Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
S E E
TATE  FFORTS TO  XCLUDE 
 
  340B D
  RUGS FROM 
 
M   M C
EDICAID  ANAGED  ARE 
 
R  
  EBATES
 
 
Suzanne Murrin 
Deputy Inspector General for 
Evaluation and Inspections 
 
June 2016 
OEI-05-14-00430   
   
EXECUTIVE SUMMARY:  STATE EFFORTS TO EXCLUDE 340B DRUGS 
FROM MEDICAID MANAGED CARE REBATES 
OEI-05-14-00430 
 
WHY WE DID THIS STUDY  
 
Manufacturer rebates for drugs paid through Medicaid managed care organizations 
(MCOs) are an increasingly important source of savings for both States and the Federal 
government.  However, duplicate discounts, which occur when manufacturers pay 
Medicaid rebates on drugs sold at the already-discounted 340B price, are prohibited by 
law.  Thus, for States to collect allowable rebates only and avoid duplicate discounts for 
drugs paid through MCOs, they must identify and exclude 340B drug claims.  If a State 
does not accurately identify 340B drug claims, both duplicate discounts and forgone 
rebatesthat is, unclaimed rebates to which States are legally entitledmay occur.  
Duplicate discounts result in manufacturers paying too much in rebates, while forgone 
rebates result in States paying too much for drugs. 
 
HOW WE DID THIS STUDY 
 
We conducted structured interviews with States that pay for drugs through MCOs to 
determine how they identify 340B drug claims when collecting Medicaid rebates.  We 
assessed States methods and identified potential vulnerabilities that could inhibit correct 
rebate collection.  We did not attempt to determine whether duplicate discounts for MCO 
drugs had occurred. 
 
WHAT WE FOUND 
 
We found that, to identify 340B drug claims and correctly collect rebates for MCO drugs, 
most States use methods that identify providers using 340B-purchased drugs.  However, 
we found that these provider-level methods may not accurately identify all individual 
340B drug claims, creating a risk of duplicate discounts and forgone rebates.  By 
contrast, we found that methods that operate at the claim level can improve accuracy in 
identifying 340B drug claims, and thereby, help States correctly collect rebates. 
 
WHAT WE RECOMMEND  
 
We recommend that the Centers for Medicare & Medicaid Services (CMS) require States 
to use claim-level methods to identify 340B claims.  CMS did not concur with our 
recommendation, noting that while it agrees with the importance of claim-level methods, 
the statute does not contemplate such a requirement for States.  We continue to 
recommend that CMS require the use of claim-level methods to improve accuracy in 
identifying 340B claims and thereby reduce the risk of duplicate discounts and forgone 
rebates. 
 
We also recommend that the Health Resources and Services Administration (HRSA) 
clarify its guidance on preventing duplicate discounts for MCO drugs to align with this 
new requirement.  HRSA concurred with our recommendation.  
TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 
Background ..................................................................................................1 
Methodology ................................................................................................7 
Findings........................................................................................................8 
Most States use provider-level methods to identify 340B claims for 
MCO drugs.......................................................................................8 
Provider-level methods may not accurately identify all 340B 
claims, creating a risk of duplicate discounts and forgone 
rebates ............................................................................................10 
Claim-level methods can improve accuracy in identifying 340B 
claims .............................................................................................13 
Conclusion and Recommendations ............................................................16 
Agency Comments and Office of Inspector General Response .....18 
Appendices .................................................................................................19 
A:  Descriptions of Methods to Identify 340B Claims and Prevent 
Duplicate Discounts .......................................................................19 
B:  HRSA and CMS Policies Related to Duplicate Discounts for 
MCO Drugs ....................................................................................21 
C:  Detailed Methodology ..............................................................23 
D:  State-Specific Methods to Identify 340B Claims and Prevent 
Duplicate Discounts for MCO Drugs ............................................25 
E:  Agency Comments ...................................................................27 
Acknowledgments......................................................................................31 
 
   
   
OBJECTIVES 
1.  To describe States methods for identifying claims for 340B-purchased 
drugs paid through Medicaid managed care organizations (MCOs). 
2.  To identify potential vulnerabilities in States methods for correctly 
collecting rebates and preventing duplicate discounts for drugs paid 
through MCOs. 
BACKGROUND 
Manufacturer rebates for drugs paid through MCOs are an increasingly 
important source of savings for both States and the Federal government.  
From 2011 to 2014, the proportion of States paying for prescription drugs 
through MCOs rose from under one-quarter to over two-thirds.1  As more 
Medicaid drugs are paid through MCOs, the financial impact of States 
collection of rebates for those drugsor failure to collect such rebates
becomes increasingly significant. 
States methods for identifying claims for drugs purchased under the 340B 
Program have both direct and indirect effects on rebate collection.  The 
340B Program allows certain health care providers to purchase drugs at a 
discount.  Duplicate discounts, which occur when manufacturers sell drugs 
at the discounted 340B price and later pay Medicaid rebates on the same 
drugs, are prohibited by law.  To collect rebates correctly and prevent 
duplicate discounts, States must identify and exclude claims representing 
340B-purchased drugs.  If States methods do not accurately identify 340B 
claims, however, States may end up forgoing rebates to which they are 
legally entitled.  Moreover, manufacturer concerns about the effectiveness 
of States methods to prevent duplicate discounts can contribute to rebate 
disputes, as demonstrated in previous OIG work.2  Such disputes may 
impede or delay rebate payments, and require States to expend scarce 
resources to resolve them. 
This study was conducted in response to a Congressional request. 
Medicaid Prescription Drug Coverage 
All 50 States and the District of Columbia (hereinafter referred to as 
States) offer prescription drug coverage as part of their Medicaid benefit 
packages.  Medicaid reimbursement for covered outpatient drugs totaled 
                        ____________________________________________________________ 
1 Office of Inspector General (OIG), States Collection of Rebates for Drugs Paid 
Through Medicaid Managed Care Organizations Has Improved, OEI-05-14-00431, 
September 2015, p. 1. 
2 OIG, Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-11-00580, 
August 2014. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  1   
   
approximately $42 billion in 2014.3, 4  Covered outpatient drugs include 
drugs dispensed directly to patients at pharmacies (pharmacy drugs) and 
drugs administered by physicians or other medical practitioners to patients 
(physician-administered drugs). 
States use two primary models to pay for drugs:  fee-for-service (FFS) and 
MCOs.  Under the FFS model, pharmacies and providers submit 
reimbursement claims for drugs directly to the State, and the State pays 
pharmacies and providers for those claims.  Under the MCO model, States 
prospectively pay MCOs a fixed monthly amount for each Medicaid 
beneficiary, regardless of whether a beneficiary receives services during 
the month.  Pharmacies and providers submit drug claims to MCOs under 
the MCO model.  States may choose to use more than one payment model.  
For example, a State might pay for pharmacy drugs under the FFS model 
but pay for physician-administered drugs under the MCO model. 
The Medicaid Drug Rebate Program 
The Omnibus Budget Reconciliation Act of 1990 established the Medicaid 
Drug Rebate Program.5  The program requires that, for covered outpatient 
drugs (hereinafter referred to as drugs) to be eligible for Federal financial 
participation through Medicaid, manufacturers must pay rebates to States 
on these drugs when dispensed to Medicaid beneficiaries and paid for by 
Medicaid.6  States essentially share a portion of these rebates with the 
Federal government.7 
In 2010, the Affordable Care Act (ACA) expanded the Medicaid Drug 
Rebate Program to require payment of rebates for MCO drugs.8  Prior to 
ACA, only FFS drugs were subject to rebates under the Medicaid Drug 
Rebate Program. 
To collect rebates, States determine the amount of rebates owed to them 
for each quarter and send invoices to manufacturers.  First, States 
determine the total number of units of each drug paid by Medicaid in the 
quarter.  For FFS drugs, States calculate units from drug claims 
                        ____________________________________________________________ 
3 The term covered outpatient drug is defined at 42 U.S.C.  1396r-8(k)(2). 
4 OIG analysis of data from the Centers for Medicare and Medicaid Services (CMS) 
Medicaid Budget and Expenditure System (MBES) and Medicaid State drug utilization 
data, September 2015.  We combined Medicaid fee-for-service expenditures from MBES 
and MCO expenditures from Medicaid State drug utilization data.  This amount does not 
reflect rebates. 
5 The Omnibus Budget Reconciliation Act of 1990, P.L. 101-508,  4401; 42 U.S.C.  
1396r-8. 
6 42 U.S.C.  1396r-8(a)(1) and 1396r-8(b)(1). 
7 42 U.S.C.  1396r-8(b)(1). 
8 ACA, P.L. 111-148  2501(c); 42 U.S.C.  1396b(m)(2) and 42 U.S.C.  1396r-8(b)(1). 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  2   
   
reimbursed directly by the State.  For MCO drugs, States calculate units 
from drug claims data provided by their MCOs.9  States then multiply the 
total number of units of each drug by the drugs unit rebate amount to 
determine the total quarterly amount of rebates owed.10  Finally, States 
send invoices to manufacturers reflecting the total quarterly amount of 
rebates owed for the manufacturers drugs. 
When a manufacturer, in good faith, believes that a States rebate invoice 
for a given drug is based on erroneous utilization data, the manufacturer 
may dispute the invoiced amount for that drug.11  Once a manufacturer 
initiates a dispute, it can withhold payment to States for the disputed 
invoiced amount. 
The 340B Drug Pricing Program 
The Veterans Health Care Act of 1992 established the 340B Drug Pricing 
Program.12  The 340B Program requires that, for drugs to be eligible for 
Federal financial participation through Medicaid, manufacturers must 
provide discounts on such drugs to certain eligible health care providers, 
known as covered entities.13, 14  To participate, covered entities must 
register with HRSA, the agency responsible for administering the 340B 
Program.  Covered entities generally bill their patients insurance
including Medicaid, if applicablefor 340B-purchased drugs that they 
dispense or administer. 
340B-purchased drugs for Medicaid patients.  Covered entities may 
decide to use either 340B-purchased drugs or non-340B-purchased drugs 
                        ____________________________________________________________ 
9 We refer to data on drug claims reimbursed directly by the State (for FFS drugs) or by 
MCOs (for MCO drugs) as drug utilization data. 
10 CMS uses drug pricing data provided by manufacturers to calculate the unit rebate 
amount for each drug according to a statutory formula.  See 42 U.S.C.  1396r-8(c). 
11 CMS, Sample Drug Rebate Agreement,  V(b). Accessed at http://www.medicaid.gov/ 
Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/ 
Downloads/SampleRebateAgreement.pdf on October 27, 2015. 
12 Veterans Health Care Act of 1992, P.L. 102-585  602; Public Health Service Act  
340B; 42 U.S.C.  256b. 
13 42 U.S.C.  1396r-8(a)(1), 42 U.S.C.  1396r-8(a)(5), and 42 U.S.C.  256b(a)(1). 
14 42 U.S.C.  256b(a)(4) enumerates the complete list of the types of entities eligible to 
become covered entities. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  3   
   
for their Medicaid patients.15, 16  Covered entities might make the same 
decision for all of their Medicaid patients, or make different decisions for 
their FFS Medicaid patients and their MCO Medicaid patients. 
Contract pharmacy arrangements.  Covered entities may contract with 
one or more pharmacies, known as contract pharmacies, to dispense 
340B-purchased drugs on their behalf.17  Most contract pharmacies are 
retail pharmacies that serve the general public as well as patients of the 
covered entity or entities with which they contract.  Contract pharmacies 
generally bill patients insuranceincluding Medicaid, if applicableon 
behalf of the covered entity for 340B-purchased drugs dispensed to its 
patients. 
Duplicate Discounts 
Duplicate discounts occur when manufacturers sell drugs at a discount 
under the 340B Program and later pay Medicaid rebates on the same 
drugs.  Duplicate discounts are prohibited by law for both FFS drugs and 
MCO drugs.18  Figure 1 shows how duplicate discounts could occur in the 
Medicaid rebate process. 
                        ____________________________________________________________ 
15 The decision to use 340B-purchased drugs for Medicaid patients is often referred to as 
carving in, whereas the decision to use non-340B-purchased drugs for Medicaid 
patients is referred to as carving out.  Covered entities may decide to use 
non-340B-purchased drugs for their Medicaid patients because payment rates make doing 
so more financially advantageous.  State laws and/or billing rules may restrict covered 
entities ability to make this decision. 
16 See, e.g., 65 Fed. Reg. 13983, 13984 (March 15, 2000).  That guidance applies to FFS 
drugs because it was developed before the ACA expanded the Medicaid Drug Rebate 
Program to include MCO drugs.  However, HRSA has proposed new guidance that 
would extend this policy to MCO drugs.  See 80 Fed. Reg. 52300, 52309 (August 28, 
2015). 
17 See, e.g., 75 Fed. Reg. 10272 (March 5, 2010).  Covered entities are permitted to use 
multiple contract pharmacy arrangements as long as they comply with applicable 
guidance.  Id. at 10277-10278. 
18 42 U.S.C.  256b(a)(5)(A)(i) and 42 U.S.C.  1396r-8(j)(1). 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  4   
   
Figure 1:  How Duplicate Discounts Could Occur in the Medicaid Drug Rebate Process 
Covered Entity 
Discount 1:  Drugs 
Sold at Reduced 340B 
MCO 340B 
Price 
Claims 
FFS 340B 
MCO  Claims  Rebate Invoice  Manufacturer 
(Mistakenly 
Includes 340B 
Claims) 
MCO Utilization 
Data (Includes  Discount 2:  Rebates 
340B Claims)  for 340B-Purchased 
State 
Drugs 
 
States play a key logistical role in preventing duplicate discounts because 
they invoice manufacturers for rebates.  To collect rebates correctly and 
prevent duplicate discounts, States must ensure that FFS and MCO 
utilization data used to invoice manufacturers do not include claims 
representing 340B-purchased drugs (hereinafter referred to as 340B 
claims).  In general, States do so by identifying 340B claims in utilization 
data and excluding them before compiling rebate invoices. 
Methods for identifying 340B claims.  A number of different methods are 
available to States for identifying 340B claims and preventing duplicate 
discounts, but they generally correspond to one of two types: 
  Provider-level methods, which identify covered entities that use 
340B-purchased drugs for their Medicaid patients and exclude 
drug claims billed by those entities from utilization data.  The most 
prominent provider-level method is HRSAs Medicaid Exclusion 
File (MEF). 
  Claim-level methods, which exclude individual drug claims that 
covered entities have explicitly identified as 340B claims from 
utilization data. 
See Appendix A for detailed descriptions of methods to identify 340B 
claims and prevent duplicate discounts. 
Federal policies on duplicate discounts for MCO drugs.  Because 
duplicate discounts for MCO drugs are relevant to the 340B Program and 
the Medicaid Drug Rebate Program, both HRSA and CMS have been 
involved in developing Federal policies on the topic.  HRSA provides 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  5   
   
direction to covered entities related to their participation in the program, 
including their role in preventing duplicate discounts.  Importantly, in 
December 2014, HRSA issued a notice clarifying that the MEF is 
available to help prevent duplicate discounts specifically for FFS drugs.19  
CMS provides direction to States regarding MCO drugs and rebate 
collection under the Medicaid Drug Rebate Program.  See Appendix B for 
details on HRSA and CMS policies related to duplicate discounts for 
MCO drugs. 
Related Office of Inspector General Work 
In recent years, OIG has published an extensive body of work on the 340B 
Program and MCO rebates. 
OIG work on the 340B Program.  In June 2011, OIG published a review of 
States FFS Medicaid reimbursement policies and oversight activities 
related to 340B-purchased drugs.20  OIG found that over half of States had 
developed alternatives to MEF for correctly collecting rebates and 
preventing duplicate discounts for FFS drugs. 
In February 2014, OIG published a review of 340B contract pharmacy 
arrangements.21  OIG found that contract pharmacy arrangements create 
complications in preventing duplicate discounts. 
In August 2014, OIG published a review of manufacturer dispute 
resolution under the Medicaid Drug Rebate Program, highlighting 
duplicate discount concerns.22  OIG found that disputes between States and 
manufacturers related to 340B-purchased drugs occur frequently.  OIG 
recommended that CMS inform States of the availability of 340B 
indicators, and CMS concurred with that recommendation. 
OIG work on MCO rebates.  In September 2015, OIG published a review 
of States collection of MCO rebates.23  That review was conducted in 
conjunction with this study.  It was a follow-up to a September 2012 OIG 
report that found that less than half of States paying for drugs under the 
                        ____________________________________________________________ 
19 The notice stated that it did not apply to the prevention of duplicate discounts for MCO 
drugs.  See HRSA, 340B Drug Pricing Program Notice:  Clarification on use of the 
Medicaid Exclusion File, Release No. 2014-1, December 12, 2014, p. 3. 
20 OIG, State Medicaid Policies and Oversight Activities Related to 340B-Purchased 
Drugs, OEI-05-09-00321, June 2011. 
21 OIG, Contract Pharmacy Arrangements in the 340B Program, OEI-05-13-00431, 
February 2014. 
22 OIG, Medicaid Drug Rebate Dispute Resolution Could Be Improved, 
OEI-05-11-00580, August 2014. 
23 OIG, States Collection of Rebates for Drugs Paid Through Medicaid Managed Care 
Organizations Has Improved, OEI-05-14-00431, September 2015. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  6   
   
MCO model had invoiced manufacturers for MCO rebates.24  The 2015 
review found that a greater number of States are now paying for drugs 
under the MCO model, and that almost all of them are collecting MCO 
rebates. 
METHODOLOGY 
Scope 
This report describes States methods for identifying 340B claims for 
MCO drugs and assesses vulnerabilities in those methods with respect to 
correctly collecting rebates and preventing duplicate discounts.  We did 
not attempt to determine whether duplicate discounts for MCO drugs had 
actually occurred. 
Data Collection and Analysis 
To address our objectives, we administered electronic surveys, structured 
telephone interviews, and follow-up email inquiries with States between 
November 2014 and April 2015.  From the survey results and analysis of 
additional CMS data sources, we identified 37 States that paid for drugs 
under the MCO model and collected rebates for those drugs.  We 
conducted structured interviews and follow-up inquiries with those 37 
States to determine what methods they use to identify 340B claims for 
MCO drugs.  We then assessed the methods reported by States to identify 
potential vulnerabilities.  See Appendix C for a detailed description of our 
methodology. 
Limitations 
Our findings are based on survey and interview responses provided by 
States.  We did not independently verify States interview responses 
regarding their methods for identifying 340B claims for MCO drugs. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency. 
   
                        ____________________________________________________________ 
24 OIG, States Collection of Rebates for Drugs Paid Through Medicaid Managed Care 
Organizations, OEI-03-11-00480, September 2012. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  7   
   
FINDINGS 
Almost all (35) of the 37 States in our review reported having methods for 
identifying 340B claims for MCO drugs.  Many of these 35 States 
reported using more than one method to do so.  For example, some states 
used one method for MCO pharmacy drugs and another for MCO 
physician-administered drugs.  Other states used one method as a primary 
and another as a secondary or backup. 
One of the two remaining States reported that it did not have any methods 
for identifying 340B claims for MCO drugs at the time of our data 
collection, but planned to begin using a provider-level method.  The other 
remaining State did not provide information regarding its method(s) for 
identifying 340B claims for MCO drugs. 
Most States use provider-level methods to identify 
340B claims for MCO drugs 
Thirty of the 35 States reported using provider-level methods in some 
capacity to identify 340B claims and prevent duplicate discounts for MCO 
drugs.  Provider-level methods identify covered entities that use 
340B-purchased drugs for their Medicaid patients and allow States to 
exclude drug claims billed by those entities from utilization data.  For 
example, HRSAs MEFthe most commonly-used provider-level 
methodidentifies all covered entities that have informed HRSA that they 
will use 340B-purchased drugs for their FFS Medicaid patients. 
Of the 30 States that use provider-level methods, 22 reported using only 
provider-level methods to identify 340B claims for either all of their MCO 
drugs or a segment of their MCO drugs (e.g., MCO pharmacy drugs, MCO 
physician-administered drugs).  The remaining 8 States reported using 
provider-level methods in conjunction with another type of method, such 
as a claim-level method, for all or a segment of their MCO drugs. 
Fourteen of the 35 States reported using claim-level methods in some 
capacity to identify 340B claims and prevent duplicate discounts for MCO 
drugs.  Claim-level methods allow States to exclude individual drug 
claims that covered entities have explicitly identified as 340B claims from 
utilization data.  Of the 14 States, 9 reported using only claim-level 
methods for all or a segment of their MCO drugs, whereas 5 reported 
using claim-level methods in conjunction with another type of method for 
all or a segment of their MCO drugs. 
 
 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  8   
   
Table 1 shows the number of States using different types of methods to 
identify 340B claims and prevent duplicate discounts for MCO drugs. 
 
Table 1:  Types of Methods Used by States to Identify 340B Claims for MCO Drugs 
Number of States Using  Number of States Using  Number of States Using 
Type of Method  This Type in Some  This Type Only for  This Type in Conjunction with Another 
Capacity for MCO Drugs    Some or All MCO Drugs  Type for Some or All MCO Drugs 
Provider-level  30  22  8 
Claim-level  14  9  5 
Other  6  2  4 
     Overlap  (15)     
     Total  35     
Source:  OIG analysis of State interviews, 2015. 
 
See Appendix D for the specific method(s) used by each of the 35 States to 
identify 340B claims and prevent duplicate discounts for MCO drugs. 
Many States use the Medicaid Exclusion File to identify 340B 
claims for MCO drugs and continued to do so despite HRSA 
guidance 
Of the 30 States that use provider-level methods to identify 340B claims 
for MCO drugs, 24 reported using the MEF in some capacity.  Of these 24 
States, 17 reported using only the MEF for all or a segment of their MCO 
drugs, whereas 7 reported using the MEF in conjunction with another 
method, such as a different provider-level method or a claim-level method, 
for all or a segment of their MCO drugs.  Chart 1 shows use of the MEF 
among the 30 States that use provider-level methods to identify 340B 
claims for MCO drugs. 
 
 
 
 
 
 
 
 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  9   
   
Chart 1:  Use of the MEF Among 30 States That Use Provider-Level Methods for MCO Drugs 
No MEF
(6)
MEF Only
(17)
MEF in Conjunction 
with Another Method
(7)
 
Source:  OIG analysis of State interviews, 2015. 
 
In December 2014, HRSA issued a notice clarifying that the MEF is 
available to help prevent duplicate discounts specifically for FFS drugs.25  
The notice encouraged covered entities to work with their States to 
develop alternative strategies for preventing duplicate discounts for MCO 
drugs. 
In April 2015, however, all 19 States that responded to our follow-up 
inquiries reported that they continued to use the MEF for MCO drugs.  
This included almost all (15 of 17) States that reported using only the 
MEF for all or a segment of their MCO drugs. 
Provider-level methods may not accurately identify all 
340B claims, creating a risk of duplicate discounts and 
forgone rebates 
States use of provider-level methods may not accurately identify 340B 
claims for some covered entities.  Provider-level methods generally treat 
all drug claims from a given covered entity in the same waythat is, as 
either 340B claims or non-340B claimsand do not allow covered entities 
to differentiate among specific claims.  In practice, however, a covered 
entity may submit both 340B claims and non-340B claims to Medicaid.  
This may occur because a covered entity:  (1) makes different decisions on 
use of 340B-purchased drugs for its FFS Medicaid patients and its MCO 
                        ____________________________________________________________ 
25 HRSA, 340B Drug Pricing Program Notice:  Clarification on use of the Medicaid 
Exclusion File, Release No. 2014-1, December 12, 2014. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  10   
   
Medicaid patients; and/or (2) must make exceptions to its decision to use 
340B-purchased drugs in certain situations. 
For such covered entities, States use of provider-level methods creates a 
risk of duplicate discounts and forgone rebates.  States using 
provider-level methods are likely to either erroneously include some 340B 
claims in rebate invoices (resulting in duplicate discounts) or erroneously 
exclude some non-340B claims from rebate invoices (resulting in forgone 
rebates). 
Use of 340B-purchased drugs for FFS Medicaid patients and MCO 
Medicaid patients differs.  Covered entities that decide to use 
340B-purchased drugs for their FFS Medicaid patients but not for their 
MCO Medicaid patientsor vice versawill submit both 340B claims 
and non-340B claims to Medicaid.  Provider-level methods are generally 
insufficient to distinguish between such entities 340B and non-340B 
claims. 
Consider, for example, the 17 States that reported using only the MEF to 
identify 340B claims and prevent duplicate discounts for all or a segment 
of their MCO drugs.  The MEF was designed to identify covered entities 
that decide to use 340B-purchased drugs for their FFS Medicaid patients.  
By using the MEF for MCO drugs, States are effectively assuming that 
covered entities are making the same decision on use of 340B-purchased 
drugs for all of their Medicaid patients, which may not be the case.  
Table 2 illustrates how this can cause States to incorrectly identify 340B 
claims, resulting in duplicate discounts and/or forgone rebates. 
 
Table 2:  Potential Duplicate Discounts and Forgone Rebates for States Using the MEF for MCO Drugs 
Type of Drugs Used  States Action for  Type of Drugs Used 
Entity in 
  for FFS Medicaid  MCO Rebates, per  for MCO Medicaid  Result 
MEF? 
Patients  MEF  Patients 
Entity A  340B  Yes  Exclude Claims  340B   Duplicate Discount Prevented 
Entity B  Non-340B  No  Include Claims  Non-340B   Allowable Rebate Invoiced 
Entity C  Non-340B  No  Include Claims  340B   Duplicate Discount 
Entity D  340B  Yes  Exclude Claims  Non-340B   Forgone Rebate 
Source:  OIG analysis of State interviews, 2015. 
 
For entities A and B, which make the same decision on use of 
340B-purchased drugs for their FFS Medicaid patients and their MCO 
Medicaid patients, use of the provider-level MEF has the desired result:  
duplicate discounts are prevented for entity A, and allowable rebates are 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  11   
   
invoiced for entity B.  However, for entities C and D, which make 
different decisions on use of 340B-purchased drugs for their FFS 
Medicaid patients and their MCO Medicaid patients, use of the 
provider-level MEF is problematic:  entity Cs MCO claims are included 
in rebate invoices, resulting in duplicate discounts, and entity Ds MCO 
claims are excluded from rebate invoices, resulting in forgone rebates. 
In a May 2015 working paper, the National Association of Medicaid 
Directors (NAMD) also highlighted this vulnerability.  Specifically, 
NAMD noted that, with respect to States use of the MEF, covered entities 
that make different decisions on the use of 340B-purchased drugs for their 
FFS Medicaid patients and their MCO Medicaid patients present 
challenges for States.26 
Some States that use provider-level methods have taken steps to address 
the risk of duplicate discounts and forgone rebates described above.  Two 
States reported that they have begun efforts to track covered entities 
decisions on the use of 340B- or non-340B-purchased drugs separately for 
FFS Medicaid patients and MCO Medicaid patients.  Alternatively, one 
State reported that it requires covered entities to make the same decision 
on the use of 340B- or non-340B-purchased drugs for their FFS Medicaid 
patients and their MCO Medicaid patients. 
Exceptions to decisions to use 340B-purchased drugs.  Even if covered 
entities generally use 340B-purchased drugs for both FFS Medicaid 
patients and MCO Medicaid patients, they may still submit non-340B 
claims to Medicaid in certain situations.  Covered entities are sometimes 
unable to obtain or use 340B-purchased drugs, due to circumstances such 
as manufacturer supply limitations or the 340B Programs orphan drug 
exclusion.27  In such situations, covered entities will likely use 
non-340B-purchased drugs for Medicaid patients and thus submit 
non-340B claims to Medicaid.  However, if a States provider-level 
method indicates that the entities dispense 340B-purchased drugs to 
Medicaid (because they generally do so), the non-340B claims they submit 
will be incorrectly identified as 340B claims and excluded from rebate 
invoices, resulting in forgone rebates.  While HRSA guidance recognizes 
                        ____________________________________________________________ 
26 NAMD, Medicaid and the 340B Program:  Alignment and Modernization 
Opportunities, May 13, 2015, p. 10. 
27 See, e.g., HRSA, Clarification of Non-Discrimination Policy, Release No. 2011-1.1, 
May 23, 2013 and 42 U.S.C.  256b(e). 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  12   
   
that these situations might occur, it does not provide specific policies to 
address the risk of forgone rebates.28 
NAMDs May 2015 working paper addresses this vulnerability as well.  
Specifically, NAMD stated that covered entities that generally use 
340B-purchased drugs for Medicaid patients do use non-340B-purchased 
drugs in certain situations.  Moreover, NAMD noted that for States that 
use the MEF, no mechanism is in place for covered entities to notify States 
of these situations.29 
Claim-level methods can improve accuracy in 
identifying 340B claims 
Use of claim-level methods can help States more accurately identify 340B 
claims and thus reduce the risk of duplicate discounts and forgone rebates 
associated with provider-level methods.  Unlike provider-level methods, 
claim-level methods allow covered entities to differentiate among specific 
claimsthat is, to identify some of their drug claims as 340B claims and 
others as non-340B claims.  For example, a covered entity that decides to 
use 340B-purchased drugs for MCO Medicaid patients only can use a 
States claim-level method to identify its MCO claimsbut not its FFS 
claimsas 340B claims.  Likewise, a covered entity that generally uses 
340B-purchased drugs for its Medicaid patients, but is unable to do so in 
certain situations, can use a States claim-level method to identify its drug 
claims as non-340B claims in those situations.  In both cases, the State can 
correctly identify 340B claims and exclude them from its rebate invoices 
while including all other (non-340B) claims, thereby preventing both 
duplicate discounts and forgone rebates. 
Alternatively, States may be able to achieve claim-level specificity 
through existing provider-level methods by directing covered entities to 
use a separate provider identifier for 340B claims.  Specifically, each 
covered entity could use two separate provider identifiers (NPIs or 
Medicaid billing numbers) to bill Medicaidone for 340B claims and one 
for non-340B claims.  States could, in turn, ensure that their provider-level 
methods are configured to exclude claims from rebate invoices only when 
                        ____________________________________________________________ 
28 HRSAs December 2014 notice states only that covered entities must have a 
mechanism in place to notify the State Medicaid agency that non-340B-purchased drugs 
were used in such circumstances.  See HRSA, 340B Drug Pricing Program Notice:  
Clarification on use of the Medicaid Exclusion File, Release No. 2014-1, December 12, 
2014, p. 2.  HRSAs proposed omnibus guidance reiterated this expectation, but did not 
provide additional detail.  See 80 Fed. Reg. 52300, 52320 (August 27, 2015). 
29 NAMD, Medicaid and the 340B Program:  Alignment and Modernization 
Opportunities, May 13, 2015, p. 8-9. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  13   
   
billed using a covered entitys 340B-specific provider identifier.  If 
covered entities and States perform this process correctly, both duplicate 
discounts and forgone rebates could be effectively prevented.30  However, 
covered entities use of multiple provider identifiers solely for the purpose 
of identifying individual 340B claims may create complications for other 
State and Federal oversight activities. 
States may be able to use claim-level methods to identify 
340B-purchased drugs dispensed through contract 
pharmacies 
Per HRSA guidance, covered entities should not dispense 340B-purchased 
drugs to Medicaid patients through their contract pharmacies, unless they 
have an arrangement to prevent duplicate discounts.31  If contract 
pharmacies do not dispense 340B-purchased drugs to Medicaid patients, 
States can collect rebates for the pharmacies drug claims without causing 
duplicate discounts to occur. 
Ten States reported that if covered entities do dispense 340B-purchased 
drugs to MCO Medicaid patients through contract pharmacies, the States 
use of claim-level methods can accurately identify 340B claims and 
prevent duplicate discounts.32  Eight of these 10 States referenced their use 
of 340B indicators, whereas two States referenced their use of alternative 
claim-level methods. 
Seven of the eight States that referenced their use of claim-level 340B 
indicators reported that contract pharmacies, like all of their States 
covered entities, should use 340B indicators if they submit 340B claims to 
                        ____________________________________________________________ 
30 HRSA guidance contemplates this type of separate identifier arrangement, but not as 
a means of achieving claim-level specificity through provider-level methods.  Rather, 
HRSA addresses this arrangement only with respect to multi-site covered entities that 
wish to have some sites use 340B-purchased drugs for Medicaid patients and other sites 
use non-340B-purchased drugs for Medicaid patients (i.e., by using a separate provider 
identifier for each site).  See, e.g., HRSA, 340B Drug Pricing Program Notice:  
Clarification on use of the Medicaid Exclusion File, Release No. 2014-1, December 12, 
2014, p. 2 and 80 Fed. Reg. 52300, 52308-52309 (August 27, 2015). 
31 HRSA guidance allows contract pharmacies to dispense 340B-purchased drugs to 
Medicaid patients only if the covered entity, the contract pharmacy, and the State 
Medicaid agency have established an arrangement to prevent duplicate discounts and 
report the arrangement to HRSA.  See 75 Fed. Reg. 10272, 10278 (March 5, 2010).  That 
guidance applies to FFS drugs because it was developed before the ACA expanded the 
Medicaid Drug Rebate Program to include MCO drugs.  However, HRSA has proposed 
new guidance that would extend this policy to MCO drugs.  See 80 Fed. Reg. 52300, 
52309 (August 28, 2015). 
32 Previous OIG work found some covered entities whose contract pharmacies were 
dispensing 340B-purchased drugs to Medicaid patients but did not have arrangements to 
prevent duplicate discounts.  See OIG, Contract Pharmacy Arrangements in the 340B 
Program, OEI-05-13-00431, February 2014, p. 13-14. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  14   
   
MCOs.  The one additional State reported using 340B indicators 
exclusively for contract pharmacies wishing to dispense 340B-purchased 
drugs to MCO Medicaid patients.  By including 340B indicators, contract 
pharmacies allow the States to identify and exclude their 340B claims 
from rebate invoices to ensure correct rebate collection and prevent 
duplicate discounts. 
The structure of many contract pharmacy arrangements, however, creates 
technical challenges regarding the use of claim-level 340B indicators.  
Drugs dispensed by contract pharmacies on behalf of covered entities are 
often determined to be 340B-eligible retroactivelythat is, after they have 
been dispensed to patients and billed.  Contract pharmacies that operate 
this way cannot use 340B indicators when billing because they do not 
know the drugs 340B eligibility status at that time.33 
Six of the eight States reported that they expect contract pharmacies to 
work around these technical challenges.  Specifically, these States reported 
that if contract pharmacies determine 340B eligibility retroactively but 
still wish to dispense 340B-purchased drugs to MCO Medicaid patients, 
they should reverse any claims retroactively determined to be 
340B-eligible and re-submit them with 340B indicators.34 
By contrast, two States reported developing alternative claim-level 
methods to accommodate contract pharmacies technical challenges.  
Specifically, these two States instruct contract pharmacies to regularly 
submit spreadsheets identifying all previously-billed claims that are 
retroactively determined to be 340B-eligible.  To correctly collect rebates 
and prevent duplicate discounts, the States then remove all 340B claims 
identified in the spreadsheets from rebate invoices.35  Because contract 
pharmacies send the spreadsheets to the State after the drugs have been 
dispensed to patients and billed, they are able to identify drug claims 
retroactively determined to be 340B-eligible.  However, this process 
requires greater effort and involvement by State staff. 
   
                        ____________________________________________________________ 
33 Ibid, p. 9, 14.  See also NAMD, Medicaid and the 340B Program:  Alignment and 
Modernization Opportunities, May 13, 2015, p. 11. 
34 While some States reported that they were aware of the NCPDP Telecommunication 
standards N1 transactionwhich allows providers to add 340B indicators to 
previously-submitted claims without reversing and re-submitting themnone reported 
using it. 
35 The States may need to adjust previous quarters rebate invoicesinstead of removing 
340B claims prior to invoicingdue to timing issues. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  15   
   
CONCLUSION AND RECOMMENDATIONS 
Effective methods for identifying 340B claims are needed to ensure 
compliance with the statutory prohibition on duplicate discounts, but are 
also a critical component of States ability to achieve savings under the 
Medicaid Drug Rebate Program.  If States methods do not accurately 
identify 340B claims, States can end up forgoing rebates to which they are 
entitled.  They also may be more likely to face rebate disputes that require 
additional resources and impede or delay rebate payments. 
Nevertheless, we found that most States use provider-level methods
which may not accurately identify all 340B claimsfor MCO drugs.  
Moreover, we found that many States continued to use the MEF to identify 
340B claims for MCO drugs, even after HRSAs December 2014 notice 
clarified that the MEF is available to help prevent duplicate discounts 
specifically for FFS drugs. 
Accordingly, we recommend that CMS: 
Require the use of claim-level methods to identify 340B claims 
CMS should require that States use claim-level methods to identify claims 
for 340B-purchased drugs.  As described in the findings of this report, 
claim-level methods can help States more accurately identify 340B claims, 
and thus reduce the risk of duplicate discounts and forgone rebates 
associated with provider-level methods. 
CMS could afford States flexibility in complying with this requirement.  
States could use claim-level 340B indicators (specific data elements on 
claims transactions), for example, as a number of States already do for 
MCO drugs.  States could instead opt to use alternative claim-level 
methods, such as spreadsheets identifying individual 340B claims, to 
avoid the technical challenges that 340B indicators pose for many contract 
pharmacy arrangements. 
OIG acknowledges that methods to identify 340B claims may not be 
needed in States that require covered entities to use non-340B-purchased 
drugs for their Medicaid patients. 
We also recommend that HRSA: 
Clarify its guidance on preventing duplicate discounts for 
MCO drugs 
In finalizing its August 2015 proposed omnibus guidance, HRSA should 
clarify that, for MCO drugs, covered entities must follow State 
instructions to facilitate States claim-level identification of 
340B-purchased drugs.  As proposed, HRSAs omnibus guidance suggests 
creating a new exclusion file (a provider-level method) to account for 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  16   
   
covered entities decisions on the use of 340B- or non-340B-purchased 
drugs for their MCO Medicaid patients.  However, as we recommend 
above, CMS should instead require States to use claim-level methods to 
identify 340B claims.  Accordingly, a new MCO-specific exclusion file 
would not be necessary for States to correctly collect rebates and prevent 
duplicate discounts for MCO drugs.  While HRSAs proposed omnibus 
guidance does note that covered entities may be required to follow 
State-specific billing rules36, we recommend that HRSA further emphasize 
this point for MCO drugs and remove references to a new MCO-specific 
exclusion file. 
   
                        ____________________________________________________________ 
36 80 Fed. Reg. 52300, 52309 (August 28, 2015). 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  17   
   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS did not concur with our first recommendation to require the use of 
claim-level methods to identify 340B claims.  CMS stated that it agrees 
with the importance of claim-level methods, but that the statute does not 
contemplate such a requirement for States.  CMS noted that States may 
develop their own billing instructions as a way to comply with the 
requirement to prevent duplicate discounts.  Finally, CMS stated that it 
will continue to provide technical assistance to States as needed. 
OIG continues to recommend that CMS require the use of claim-level 
methods to identify 340B claims.  We believe that claim-level methods 
can improve accuracy in identifying 340B claims, and thereby reduce the 
risk of duplicate discounts and forgone rebates.  We acknowledge that the 
statute does not explicitly direct CMS to require States use of claim-level 
methods.  However, as CMS notes, States have the primary role of 
identifying and excluding 340B claims to correctly collect rebates and 
prevent statutorily-prohibited duplicate discounts. 
HRSA concurred with our recommendation to clarify its guidance on 
preventing duplicate discounts for MCO drugs.  However, HRSA stated 
that it will need to consider public comments received on its proposed 
omnibus guidance prior to implementing our recommendation. 
   
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  18   
   
APPENDIX A 
Descriptions of Methods to Identify 340B Claims and Prevent 
Duplicate Discounts 
Provider-level methods.  Provider-level methods identify covered entities 
that use 340B-purchased drugs for their Medicaid patients and exclude 
drug claims billed by those entities from utilization data. 
The most prominent provider-level method is the Medicaid Exclusion File 
(MEF).  The MEF, which is maintained by HRSA and published quarterly, 
contains provider identifiers, such as national provider identifiers (NPIs) 
and Medicaid billing numbers, for all covered entities that have informed 
HRSA they will use 340B-purchased drugs for their FFS Medicaid 
patients for the relevant quarter.37  Accordingly, States can compare 
provider identifiers on drug claims for a quarter to the provider identifiers 
contained in that quarters MEF, and exclude all matching claims from 
utilization data when compiling rebate invoices. 
Self-developed lists of covered entities are another type of provider-level 
method.  These lists generally contain provider identifiers for covered 
entities that have been identified as using 340B-purchased drugs for their 
Medicaid patients, and can be applied in a similar manner as the MEF to 
exclude 340B claims from rebate invoices.  Unlike the MEF, however, 
these lists are compiled and maintained independently by States, rather 
than HRSA. 
Claim-level methods.  Claim-level methods exclude individual drug claims 
that covered entities have explicitly identified as 340B claims from 
utilization data. 
In the most common claim-level method, States direct covered entities to 
include specific data elements (hereinafter referred to as 340B indicators) 
on drug claims, in accordance with industry-accepted transaction 
standards, to identify them as 340B claims.  For pharmacy drugs, the 
National Council on Prescription Drug Programs (NCPDP) 
Telecommunication standard contains a submission clarification code 
                        ____________________________________________________________ 
37 The Veterans Health Care Act of 1992 directed the Secretary to develop a mechanism 
to prevent duplicate discounts.  See 42 U.S.C.  256b(a)(5)(A)(ii).  HRSA developed 
MEF as that mechanism.  See 58 Fed. Reg. 34058 (June 23, 1993) and HRSA, 340B 
Drug Pricing Program Notice:  Clarification on use of the Medicaid Exclusion File, 
Release No. 2014-1, December 12, 2014. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  19   
   
field that can be populated with a value of 20 to identify a 340B claim.38  
For physician-administered drugs, the American National Standards 
Institutes (ANSI) Accredited Standards Committee (ASC) X12 837P 
standard contains a UD modifier value that can be added to identify a 
340B claim.39  Accordingly, States can exclude drug claims with 340B 
indicators from utilization data when compiling rebate invoices. 
States also can employ claim-level methods using alternative mechanisms.  
For example, States can require covered entities that use 340B-purchased 
drugs for their Medicaid patients to compile and submit spreadsheets 
identifying individual 340B claims.  States can exclude the drug claims 
identified in such spreadsheets from utilization data when compiling 
rebate invoices. 
Other methods.  Other methods attempt to correctly collect rebates by 
ensuring that utilization data contains no 340B claims that need to be 
excluded. 
For example, States can require covered entities to use 
non-340B-purchased drugs for their Medicaid patients (i.e., carve out).  
If all of a States covered entities correctly do so, the States utilization 
data will not include any 340B claims.  Accordingly, the State can compile 
rebate invoices for manufacturers from its utilization data without causing 
duplicate discounts to occur. 
Alternatively, for MCO drugs, States can delegate the process of excluding 
340B claims from utilization data to MCOs.  If MCOs correctly exclude 
340B claims from their utilization data before providing such data to 
States, States can compile rebate invoices for manufacturers from MCO 
utilization data without causing duplicate discounts for MCO drugs to 
occur. 
 
                        ____________________________________________________________ 
38 The submission clarification code field can be populated with a value of 20 on the 
initial drug claim (B1) transaction, as well as on a subsequent information reporting 
(N1) transaction, which allows providers to amend or revise information from a 
previously-submitted B1 transaction.  See NCPDP, 340B Information Exchange 
Reference Guide Version 1.0, July 2011. 
39 While not explicitly defined by ANSI ASC X12 as identifying 340B claims, the UD 
modifier is often used for this purpose.  See, e.g., Apexus 340B Prime Vendor Program, 
340B & Medicaid, p. 1.  Accessed at 
https://docs.340bpvp.com/documents/public/resourcecenter/340B_Medicaid.pdf on 
January 20, 2016. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  20   
   
APPENDIX B 
HRSA and CMS Policies Related to Duplicate Discounts for 
MCO Drugs 
HRSAs existing guidance on use of the Medicaid Exclusion File.  HRSA 
guidance states that the Medicaid Exclusion File (MEF) is the official data 
source regarding covered entities that bill FFS Medicaid for 
340B-purchased drugs, but that it is not applicable to MCO drugs. 
When HRSA first established the MEF in 1993, the Medicaid Drug Rebate 
Program applied only to FFS drugs.  Accordingly, HRSAs pre-ACA 
guidance did not distinguish between FFS drugs and MCO drugs.40  In 
2010, the ACA expanded the Medicaid Drug Rebate Program to include 
MCO drugs. 
In December 2014, HRSA issued a notice clarifying that the MEF is 
available to help prevent duplicate discounts specifically for FFS drugs.  
The notice encouraged covered entities to work with their States to 
develop alternate strategies for preventing duplicate discounts for MCO 
drugs.41 
HRSAs existing guidance on contract pharmacies and Medicaid.  HRSA 
guidance allows contract pharmacies to dispense 340B-purchased drugs to 
FFS Medicaid patients only if the covered entity, the contract pharmacy, 
and the State Medicaid agency have established an arrangement to prevent 
duplicate discounts and report the arrangement to HRSA.42 
HRSAs December 2014 notice did not provide any additional guidance on 
contract pharmacy requirements related to preventing duplicate discounts 
specifically for MCO drugs. 
HRSAs proposed omnibus guidance.  In August 2015, HRSA issued 
proposed omnibus guidance on the 340B Program that explicitly 
addressed the issue of duplicate discounts for MCO drugs, among other 
topics.43  In that proposed guidance, HRSA suggested creating a new 
exclusion file to account for covered entities decisions on use of 340B- or 
non-340B-purchased drugs for their MCO Medicaid patients, but the 
operational details are yet to be defined.  The proposed guidance continues 
                        ____________________________________________________________ 
40 See 58 Fed. Reg. 27293 (May 7, 1993), 58 Fed. Reg. 34058 (June 23, 1993), and 65 
Fed. Reg. 13983 (March 15, 2000). 
41 HRSA, 340B Drug Pricing Program Notice:  Clarification on use of the Medicaid 
Exclusion File, Release No. 2014-1, December 12, 2014. 
42 75 Fed. Reg. 10272, 10278 (March 5, 2010). 
43 80 Fed. Reg. 52300, 52309 (August 28, 2015). 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  21   
   
to encourage covered entities, States, and MCOs to work together on 
preventing duplicate discounts for MCO drugs. 
The proposed guidance would also explicitly apply HRSAs existing 
guidance on contract pharmacies and Medicaid to MCO drugs as well as 
FFS drugs.44 
CMSs final rule on covered outpatient drugs.  In February 2016, CMS 
issued a final rule on covered outpatient drugs that discussed duplicate 
discounts for MCO drugs; however, it did not implement any new 
regulations on the topic.45  In the preamble of that final rule, CMS noted 
that States are responsible for ensuring that duplicate discounts for MCO 
drugs do not occur.  CMS also stated that States should ensure that their 
MCOs have procedures in place to exclude 340B claims from utilization 
data.  Finally, CMS encouraged States to work with their MCOs and 
covered entities on preventing duplicate discounts for MCO drugs. 
CMSs final rule on MCOs.  In May 2016, CMS issued a final rule on 
MCOs that included provisions relating to duplicate discounts for MCO 
drugs.46  The final rule mandated that State contracts require MCOs to 
establish procedures for excluding 340B claims from utilization data 
provided to States.47  However, the final rule did not specify what 
method(s) MCOs should use to do so. 
 
                        ____________________________________________________________ 
44 See 80 Fed. Reg. 52300, 52309 (August 28, 2015).  While HRSAs existing guidance 
on contract pharmacies and Medicaid does not distinguish between FFS drugs and MCO 
drugs, its proposed omnibus guidance addresses dispensing of 340B-purchased drugs to 
Medicaid FFS and/or MCO patients through contract pharmacies. 
45 81 Fed. Reg. 5170 (February 1, 2016). 
46 81 Fed. Reg. 27498 (May 6, 2016). 
47 See 42 C.F.R.  438.3(s)(3) at 81 Fed. Reg. 27498, 27857 (May 6, 2016).  This 
requirement does not apply to States that require submission of MCO claims data from 
covered entities directly. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  22   
   
APPENDIX C 
Detailed Methodology 
State surveys.  In November 2014, we surveyed all 51 States to identify 
States that paid for drugs under the MCO model.  We sent the surveys to 
State Medicaid pharmacy directors with instructions to delegate to other 
State staff as appropriate.48  We asked whether States paid for either 
pharmacy drugs or physician-administered drugs through MCOs from July 
1, 2013 to June 30, 2014, and whether they had invoiced and collected 
rebates for those drugs.  We received responses from all 51 States for a 
100-percent response rate.  Of the 51 States, 42 reported that they paid for 
all or some drugs through MCOs between July 1, 2013 and June 30, 2014, 
whereas 9 States reported that they did not pay for drugs through MCOs. 
We confirmed survey responses of the nine States that reported that they 
did not pay for drugs through MCOs using three CMS data sources.  We 
checked these data sources for any evidence suggesting that the States had 
paid for drugs through MCOs.  Specifically, we checked CMSs National 
Summary of State Medicaid Managed Care Programs report from 2012 for 
any listed plans with outpatient drug coverage.49  We also checked CMS-
64 expenditure data and Medicaid drug utilization data, which States send 
to CMS, for any dollar amounts associated with drugs paid through 
MCOs.  If we found any such evidence, we contacted the State to resolve 
the discrepancy and confirm that it did not pay for drugs through MCOs. 
We excluded 5 of the 42 States that paid for drugs through MCOs from 
our analysis.  These five States reported that they do not collect any MCO 
rebates; accordingly, they do not need methods for identifying 340B 
claims for MCO drugs.  Four of the five States reported that they paid for 
only a small volume of drugs through MCOs (e.g., for a small number of 
beneficiaries enrolled in Program of All Inclusive Care for the Elderly 
(PACE) plans).  These four States reported that they do not collect MCO 
rebates because it is not cost-effective to do so for such a small volume of 
drugs.  The fifth State reported that its only MCO was an integrated health 
system that is itself a covered entity.  Accordingly, the State considers all 
drugs paid through the MCO to be 340B-purchased and thus not subject to 
rebates. 
                        ____________________________________________________________ 
48 In many cases, States had their rebate vendorsi.e., private contractors that assist 
States in the process of compiling drug utilization data, invoicing manufacturers, and/or 
collecting rebate paymentsrespond to some or all survey questions.  Throughout this 
report, we attribute survey and interview responses from rebate vendors to the relevant 
State. 
49 This was the most current available version of the report. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  23   
   
State interviews.  In November and December 2014, we conducted 
structured interviews with staff from the remaining 37 States.  We asked 
States to describe their methods for identifying 340B claims to collect 
rebates correctly and prevent duplicate discounts for MCO drugs.  We also 
asked specifically about any differences in the States methods for 
pharmacy MCO drugs and physician-administered MCO drugs, as well as 
MCO drugs dispensed by contract pharmacies. 
State follow-up inquiries.  In April 2015, we sent follow-up email inquiries 
to 23 of the 24 States that reported using the MEF to identify 340B claims 
for MCO drugs.  We did so because HRSAs December 2014 notice 
clarified that the MEF was not intended for use in identifying 340B claims 
and preventing duplicate discounts for MCO drugs.  We did not send a 
follow-up email inquiry to the one additional State because we did not 
initially identify it as having reported use of the MEF for MCO drugs.  In 
the follow-up inquiries, we asked States whether they were still using the 
MEF in the same capacity for MCO drugs. 
Identification of potential vulnerabilities.  After completing the structured 
interviews and follow-up inquiries, we assessed the methods reported by 
States to identify any potential vulnerabilities.  Specifically, we assessed 
whether, and in what circumstances, the methods reported by States could 
allow duplicate discounts and/or forgone rebates to occur. 
   
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  24   
   
APPENDIX D 
State-Specific Methods to Identify 340B Claims and Prevent Duplicate Discounts 
for MCO Drugs 
State  Description of Methods Used for MCO Drugs 
Arizona  Provider-level:  self-developed list of covered entities 
Provider-level:  MEF 
California 
Claim-level:  340B indicators 
Delaware  Provider-level:  self-developed list of covered entities 
Florida  Provider-level:  MEF 
Georgia  Provider-level:  MEF; self-developed list of covered entities 
Hawaii  Claim-level:  spreadsheet 
Illinois  Claim-level:  340B indicators 
Indiana  Provider-level:  MEF 
Provider-level:  MEF 
Iowa 
Claim-level:  340B indicators 
Kansas  Provider-level:  MEF 
Kentucky  Provider-level:  MEF 
Louisiana  Provider-level:  MEF 
Provider-level:  self-developed list of covered entities (physician-administered drugs) 
Maryland 
Claim-level:  340B indicators (pharmacy drugs) 
Massachusetts  Claim-level:  340B indicators 
Provider-level:  MEF; self-developed list of covered entities 
Michigan 
Other:  list of specific drugs for certain types of covered entities 
Provider-level:  MEF 
Minnesota 
Claim-level:  340B indicators (exclusively for contract pharmacies) 
Mississippi  Provider-level:  MEF 
Nebraska  Provider-level:  self-developed list of covered entities 
Provider-level:  MEF 
Nevada 
Other:  delegation to MCOs 
New Hampshire  Other:  required use of non-340B-purchased drugs for Medicaid 
New Jersey  Provider-level:  MEF 
Provider-level:  MEF; self-developed list of covered entities 
New Mexico 
Claim-level:  340B indicators 
Provider-level:  MEF 
New York 
Claim-level:  340B indicators 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  25   
   
State-Specific Methods to Identify 340B Claims and Prevent Duplicate Discounts 
for MCO Drugs (Continued) 
State  Description of Methods Used for MCO Drugs 
Provider-level:  self-developed list of covered entities 
North Dakota 
Other:  required use of non-340B-purchased drugs for Medicaid 
Ohio  Provider-level:  MEF 
Provider-level:  MEF; self-developed list of covered entities 
Oregon 
Claim-level:  spreadsheet (exclusively for contract pharmacies) 
Pennsylvania  Provider-level:  MEF 
South Carolina  Provider-level:  MEF 
Tennessee  Provider-level:  MEF 
Provider-level:  MEF (physician-administered drugs) 
Texas 
Claim-level:  340B indicators (pharmacy drugs) 
Claim-level:  340B indicators (pharmacy drugs) 
Utah 
Other:  required use of non-340B-purchased drugs for Medicaid (physician-administered drugs) 
Provider-level:  MEF 
Virginia 
Claim-level:  340B indicators 
Washington  Provider-level:  MEF 
Provider-level:  self-developed list of covered entities (physician-administered drugs) 
West Virginia 
Claim-level:  340B indicators (pharmacy MCO drugs) 
Provider-level:  MEF 
Wisconsin 
Other:  delegation to MCOs 
 
Source:  OIG analysis of State interviews, 2015.  
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  26   
   
APPENDIX E 
Agency Comments 
   
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  27   
   
 
   
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  28   
   
 
   
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  29   
   
   
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  30   
   
ACKNOWLEDGMENTS 
This report was prepared under the direction of Thomas Komaniecki, 
Regional Inspector General for Evaluation and Inspections in the Chicago 
regional office, and Laura Kordish, Deputy Regional Inspector General.  
Adam Freeman and Kelly Waldhoff served as team leaders for this study.  
Central office staff who provided support include Althea Hosein, Meghan 
Kearns, and Joanne Legomsky. 
State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430)  31   
Office of Inspector General
http://oig.hhs.gov  
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95452, as  
amended, is  to protect the integrity of the Department of  Health and Human Services  
(HHS) programs, as  well  as the health  and welfare of individuals served by those programs.  
This statutory mission is carried  out through a nationwide network of audits, investigations,  
and inspections conducted by the following operating components: 
Office of Audit Services 
The Office  of  Audit Services  (OAS) provides auditing services  for HHS, either by  conducting  
audits  with its own audit resources or by  overseeing  audit work done by others.  Audits  
examine the performance of HHS programs and/or its grantees and contractors in carrying  
out their respective responsibilities and are intended  to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and  
mismanagement and promote economy and efficiency  throughout  HHS. 
Office of Evaluation and Inspections 
The Office  of  Evaluation and Inspections (OEI)  conducts national evaluations to  provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud,  waste, or abuse  and promoting  
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations  
of fraud and misconduct  related to HHS programs, operations, and individuals.  With  
investigators working in all 50 States and the District of Columbia, OI  utilizes its resources 
by actively  coordinating with the Department  of Justice  and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to  criminal 
convictions, administrative sanctions,  and/or  civil monetary  penalties.  
Office of Counsel to the Inspector General 
The Office of Counsel to the  Inspector  General (OCIG) provides general legal services to 
OIG, rendering  advice and opinions on HHS programs and operations and  providing all  
legal support for OIGs  internal operations.  OCIG represents  OIG in all civil and 
administrative fraud and  abuse cases involving HHS programs, including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In  connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program  guidance, publishes fraud alerts, and provides other  
guidance  to  the health care industry concerning the anti-kickback statute and other  OIG  
enforcement authorities.