THE 340B DRUG DISCOUNT PROGRAM AND INTERPLAY WITH MEDICARE AND MEDICAID REIMBURSEMENT PRINCIPLES. Barbara Straub Williams.

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1 THE 340B DRUG DISCOUNT PROGRAM AND INTERPLAY WITH MEDICARE AND MEDICAID REIMBURSEMENT PRINCIPLES I. History and Purpose of 340B Program Barbara Straub Williams March 2015 Section 340B of the Public Health Service Act (42 U.S.C. 256b) was implemented by Congress in 1992 through enactment of Public Law , Section 602. The 340B statute requires pharmaceutical manufacturers to enter into an agreement with the Department of Health and Human Services (HHS) to provide discounts on covered outpatient drugs purchased by certain providers called covered entities that serve the nation s vulnerable patient populations as a condition of their drugs being reimbursable by Medicaid and Medicare Part B. Participation in the 340B program provides covered entities with access to significant drug pricing discounts on covered outpatient drugs. The purpose of the 340B program is to assist covered entities to stretch scarce federal [and state] resources as far as possible, reaching more eligible patients and providing more comprehensive services. 1 II. Administration of the 340B Program HHS is responsible for administration and oversight of the 340B program through the Office of Pharmacy Affairs (OPA) within the Health Resources and Services Administration (HRSA). HRSA contracts with a Prime Vendor to provide guidance to covered entities and manufacturers and to act as a group purchasing organization for covered entities. The current prime vendor is Apexus. 1 H.R. REP (II), at 12 (1992). {D DOCX / 2 }1

2 340B program guidance is generally issued through Federal Register Notices, Policy Releases, and FAQs. Program guidance is on the HRSA website: (Federal Registers) or (OPA FAQs). Apexus also has resources on its website, including FAQs: III. Eligibility Criteria A. Hospital Eligibility 1. DSH Payment Percentage Six categories of hospitals are eligible to participate in 340B: 1. Acute care hospitals with a DSH payment % > 11.75% 2. Children s Hospitals with a DSH payment % > 11.75% 3. Cancer Hospitals with a DSH payment % > 11.75% 4. Sole Community Hospitals (SCHs) with a DSH payment % 8% 5. Rural Referral Centers (RRCs) with a DSH payment % 8% 6. Critical Access Hospitals (CAHs) (no DSH requirement) 2 Unlike CMS, OPA refers to hospitals in the first three categories as DSH hospitals (even though they are a subcategory of DSH hospitals for CMS purposes) and to hospitals in the last three categories as rural hospitals (even though they are a subcategory of rural hospitals for CMS purposes). Hospitals that qualify under more than one category may participate under any of those categories. Note that the DSH payment percentage is different than the DSH patient percentage U.S.C. 256b(a)(4)(L)-(O). {D DOCX / 2 }2

3 A hospital needs a DSH patient percentage of.2733 to reach a DSH payment percentage above 11.75% and a DSH patient percentage of.2277 to reach a DSH payment percentage of at least 8%. Hospitals in states that expand Medicaid under the Affordable Care Act will have increased DSH patient percentages, which will likely result in more hospitals qualifying for the 340B program. As part of the registration process for 340B participation, hospitals submit Medicare cost report Worksheet E, Part A to verify their DSH payment percentage. Participation is prospective only. In one of only two court cases involving the 340B program, the court held that a hospital was not eligible for retroactive 340B discounts based on an amended cost report from a prior period. 4 If a hospital s DSH payment percentage falls below the required percentage, OPA expects the hospital to notify OPA immediately. Hospitals that are undergoing a change in ownership that will result the hospital operating under a new provider number should contact OPA so they do not lose 340B eligibility in the transition. 2. Corporate Status Hospitals in each of the six categories listed above must be either: 3 The Medicare statute provides an additional payment to prospective payment system hospitals which serve a significantly disproportionate number of low-income patients U.S.C. 1395ww(d)(5)(F)(i)(I). Whether a hospital qualifies for this additional payment depends on whether the hospital s disproportionate patient percentage (DPP), exceeds certain thresholds. 42 U.S.C. 1395ww(d)(5)(F)(v). The amount of the additional payment depends on the extent to which the hospital s DPP exceeds the thresholds. 42 U.S.C. 1395ww(d)(5)(F)(vii)-(viii). The DPP is the sum of two fractions (expressed as percentages). 42 U.S.C. 1395ww(d)(5)(F)(vi). The first, referred to as the SSI percentage, is based on patient days attributable to patients entitled to both Medicare Part A benefits and SSI benefits. 42 U.S.C. 1395ww(d)(5)(F)(vi)(I). The second, referred to as the Medicaid percentage, is based on patient days attributable to patients entitled to Medicaid and not Medicare. 42 U.S.C. 1395ww(d)(5)(F)(vi)(II). 4 Univ. Med. Center of Sentara Nevada v. Shalala, 173 F.3d 438 (D.C. Cir. 1999). {D DOCX / 2 }3

4 1. owned or operated by a State or local government; 2. a public or private nonprofit corporation that is formally granted government powers by a State or local government; or 3. a private nonprofit corporation that has a contract with a State or local government to provide health services to low income individuals who are not Medicare or Medicaid beneficiaries GPO Prohibition Hospitals in the first three categories listed above may not purchase covered outpatient drugs through a group purchasing organization (GPO) or similar arrangement. 6 Because the GPO prohibition is a condition of eligibility, it has implications for the sanctions that OPA imposes for non-compliance (see below). B. Grantees and FQHC Look-Alike Eligibility In addition to hospitals, other qualifying 340B covered entity categories include: Federally Qualified Health Centers (FQHCs) and Look-Alikes Ryan White HIV/AIDS Program Grantees (Parts A, B, and C grantees) Hemophilia Treatment Centers Native Hawaiian Health Centers Tribal/Urban Health Centers Black Lung Clinics Title X Family Planning Clinics Sexually Transmitted Disease Clinics Tuberculosis Clinics 7 Participating hospital with a provider-based department that separately qualifies under one of these categories may separately register the department under that category. IV. Registration of 340B Covered Entities and Child Sites Facilities that meet the criteria of a covered entity apply to participate in the 5 42 U.S.C. 256b(a)(4)(L)(i). 6 Id. at 256b(a)(4)(L)(iii). 7 Id. at 256b(a)(4)(A)-(K). {D DOCX / 2 }4

5 340B program by completing the online registration process during the first 15 days of the calendar quarter (e.g., January 1-15) for an effective date on the 1 st of the next calendar quarter (e.g., April 1). Registration is accomplished through the OPA website. Through informal guidance, OPA has stated that hospitals must register all off-site outpatient clinics that use 340B. OPA refers to these clinics as child sites. Only providerbased clinics may register for the 340B program and the hospital must submit Medicare cost report worksheets A and C to register the clinic so that OPA can verify that the costs for the clinic appear in a reimbursable outpatient or ancillary line. OPA has defined off-site as outside the four walls of the hospital. OPA also requires that on-site clinics appear on the Medicare cost report before the clinics begin to use 340B. Note that off-site for 340B program purposes is different than the Medicare definition of off-campus. For purposes of the provider-based regulations, Medicare defines a hospital s campus as the physical area immediately adjacent to the provider s main buildings, other areas that are not strictly contiguous to the main buildings but are located within 250 yards of the main buildings and any other areas as determined on an individual basis by the CMS Regional Office. 42 C.F.R (a)(2). Hospitals in the 340B program may be able to take advantage of alternate criteria for meeting the Medicare location requirement for purposes of qualifying a clinic for provider-based status. The Medicare provider-based regulations include several criteria for meeting the location requirement, but the one most commonly used is that that clinic be located within 35 miles of the hospital. Another criteria allows a clinic to meet the location requirement if it is owned and operated by a hospital that has a DSH payment percentage greater than 11.75% and is either 1) owned or operated by a unit of state or local government; 2) a public or nonprofit corporation {D DOCX / 2 }5

6 that is formally granted governmental powers by a unit of state or local government; or 3) a private hospital that has a contract with a state or local government that includes the operation of clinics off the main campus to assure access in a well-defined service area to health care services for low-income individuals who are not eligible for Medicare or Medicaid benefits. 8 The requirements are very similar to the requirements to qualify as a 340B covered entity, but there are inpatient distinctions with regard to the contract with a state or local government. In Mercy Hospital Lebanon v. Centers for Medicare and Medicaid Services, 9 the provider appealed the denial of provider-based status for a remote location. The ALJ assessed whether the hospital satisfied 42 C.F.R (e)(3)(ii)(C) as a result of having a contract with state or local government to furnish care to low-income, non-medicare, and non-medicaid individuals. The ALJ determined that, although the hospital had such an agreement with the county in which the main hospital was located, it did not have an agreement with the county where the remote site was located and did not have any other evidence that the remote location was established, at least in part, to serve low-income patients without Medicare or Medicaid. Accordingly, the ALJ concluded that the hospital did not meet this alternative to meet the location criteria. 10 V. Contract Pharmacies When Congress created the 340B drug discount program, it did not consider that some covered entities would not be able to participate due to the lack of an in-house pharmacy to purchase and dispense 340B drugs. In 1996, HRSA published guidelines that allow covered entities to use third-party pharmacies to dispense their 340B drugs by using a ship to-bill to process whereby the covered entity purchases the drugs and has the manufacturer or wholesaler ship them to the contract pharmacy, which then provides all pharmacy services related to the 8 42 C.F.R (e)(3). 9 Docket No. C (Aug. 7, 2014), reported in Medicare and Medicaid Guide (CCH) at 123, The ALJ concluded that the clinic met the zip code test at 42 C.F.R (e)(3)(iii). {D DOCX / 2 }6

7 dispensing of the 340B drugs. 11 For many years, HRSA allowed covered entities to enter into only one contract pharmacy agreement. Effective April 5, 2010, HRSA allows covered entities to dispense 340B-discounted drugs through more than one contract pharmacy. 12 The covered entity must have a separate agreement with each of its contract pharmacies, although a covered entity may contract with a chain pharmacy under one agreement. The March 5, 2010 Federal Register allowing multiple contract pharmacy agreements includes requirements that are applicable to these agreements. Significantly, HRSA emphasized that covered entities retained responsibility to comply with all 340B program requirements when it enters into a contract pharmacy arrangement and that HRSA will hold the covered entity accountable for any violations of these requirements by the contract pharmacy. 13 In addition, the contract pharmacy guidelines require the 340B covered entity to maintain auditable records to demonstrate 340B compliance and verify that the contract pharmacy has a tracking system to ensure that the covered entity s 340B drugs are not diverted to other patients. 14 The 340B covered entity is responsible for furnishing the contract pharmacy with a list of its eligible prescribers to identify prescriptions that may be filled with 340B drugs and for updating the list. 15 Note that the contract pharmacy is billing under its Medicare, Medicaid and private payor billing numbers for drugs that are owned by the covered entity for 340B purposes. The contract pharmacy provides the proceeds of the billed drugs (less a dispensing fee and any administrative fees) to the covered entity. Question whether Medicare or Medicaid would view the drugs as owned by the covered entity if the pharmacy bills for them. 11 Notice Regarding Section 602 of the Veterans Health Care Act of 1992, Contract Pharmacy Services, 61 Fed. Reg. 43,549 (Aug. 23, 1996). 12 Notice Regarding 340B Drug Pricing Program Contract Pharmacy Services, 75 Fed. Reg. 10,272 (March 5, 2010), 13 Id. at 10, Id. 15 Id. {D DOCX / 2 }7

8 VI. Compliance Issues A. Anti-Diversion/Patient Eligibility Covered entities may not dispense 340B drugs to a patient who is not an eligible outpatient. Covered entities that dispense 340B drugs to patients that are not eligible to receive them are said to have engaged in diversion of the drug. 1. Patient Definition Guidance HRSA has issued guidance that states that an individual is a patient of a covered entity if three criteria are met: a. Record Maintenance Test The covered entity maintains records of the individual s health care. b. Professional Care Test The individual is under the care of a physician or other health care professional who is employed by, under contract with, or in a referral relationship to the covered entity such that responsibility for the individual s care remains with the covered entity. c. Qualified health care service/range of services The individual receives a range of health care services that are consistent with the services for which grant funding or FQHC look-alike status has been provided to the covered entity. (This requirement is not applicable to hospitals.) Ineligible Patients Note that the definition of patient for 340B purposes is very different than the definition of outpatient for Medicare. 42 C.F.R As one example, an individual filling a prescription at a retail pharmacy may be a patient for 340B purposes even though the individual is no longer a registered outpatient for Medicare purposes. drugs: Program Guidelines define the three categories of prohibited diversion in the use of 340B for non-patients of the covered entity; in ineligible facilities within the covered entity; and 16 Final Notice Regarding Section 602 of the Veterans Health Act of 1992, Patient and Entity Eligibility, 61 Fed. Reg. 55,156, 55,157 (October 24, 1996). {D DOCX / 2 }8

9 for excluded services (e.g., inpatient services). 17 B. Duplicate Discount Prohibition Drug manufacturers are required to give rebates to State Medicaid programs on drugs reimbursed under State Medicaid programs, both FFS or managed care. 18 Drug manufacturers are, however, protected from giving both a 340B discount and a Medicaid rebate on the same drug. 19 Covered entities may elect to use 340B drugs for Medicaid patients ( carve-in ) or may elect not to use 340B for Medicaid patients ( carve-out ) and may make different election for each Medicaid billing number that the covered entity uses. Medicaid programs submit requests for rebates to manufacturers on carve-out 340B drugs, but forgo rebates for entities that carve-in. Covered entities notify OPA of their election and OPA maintains an Exclusion File for State Medicaid to determine if an entity has carved-in. HRSA recently clarified that the Medicaid Exclusion file does not apply to Medicaid MCO drugs. 20 C. GPO Restriction Certain hospitals (acute care hospitals with a DSH payment percentage above 11.75%, children s hospitals and cancer hospitals) may not purchase any covered outpatient drugs through a GPO. 21 The one exception to this rule is that these hospitals may purchase through the GPO operated by OPA s prime vendor program. HRSA issued a 340B program Notice on 02/07/13 entitled Statutory Prohibition on Group Purchasing Organization Participation which states that violations of the GPO restriction will result in termination from the 340B program. 22 The 17 Notice Regarding Section 602 of the Veterans Health Act of 1992, Entity Guidelines, 58 Fed. Reg. 68,922,68,923 (December 29, 1993) U.S.C. 1396r-8(a)(1). 19 Id. at 256b(a)(5)(A)(i). 20 HRSA Program Notice , Clarification on Use of Medicaid Exclusion File (Dec. 2014); available at U.S.C. 256b(a)(4)(L)(iii) B Drug Pricing Program Notice, Release , available at: {D DOCX / 2 }9

10 notice also states that provider-based departments of a hospital may elect not to participate in 340B if they meet four requirements: Are located at a different physical address than the parent; Are not registered on the OPA 340B database as participating in the 340B program; Purchase drugs through a separate pharmacy wholesaler account than the 340B participating parent; and Hospital maintains records demonstrating that any covered outpatient drugs purchased through the GPO at these sites are not utilized or otherwise transferred to the parent hospital or any outpatient facilities registered on the OPA 340B database. 23 D. Orphan Drug Restriction Certain hospitals (SCHs, RRCs, CAHs and cancer) are subject to restrictions on their use of 340B pricing for orphan drugs. 24 implement orphan drug exclusion. 25 HRSA issued final regulations effective October 1, 2013 to The regulations stated that hospitals may choose to apply orphan drug restriction only to uses for the rare disease or condition for which the orphan drug was designated or to any use of orphan drugs. The Pharmaceutical Manufacturers Association (PhRMA) filed lawsuit challenging the regulations alleging, inter alia, that orphan drug restriction applies to any use of orphan drugs and that HRSA did not have the authority to issue regulations on this matter. 26 The Court ruled that HRSA has rulemaking authority only regarding: 1) establishment of dispute resolution process; 2) standards for calculating ceiling prices; 3) imposition of civil monetary penalties on manufactures and invalidated the orphan drug regulation. HRSA 23 Id U.S.C. 256b(e). 25 Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program, 78 Fed. Reg (July 23, 2013). 26 PhRMA v. HHS, Case No. 1:13-cv (D.C. District Court). {D DOCX / 2 }10

11 subsequently issued an interpretive rule that essentially repeated the requirements in the orphan drug regulation. 27 PhRMA has filed a second lawsuit in DC District Court challenging HRSA s orphan drug guidance. 28 As of the date of the publication of this document, no decision has been issued yet. E. OPA Database Errors Covered entities must ensure that the data on the OPA database is accurate. This data includes contact information for an authorizing official, a contact person and information on an entity s child sites. A database error related to a hospital s carve in or carve out election may lead to more serious violations. Specifically, if a covered entity s election on the OPA database states that it carves out, but it carves in in practice, manufacturers may be subject to duplicate discounts. Alternatively, if the OPA database states that a covered entity carves in but it carves out in practice, the State Medicaid agency may have lost the opportunity to collect rebates. F. Auditable Records HRSA requires that covered entities maintain auditable records related to 340B program compliance or risk termination from the program. G. Recertification HRSA has implemented an annual recertification process that requires covered entities to certify to several statements, including that the information that is on the OPA database is correct, that they are in compliance with all 340B program requirements and that they will notify OPA if they are in material breach of any 340B program requirements. A covered entity that does not recertify is terminated from the 340B program. 27 Availability of Interpretive Rule: Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities Under the 340B Program, 79 Fed. Reg. 42,801 (July 23, 2014). 28 Case No. 1:14-cv (D.C. District Court). {D DOCX / 2 }11

12 H. State Medicaid Billing Requirements for 340B Drugs Some states cap reimbursement to 340B drug claims at actual acquisition cost plus a dispensing fee, thereby obtaining the benefit of 340B pricing. 29 Some states require that claims for 340B drugs be flagged by using a claims modifier. 30 Note that providers have a very difficult time implementing the requirement to bill at actual acquisition cost for 340B, which essentially requires the charge master to reflect different charges for Medicaid drugs purchased through 340B and other Medicaid drugs as well as constant updates to the charge master. VII. HRSA Sanction Authority A. Covered Entities If HRSA finds, after audit and providing the covered entity with notice and an opportunity for hearing, that a covered entity is in violation of the diversion and/or duplicate discount requirements, it may impose the following sanctions: repayment of 340B discounts to manufacturers; interest on the repayments if the violation is knowing and intentional; and removal from the program if the violation is knowing, intentional, systemic and egregious. 31 For alleged violations of the GPO prohibition, HRSA has threatened to terminate covered entities because the GPO prohibition is a condition of eligibility. Several hospitals are currently 29 See e.g. NYCRR tit. 10, 68.9; Iowa Medicaid Manual, Prescribed Drugs Manual, B Drug Pricing Program. 30 See e.g. Ill. Medicaid Manual, Hospital Services, H-276.2; New York Medicaid Manual, Hospital Based Ordered Ambulatory, MMIS Modifiers U.S.C. 256b(a)(5)(D); (d)(2)(b)(v). {D DOCX / 2 }12

13 waiting for final decisions from HRSA on this proposed sanction of termination. HRSA has also threatened to terminate covered entities that do not maintain auditable records. B. Manufacturers HRSA has statutory authority to impose civil monetary penalties on manufactures for knowing and intentionally charging a covered entity a price that exceeds the maximum 340B ceiling price. 32 HRSA has not yet promulgated regulations to implement those provisions, although proposed regulations are expected in VIII. Audits A. Audits of Covered Entities In 2011, the Government Accountability Office (GAO) issued a report that found HRSA s oversight and enforcement of the 340B program to be inadequate, in part due to HRSA s over-reliance on self-policing by covered entities. 33 In response to that report, HRSA began auditing covered entities in HRSA has conducted between 50 and 100 audits annually, although the number is expected to increase in Audits generally cover a six month period in the year prior to the site visit. After the on-site audit, HRSA issues a report with its findings (i.e., areas of alleged violations) and Areas for Improvement (areas for which HRSA recommends changes to the covered entity s policies or practices but are not violations). The covered entity may contest the report by submitting a written objections and arguments within 30 days or it may concede the findings and submit a Corrective Action Plan within 60 days. HRSA may require the corrective action plan to include an offer to make repayment of 340B drug discounts to manufacturers. HRSA requires covered entities to post a public letter to 32 Id. at 256b(d)(vi). 33 U.S. Government Accountability Office, Manufacturer Discount in the 340B Program Offer Benefits, but Federal Oversight is Needed, GAO , September 2011, at {D DOCX / 2 }13

14 manufacturers on its website that describes HRSA s final findings and summarizes the entity s corrective action plan. Manufacturers may also audit a covered entity for compliance with the diversion and duplicate discount requirements. 34 However, the manufacturer must first notify the covered entity of the alleged violation and must enter into good faith attempt to resolve the matter for thirty days. If the manufacturer and covered entity do not resolve the matter, the manufacturer must submit information to HRSA to show that reasonable cause exists to believe that a violation occurred and must get approval from HRSA before proceeding with the audit. The manufacturer must hire a third party auditor to conduct the audit. The audit report is provided to the covered entity, HRSA and the OIG. The covered entity has the opportunity to submit a response to the audit report. If the manufacturer and covered entity cannot agree on the final audit report, they may enter into a voluntary dispute resolution process. 35 The procedures for the voluntary dispute resolution process are set forth in the same federal register notice. It is generally believed that this process has never been used. B. Audits of Manufacturers and Wholesalers HRSA has the authority to audit manufacturers and wholesalers. 36 HRSA has stated that it is developing protocols to conduct additional audits of manufacturers in U.S.C. 256b(a)(5)(C). Manufacturers may not audit for GPO violations. 35 Final Notice Regarding Section 602 of the Veterans Health Care Act of 1992, Patient and Entity Eligibility, 61 Fed. Reg. 65,406 (Dec. 12, 1996) U.S.C. 256b(d)(1)(B)(v). {D DOCX / 2 }14