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HHS-OIG Criticizes 340B Drug Discount Program

Written by:  Ellyn L. Sternfield

I recently posted that 2014 is expected to be a year of major developments in the 340B Drug Discount Program, with HRSA receiving enhanced funding, stepping up audit activity, and drafting regulations in response to criticism from multiple industry stakeholders. While those regulations are under development, the Office of Inspector General for the U.S. Department of Health and Human Services (OIG) has added its criticism to the mix. 

OIG Work Plan

In a recently released 2014 Work Plan, the OIG announced it will be conducting three separate reviews of the 340B Drug Discount Program this year:

  1. Examining the extent to which HRSA and 340B covered entities oversee compliance by 340B contract pharmacies;
  2. Examining the extent to which HRSA has implemented prior OIG recommendations regarding 340B covered entities’ access to 340B ceiling prices; and
  3. Examining whether changes in practice or procedure might allow Medicare Part B to receive the benefit of 340B discounts when reimbursing for 340B drugs. 

Within days of releasing its Work Plan, the OIG issued its first report on oversight of contract pharmacies. 

OIG Report Criticizes Inconsistent Operations and Oversight of Contract Pharmacies

In 2010 HRSA issued guidance to 340B covered entities regarding the use of contract pharmacies that provided suggested contract provisions and recommended oversight practices.  Underlying HRSA’s guidance was its assertion that oversight of and compliance by a 340B contract pharmacy is the responsibility of the contracting 340B covered entity.

In its report, entitled Contract Pharmacy Arrangements in the 340B Program, the OIG found that the two compliance problems highlighted in recent HRSA audits – diversion of 340B drugs to non-340B patients and duplicate discounts due to failure to appropriately track Medicaid payments for 340B drugs – are exacerbated by the use of 340B contract pharmacies.  Included among the OIG’s findings: 

  • Contract pharmacies use varying and inconsistent methods to determine patient eligibility to receive 340B drugs.  On this point, the OIG points the finger at “a lack of clarity on how HRSA’s patient definition” is interpreted and applied. 
  • Contract pharmacies have difficulty identifying Medicaid-eligible patients covered through Medicaid managed care, and multiple pharmacies surveyed lack adequate processes to avoid duplicate discounts.
  • While covered entities do monitor contract pharmacies, most do not conduct all of the oversight activities recommended by HRSA.

Many Uninsured Patients Cannot Access 340B Drugs

The OIG report is also critical of the fact that many 340B covered entities do not offer 340B prices to uninsured patients through contract pharmacy arrangements.  Although, the OIG does acknowledge that the logistics of some contract pharmacy arrangements, where 340B eligibility and pricing are applied only after the drug is dispensed, will by process exclude uninsured patients whose 340B eligibility is not determined at the point-of-sale.

This finding is likely to be controversial since, as I noted in a prior post, a hospital trade association has defended existing 340B Program operations on the basis that the proceeds generated by 340B discounts are used by covered entities to expand health care services to the uninsured.  However, as noted by the OIG, “neither the 340B statute nor HRSA guidance” address actual access to 340B drugs for the uninsured.   The OIG report does not address how providing uninsured individuals with 340B drugs might impact Medicaid pharmacy reimbursement in states where “usual and customary” reimbursement is based either on the least amount charged any individual, or the amount charged to uninsured individuals. 

HRSA Response

While not responding directly to the OIG, after publication of the OIG report, HRSA sent a form letter to covered entities emphasizing once again that the onus for “vigilant oversight” of contract pharmacies rests with the covered entities. 

HRSA’s position is that all covered entities are expected to conduct annual audits of contract pharmacies through independent auditors.  If HRSA determines that a covered entity is providing “no oversight” over a contract pharmacy, HRSA may terminate the contract pharmacy arrangement. 

HRSA also used the letter to restate its position that contract pharmacies must carve-out Medicaid-eligible patients, unless there are adequate arrangements in place to prevent duplicate discounts.  If duplicate discounts are identified through audit, HRSA will impose a sanction, which is repayment to the manufacturer. 

Developments Likely to Continue in 2014

By issuing the report now, the OIG is likely trying to influence HRSA’s rulemaking by reinforcing the need to clearly articulate a definition for patients who are eligible to receive the benefit of discounted 340B drug pricing. 

HRSA’s response letter may provide further support for those who argue that the new regulations must add teeth to 340B enforcement.  According to HRSA, when the statutory duplicate discount prohibition is violated, the penalty is that the covered entity must repay the manufacturer for that drug purchase.  This means that there is no real incentive for covered entities and contract pharmacies to take the necessary steps to segregate Medicaid-covered drugs in 340B and to prevent manufacturers from paying Medicaid Drug Rebates on 340B drugs, as Congress intended. 

In the end, critics of 340B program operations will be bolstered by the first of the OIG’s 2014 reports focused on 340B.  It will be interesting to see whether they find further support in the forthcoming OIG reports and how soon those reports are finalized and issued.  

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Theresa advises clients on all aspects of the pharmaceutical supply chain, including counseling industry stakeholders on a range of business, legal, transactional, and compliance matters. She provides clients with strategic counseling and creative business modeling that considers legal restrictions and regulatory risk in light of innovation and business goals.