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OIG Testimony Focuses on Longstanding 340B Program Vulnerabilities

OIG Monitor David Blank

On May 15, 2018, Ann Maxwell, Assistant Inspector General for Evaluation and Inspections for the Office of Inspector General (OIG) delivered testimony before the U.S. Senate Committee on Health, Education, Labor, and Pensions to discuss recommendations to protect the integrity of the 340B Drug Pricing Program (340B Program).

The OIG focused on two long-standing program vulnerabilities it believes impedes effective 340B Program operations and oversight. First, the OIG noted the program’s lack of transparency hinders the ability to ensure: (1) 340B providers are not overpaying pharmaceutical manufacturers; and (2) that state Medicaid programs are not overpaying 340B providers. Second, the OIG remains concerned that a lack of clear rules governing the 340B Program creates uncertainty, leads to inconsistent implementation, and limits accountability.

340B Program Overview

Created in 1992, the 340B Program looks to generate savings for certain safety-net health care providers (covered entity) by allowing them to purchase outpatient drugs from manufactures at discounted prices. Covered entities generally administer or dispense the discounted drugs to patients in low-income and needy communities. Under the 340B Program, manufacturers sell drugs to covered entities at, or below, a capped amount known as the “ceiling price.” The ceiling price is calculated by the manufacturer using a statutorily defined formula. The ceiling price is not made public because of the proprietary nature of the information. State Medicaid programs, in turn, reimburse providers for drugs purchased under the 340B Program at actual “acquisition cost,” which is the aggregate of the ceiling price plus a dispensing fee. Health Resources and Services Administration (HRSA) is the agency responsible for managing the 340B Program. 340B sales account for approximately 3.6% of the U.S. drug market.

340B Program Vulnerabilities

Since its inception, the 340B Program has faced criticism tied to a lack transparency and meaningful oversight. While the OIG acknowledged that HRSA has strengthened the program by addressing many its prior concerns, certain vulnerabilities remain. For example, OIG noted that Medicaid programs continue to lack access to manufacturer ceiling prices because the information is deemed proprietary. This lack of transparency has left covered entities unable to determine whether they are paying accurate amounts to drug manufacturers. OIG also noted that manufacturers are occasionally subjected to paying a state Medicaid program a rebate on a drug that was sold at the 340B price, resulting in a “double discount.” The double discount is prohibited under the program and penalizes the manufacturer. Finally, OIG noted that HRSA continues to lack the necessary enforcement tools to hold manufacturers accountable for charging correct prices.

OIG Recommendations

To address these concerns, the OIG recommended HRSA: (1) increase transparency aimed at improving payment accuracy; and (2) clarify certain rules to ensure that the program operates as intended. OIG believes these recommendations would significantly improve program integrity and oversight within the 340B Program.

(1) Increase Transparency to Allow Payment Accuracy

First, the OIG recommended the manufacturer’s ceiling price be made known to covered entities and State Medicaid programs to ensure they are paying the correct amount. Congress authorized HRSA to share ceiling price information with covered entities in 2010; however, no system exists for providers to access or obtain the information. HRSA maintains that the ceiling price validation system is a top agency priority. Unfortunately, until such a system or database is operational, providers remain without a tool to ensure they are paying the correct amount. More information about the HRSA information system can be found here.

The prospects for a ceiling price validation system for state Medicaid programs is less clear. The 2010 legislation did not address the issue and HRSA lacks statutory authority to allow state access. The OIG noted the lack of access will continue to adversely impact state enforcement efforts relating to 340B payment noncompliance, prevent the implementation and use of automated claim edits, and require labor-intensive post-payment audits.

Second, the OIG recommended that states strengthen their oversight capabilities by working to identify claims associated with 340B drugs. Claim identification will allow State Medicaid programs to pay covered entities accurately and ensure they collect all appropriate drug rebates without subjecting manufacturers to duplicate discounts. The current lack of transparency regarding both 340B pricing and claim identification hampers payment accuracy on both fronts. In sum, the OIG recommended:

  • HRSA fully implement its authority to share ceiling prices with covered entities;
  • HRSA work with CMS to share ceiling prices with State Medicaid agencies; and
  • CMS require State Medicaid agencies to use claim-level methods to identify 340B claims and HRSA should update its related guidance.

(2) Clarify Rules to Ensure That the 340B Program Operates as Intended

The OIG also suggested improvements aimed at preventing the diversion of 340B drugs to ineligible patients. The OIG noted the potential for the diversion of 340B drugs and attributed the problem, in part, to the widespread use of contract pharmacy arrangements. Contract pharmacies are external pharmacies, often in the retail sector, that partner with providers to dispense 340B drugs to the providers’ patients. Contract pharmacies typically dispense both 340B and non-340B drugs.

The OIG’s primary concern is that the contract pharmacies are often faced with variations in program eligibility determination across different covered entities. The problem is exacerbated by the contract pharmacies' inability to distinguish a 340B patient from any other customer filling a prescription. The inability to identify the 340B patient results in the pharmacy dispensing drugs from its regular inventory and subsequently accounting for the 340B drugs through inventory reconciliation efforts. The OIG concluded determining patient eligibility and patient identification is a critical step to prevent the diversion of 340B drugs and ensure proper administration of the program. The OIG concluded that this concern would benefit from a uniform definition of “eligible patient” that accounts for issues raised by contract pharmacies. In sum, the OIG recommended:

  • HRSA should clarify the definition of eligible patient; and
  • HRSA should address whether 340B providers must offer discounted 340B prices to uninsured patients.


While there have been improvements in the 340B Program aimed at improving program integrity, problems still remain. The year 2018 is failing to meet the expectations that many 340B Program participants had for significant programmatic improvements. The OIG’s testimony is a reminder that structural vulnerabilities remain. HRSA and CMS responded to the OIG’s recommendations indicating the agencies do not have the requisite statutory authority to implement or carry out most of these recommendations. The lack of statutory authority means many of these recommendations cannot be implemented without Congressional action increasing HRSA’s broader regulatory power.

Covered entities should take note of the OIG’s recommendations and continue to monitor the legislative landscape. While states look to improve their oversight capabilities, enforcement will continue be the primary driver of 340B compliance. Covered entities should remain focused on keeping timely, accurate, and complete records to ensure compliance with federal and state law and 340B Program requirements. Please feel free to reach out to David Blank at (202) 780-2643/[email protected], Brian King at (312) 715-5065/[email protected], or your regular Quarles & Brady attorney, to learn more about the 340B program, legislative updates, or other government initiatives.

Read more OIG Monitor insights from April-June 2018:

OIG by the Numbers – June, 2018

Can You Hear Me Now? OIG Examines Improper Telehealth Payments

GAO Provides Congress Inside Look at OIG Integrity Obligations