United States: HRSA Takes Its First Steps On 340B Rules

Last Updated: June 23 2015
Article by Ellyn Sternfield and Bridgette A. Wiley

The 340B Drug Discount Program has operated for more than 20 years with just a few governing regulations codified in 42 CFR Part 10.  Through the Affordable Care Act ("ACA"), Congress adopted several amendments to the 340B Program.  One of those amendments required the Department of Health and Human Services ("HHS") to impose a maximum $5000 civil monetary penalty on participating manufacturers for each instance in which the manufacturer knowingly and intentionally charged a participating 340B entity a purchase price for a 340B drug that exceeds the statutory ceiling price.  Congress specifically authorized the Health Resources and Services Administration ("HRSA") to promulgate regulations implementing this requirement within 180 days of the ACA enactment, i.e. by September 2010.

And in fact, in September 2010 HRSA published an Advance Notice of Rulemaking on this requirement, seeking stakeholder input on the requirement.

Finally, on June 17, 2015, HRSA issued proposed rules to implement that requirement.  What took so long?  HRSA's commentary to the proposed rules, combined with the recent history of the 340B Program, provide the answers.  These proposed rules may be the first steps, but not the last, in what may be major changes to the 340B Program.

340B Program Recent History

We have written about the criticisms regarding 340B Program operations, which surfaced in a critical 2011 GAO Report and intensified over the next several years.   In response, HRSA went to work on an omnibus rule that would clarify multiple aspects of 340B Program operations, promising publication of that rule by June 2014.

But before the omnibus rule was made public, a DC Circuit Judge struck down a limited rule that HRSA had issued to implement another ACA requirement, an exception to 340B pricing for orphan drugs.  Unlike the monetary penalty provision in the ACA, the orphan drug provision contained no authority for HRSA rulemaking, and the Court found that HRSA lacked authority to issue the orphan drug rule.  As a result of that case, HRSA pulled back its omnibus rule and many commentators, including me, predicted that HRSA would instead issue limited rules in areas where it had specific rule making authority, such as the penalty authority.

Proposed Rules

The newly proposed rules, which would be codified within 42 CFR Part 10, address two ACA provisions:  (i) the requirement that HRSA adopt regulations penalizing manufacturers for overcharging ceiling prices, and (ii) a separate requirement that HRSA "develop and publish through an appropriate policy or regulatory issuance, precisely defined standards and methodology for the calculation of [340B] ceiling prices."  Because the statutory language does not specifically authorize rulemaking on calculation of ceiling prices, this portion of the rule may be the subject of comments or future legal challenges.  Comments to the proposed rules must be submitted by Monday, August 17, 2015.

Proposed Rule on Penalties

The proposed rules would allow HRSA to assess penalties of up to $5000 for each instance in which a manufacturer "knowingly and intentionally" charges a covered entity more than the ceiling price for a 340B drug.  The commentary clarifies that HHS-OIG will have the authority to bring the penalty actions pursuant to a delegation of authority and utilizing OIG's CMPL procedures codified in 42 CFR part 1003, but does not provide any specifics, just which provisions of part 1003 are applicable in the context of 340B.

Section 10.11(b)(1) of the proposed rule would define each "instance" of overcharging as each order for an NDC, regardless of the number of units of each NDC in that order,  and regardless of whether the order is placed directly with a manufacturer or through a wholesaler, authorized distributor, or agent.  Section 10.11(b)(5) then states that a manufacturer's failure to provide the ceiling price is not an actionable instance of overcharging if "a covered entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase" (emphasis added).  This leaves open the question:  what is a 340B covered entity's obligation to specify that the purchase is for 340B when purchasing from a wholesaler, authorized distributor or agent, and what impact does its failure to do so have on the manufacturer's liability?

Additionally, neither the commentary nor the rule provides insight into this question:  will the government define "knowingly and intentionally" as requiring specific intent, or will some other standard be used?

Proposed Rule on Calculating Ceiling Price

Section 10.10(a) of the proposed rule incorporates the original statutory requirement that 340B ceiling price be calculated by subtracting the Medicaid Drug Rebate Unit Rebate Amount ("URA") from the reported Average Manufacturer Price ("AMP") for the smallest unit of measure calculated using six decimal places.  To ensure utility of the pricing, HRSA multiplies that amount by the drug's package size and case package size.  HRSA will publish the 340B ceiling price rounded to two decimal places.

Section 10.10(b) of the proposed rule also codifies HRSA's 2011 policy  regarding so-called "penny pricing."  For certain drugs, the Medicaid Drug Rebate Program authorizes CMS to index URA to the rate of inflation and increase the URA if the AMP for the drug increased faster than inflation.  When this increase is factored into the 340B ceiling price calculation for certain drugs, it is possible that the 340B price could come out to $0.00 per unit of measure.  For those drugs, the rule instead authorizes a 340B ceiling price of $0.01 per unit of measure.

Section 10.10(c) of the proposed rule codifies HRSA's guidelines, first published in 1995, on calculating ceiling price for new drugs which lack prior sales data.

What's Next?

HRSA has indicated it is already working on proposed rules in another area in which it has specified rulemaking authority:  implementation of a dispute resolution process.  HRSA has also indicated that before the end of 2015, it intends to publish protocols for audits of pharmaceutical manufacturers and to operationalize a system that will allow 340B covered entities to access information verifying 340B ceiling prices.  And purportedly, in lieu of its omnibus rule, HRSA is working on "omnibus guidance" to address multiple areas, including several recommendations first made in the 2011 report: (i) clarifying hospital eligibility standards for 340B, and (ii) the definition of a 340B "patient."

In the meantime, it is possible that Congress won't wait for HRSA to act.  On March 25, 2015, the House Energy & Commerce Committee held its first hearing on the 340B Program in years.  As we previously noted, the written testimony from that hearing focused on the lack of clear guidelines and accountability in 340B.  In the wake of that hearing, Committee staff circulated a draft of provisions to be included in the 21st Century Cures bill specific to 340B.  Clearly intended as a compromise measure, the legislation would have defined a 340B "patient," eliminated 340B status for drugs self-administered by patients at home, imposed greater accountability for hospitals and contract pharmacies, imposed a user fee, and required annual reporting by hospitals on 340B drug usage and resulting revenue, including reporting on how that revenue is used.  The legislation would also have allowed Medicaid Programs direct access to 340B price information to better enable the government to audit Medicaid billings for 340B drugs.   While stakeholder pushback caused the 340B provisions to be removed from the 21st Century Cures bill, Congressional interest in 340B operations is not waning.

So, whether the next move to alter 340B Program operations comes from Congress or from HRSA remains to be seen.  But one thing seems sure: there will be a next move.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ellyn Sternfield
Bridgette A. Wiley
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