Program.

Child Sites

Under the 340B Program, all offsite outpatient facilities, clinics, eligible offsite locations, or associated health care delivery sites (collectively referred to hereinafter as “offsite facilities”) not located at the same physical address as the “parent” CE must be registered in the 340B Program if the offsite facilities intend to purchase and use 340B drugs for their eligible patients. These “child sites” must register separately by service line. For nonhospital entities, a facility is an eligible child site if it receives federal funds and is performing services within the scope of its grant. Hospitals, on the other hand, demonstrate child site eligibility by showing that each facility is listed on a line of the parent hospital's cost report that is reimbursable under Medicare, and the services provided at each of the facilities have associated outpatient Medicare costs and charges. This procedure is slightly different for children's hospitals, which do not file Medicare cost reports. In the Guidance, HRSA indicates that it has been struggling with the manner in which it should determine child site eligibility specific to hospitals and is actively seeking comments on alternatives to demonstrating such eligibility.

In regard to loss of eligibility, a child site's eligibility to participate in the 340B Program is tied to the eligibility of the parent. Therefore, if a parent CE site is terminated or a site loses grant funding, all child sites and contract pharmacies will be removed from the public 340B database with the same termination date. However, a child site may lose eligibility separately from the parent CE in certain circumstances; for example, if only a hospital child site violates the group purchasing organization prohibition, as discussed below.

Significantly, the Guidance permits child sites to contract with contract pharmacies independently of the parent, as is discussed in more detail in later sections.

GPO Prohibitions

An element of eligibility for DSH hospitals, children's hospitals, and freestanding cancer hospitals in the 340B Program is that the hospital-CEs must not obtain covered outpatient drugs through a group purchasing organization (“GPO”) or other group purchasing arrangement. This GPO prohibition extends to any pharmacy owned or operated by these CEs. This means that from the first day the CE is listed on the public 340B database, the CE must stop purchasing covered outpatient drugs through a GPO, even if some of the drugs are intended only for ineligible patients. However, HRSA proposes to allow a CE to use up any leftover GPO-purchased covered outpatient drug.

The trickier analysis is determining what actions do not violate the GPO prohibition. The proposed Guidance tackles this analysis by outlining specific situations that would not violate the GPO prohibition. First, the proposed Guidance clarifies that a GPO account may be used at an offsite outpatient facility that is not participating in the 340B Program or listed on the public 340B database. However, HRSA is proposing that this offsite facility only be permitted to access outpatient drugs through a GPO if that offsite facility has a purchasing account separate from that of any 340B enrolled site, and that offsite facility ensures GPO purchased drugs are never provided to outpatients of any related entity enrolled in the 340B Program. Second, the proposed Guidance clarifies that 340B eligibility can be maintained when GPO drugs are provided to an inpatient whose status is subsequently changed to outpatient by a third party, provided there is sufficient documentation of the patient’s change of status. Finally, HRSA is proposing to recognize an exception to the GPO prohibition for CE hospitals that cannot access a drug at the 340B price or at wholesale acquisition cost (WAC) to prevent disruptions in patient care. In this instance, HRSA will consider a hospital in compliance with 340B law and regulation if the hospital documents the facts surrounding the purchase and provides HRSA with the name of the drug in question, the manufacturer, and a brief description of the attempts to purchase the drug at the 340B price and the WAC price prior to purchasing the drug through a GPO.

Drug Inventory/Replenishment Models & Repayment

Many CEs use replenishment models to carry out the 340B Program. In the replenishment inventory model, the CE tallies the drugs dispensed to each type of patient (i.e., eligible and ineligible). When a sufficient quantity of a given drug has been dispensed to eligible patients, typically in the form of a full manufacturer package size, the CE purchases that quantity of the drug at the discounted 340B price. This order of 340B-priced drugs thus replaces or “replenishes” the drugs originally dispensed.

The Guidance acknowledges that some CEs use “banking practices” to retroactively look back over long periods of time at drug purchases not initially identified as 340B eligible and then attempt to re-characterize these purchases as 340B eligible. HRSA notes that before carrying this out, the CE should use the 340B pricing in effect at the time of the transaction and first notify manufacturers and ensure all processes are fully transparent with a clear audit trail that reflects the actual timing and facts underlying the transaction.

The Guidance denotes approval and continued use of the credit and re-bill process, whereby the CE and manufacturer work together to correct drug classification errors within 30 days of the initial purchase. The commentary further stresses the importance of detailed, accurate inventory management and record-keeping at all stages of drug ordering and replenishment.

What Are “Covered Outpatient Drugs”?

In order for a drug to be eligible for purchase under the 340B Program, it must be “ordered or prescribed pursuant to a health care service that is classified as outpatient.” This requirement is contained in the fifth element of the proposed patient definition. While the program has always been understood to be limited to “covered outpatient drugs,” this iteration of the requirement appears designed to circumscribe the concept of covered outpatient drugs. For example, it has been commonly understood, and has been previously stated by HRSA in guidance to the regulated community, that “covered outpatient drugs” include discharge prescriptions, i.e., the drugs that are prescribed for a patient to take at home following discharge from an inpatient care episode. Under the Guidance, the patient services that generated the prescription(s) will need to be billed to the patient’s insurance carrier or third party payor as outpatient in order for the associated drugs to be 340B eligible. If the patients are self-pay, uninsured, or covered under the hospital CE’s charity care program, their categorization as inpatient or outpatient is to be based on how the services would have been billed to Medicare or another third party payor if the patient were eligible.

Likewise, the Guidance appears to limit the concept of covered outpatient drugs by excluding those drugs billed to and paid by Medicaid as part of a bundled payment. Without going too deep into the weeds, the definition of a covered outpatient drug is found in section 1927(k)(2) of the Social Security Act. This section of the Social Security Act references another section of the Social Security Act, which limits the definition of "covered outpatient drugs" to exclude drugs bundled for Medicaid payment. Because the 340B Program laws and regulations don't specifically reference the limiting definition, historically HRSA allowed CEs to make their own determination about whether the exclusion applied, as long as the CE's approach was well-documented, reasonable, and applied consistently. The Guidance denies CEs that flexibility and proposes, instead, that those drugs billed to and paid by Medicaid as part of a bundled payment are not considered covered outpatient drugs under the 340B Program.

The Patient Definition

From a CE’s perspective, one of the most significant changes the proposed Guidance makes to existing guidance from HRSA and its contracted 340B Prime Vendor, Apexus, is in the definition of a patient. 340B Program CEs may only provide covered outpatient drugs to “patients.” As it stands now, an individual is a patient of a 340B CE (with the exception of state-operated or funded AIDS drug purchasing assistance programs ["ADAPs"]) only if:

  1. The CE has established a relationship with the individual, such that the CE maintains records of the individual’s health care;
  2. the individual receives health care services from a health care professional who is either employed by the CE or provides health care under contractual or other arrangements (e.g., referral for consultation) such that responsibility for the care provided remains with the CE; and
  3. the individual receives a health care service or range of services from the CE which is consistent with the service or range of services for which grant funding or federally qualified health center lookalike status has been provided to the entity. Disproportionate share hospitals are exempt from this requirement.

However, the proposed Guidance appears to significantly restrict who qualifies as an eligible patient. Under the proposed Guidance, an individual is considered a patient “on a prescription-by-prescription or order-by-order basis” (with the exception of state-operated or funded ADAPs) only if all of the following six elements are met:

  1. The individual receives a health care service at a facility or clinic site which is registered for the 340B Program and listed on the public 340B database.
  2. The individual receives a health care service provided by a CE provider who is either employed by the CE or who is an independent contractor for the CE, such that the CE may bill for services on behalf of the provider.
  3. An individual receives a drug that is ordered or prescribed by the CE provider as a result of the service described in (2).
  4. The individual’s health care is consistent with scope of the federal grant, project, designation, or contract.
  5. The individual’s drug is ordered or prescribed pursuant to a health care service that is classified as outpatient.
  6. The individual’s patient records are accessible to the CE and demonstrate that the CE is responsible for care.

The Guidance tightens the nexus between a 340B prescription and the type of outpatient care provided while the patient is physically located at the CE, and the patient's relationship to the provider. For example, if this Guidance is finalized in this form, it will likely have a significant impact on CEs that already have referral arrangements in place. The proposed Guidance, on its face, seems to remove the “referral for consultation” option, which is surprising, given that this option is currently listed as an example of an eligible provider relationship in the current patient definition.

Prohibition on Duplicate Discounts

A duplicate discount occurs when a state Medicaid program obtains a rebate on a drug provided to a Medicaid patient after that same drug was already provided by the manufacturer to a CE at a discount under the 340B Program. The prohibition on such duplicate discounts is one of the statutory cornerstones of the 340B Program. The Guidance attempts to address some confusion that has arisen around this prohibition since 2010 when the Affordable Care Act extended Medicaid drug rebate eligibility beyond Medicaid fee-for-service (FFS) drugs to certain Medicaid managed care organization (MCO) covered outpatient drugs. Those drugs, likewise, are not subject to a rebate if they are also subject to a discount under 340B.

The Guidance makes it clear that a CE must identify, at the time of its registration, whether it will be listed in the 340B database as carving in or carving out. The Guidance defines carve-in as purchasing and dispensing 340B drugs to the CE’s Medicaid patients. Similarly, carve-out is defined as purchasing and dispensing non-340B drugs to the CE’s Medicaid patients. These are not new concepts, but having crisp, clear definitions in the Guidance will be helpful. HRSA uses this information to maintain its 304B Medicaid Exclusion File, which is its principal mechanism to prevent duplicate discounts. The file is posted in the public 340B database so that CEs, states, and manufacturers can determine whether a CE is using 340B drugs for its Medicaid FFS patients. Under the Guidance, CEs would be permitted to make a different determination regarding carve-in or carve-out status for Medicaid MCO patients than for their FFS patients, and also permitted to make this decision by CE site and by MCO as long as all the necessary information is provided to HRSA so that it can be made available in the Medicaid exclusion file. HRSA declines, however, to give CEs instructions on best billing practices to prevent duplicate discounts. Instead, it urges CEs, state Medicaid programs and Medicaid MCOs to work together on a process to identify 340B claims.

The risk of duplicate discounts can increase in contract pharmacy arrangements. Because of that heightened risk, HRSA proposes that when a contract pharmacy is listed on the 340B database, it will be presumed to not dispense 340B drugs to Medicaid FFS or Medicaid MCO patients. To depart from this presumption, the CE must provide HHS with a written agreement with its contract pharmacy and state Medicaid agency or MCO that describes whatever system has been put in place to prevent duplicate discounts. If HHS approves that agreement, then the public database will reflect that the contract pharmacy is using 340B drugs for Medicaid FFS and/or MCO patients. Of course, as always, all records related to the prevention of duplicate discounts must be accurate and auditable. Both HHS and manufacturers have the ability to audit CE compliance with the duplicate discount prohibition; a CE found in violation of the prohibition may be required to repay manufacturers if duplicate discounts have occurred.

Covered Entity Audits

The guidance is replete with references to the requirement to have accurate and auditable records. Failure to do so is a failure to meet the requirements of Section 340B(a)(5) of the PHSA. It could also be grounds for losing eligibility to participate in the program. At the request of stakeholders, HRSA has proposed a record retention standard period of not less than five years. The requirement applies not only to the CE but also to all of its child sites and contract pharmacies. Violations of the recordkeeping requirements can be both systematic and nonsystematic. A nonsystematic violation occurs if a CE is unable to produce even one specific record. In that event, the entity would not be removed from the program but would be presumed to have dispensed a 340B drug in violation of the statute and may be liable for repayment with respect to the presumably ineligible patient who received a 340B drug. Systematic recordkeeping failures can result in a determination of ineligibility as well as, of course, liability for repayment to manufacturers for the periods of ineligibility. Notice and hearing requirements proposed in the Guidance would apply prior to removal of a CE from the program.

CEs need to understand that every requirement in this many faceted program carries with it a related requirement to maintain auditable documentation that the requirement has been satisfied. The CE’s records documenting compliance are considered to include the records of contract pharmacies used by the CE.

Program Integrity

To further strengthen program integrity, the Guidance adds several features. It is, of course, the CE which attests to the satisfaction of compliance requirements regarding its contract pharmacy arrangements. HRSA is concerned that not all CEs have sufficient mechanisms in place to ensure their contract pharmacies’ compliance with all 340B Program requirements. Therefore additional compliance mechanisms are proposed. At least quarterly, the CE is expected to compare its own 340B prescribing records with the contract pharmacies’ 340B dispensing records to ensure that neither diversion nor duplicate discounts have occurred. Any instances of either must be corrected and the corrective action reported to HRSA. An annual audit by an independent outside auditor will also be required. Previously the annual independent audit was only a recommendation.

The good news with respect to HRSA audit activity is that HRSA will ensure that only one 340B Program audit of a CE, its child sites, and contract pharmacies, is in process at any given time. This "one at a time" promise includes manufacturer audits of CEs, which will be discussed in more detail in following sections.

Contract Pharmacy Arrangements

As expected, HRSA made some clarifications and proposed some new requirements regarding contract pharmacy oversight. As noted earlier, (1) only a CE may register a contract pharmacy; (2) a CE “is expected” to conduct annual audits using an independent auditor; and (3) a CE “is expected” to conduct quarterly reconciliations of drug prescribing to the contract pharmacy's dispensing records. The annual audit requirement was expected, but the difference between suggested and required may be challenging to operationalize. Contract pharmacies with multiple CE relationships will need to consider how to respond to and work with CEs for annual program audits. Contract pharmacies will need to ensure they maintain clear records of all transactions so they can respond to both quarterly reconciliations and annual audits. CEs will need to consider the cost of performing quarterly reviews and annual audits and, perhaps, re-evaluate the number of contract pharmacies they work with.

Interestingly, as mentioned earlier, the Guidance states that a CE child site may enter into its own contract pharmacy agreement independent of its parent. This presents a business opportunity for contract pharmacies and a potential compliance risk for CEs. The parent retains ultimate responsibility for program compliance so the parent should ensure the child site follows CE and Program requirements.

Manufacturer Eligibility, Registration, and Termination

Manufacturers participate in the 340B Program for two reasons: They must or they volunteer. Manufacturers that have entered into a Medicaid Drug Rebate Agreement must enter into a Pharmaceutical Pricing Agreement (PPA) within 30 days of enrolling in the Medicaid drug rebate program. Signing this PPA enrolls a manufacturer in the 340B Program. A manufacturer that is not subject to the Medicaid Drug Rebate Agreement may voluntarily enter into a PPA and therefore the 340B Program.

As noted in the June 2015 proposed rule, 340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation, HRSA is proposing that a manufacturer undergo a similar recertification process as is required of CEs. As a participating manufacturer, the manufacturer is expected to submit timely updates to its 340B database record, maintain auditable records demonstrating 340B Program compliance for no less than five years, provide such records when requested, and permit HRSA to audit its compliance. When a manufacturer decides to exit the 340B Program, the manufacturer should provide an explanation and documentation of the termination, the timing of the termination, and the date the manufacturer will cease offering covered outpatient drugs under the 340B Program. HRSA clarifies that even if a manufacturer withdraws from the Medicaid drug rebate program, HRSA presumes continued participation in the 340 Program unless and until the manufacturer advises HRSA otherwise. HRSA proposes that manufacturers maintain auditable 340B Program records for five years after the termination date.

Audits of and Audits by Manufacturers

HHS Audits of Manufacturers

Manufacturers only have one statutory obligation under the 340B Program: To provide covered outpatient drugs to participating CEs at no greater than the 340B ceiling price. This manufacturer obligation was more clearly defined by the June 2015 proposed rule. The Omnibus guidance does not restate the items raised in the June 2015 proposed rule. However, HRSA reiterates the fact that manufacturers and their contractors (e.g., wholesalers) can and will be audited by HHS, and, if necessary, will be investigated by the United States Department of Justice or the HHS Office of the Inspector General. Any final audit findings will be made public. If the manufacturer is found to have violated the 340B Program, the manufacturer will be provided the same opportunity for notice and hearing as is afforded to CEs, as discussed earlier. Manufacturers will also create corrective action plans and HHS may verify manufacturers compliance with its HHS-approved corrective action plan at any time.

Manufacturer Audits of Covered Entities

One aspect of the manufacturer's statutory obligation is to confirm that the entity that requests 340B drug prices is actually a participating CE. In this regard, manufacturers, as has been the case heretofore, can seek HHS approval to conduct an audit if they have reasonable cause to believe that the CE is not complying with the duplicate discount and diversion prohibitions. HRSA defines reasonable cause as follows: "[T]hat a reasonable person could conclude, based on reliable evidence, that a CE, its child sites, or contract pharmacies may have violated" the prohibition against duplicate discounts and diversion. HRSA goes on to provide four examples of reasonable cause, as a situation where: (1) significant changes in quantities of specific drugs ordered by a CE without adequate explanation by the CE; (2) significant deviations from national averages of inpatient or outpatient use of certain drugs without adequate explanation by the CE; (3) evidence of duplicate discounts provided by manufacturers or state Medicaid agencies; or (4) potentially, a CE's refusal to respond to manufacturer questions related to 340B drug diversion and duplicate discounts. A manufacturer must document this reasonable cause to HRSA's satisfaction.

HRSA then proposes that a manufacturer must submit an audit work plan for HRSA's approval prior to conducting such an audit. When submitting this audit work plan, the manufacturer will also submit the reasonable cause documentation. HRSA may modify the audit work plan as it sees fit. HRSA outlines the general standards for manufacturers conducting this 340B Program audit. Manufacturers should use an independent certified public accountant, the audit cannot last more than one year, and the cost of the audit shall be borne by the manufacturer. When a manufacturer requests records, the CE must provide auditable records within 30 days of the request.


If a manufacturer charges a CE more than the 340B ceiling price, the manufacturer must refund or credit that CE. A manufacturer may only calculate the refund by NDC. HRSA expects the refund or credit to be applied within 90 days of the determination of the overpayment. A CE waives its right to repayment if it does not act to accept repayment within 90 days of an undisputed refund. Refunds and credits specified under this proposed guidance may still be imposed on a terminated manufacturer for 340B drugs sold above the ceiling price during the time that the manufacturer had a PPA in effect.

Limited Distribution Plans

HRSA recognizes that certain covered outpatient drugs may be required to be dispensed by specialty pharmacies and that those specialty pharmacies may not fall under the terms of a contract pharmacy agreement or wholesaler contract for the distribution of drugs to CEs. HRSA allows the manufacturer to develop a limited distribution plan, but proposes to require manufacturers to notify HHS, in writing, of any plan. The plan may be revised and published by HRSA.

HRSA proposes that the plan include the following information: a description of product information (drug name, dosage, form, and NDC) and details of a nondiscriminatory practice for restricted distribution to all purchasers, including 340B covered entities, which includes each of the following components: (1) an explanation of the product’s limited supply or special distribution requirements and the rationale for restricted distribution among all purchasers; (2) an assurance that manufacturers will impose these restrictions equally on both 340B covered entities and non-340B purchasers; (3) specific details of the drug allocation plan, including a mechanism that allocates sales to both covered entities and non-340B purchasers with no previous purchase history of the restricted drug; (4) the dates the restricted distribution begins and concludes; and (5) a plan for the notification of wholesalers and 340B covered entities of the restricted plan.


If you want to be heard on this issue, you need to submit comments to HRSA on or before October 27, 2015—make sure to include the Regulatory Information Number, 0906–AB08. For more information on the 340B Program or assistance in drafting a comment, please contact Alyce Katayama at (414) 277-5823/alyce.katayama@quarles.com, Ed Rickert at (312) 715-5139/ed.rickert@quarles.com, Brenda Maloney Shafer at (202) 372-9526/brenda.shafer@quarles.com, Elizabeth Gebarski at (414) 277-5303/elizabeth.gebarski@quarles.com, or your Quarles & Brady attorney.

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