Testimony of: 
Stuart Wright 
Deputy Inspector General for Evaluation and Inspections 
Office of Inspector General, U.S. Department of Health and Human Services 
 
Good afternoon, Mr. Chairman and members of the subcommittee.  I am Stuart Wright, 
Deputy Inspector General for Evaluation and Inspections for the Office of Inspector 
General (OIG), U.S. Department of Health and Human Services (HHS).  I am pleased to 
have Ann Maxwell, Acting Regional Inspector General from our Chicago office, with me 
today.  I appreciate the opportunity to appear before you to present information regarding 
the 340B Drug Pricing Program (340B program), which establishes ceiling prices on 
prescription drugs that are purchased by certain health care entities. 
 
Over the past few years, OIG has issued a number of audit and evaluation reports looking 
at various aspects of the 340B program.  Our most recently published work, 
Deficiencies in the Oversight of the 340B Drug Pricing Program, assessed the 
effectiveness of existing systems and processes that are intended to ensure that entities 
participating in the program are able to purchase products at or below a statutorily 
established ceiling price.  Currently, we are engaged in another evaluation of the program 
to determine whether entities participating in the 340B program have actually received 
the ceiling prices to which they are entitled, and if not, the potential reasons for price 
discrepancies.  Our work has led us to conclude that the 340B program may not be 
functioning as intended to ensure that appropriate discounts on drugs are available to 
eligible entities.  We have found a number of deficiencies in oversight of the program and 
have concerns related to broader programmatic issues that negatively impact the program. 
 
My testimony begins with a brief overview of the program, followed by a summary of 
OIG findings and recommendations that are aimed at improving the 340B program.  
 
BACKGROUND ON THE 340B DRUG PRICING PROGRAM 
 
In 1992, Congress enacted section 340B of the Public Health Service Act (PHS Act), 
42 U.S.C. 256b, to establish the 340B Drug Pricing Program.  This program, which is 
managed by the Health Resources and Services Administration (HRSA), provides for 
sales of drugs at or below established ceiling prices to certain covered entities (340B 
entities) that provide health care to some of the countrys most disadvantaged citizens 
who are typically uninsured or underinsured.  340B entities include such health care 
entities as public hospitals, AIDS Drug Assistance programs, and community health 
centers.  Based on the most recent HRSA estimates, 340B entities spent $4 billion on 
covered outpatient drugs in calendar year 2005.  
 
Pursuant to the PHS Act, manufacturers sign a Pharmaceutical Pricing Agreement 
(Agreement) stipulating that they will charge 340B entities at or below a specified 
maximum price, known as the 340B ceiling price, for covered outpatient drug purchases.  
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     1   Ceiling prices are guaranteed whether the 340B entity purchases drugs directly from 
manufacturers or through a wholesaler.   
 
The Government and pharmaceutical manufacturers separately calculate 340B ceiling 
prices each quarter.  The Governments calculations are intended for use in program 
oversight, while the manufacturers calculations are the prices used in sales to 340B 
entities.  Both the Government and the manufacturers calculate 340B ceiling prices using 
the same statutorily-defined formula and the drug pricing data that manufacturers report 
to the Centers for Medicare & Medicaid Services (CMS) for the purposes of the Medicaid 
drug rebate program.  
 
Due to statutory provisions and policies protecting the manufacturers pricing data, 
neither the Governments nor the manufacturers ceiling prices are disclosed to the 
covered entities.  Instead, 340B entities pay the prices they are billed by the manufacturer 
or wholesaler with no way to verify that they are being charged at or below the 340B 
ceiling prices to which they are entitled.  The chart below illustrates the current flow of 
340B ceiling price calculations in the purchase of drugs and oversight of the program.  
The dotted lines represent where program oversight should be strengthened, as I will 
discuss further. 
 
Calculation of the 340B Ceiling Price and Purchase Flow 
 
 
Pharmaceutical  Proprietary drug  Proprietary drug 
  CMS HRSA
pricing  pricing data 
Manufacturers 
  information sent  forwarded 
 
 
Manufacturer-
calculated 340B ceiling 
  Governments 340B 
price sent  No verification that  ceiling prices 
  manufacturer &  calculated 
Governments price 
match 
 
Wholesalers   
 
 
Drugs sold at or below  Verifications that entities 
manufacturer-calculated  purchase prices are at or 
340B ceiling price     below the Governments 
340B price are rarely done 
 
and results are not fully 
disclosed  
 
340B   
Entities 
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     2   340B PROGRAM OVERSIGHT ISSUES 
 
Calculating the 340B Ceiling Price 
 
For many years CMS calculated the 340B ceiling prices used by the program.  More 
recently, HRSA assumed that responsibility.  HRSA needs the 340B ceiling prices for 
research, analysis, audit, and dispute resolution purposes.  However, OIG has found 
systemic problems with the accuracy and reliability of the Governments historical record 
of 340B ceiling prices.  For example, for over a decade, the Governments 340B ceiling 
prices were calculated using incomplete data to represent package size.  HRSA has not 
established any standards or technical guidance on using the statutorily-defined formula 
to calculate 340B ceiling prices. 
 
Problems with reliability and accuracy also stem from missing data.  When any of the 
drug pricing elements needed to calculate a ceiling price are missing, an accurate 340B 
ceiling price cannot be calculated, and HRSA cannot create an accurate record of ceiling 
prices for program oversight purposes.  Missing ceiling prices are most often the result of 
manufacturers not reporting to CMS, or not reporting in a timely manner, the drug pricing 
data necessary for the calculation.  While HRSA is eventually provided the missing data 
when they are submitted by the manufacturer to CMS at a later date, HRSA does not 
have a policy in place to update the ceiling prices when supplemental data are received.  
Thus, any missing data elements or 340B ceiling prices simply remain missing.  OIG 
found that HRSA did not have 340B ceiling prices for nearly 30 percent of eligible drugs 
due to missing data.  Another 8 percent of 340B ceiling prices were calculated incorrectly 
due to missing data.   
 
Monitoring of 340B Program Participation 
 
Based on our review, we concluded that 340B entities participation in the program is not 
adequately monitored.  HRSA is required to maintain a complete listing of all its 
participating 340B entities.  This permits pharmaceutical manufacturers to verify entities 
eligibility for the discount and ensure that their drugs are only shipped to legitimate sites.  
However, in a June 2004 report, Deficiencies in the 340B Drug Discount Programs 
Database, we found that HRSAs participant database inappropriately listed 38 percent of 
sampled entities as participating in the program when, in fact, they did not.  Additionally, 
we found that the database had incorrect address information for 43 percent of sampled 
entities.  The inaccuracies in the participant database limits HRSAs ability to ensure that 
only legitimate entities are receiving the 340 ceiling prices.   
 
Ensuring That 340B Entities Pay 340B Ceiling Prices or Below 
 
OIG also found that there is no systematic oversight process in place to ensure that 340B 
entities receive the ceiling prices to which they are legally entitled.  HRSA does not 
monitor the purchase prices paid by 340B entities to ensure that they are at or below the 
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     3   Governments 340B ceiling prices.  Conducting this type of oversight is essential to 
ensure that Federal grant dollars are spent appropriately.  
 
Rather than establishing a systematic means of monitoring prices, HRSA generally 
checks the appropriateness of 340B entities prices only when requested by the entity to 
do so.  An entity may submit a written request to HRSA to conduct a review for a 
maximum of 10 products.  If HRSA agrees to undertake the review, the results will only 
confirm or refute that the entity has been overcharged.  HRSA does not convey the extent 
of any overcharges due to confidentiality concerns.    
 
Overseeing the Drug Industrys 340B Ceiling Price Calculations 
 
OIG found that HRSA does not verify that manufacturers are correctly calculating 340B 
ceiling prices.  It is especially important for HRSA to monitor manufacturers ceiling 
price calculations because the 340B entities are not permitted access to ceiling prices 
themselves, and therefore cannot perform their own checks.  Specifically, HRSA does not 
compare the Governments 340B ceiling prices to the manufacturers ceiling prices to 
ensure that the results are the same.  Theoretically, HRSA and manufacturers should 
calculate the same 340B ceiling prices because they use the same drug pricing elements 
for the calculation.  However, this may not be the case due to differing interpretations of 
the drug pricing data used in the formula, administrative or other error, and/or intentional 
misrepresentation.   
  
The lack of written, formal procedures explaining how the Government calculates its 
340B ceiling prices increases the possibility of differences in interpretation that could 
cause manufacturers ceiling prices to differ.  It is also possible for a manufacturer to 
correctly interpret the calculation but to make an administrative error in applying or 
transmitting the calculation.  Alternatively, manufacturers can benefit from any 
overpayments that result from their intentional inflation of the 340B ceiling prices or the 
inappropriate manipulation, to their advantage, of any of the drug pricing data used in the 
calculation.  OIGs current work will attempt to ascertain the extent to which each of 
these factors may be contributing to 340B entities paying more than the stipulated ceiling 
prices.  A previous OIG report, Pharmaceutical Manufacturers Overcharged 340B-
Covered Entities (A-06-01-00060), found that five drug manufacturers inappropriately 
excluded certain sales from one of the drug pricing elements in the calculation, resulting 
in overcharges to 340B entities of $6.1 million in 1999.       
 
BROADER PROGRAMMATIC ISSUES 
 
Confidentiality Provisions 
  
Confidentiality provisions in the Medicaid drug rebate provisions of the Omnibus Budget  
Reconciliation Act of 1990 (OBRA 90), regarding manufacturers pricing information, 
impact HRSAs ability to ensure that 340B entities receive the appropriate ceiling price.  
The Medicaid drug rebate statute protects the pricing and other data that manufacturers 
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     4   submit to CMS for the Medicaid drug rebate program, in particular Average 
Manufacturer Price (AMP) and Best Price, as confidential.  The law states that the pricing 
information disclosed by manufacturers  ...shall not be disclosed by the Secretary...in a 
form which discloses the identity of a specific manufacturer, ...[or] prices charged for 
drugs by such manufacturers, except as the Secretary determines to be necessary to carry 
out the provisions of the statute or in other limited situations.1  This provision has been 
interpreted to mean that HRSA is precluded from revealing exact overcharges to 340B 
entities, so as not to reveal the 340B ceiling prices to the entities.   
 
Confidentiality provisions related to disclosure of 340B ceiling prices also limit the 
ability of the Prime Vendor to negotiate for prices below stipulated 340B ceiling prices.  
The PHS Act mandates the creation of a Prime Vendor Program.  The Prime Vendor may 
attempt to negotiate subceiling prices on behalf of 340B entities.  However, the Prime 
Vendor cannot effectively negotiate subceiling prices if it is not allowed access to the 
340B ceiling prices.  Such access has been limited by the manner in which the 
confidentiality provisions have been interpreted. 
 
340B Program Enforcement Authorities  
 
We believe that HRSA lacks the necessary legislative, regulatory, and contractual 
authority to enforce manufacturer and wholesaler compliance with the PHS Act and the 
Agreement.  The PHS Act does not provide HRSA with the authority to impose civil 
monetary penalties for noncompliance with the 340B program requirements.  Instead, the 
PHS Act and the companion provisions of the Social Security Act require that 
manufacturers must comply with the terms of the 340B program and the Medicaid drug 
rebate statute.  Noncompliance could result in termination from participation in the 
Medicaid and 340B programs.  This remedy is so extreme that it limits the likelihood that 
it will be used.  To date, it has never been used.  Terminating a manufacturers 
participation is an exceptionally severe sanction, given the effect that terminating a 
manufacturer would have on access to medications for the millions of Medicaid and 
340B beneficiaries.  
 
Further, it is CMS and not HRSA that initially receives the data from manufacturers, and 
manufacturers are not required to report the information directly to HRSA.  HRSA does 
not have statutory authority to compel manufacturers to report complete drug pricing data 
in a timely matter to CMS.  Under the Medicaid drug rebate program statute (pursuant to 
which manufacturers send data to CMS), the Secretary of HHS has the authority to 
impose a civil monetary penalty for late submission of drug pricing data.  We are 
unaware of any use of this provision in recent years.  Instead, manufacturers are generally 
notified by CMS of the late data and are afforded the opportunity to supply the previously 
missing data with a subsequent data submission.  While subsequent data submissions do 
not pose a significant problem for the retrospective Medicaid drug rebate program, which 
CMS oversees, late submissions of the drug pricing data prevent HRSAs timely and 
                                                 
1   42 USC 1396r8(b)(3)(D) 
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     5   accurate calculations of the Governments 340B ceiling prices.  Also, because 
manufacturers are not required to share the 340B ceiling prices that they calculate with 
the Government, there are no data available for comparison. 
 
OIG also found limitations with the obligations outlined in the Agreement.  The 
Agreement gives the Secretary of HHS the ability to require manufacturers to reimburse 
entities for discounts withheld.  However, even when HRSA attempts to take action 
against violators based on the Agreement, HRSAs lack of legal authority makes the 
Agreement challenging to enforce.  For example, in response to the 2003 OIG finding 
that five manufacturers had overcharged 340B entities by $6.1 million, HRSA issued 
letters to each of the five drug companies requesting that they develop action plans that 
include refunding covered entities for overcharges.  According to HRSA, the companies 
have responded to the letters, but refunds have yet to be recovered.   
 
OIG found that the only compliance mechanism that HRSA currently has with regard to 
refunds is an informal dispute resolution process that has never been utilized.  Because 
the 340B program dispute resolution process is voluntary, manufacturers and 340B 
entities are not required to participate.  If the manufacturer does not cooperate with the 
dispute resolution process, HRSA can neither compel their participation nor sanction 
their lack of participation.  
 
OIG RECOMMENDATIONS 
 
OIGs recommendations to improve the 340B Program focus on the steps HRSA can take 
to strengthen its oversight and management of program operations and on the two 
broader programmatic issues I just described. 
 
340B Program Oversight 
 
To strengthen HRSAs ability to oversee the program, OIG recommends that HRSA:  (1) 
publish detailed standards for the Governments calculation of 340B ceiling prices, (2) 
work with CMS to ensure timely receipt of manufacturers pricing data, and (3) develop a 
strategic plan for managing the 340B program database.  HRSA concurred with these 
recommendations and has made some progress in implementing them, including 
launching a new database to track entity participation.   
 
In addition, OIG recommends that HRSA develop oversight mechanisms to verify that 
340B ceiling prices are being correctly calculated by manufacturers.  We suggest that 
HRSA selectively audit manufacturers and wholesalers.  HRSA has stated its intention to 
review 340B prices that manufacturers voluntarily supply to them.  However, OIG does 
not believe that this approach provides a  sufficiently systematic review of compliance 
necessary to provide adequate oversight to the program.   
 
OIG also recommends that HRSA develop monitoring mechanisms that allow for a 
comparison of the Governments 340B prices and the prices paid by 340B entities.  There 
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     6   are several ways HRSA could achieve this.  For example, HRSA could spot-check 
covered entity invoices against the Governments record of 340B ceiling prices.  
Alternatively, HRSA could develop a system for covered entities to access certain 
secured pricing data to help them determine whether the prices they pay exceed the 340B 
ceiling prices.   
 
Broader Programmatic Issues 
 
OIG believes that permitting some disclosure of information about 340B ceiling prices is 
essential to improving the operation of the program.  HRSAs options for using 340B 
ceiling prices to monitor the program are limited due to the confidentiality of the drug 
pricing data elements used to calculate the 340B ceiling prices.  The Social Security Act 
expressly permits the Secretary to disclose information if disclosure is determined to be 
necessary to carry out the programs, including the 340B program.  However, HRSA 
has been following a CMS interpretation of the confidentiality provision that prohibits 
HRSA from using the 340B ceiling prices to monitor the program.  OIG sees a need for 
clarification of the confidentiality provision.   
 
OIG also recommends that HRSA seek authority to establish penalties for program 
violations.  We disagree with HRSAs assessment that it has sufficient authorities to 
enforce the requirements of the 340B program statute.  The Secretary of HHS could 
terminate a manufacturers participation in the Medicaid drug rebate and 340B programs, 
but HRSA has no effective penalties to use for violations of the PHS Act or the 
Pharmaceutical Pricing Agreement.  We believe that legislation authorizing the 
imposition of penalties and fines would provide HRSA with more effective tools to 
enforce the 340B program requirements.   
 
CONCLUSION 
 
We appreciate the Committees interest in this important subject.  Further, we are 
encouraged by HRSAs response to our recommendations.  We believe that HRSA has 
been responsive in terms of its improvements in the accurate calculation of the 340B 
ceiling prices and its 340B participant database.  However, we encourage HRSA to fully 
address OIGs recommendations related to strengthening the administration and oversight 
of the 340B program.  In addition, OIG continues to believe that confidentiality issues 
and a lack of enforcement authority impact HRSAs ability to ensure that the program is 
functioning properly and that 340B entities are paying at or below the 340B ceiling 
prices.  
 
OIG is committed to continuing its review of this program and addressing the concerns of 
congressional oversight committees.  As previously mentioned, OIG is currently engaged 
in a review to determine whether 340B entities pay at or below the statutorily-defined 
340B ceiling price, and, if not, the potential reasons for price discrepancies.  We 
anticipate a final report on this topic in Spring 2006.  This concludes my testimony.  
I would be happy to answer your questions. 
    
 
House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations 
Hearing  December 15, 2005     7