340B Background
The 340B drug discount program is unique to the US pharmaceutical marketplace and an important topic for understanding many dynamics of drug pricing. The program, named for the legislation that created it in 1992 (section 340B of the Public Health Service Act), requires manufacturers to sell outpatient prescription drugs to safety net providers, called covered entities, that primarily serve low-income and uninsured individuals, at a discounted price no higher than the net price paid by Medicaid in order to have their medicines covered by Medicaid and Medicare Part B.
The program was designed to address an unintended consequence of the 1990 Medicaid rebate law - the requirement to provide Medicaid with rebates equal to the lowest price in the market (the “best price”) resulted in manufacturers no longer offering voluntary discounts to safety net providers.
Covered entities eligible to participate in 340B include certain categories of nonprofit hospitals (e.g., Disproportionate Share Hospitals [DSHs], children’s hospitals, certain cancer hospitals, sole community hospitals, rural referral centers, and critical access hospitals) along with federal grant recipients, including Federally Qualified Health Centers, Title X-funded centers, the Ryan White HIV/AIDS Program, and Section 318 STD clinics.
Manufacturers must make available covered outpatient drugs, including provider-administered medicines, to participating hospitals and other covered entities at or below deeply discounted prices, known as 340B ceiling prices. The ceiling price is calculated quarterly using Medicaid Drug Rebate Program (MDRP) figures, Average Manufacturer Price (AMP) minus the Unit Rebate Amount from two quarters prior, except that 340B pricing is estimated for new drugs until the MDRP figures become available.
Hospitals and other covered entities may purchase medicines at even lower prices by negotiating additional voluntary discounts from manufacturers. These lower prices are referred to as 340B sub-ceiling prices. According to a recent survey, 340B hospitals purchase medicines at an average discount of Average Sales Price (ASP) minus 58%. The mandatory discounts required under the 340B Program are exempt from best price (and related) calculations.
After purchasing the drug at the ceiling or sub ceiling price, covered entities seek reimbursement from the patient’s insurance (commercial or government) or potentially the patient. The difference between the 340B Price and the reimbursed amount is viewed by covered entities as an important subsidy for providing uncompensated care. However, critics argue that the spread has instead become a new funding stream for public hospitals, including those that provide relatively limited amounts of uncompensated care.
The statute prohibits covered entities from obtaining duplicate discounts under 340B and MDRP and bans them from diverting discounted drugs to anyone but to individuals meeting the program’s definition of a 340B patient, which, however, does not limit eligibility based on income level or insurance status. By law, 340B-eligible purchasers cannot bill Medicaid more than the 340B price.
340B Implementation Issues
Most of the implementation issues associated with the 340B program stem from the lack of meaningful program eligibility and transparency standards.
Rapid Expansion of DSHs and “Child” Affiliates
Participation in the 340B Program has grown from nearly 9,700 covered entities in 2010 to 12,700 in 2020. The number of participating hospitals has more than quadrupled, growing from 591 in 2005 to more than 2,500 in 2019, i.e., more than 2 out of every 5 hospitals in the US participate in the 340B program today. Along with the number of 340B hospitals, there has also been a significant increase in the number of hospital owned off-site outpatient clinics and facilities, known as “child sites.” Between 1994 and 2020, the number of child sites established by 340B hospitals increased from 34 to more than 28,000.
This explosive growth has fueled discounted sales of medicines purchased through the 340B program, which have grown at an average rate of 23% per year since 2012, reaching $29.9 billion in 2019. Today, nearly 75% of discounted 340B sales are made at hospitals and clinics.
Some of this growth can be explained by Congressional efforts to expand eligibility for the program. For instance, in 2010, the Affordable Cares Act expanded 340B eligibility to include additional categories of hospitals. Another key driver was the expansion of Medicaid resulting in more public hospitals became 340B-eligible DSH hospitals.
However, a non-negligible share of growth is related to the large financial rewards associated with participation without commensurate transparency requirements. A growing body of evidence suggests that the program creates strong incentives for hospitals to expand access to 340B discounts by acquiring physician practices, outpatient clinics, and other child sites, which in turn increases a 340B hospital’s profits. The program also creates incentives for hospitals to shift the delivery of care to more costly hospital outpatient settings and that hospital acquisition of physician practices leads to fewer lower-cost community-based provider options.
Further exacerbating the issue is that the current eligibility standards for covered entities are not correlated with the level of care delivered to vulnerable patients or the level of charity care at 340B hospitals. Hospitals need only to demonstrate that they provide a sufficient amount of inpatient services to Medicaid and low-income Medicare beneficiaries to continue to qualify. Once a DSH qualifies for the program, they may register affiliates for the program. The only requirements of these affiliates are that they are expected to treat DSHs’ “patients” with discounted drugs.
The Role of For-Profit Retail Contract Pharmacy
In 2010, through draft guidance the Health Resources and Services Administration (HRSA), which is part of the Department of Health and Human Services (HHS) and oversees the 340B program, removed the restriction on 340B entities using only one contract pharmacy, leading to growth in 340B dispensing. 340B contract pharmacies have grown from 3000 locations in 2010 to over 20,000 in 2017. Six large chains account for two out of three 340B contract pharmacy.
Reports repeatedly show that 340B covered entities and their contract pharmacies share in 340B profits but, in most cases, do not share 340B discounts with uninsured patients at contract pharmacies. For instance, an Office of Inspector General (OIG) study of 340B contract pharmacies found that two out of three hospitals did not offer the 340B discounted prescription price to uninsured patients via these pharmacies. HRSA audits also identified issues relating to diversion and duplicate discounts associated with contract pharmacy arrangements. HRSA audits found two-thirds of the diversion involved drugs distributed at contract pharmacies.
The Lack of Meaningful “Patient” Eligibility Criteria
Despite the “patient centricity” of the 340B program, the patient definition has yet to be more clearly defined since the program’s creation 25 years ago. Without a clear definition of which individuals are deemed “patients” of 340B covered entities, it remains difficult for policymakers and stakeholders to effectively assert program oversight or quantify its benefit to patients.
Recent 340B Development
HHS Reduced Medicare Part B Reimbursement Rates for 340B-Acquired Drugs Starting 2018
In 2018, HHS reduced Medicare Part B reimbursement rates for certain drugs acquired under the 340B program from ASP +6% to ASP minus 22.5%, so as to “better, and more appropriately, reflect the resources and acquisition costs that these hospitals incur”. In litigation challenging this change in reimbursement, the D.C. Circuit Court of Appeals upheld Medicare payment cuts to certain hospitals participating in the 340B drug pricing program that have been in place since 2018, reversing a lower court decision that found HHS exceeded its statutory authority by reducing the reimbursement rate in this manner.
The 2021 Medicare Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center (ASC) Payment System Final Rule issued on December 2, 2020 continued the ASP minus 22.5% reimbursement rates for 340B-acquired drugs except for exempt covered entities (e.g., sole community hospitals, children’s hospitals, and PPS-exempt cancer hospitals) which continue to be reimbursed at ASP + 6%.
HELP ACT and PAUSE ACT
Two new pieces of legislation, the House of Representatives' 340B PAUSE Act (December 2017), and the Senate’s 340B HELP ACT (January 2018), were introduced to further clarify the responsibilities of the 340B participants and enhance government oversight of them.
Both the PAUSE and HELP ACT propose two-year moratoriums on the approval of new DSHs, their clinics, and contract pharmacies. They also both contain reporting requirements for participating DSHs, as well as separate requirements for affiliate clinics and pharmacies.
Reporting requirements under the HELP ACT require DSHs and their affiliates to use 340B drug claim modifiers. Using these claims modifiers, DSHs, their affiliates and regulators will be able to assess net aggregate annual revenue from 340B drugs and the percentage of total revenue obtained from physician-administered drugs.
The HELP ACT also includes clarifying and enforcing eligibility criteria for DSHs and their affiliates.
If enacted, these legislative measures would improve program oversight and likely reorient DSHs and their affiliates towards using 340B revenues to increase care for underserved communities.
Administrative Dispute Resolution (ADR) Final Rule
On December 14, 2020, HRSA published a final rule defining an administrative dispute resolution (ADR) process for the 340B Drug Pricing Program. The rule went into effect on January 13, 2021. The ADR regulations, which have lingered in HHS since 2010, arrive amid increasing tensions and a flood of 340B-related litigation between covered entities, manufacturers, and HHS.
The ADR process permits covered entities and drug manufacturers to request two types of disputes:
Claims by covered entities that may have been overcharged for covered outpatient drugs purchased from manufacturers.
Claims by manufacturers of 340B drugs, after a manufacturer has conducted an audit of a covered entity, that a covered entity may have violated the prohibitions against duplicate discounts or diversion.
Claims will be heard by a three-member panel, selected by the HRSA Administrator from a newly created 340B ADR Board. The ADR panel will have full jurisdiction to resolve all issues underlying any claim, including “those having to do with covered entity eligibility, patient eligibility, or manufacturer restrictions on 340B sales that the 340B ADR Panel deems relevant for resolving an overcharge, diversion, or duplicate discount claim ….”
Decisions made by the ADR panel will be binding on the parties and precedential for future ADR proceedings. ADR decisions may, therefore, shape the 340B program over time.
HHS Advisory Opinion on Contract Pharmacy
The HHS Office of General Council Advisory Opinion published on Dec. 30, 2020 (AO) responds to recent developments in the 340B program.
Beginning this past summer, a number of pharmaceutical manufacturers implemented policies that generally limit the ability of 340B covered entities to use contract pharmacies to access 340B discounts for the manufacturers’ covered outpatient drugs.
The AO claims that the 340B statute itself requires a participating manufacturer to honor contract pharmacy arrangements since “This fundamental requirement is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs. All that is required is that the discounted drug be ‘purchased by’ a covered entity. In this setting, neither the agency nor a private actor is authorized by section 340B to add requirements to the statute.”
Despite its non-binding nature, the AO and the “current views” it reflects may have greater significance in light of the newly established 340B ADR process discussed above.
References:
The 340B Discount Program, 9/14/2017, Health Affairs, https://www.healthaffairs.org/do/10.1377/hpb20171024.663441/full/, Accessed 2/21/21
Pricing and Reimbursement 2020 USA, Covington, https://www.globallegalinsights.com/practice-areas/pricing-and-reimbursement-laws-and-regulations/usa, Accessed 2/21/21
The Booming 340B Contract Pharmacy Profits of Walgreens, CVS, Rite Aid, and Walmart, 7/11/2017, Drug Channels, https://www.drugchannels.net/2017/07/the-booming-340b-contract-pharmacy.html, Accessed 2/21/21
Drug Pricing Program: HHS Uses Multiple Mechanisms to Help Ensure Compliance with 340B Requirements, 12/14/2020, U.S. Government Accountability Office (GAO), https://www.gao.gov/products/GAO-21-107?source=ra, Accessed 2/25/21
PhRMA Response to Request for Input on Modernizing 340B Drug Pricing Program, PhRMA, 10/30/2020
Follow the Dollar Part II: Understanding the Cost of Brand Medicines Administered to Commercially Insured Patients in Hospital Outpatient Departments, PhRMA, 2/2021,
Federal Appeals Court Upholds Payment Reduction to 340B Hospitals, 8/20/2020, JDSURPA, https://www.jdsupra.com/legalnews/federal-appeals-court-upholds-payment-37849/, Accessed 2/25/21
CY 2021 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Final Rule (CMS-1736-FC), 12/2/2020, CMS, https://www.cms.gov/newsroom/fact-sheets/cy-2021-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center-0, Accessed 2/25/21
Proposed Reforms To The 340B Drug Discount Program, 3/7/2018, Health Affairs, https://www.healthaffairs.org/do/10.1377/hblog20180306.70004/full/, Accessed 2/21/21
2020 final price reporting developments: stimulus legislation, 340B contract pharmacy Advisory Opinion, Hogan Lovells, 1/7/2021, https://www.lexology.com/library/detail.aspx?g=95866940-c682-424c-89e2-1eb60cb55ea4, Accessed 2/21/21
340B Administrative Dispute Resolution Goes Live Amid a Flurry of 340B Litigation, Mints, 1/18/21, https://www.lexology.com/library/detail.aspx?g=f89933cc-435a-42fb-a5f3-60ec04c7022d, Accessed 2/21/21