340B Program Compliance in a Shifting Landscape: What Challenges Do Stakeholders Face?
American Health Law Association 05/24/22 Brenda M. Shafer, Michael French, Richard B. Davis
The federal 340B Drug Pricing Program (340B Program) allows certain qualifying health care providers such as hospitals and clinics (Covered Entities) to purchase outpatient medications at significant discounts. The 340B Program has long had an expansive reach that significantly impacts a wide variety of stakeholders in the health care space. According to the Covered Entities, the 340B Program provides crucial funds to safety net providers that help them better serve at-risk patient populations. Drug manufacturers and associated advocacy groups disagree, claiming the 340B Program has little oversight and is rife with non-compliance that unfairly impacts those selling medications. These disagreements have only intensified over the last couple of years, as the enforcement of the 340B Program's sub-regulatory guidance has come into question. This uncertainty has unleashed new interpretations of applicable obligations and triggered numerous lawsuits that could change the 340B Program as we know it.
This article looks at how 340B stakeholders are navigating this time of extreme uncertainty and what challenges stakeholders face when the underlying rules of the 340B Program itself are in flux.
Enacted in 1992 via federal statute, the 340B Program requires manufacturers that participate in the Medicaid Drug Rebate Program to provide discounts to qualifying Covered Entities on drugs dispensed or administered to eligible outpatients. 1 The Program has two main prongs:
- Covered Entities can purchase certain outpatient medications at significant discounts for subsequent administration during on-site patient visits.
- Covered Entities can fill prescriptions tied to Covered Entity visits with 340B-priced medications at entity-owned retail pharmacies. Covered Entities can also contract with third party pharmacies (i.e., "contract pharmacies") to fill eligible prescriptions for its eligible patients at 340B prices in exchange for a dispensing fee.
Note that Covered Entities and their contract pharmacy partners, despite being able to purchase the drugs at a steeply discounted rate, may generally still bill insurers at the typical rates, resulting in a significant "profit" for the Covered Entity off the administration or dispensation of the drug.
The overall intent of the 340B Program is for Covered Entities to use these savings "to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services."2 In furtherance of this stated intent, the Affordable Care Act, passed in 2010, significantly expanded the 340B Program by (1) adding additional Covered Entity-types that can qualify for 340B eligibility and associated drug discounts and (2) removing the limitation on the number of contract pharmacy partners a Covered Entity can have.3
The 340B Program is regulated by the Health Resources and Services Administration (HRSA), which has primarily defined the contours of the Program, especially those facets related to contract pharmacy relationships, through guidance documents and "frequently asked questions" posted online. 4 For many years, 340B stakeholders operated within the parameters of this sub-regulatory guidance with limited issue. However, starting in late 2019, cracks began to form in this regulatory scheme when HRSA appeared to question and reevaluate its own enforcement authority based on a Trump Administration Executive Order geared to limiting the prevalence and enforceability of administrative "guidance documents" promulgated outside of the formal rule making process.5 Seizing a potential opportunity to limit the situations where they must offer drugs at 340B pricing, several manufacturers began significantly limiting when they would offer 340B pricing for prescriptions filled through contract pharmacy relationships.6 This led to many participating Covered Entities losing substantial 340B savings typically realized through their contract pharmacy relationships, and in some cases severely affecting the Covered Entities' operations already complicated by the ongoing COVID-19 pandemic. Unsurprisingly, this manufacturer activity led many Covered Entities to sue the Department of Health and Human Services (HHS), requesting enforcement of its contract pharmacy guidance and penalties to be levied. From there:
- In December 2020, HRSA released an Advisory Opinion (AO) outlining the current views of the agency and its interpretation of 340B Program requirements. Importantly, HRSA argued that the manufacturer's obligation "is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs" and that the manufacturer is not permitted to introduce unilateral restrictions on 340B drug distribution.7 While this AO was not legally binding, it was still challenged by several drug manufacturers in court, who claimed that HHS' stated position was incorrect, exceeded statutory authority, and was inconsistent with HHS' recent questioning of its own authority over aspects of the Program. The AO was eventually rescinded after a court denied HHS' motion to dismiss the manufacturer's suit. However, the tenets of the AO (and HHS' stance contained within) were used in subsequent Enforcement Letters sent to applicable manufacturers in May 2021.
- These Enforcement Letters were initially sent to six manufacturers that had begun limiting 340B pricing available through most contract pharmacy relationships. The letters state that these pricing limitations violate the 340B statute and HRSA's rules related to offering 340B pricing through contract pharmacies, and thus resulted in overcharges to the affected Covered Entities. Moreover, the letters obligate the manufacturers to begin offering 340B pricing immediately and make repayments for amounts owed to Covered Entities or suffer civil monetary penalties.8
- The affected manufacturers almost immediately brought suit in various jurisdictions challenging both the substance and the enforceability of the Enforcement Letters.9 While the courts were split on whether manufacturers could unilaterally impose restrictions on 340B drug distribution, all agreed that the Enforcement Letters were not an appropriate mechanism for enforcement and could not be used in their current state to impose penalties against the manufacturers. These lawsuits have been appealed, and at least one has reached the appellate court for further consideration.10 The ultimate results of these cases will have huge implications related to the scope of available 340B benefits for Covered Entities through contract pharmacy relationships, and are being watched closely by both Covered Entities and manufacturers.
Outside of the manufacturer vs. Covered Entity battle detailed above, other recent legal and regulatory changes have also shifted compliance responsibilities for many 340B shareholders. For example, a growing number of states have enacted pharmacy benefit manager (PBM) 340B anti-discrimination laws that bar PBMs from having reduced reimbursement rates for 340B Covered Entities and/ or prescription fills involving 340B medications.11 This has impacted PBM contracting strategies, as many PBMs had introduced alternate reimbursement structures for 340B claims that may no longer be permissible under new state laws (further discussion can be found in the "340B Stakeholder Challenges" below).
Covered Entities have also been pursuing a similar tactic via the ongoing Genesis12 litigation which effectively asserts that HRSA's sub-regulatory guidance regarding which Covered Entity patients are eligible to receive 340B drugs is also nonbinding. While the Genesis litigation has kept a lower profile than the splashier manufacturer dispute, it nonetheless represents a second front in the war to limit the scope of HRSA's sub-regulatory guidance.
Finally, since 2018, certain Covered Entity types have experienced similar reimbursement reductions instituted by the Centers for Medicare & Medicaid Services (CMS) for certain non-pass through outpatient 340B medications administered during patient visits and subsequently billed to Medicare Part B plans.13 The nearly 30% reimbursement reduction has significantly impacted Covered Entities and offset a significant portion of many Covered Entity's drug cost savings accrued through the 340B Program. However, this CMS-initiated reduction may not be here to stay-a lawsuit brought by hospital groups has reached the Supreme Court, and the reductions could be overturned if the Court determines that CMS exceeded its rulemaking authority when instituting the reimbursement cuts.
As demonstrated by all of the recent regulatory changes and heated lawsuits detailed above, the 340B Program is in a state of flux, with frequently shifting rules that in some cases may not be truly enforceable. What specific challenges do various 340B stakeholder groups face, and how do these groups navigate through all of this uncertainty?
340B Stakeholder Challenges
While the following are far from the only challenges 340B stakeholders are facing, we chose to highlight some of the biggest issues faced by each group, especially those that relate to the uncertain 340B Program regulatory structure described in the preceding section.
Covered Entities are the stakeholder group most negatively impacted by current manufacturer limitations on 340B pricing available through contract pharmacies. Aside from the significant reduction in available 340B savings, many Covered Entities struggle to ensure that software settings appropriately (1) "block" affected NDCs from being deemed 340B-eligble by their Third Party Administrator (TPA) software and avoid replenishment purchases at above-340B prices and (2) maintain records of otherwise-eligible claims that are "blocked" in case ongoing lawsuits determine that the manufacturer owes repayment retrospectively to Covered Entities impacted by their 340B pricing limitations. This process has become more and more difficult as more manufacturers begin to limit 340B contract pharmacy pricing-there are simply more and more drugs to track and configure appropriately through the TPA software.
Further, as mentioned above, some Covered Entity types are subject to significant reimbursement reductions for certain 340B medications billed to Medicare Part B.14 Aside from the financial hit, these Covered Entities are also responsible for identifying 340B drugs billed by adding a JG modifier for status indicator K medications that notifies CMS to trigger the reimbursement reduction. Failure to appropriately add that modifier could result in excess reimbursement at the "non-340B" rate and trigger overpayments and potential False Claims Act liability. Additionally, most Medicare Advantage plans have also introduced similar modifier requirements and associated reimbursement reductions, adding additional steps to Covered Entity billing protocols to ensure that appropriate modifiers are added to applicable claims that bill for 340B medications. Finally, CMS changes its OPPS fee schedule and applicable status indicators for drugs on a quarterly basis-Covered Entities often struggle to update their billing protocols to ensure that modifiers are added to "new" status indicator K medications to ensure appropriate reimbursement. Covered Entities are hopeful that the Supreme Court will overturn these reimbursement reductions and associated billing requirements from both a financial and compliance perspective the current CMS rule significantly reduces available reimbursement for many high-dollar drugs and also introduces false claim risk if modifiers are not appropriately added to a variety of Medicare Part B and Part C plans.
Manufacturers also have several compliance considerations tied to the current uncertainty surrounding the 340B Program regulatory structure. Most notably, manufacturers who have opted to significantly limit 340B pricing available through contract pharmacy relationships could be on the hook for significant liability if ongoing litigation is decided in favor of HHS. Depending on the parameters of the decision(s), manufacturers could be subject to retroactive repayment obligations and/or civil monetary penalties if it is determined that the payment restrictions constitute "overcharges.1"5 Even if the decisions are decided in favor of manufacturers, that could spark HHS and/ or legislators to make changes to the 340B Program and introduce rules or laws that more clearly mandate manufacturers to offer 340B pricing through all contract pharmacy relationships. Many manufacturers are determining their risk tolerance, which weighs the short-term benefit of reducing the situations where cheaper 340B prices must be offered with potential liability if the ongoing lawsuits are decided against them.
Although outside of the current ongoing litigation, another challenge manufacturers frequently deal with relates to "duplicate discounts" for Medicaid, commercial, and Medicare Part D claims billed through retail pharmacies. In many circumstances, manufacturers are obligated to provide (1) cheaper 340B drug pricing and (2) a PBM rebate for the same drug. While state Medicaid agencies and many PBM Part D and commercial contracts have required mechanisms for identifying when 340B drugs are billed to avoid additional PBM rebates owed, manufacturers claim that these mechanisms are commonly not used-this is largely unsurprising, as the pharmacy rarely knows when a medication is 340B-eligible at the time of adjudication when the claim is dropped. This ultimately leads to the manufacturer being "on the hook" for both a 340B pricing discount and a Medicaid or PBM rebate (depending on the plan type). Several manufacturers have essentially linked this internal challenge to their decision to limit 340B pricing at contract pharmacies, offering to reinstate 340B pricing at contract pharmacies in exchange for claim information from the Covered Entity via the 340B ESP platform that will assist the manufacturer in determining when "duplicate discounts" may have occurred.16 Many Covered Entities, as well as their contract pharmacy partners, are hesitant to pass along this information without knowing the complete extent to which manufacturers will use it-Covered Entities are not otherwise required by law or rule to provide information on non-Medicaid 340B claims, and contract pharmacies lack privity of contract with 340BESP and have little to no control over how their pharmacy's dispensed information could be manipulated and used in a potentially adverse manner to their interests. A growing number are willing to provide the requested information to re-obtain access to 340B contract pharmacy pricing, however, more 340B savings are lost due to the restrictions.
As detailed above, current manufacturer policy has significantly limited available 340B benefit available through 340B contract pharmacy relationships. This limitation not only negatively impacts Covered Entities, but also the contract pharmacies themselves. Contract pharmacies typically share in the 340B savings generated by collecting a dispensing fee on 340B-eligible fills that is, on average, greater than their average profit margin for those same fills at their own retail costs. Because manufacturer policy has significantly limited the number of medications that can be filled with a cheaper 340B drug, Covered Entities are filling fewer 340B prescriptions through their contract pharmacy partners, leading to the downstream effect of the pharmacy not realizing nearly as much financial benefit through the relationship.
From a compliance standpoint, contract pharmacies also often struggle with meeting 340B-specific billing requirements found in many of their payer /PBM contracts. These clauses have become more prevalent in recent years and typically require a 340B-specific modifier or other indicator to be added to the billed claim. As mentioned above, however, pharmacies very rarely know if a prescription is 340B-eligible at the point of sale, making these requirements nearly impossible for contract pharmacies to meet. While PBMs and payers have, for the most part, explored alternative options to identify 340B claims (such as "Nl" transaction reports or retrospective claim reviews), contract pharmacies could be considered in breach of their payer agreements if 340B billing requirements are unmet, which could even threaten network participation if payers/PBMs were to take a hard line.
These same contractual 340B modifier requirements have also recently become a regulatory challenge for PBMs, albeit for different reasons. Although the exact terms and specific protections slightly differ, legislation in a large number of states prohibits PBMs from offering lower reimbursement for 340B medication fills or otherwise discriminating against 340B participating entities (e.g. Covered Entities and their contract pharmacy partners). Ensuring that their payer contracts adhere to new state-specific statutes can be difficult for PBMs, especially if the contract is with a larger pharmacy or health system network with locations in multiple states with different reimbursement rate restrictions.
In short, the combination of general uncertainty over 340B Program rules, aggressive interpretation of those rules, and the proliferation of additional payer billing requirements has led to more compliance and business challenges felt across the spectrum of 340B stakeholders. These stakeholders must stay on the ball and closely track potential program changes. The 340B landscape is frequently evolving, and compliance obligations may change quickly, along with the accompanying risk calculus for taking a certain interpretation of 340B Program rules.
1 42 u.s.c. 256b.
2 U.S. House, Committee on Veterans Affairs, "Establishment of Limits on Prices of Drugs Procured by the Department of Veterans Affairs (to accompany H.R. 2890)," H. Rept. 102-384, Pt. 2, 1992.
3 Patient Protection and Affordable Care Act, as amended through May 1, 2010, at pp. 764-771, available at
http://housedocs.house.gov/energycommerce/ppacacon.pdf(last accessed April 29, 2022).
4 See, e.g., "340B Frequently Asked Questions," available at https://www.340bpvp.com/hrsa-faqs (last accessed April 29, 2022); for example of sub-regulatory guidance, see "Statutory Prohibition on Group Purchasing Organization Participation," Release No. 2013-1, Feb. 7, 2013, available at
(last accessed April 29, 2022).
5 "Executive Order 13892-Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication," Administration of Donald J. Trump, Oct. 9, 2019, available at https://www.govinfo.gov/content/pkg/DCPD-201900707 /pdf/DCPD-201900707.pdf (last accessed April 29, 2022).
6 As of the publication of this article, most manufacturer contract pharmacy pricing restrictions only apply to hospital Covered Entities and not to grantee site Covered Entities-therefore, the negative impact of these restrictions is typically greater for participating hospitals. However, note that this manufacturer distinction is voluntary, and manufacturers can change their policies to encompass grantee sites as well at any time. See "Merck Notice to 340B Covered Entities Regarding Updated Merck 340B Program Integrity Initiative", April 2022, available at https://340breport.com/wp-content/uploads/2022/04/Merck- 340B-letter-update-2022.pdf (extending Merck's contract pharmacy pricing restrictions to Consolidated Health Center Program (FQHC) Covered Entities).
7 Advisory Opinion 20-06 on Contract Pharmacies Under the 340B Program, Department of Health and Human Services, Dec. 30, 2020, available at https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/340B-AO-FINAL-12-30-
2020 0.pdf (last accessed on April 29, 2022).
8 See, e.g., AstraZeneca 340B Violation Letter, Department of Health and Human Services, May 17, 2021, available at https://www.hrsa.gov/sites/default/files/hrsa/opa/pdf/hrsa-letter-astrazeneca-covered-entities.pdf (last accessed April 29, 2022).
https:/ /fingfx.thomsonreuters.com/gfx/legaldocs/byprjkkowpe/Sanofi%20340B%20opinion.pdf (Sanofi and Novo Nordisk); https:/ /fingfx.thomsonreuters.com/ gfx/legaldocs /zdpxonnyavx/Novartis%20340B%20opinion.pdf (Novartis and United Therapeutics); https: //340breport.com/wp-content/uploads/2022/02/document8 l- l.pdf (AstraZeneca).
10 See further detail on Lilly v. Becerra initial order from the Seventh Circuit ahead of formal briefings, available at
https: //340breport.com/wp-content/uploads/2022/04/Document.pdf (last accessed April 29, 2022).
11 See, e.g., S.D. Codified Laws§ 58-29E-15 (2019), Minn. Stat. Ann.§ 62W.07(f) (2019), 2019 Or. Laws Ch. 526 (H.B. 2185),
W. Va. Code§ 33-51-9(d) (2019).
12 Genesis HealthCare v. Becerra, No. 20-1701, Fourth Circuit (argued March 9, 2022).
13 CY2018 Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs Final Rule, 82 Fed. Reg. 52916 (Dec. 17, 2017); note also that Covered Entities are already subject to reduced reimbursement for 340B drugs billed to Medicaid plans in most states (typically the actual acquisition cost plus a modest dispensing fee designed to cover the pharmacy's overhead for filling the prescription).
14 Note: CMS' reimbursement reductions only apply to DSH, RRC, and urban SCH Covered Entities. Other 340B Covered Entity types are still reimbursed in full.
15 82 Fed. Reg. 1210, 1230 Qan. 5, 2017).
16 Further detail on claim submissions process and accompanying terms of agreement can be found at https: //www.340besp.com/ (last accessed April 29, 2022).