Last August, the Obama Administration released proposed new "mega-guidance" on the 340B Drug Purchasing Program - an obscure but very significant source of income for about half of America's hospitals. Hospitals purchase drugs from drug companies at a discount of 25-50% then turn around and charge full price to Medicare or the negotiated price to commercial insurers, pocketing the spread. Great work if you can get it. While the 340B program has enhanced the income statements of many nonprofit hospitals including virtually all of the teaching and research facilities, it has been a thorn in the side of the pharmaceutical industry which has watched the program grow dramatically in recent years. For a year, the proposal has simmered on the back burner of the Obama Administration until Thursday, last week, when a final proposal was sent to the White House for approval. The proposal will limit the number of people that qualify as a "patient" for the purposes of a 340B drug discount and that is sure to be a negative for nonprofit hospitals that have come to depend on the program and their contract pharmacies including WBA, WMT, RAD, KR and CVS.
For background on the 340B Drug Purchasing Program, click here
For a list of nonprofit hospitals currently participating in the 340B Drug Purchasing Program, click here.
As a refresher, the mega-guidance currently pending updates long-standing and often vague guidance on the following areas, among others:
- Entity eligibility
- Patient eligibility
- Contract pharmacy arrangements
- Program integrity efforts
Entity Eligibility: The proposed guidance makes no substantive changes to the current "Covered Entity" or CE eligibility criteria, much to the chagrin of the pharmaceutical industry and members of Congress like Senator Charles Grassley. For years, hospitals could meet the CE eligibility criteria by simply providing certification to HHS. In 2013, the agency at HHS responsible for the program, HRSA issued clarification to strengthen oversight of CEs, including specific certification and requiring signatures of submitting officials. Those efforts did little to quel concerns of the critics.
Broader complaints about the eligibility criteria in the recent past have targeted the use of DSH as an accurate mechanism for identifying hospitals serving needy patients since DSH does not actually capture the degree to which hospitals serve uninsured patients and/or provide charity care. Because DSH measures the proportion of inpatient care provided to low-income Medicare and Medicaid patients, critics have prognosticated that the number of eligible DSH hospitals will likely increase as more people get health insurance under the ACA because of the law’s Medicaid expansions. The fact that HRSA remained mum on the issue is no surprise. The DSH eligibility criteria is in statute and therefore beyond the authority of HRSA to change. This issue may, however, be ripe for Congressional intervention in the not-too-distant future.
Other complaints – including some by the GAO – have targeted the lack of clarity around the criteria related to governmental powers and contracts to provide health services to uninsured individuals. In the case of the former, there are no explicit requirements for what constitutes a governmental power, and in the case of the latter, guidance lacks any standards for the contracts – that is, how broad or how much volume must a contract encompass to meet the criteria? Instead, hospitals with any contract with a State or local government to provide any care at all - no matter how insignificant would meet the threshold. HHS has proposed no new clarifications or requirements in this area.
Based on the proposed guidance, we wouldn’t expect any dramatic reductions to the number of eligible DSH hospitals, and we might, in fact, expect the number to increase consistent with the theory above about DSH calculations and Medicaid expansions.
Patient Eligibility: While HHS makes no waves in the CE eligibility area, it sure does make a splash in its proposed changes to patient eligibility.
The patient definition states exactly who is considered a patient of an eligible hospital for the purpose of dispensing discounted drugs purchased under the 340B program. Because eligible hospitals can dispense discounted 340B drugs to all different kinds of patients and subsequently bill insurance for those drugs, hospitals prefer the widest net possible to capture the windfall between the discounted price they paid and what a private insurer or Medicare reimburses for that drug.
The definition of patient currently in effect subjects 340B hospitals to a broad two-pronged test under which an individual must have their health care records maintained by the CE and receive care from a provider either employed by or with some "arrangement" with the CE. Over the years, this guidance proved unclear and hospitals were taking significant liberties with their interpretation.
The latest proposal attempts to pull the patient and the care associated with the 340B-discounted prescription closer to the CE. Under the proposal, a 340B drug should be linked to a specific prescription associated with a specific outpatient service provided by a provider that can bill on the CE’s behalf, and the CE must maintain auditable health records that demonstrate that the CE has a provider-to-patient relationship (vs. case management or administrative) associated with each 340B-discounted prescription. Not only would the proposed definition potentially significantly reduce the number of patients for which eligible hospitals can dispense the discounted drugs (and therefore capture 340B-enabled windfalls), it could also significantly increase the administrative burden associated with dispensing 340B-discounted drugs.
Contract Pharmacy Arrangements: Put quite simply, HHS’s proposed guidance doesn’t do much to tighten the reins on contract pharmacy usage or oversight. It goes nowhere near the issue of limiting the number of the contract pharmacy arrangements, includes some very small clarifications and ‘improvements,’ and makes a whole lot of nods to problems and broad policy statements, but in the end, the proposed guidance lacks teeth.
Some of the small improvements include:
- To be listed in the 340B Database, contracts must be in place and registered with HRSA by the CE.
- Contracts should include all locations of a single pharmacy company.
- A CE may contract with a pharmacy only on its own behalf and not via a group or network of CEs.
- Manufacturers and wholesalers are required to ship only to the authorized shipping address for a CE.
- Contract pharmacies may only provide 340B drugs to CE patients after the contract start date displayed on the Database.
As for the program integrity concerns cited by the OIG just last year, HHS reiterates that CEs should be ensuring that all drug distribution arrangements – including the use of contract pharmacies – comply with program requirements, but makes clear that CEs retain “complete responsibility” for compliance by contract pharmacies. HHS reiterates its recommendation that CEs do annual independent audits of their contract pharmacies and cites the benefits for doing so. HHS also recommends that CEs compare their 340B prescribing records with the contract pharmacies’ dispensing records. But in all cases, HHS doesn’t actually require that CEs do any of these things. Instead, HHS will indirectly police contract pharmacies through its audits of CEs, which would be no more stringent than what HHS is carrying out today.
In terms of broad policy statements that lack any enforcement mechanism, the two statements below suggest that HHS is aware that contract pharmacies are making money, perhaps feels a little iffy about it, but doesn’t really know what it can do:
“Congress intended the benefits of the 340B Program to accrue to participating covered entities. Each covered entity should carefully evaluate its relationships with contract pharmacies (i.e., cost/benefit analysis) to make certain that the relationship benefits the covered entity and is in line with the intent of the Program.”
“A covered entity contracting with a pharmacy to dispense 340B drugs should be aware of the Federal anti-kickback statute and how such provisions could apply to arrangements with contract pharmacies.”
Even though there is no significant change to the contract pharmacy arrangements, the reduction in the number of eligible patients should reduce the 340B volume at pharmacy companies like WBA, WMT, RAD and KR.
Program Integrity Efforts:
HHS's oversight of the 340B has been under fire for years. The ACA enacted several new programs integrity efforts aimed at giving HHS explicit authority to improve compliance with the program requirements by both drug manufacturers and CEs. In 2011, the GAO issued a report concluding that HHS primarily relies on self-policing by both manufacturers and CEs to ensure compliance and that existing guidance is too broad and vague to even provide clear direction for this self-policing. As a result, HHS had no way of knowing the extent of noncompliance or of assessing program risk. In the wake of the GAO report, HHS launched a more concerted and systemic audit effort – conducting over 300 audits over the last four years. In many cases, HRSA has found instances of drug diversion (that is, dispensing 340B drugs to ineligible patients) and duplicate discounts, requiring audited CEs to repay manufacturers.
The proposed guidance includes provisions to further these efforts, including:
- Requirement that CEs and manufacturers maintain auditable records for at least five years;
- Explicit parameters for HRSA’s audits of CEs and manufacturers (e.g. HRSA will ensure that only one 340B program audit of a CE is conducted at any time.);
- Details of a notice and hearing process under which CEs and manufacturers would have the opportunity to respond to adverse audit findings or proposed loss of program eligibility; and
- Parameters for manufacturers’ audits of CEs.
We wouldn’t expect HHS to increase its number of audits from current efforts without additional funding to bolster staff, which would require Congressional action. The proposed guidance appears to solidify the practices that HHS has been undertaking over the last four years, so instead of adding new regulation, we would expect that the proposed guidance would be viewed positively as it adds more clarity and stability to HRSA’s expectations for both manufacturers and CEs.
We should note the House Energy & Commerce Committee has circulated a discussion draft on changes to the 340B Program that mimic and extend much of what is in HHS's proposed guidance. However, the time to pass something is limited. With the 340B mega-guidance expected to be finalized by the end of the year, we would anticipate that Congress does not address the issue until it can see the effects of the current proposal.