Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
P B P
ART    AYMENTS FOR 
 
 
340B-P
  URCHASED 
 
  D  
RUGS 
 
Suzanne Murrin  
Deputy Inspector General for 
Evaluation and Inspections 
 
November 2015 
OEI-12-14-00030  EXECUTIVE SUMMARY:  PART B PAYMENTS FOR 340B-PURCHASED 
DRUGS 
OEI-12-14-00030 
 
WHY WE DID THIS STUDY 
 
Medicare Part B pays a set amount to health care providers who furnish drugs to its 
beneficiaries. Certain eligible health care providersgenerally, those that serve a 
disproportionate share of needy patientsare allowed to purchase drugs using the 340B 
Drug Discount Program, thereby receiving sizable statutory discounts.  Past Office of 
Inspector General (OIG) work found that Medicare payments to providers for 
340B-purchased drugs substantially exceeded the providers costs.  Under the design of 
the 340B Program and Part B payment rules, the difference between what Medicare pays 
and what it costs to acquire the drugs is fully retained by the participating covered 
entities, allowing them to stretch scarce Federal dollars in service to their communities.  
However, some policymakers have questioned whether a portion of the savings mandated 
through the 340B Program should be passed on to Medicare and its beneficiaries. 
 
HOW WE DID THIS STUDY  
 
We determined how much Part B spent on 340B-purchased drugs in 2013 by identifying 
paid Medicare claims from covered entities.  We compared 2013 Part B payment 
amounts to 340B ceiling prices at the individual drug level and the aggregate level.  We 
also analyzed the financial impact on covered entities, the Medicare program, and 
Medicare beneficiaries of three different shared-savings arrangements that would enable 
Medicare and its beneficiaries to share in the cost savings resulting from 340B discounts. 
 
WHAT WE FOUND 
 
Medicare Part B and its beneficiaries paid $3.5 billion for 340B-purchased drugs in 2013.  
In the aggregate, Part B payment amounts were 58 percent more than the statutorily 
based 340B ceiling prices that year, which allowed covered entities to retain 
approximately $1.3 billion.  The 340B statute does not restrict how covered entities may 
use these funds.  The three shared-savings arrangements described in this report would 
have resulted in Medicare Part B savings of $162 million to $1.1 billion in 2013 while 
still providing covered entities with incentives to purchase those drugs through the 
340B Program. 
 
WHAT WE CONCLUDE  
OIG has produced an extensive body of work examining the 340B Program from various 
angles. As stakeholders debate the nature of 340B discounts and whether statutory 
changes should be made to enable Medicare and/or Medicaid to share in these savings, 
this report presents an independent analysis to inform the ongoing discussion and to 
support congressional and Administration decisionmakers efforts in striking a balance 
among the needs of these vital programs.  
  TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 

Rationale ......................................................................................................1 

Background .................................................................................................2 

Methodology................................................................................................5 

Findings........................................................................................................8 

Medicare Part B and its beneficiaries spent $3.5 billion for 

340B-purchased drugs in 2013 ........................................................8 

In the aggregate, Medicare Part B payment amounts exceeded 

340B ceiling prices by 58 percent in 2013.......................................8 

Alternative payment methodologies could redistribute the financial 

benefits of the 340B program among covered entities, Medicare, 

and Medicare beneficiaries ............................................................10 

Conclusion .................................................................................................13 

Appendix....................................................................................................15 

A:  Calculation of AMP, URA, and 340B Ceiling Prices ..............15 

B: Medicare Part B Payments for Prescription Drugs ..................18 

C: Detailed Methodology..............................................................20 

Acknowledgments......................................................................................31
 
  OBJECTIVES 
1. 	  To estimate Medicare Part B expenditures for outpatient drugs 
purchased by covered entities in 2013. 
2. 	  To estimate the amount by which Medicare Part B payment amounts 
exceeded 340B ceiling prices in 2013. 
3. 	  To estimate the amount by which Medicare spending could have been 
reduced in 2013 if Part B had been able to share in the savings 
attributable to 340B discounts. 
RATIONALE 
The 340B Drug Discount program enables eligible health care providers 
generally, those that serve a disproportionate share of needy patients 
to purchase prescription drugs at statutorily discounted prices.  The 
program does not address what eligible providers may charge, and many 
payers (including Medicare and, in some cases, Medicaid) reimburse at 
amounts that are much higher than the acquisition costs of the drugs.1   
Congress intended for the savings from these discounted prices to enable 
covered entities to stretch scarce Federal resources as far as possible, 
reaching more eligible patients and providing more comprehensive 
services. 2  Current law or program guidance, however, does not specify 
exactly how covered entities are to use the savings. 
The increase in the number and types of participating entities since the 
inception of the 340B Program in 1992 has led some stakeholders to 
question whether the program has exceeded its original congressional 
intent, and has led others to suggest that affected Federal insurance 
programs (i.e., Medicare and Medicaid) and their beneficiaries should 
share in the benefits of the discounted prices.  In contrast, other 
stakeholders maintain that the program is in line with congressional intent, 
as it enables covered entities to use the savings achieved through 340B 
discounts to benefit vulnerable patient populations in ways that savings to 
Medicare or Medicaid would not. 
Proposals for restructuring the 340B Program have been a topic of 
significant debate. Various issues related to 340B have been studied by 
the Medicare Payment Advisory Commission, the Government 
Accountability Office (GAO), and the Office of Inspector General (OIG).  
This study builds on OIGs existing body of work by analyzing the 
____________________________________________________________ 
1 Drugs purchased  by 340B covered entities are hereinafter referred to as 340B-purchased 

drugs. 

2 H.R. Rep. No. 102-384(II), at 12  (1992)(Conf. Rep.).   

 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   1 
  financial intersection of the 340B program with Medicare Part B, 
including (1) costs to Part B for 340B-purchased drugs, (2) the amount by 
which Part B payment amounts exceed 340B prices, and (3) the shared 
savings that 340B covered entities, Part B, and Medicare beneficiaries 
would receive under three payment scenarios.  As stakeholders debate the 
nature of 340B discounts and whether statutory changes should be made to 
enable Medicare and/or Medicaid to share in these savings, this report 
presents an independent analysis to inform the ongoing discussion and to 
support congressional and Administration decisionmakers efforts in 
striking a balance among the needs of these vital programs.  
BACKGROUND 
                     The 340B Drug Discount Program 
The Veterans Health Care Act of 1992 established the 340B Program in 
section 340B of the Public Health Service (PHS) Act.  To have their drugs 
covered by Medicaid, manufacturers must agree to sell covered outpatient 
drugs at or below statutorily defined discount prices (340B ceiling prices) 
to covered entities.3  Covered entities include disproportionate share 
hospitals (DSHs)4, family planning clinics, federally qualified health 
centers, and hemophilia treatment centers, among others.5 In 2013, 
11,250 entities were enrolled in the 340B Program.6  
Overall financial margins for 340B DSHs tend to be lower than those for 
other hospitals, which may be attributable in part to the tendency for such 
hospitals to provide more uncompensated and charity care.7 HRSA  
estimates that covered entities saved $3.8 billion in fiscal year (FY) 2013 
____________________________________________________________ 
3  Pursuant  to 42  U.S.C.  256b(a)(1).  

4 A disproportionate share hospital is a hospital with a disproportionately large share of  

low-income patients.  Centers for Medicare & Medicaid Services (CMS), Medicare 
 
Disproportionate Share Hospital, ICN 006741, August  2014. 

5 42  U.S.C.   256b(a)(4).  Section 7101  of the Patient Protection and Affordable Care Act 
 
(ACA) added five new eligible entity types:  certain childrens hospitals, certain 
 
freestanding cancer hospitals, critical access hospitals (CAHs), rural referral centers, and 

sole community hospitals.  

6 HRSA, Covered Entity Database. Accessed at https://opanet.hrsa.gov/opa/ 

CESearch.aspx on  April 3, 2014.  Covered entities may have multiple sites for health care 

delivery.  When taking into account every location, 25,039 covered entity sites were 

enrolled in the  340B Program in 2013. 

7 GAO,  Action Needed to Reduce Financial Incentives to Prescribe 340B  Drugs at 

Participating Hospitals, June 2015, p. 11.  

 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   2 
  because of the discounts provided under the 340B Program.8   The 340B 
statute does not restrict how covered entities use these funds.   
Calculation of 340B Ceiling Prices 
HRSA calculates 340B ceiling prices each quarter.  The 340B ceiling price 
formula is based on pricing data submitted by drug manufacturers for each  
of their national drug codes (NDCs).  The 340B ceiling price is equal to 
the average manufacturer price (AMP) minus the Medicaid unit rebate 
amount (URA).9  See Appendix A for a detailed explanation of how AMPs, 
URAs, and 340B ceiling prices are calculated.   
Covered entities that participate in the Prime Vendor Program often pay 
manufacturers less than 340B ceiling prices for drugs.10  The Prime Vendor 
Program is responsible for negotiating drug prices below the 340B ceiling 
price and contracting for the distribution of 340B-purchased drugs to 
covered entities. In 2013, the Prime Vendor Program had more than 
7,000 drugs under contract, with an average discount of 10 percent below 
the 340B ceiling price.11    
Medicare Part B Payments for Prescription Drugs 
Medicare covers a limited number of outpatient drugs under its Part B 
benefit, including injectable drugs used in the treatment of cancer, certain 
vaccines, and inhalation drugs used with durable medical equipment 
(DME).12  Medicare beneficiaries can receive Part B drugs through 
hospital outpatient departments, physicians offices, and DME suppliers.  
In 2013, Medicare paid for most Part B drugs at 106 percent of the 
____________________________________________________________ 
8 U.S. Department of  Health and Human Services, HRSA  FY2015 Budget Justification,  
p. 342. 
9  42 U.S.C.  256b(a)(1-2).  Occasionally, a drugs URA is equal to its AMP, resulting in  
a 340B ceiling price of $0.   In these instances, HRSA has advised manufacturers to  
charge covered entities $0.01 per unit.  See HRSA, Clarification of  Penny Pricing Policy, 

November 21, 2011.  
   
10 Participation in the Prime Vendor Program is voluntary and  free.   

11 U.S. Department of  Health and Human Services, HRSA  FY2015 Budget Justification.  
  
12 42 CFR   414.900(b) and Medicare Benefit Policy Manual, ch. 15  50.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   3 
  volume-weighted average sales prices (ASPs).13, 14 Medicare beneficiaries 
are responsible for 20 percent of Part B payments in coinsurance.  See 
Appendix B for a detailed description of Part B payment methodologies 
for drugs in various settings. 
Part B pays for most outpatient drugs on the basis of ASPs, regardless of 
the amount that the provider paid to purchase the drug from the 
manufacturer (i.e., regardless of whether the drug was purchased at the 
340B discount price).15  As a result, Part B providers can retain the 
difference between the ASP-based payment amount and the drugs 
acquisition cost.  Because acquisition  costs for 340B-purchased drugs are 
usually substantially less than acquisition costs for drugs purchased 
through other channels (i.e., for non-340B drugs), providers are able to 
achieve a much larger spreadi.e., payment differentialon 
340B-purchased drugs than for non-340B drugs.  Medicare Part B does 
not share in any of the 340B discounts, and beneficiary coinsurance 
amounts are not reduced to reflect the discounted 340B prices.  Instead, 
covered entities retain the entire difference between Part B payment 
amounts and the 340B prices. 
In 2013, Medicare and its beneficiaries spent a total of $22.2 billion for 
Part B drugs$7.7 billion in the hospital outpatient setting, $12.8 billion  
in the physician-office setting, and $1.7 billion in the DME setting.   
____________________________________________________________ 
13 77 Fed. Reg. 68210, 68216  (Nov. 15, 2012) and section  1847A  of the Act.  Part B 
claims dated on  or after April 1, 2013, incur a 2-percent reduction in  payment in  
accordance with the Budget Control Act of 2011 and the American Taxpayer Relief Act 
of 2012 (i.e., sequestration).   This mandatory payment reduction is applied after the 
beneficiarys coinsurance has been  determined, resulting in a payment rate for most  
Part B drugs of 104.3 percent of the volume-weighted  ASP.  See http://www.cms.gov/  
outreach-and-education/outreach/ffsprovpartprog/downloads/2013-03-08-standalone.pdf.  
14 CAHs; certain hospitals in Maryland;  hospitals located  outside one of the 50 States, the 
District of Columbia, and Puerto Rico; and hospitals of the Indian  Health  Service are not  
paid  on the basis of ASPs.  They are excluded  from the hospital outpatient prospective 
payment system (OPPS) and are paid at cost.  42 CFR  419.20(b).  Furthermore, several 
Part B drugsincluding certain vaccines, blood products, and drugs infused through 
DME (which  we refer to as DME infusion  drugs)are paid for on the basis of average 
wholesale prices (AWPs) and not on the basis of  ASPs.  Sections  1847A(a)(1) and 
1842(o)(1) of  the Act.  See also Medicare Claims Processing Manual, ch. 17  20.1.3.  
15 As previously mentioned, Medicare beneficiaries can receive Part B drugs through 
hospital outpatient departments, physicians  offices, and DME suppliers.  Most  
340B-purchased drugs are provided  in  hospitals.  However, drugs provided  by physicians  
and DME suppliers associated with these hospital covered entities may sometimes be  
purchased at 340B prices.  Beneficiaries can also receive Part B drugs through 
nonhospital covered entities, such as comprehensive hemophilia treatment centers and 
grantees that receive funding through the Ryan White  HIV/AIDS Program.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   4 
  Medicaid Shared-Savings Payment Methodologies  
All State Medicaid agencies offer outpatient prescription drug coverage 
and reimburse providers for covered outpatient drugs dispensed to 
Medicaid patients.  For Federal financial participation to be available for 
covered outpatient drugs provided under Medicaid, manufacturers must 
enter rebate agreements with the Secretary of Health and Human Services  
and pay quarterly rebates for these drugs to State Medicaid agencies.16   
Covered entities must choose whether to dispense 340B-purchased drugs 
to Medicaid patients. Covered entities that choose to dispense 
340B-purchased drugs to Medicaid patients are said to carve in (or 
include) those patients and are described as carve-in covered entities, 
whereas covered entities that choose not to dispense 340B-purchased 
drugs to Medicaid patients are said to carve out those patients and are 
described as carve-out covered entities.17 If a covered entity chooses the 
carve in approach, State Medicaid agencies would not have access to 
rebates for 340B-purchased drugs provided to Medicaid patients because 
duplicate discounts are prohibited by law.18  
The rates at which States reimburse 340B-purchased drug claims  
determine whether the full 340B discount is retained by the covered entity,  
passed through to Medicaid, or shared among both parties.  OIG has  found 
that approximately half of States have written policies that direct covered 
entities to bill Medicaid at cost for 340B-purchased drugs.19 In these 
cases, the State Medicaid agencies receive the full 340B discount and the 
covered entities do not benefit from the price spreads.  However, some of 
these States provide a higher per-prescription dispensing fee for 
340B-purchased drugs as an incentive for covered entities to dispense 
340B-purchased drugs to Medicaid patients.  
METHODOLOGY 
Data Analysis  
Estimating Part B Expenditures for 340B-Purchased Drugs. We identified 
472 drug Healthcare Common Procedure Coding System (HCPCS) codes 
____________________________________________________________ 
16 Sections 1927(a)(1) and (b)(1) of the Act. 
17 See, e.g., 340B &  Medicaid. Accessed at https://docs.340bpvp.com/documents/public/ 

resourcecenter/340B_Medicaid.pdf on  August 21, 2015.  

18 42  U.S.C.   256b(a)(5)(A).  A duplicate discount situation would arise if  a State 

Medicaid agency sought Medicaid rebates for drugs sold at  340B  discounted prices. 
  
Most State Medicaid agencies use HRSAs  Medicaid Exclusion Filewhich lists
  
carve-in covered entitiesto  identify and exclude  from rebate invoices the claims for 

340B-purchased  drugs submitted by these covered entities. 

19 OIG,  State Medicaid Policies and Oversight Activities Related to  340B-Purchased 
Drugs, OEI-05-09-00321, June 2011. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   5 
  (1) that were billed in the hospital outpatient, physician-office, and/or 
DME settings in 2013 and (2) for which we could determine 340B ceiling 
prices.20  These 472 HCPCS codes accounted for 86 percent ($19 billion) 
of Part B drug expenditures in 2013.  We obtained Part B claims  
associated with covered entities for the 472 HCPCS codes in 2013.21  We  
then removed claims submitted by carve-out covered entities for 
dual-eligible beneficiaries (beneficiaries enrolled in both Medicare and 
Medicaid) because by electing to carve out, the entities should not have 
used 340B-purchased drugs for these patients.  We determined how much 
Medicare paid for 340B-purchased drugs by summing payments listed on 
the remaining claims.    
Comparing 340B Ceiling Prices to Part B Payment Amounts. For each  
HCPCS code representing a drug purchased by a covered entity, we 
compared the quarterly 340B ceiling price to its Part B payment amount.  
We then estimated an overall aggregate difference between 340B ceiling 
prices and Medicare payment amounts among all HCPCS codes.  
We also calculated the per-beneficiary difference between 2013 drug 
acquisition costs and Medicare payment amounts among covered and 
noncovered entities for five selected high-expenditure cancer drugs.    
Calculating Potential Spending Reductions. To estimate the distribution 
of savings under various possible scenarios, we developed three 
ASP-based payment options that would allow Medicare to share in 
varying proportions of the 340B discount while still providing covered 
entities with incentives to carve in Medicare patients.  These payment 
scenarios would pay for 340B-purchased drugs as follows: (1) by 
volume-weighted ASP (i.e., 100 percent of ASP), (2) by volume-weighted 
ASP reduced by a percentage that would enable Medicare and covered 
entities to equally share in 340B discounts, and (3) by the 340B ceiling 
price plus 6 percent of volume-weighted ASP.  We estimated how much 
Medicare and beneficiary spending would have been reduced in 2013 
under each of these shared-savings payment scenarios.  
See Appendix C for a detailed description of our sources and analysis. 
Limitations 
To calculate valid estimates despite certain data limitations (for example, 
lack of a 340B identifier on Part B claims), we made assumptions and 
____________________________________________________________ 
20 Providers submit claims for Part B  drugs using HCPCS codes.  Each  HCPCS code  
defines the drugs name and the amount  of the drug represented by  one unit of the  
HCPCS code  but does not specify manufacturer or package size information. 
21 Because there  is no identifier on Part B claims indicating that a drug was purchased 
through the 340B Program, we could not confirm that claims submitted by  covered 
entities were in fact for drugs purchased at or below the 340B discount price. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   6 
  analytic decisions that may have resulted in over- or underestimates of 
provider acquisition costs, Part B expenditures for 340B-purchased drugs, 
and Medicare spending reductions under shared-savings methodologies.  
This report examines only the changes in expenditures that would result 
under three different payment scenarios.  It does not examine the impact 
these changes would have on covered entities ability to provide services 
to their communities.  See Appendix C for a detailed description of these 
limitations.  
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.   
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   7 
  FINDINGS 
Medicare Part B and its beneficiaries spent $3.5 billion 
for 340B-purchased drugs in 2013 
Medicare spent $3.5 billion on discounted drugs purchased by covered 
entities in 2013, representing nearly one-fifth of the $19 billion that Part B  
spent that year on the HCPCS codes included in our review.22, 23 As 
Table 1 shows, 340B expenditures were concentrated among hospital 
outpatient settings rather than associated physicians offices and DME 
suppliers. In total, payments for 340B-purchased drugs accounted for 
almost half ($3.2 billion) of Part B hospital outpatient drug expenditures.    
Table 1: 340B and Non-340B Part B Drug Expenditures by Setting  
340B 
340B  Non-340B 
Setting   Total   Expenditures 
Expenditures   Expenditures  
Share of Total  
Hospital 
 $3,160,272,265    $3,414,983,101   $6,575,255,366   48%  
Outpatient 
DME  $54,969,170    $1,586,415,434   $1,641,384,603   3%  
Physician Office   $264,576,235    $10,561,603,279   $10,826,179,514    2%  
Total   $3,479,817,670    $15,563,001,813   $19,042,819,483    18%  
Source:  OIG analysis of HRSAs covered entities database and 2013 hospital outpatient, DME, and physician-office claims 

from the National Claims History (NCH) file. 

Notes:  All  figures include both Medicare and beneficiary portions of expenditures for  the HCPCS codes included in our review.  

Hospital outpatient  figures  include only spending under OPPS. 

In the aggregate, Medicare Part B payment amounts 
exceeded 340B ceiling prices by 58 percent in 2013 
The 340B ceiling prices represent the maximum amount that 
a manufacturer should charge covered entities for a drug.  Assuming 
covered entities paid the 340B ceiling prices for the drugs under review, 
we estimate that in 2013, covered entities spent $2.2 billion to acquire 
Part B drugs and were reimbursed $3.5 billion for these purchases by 
Medicare. In other words, Part B paid covered entities a total of  
$1.3 billion (58 percent) more than the cost of the drugs.   
   
____________________________________________________________ 
22 Payments for 340B-purchased  drugs (i.e., payments to covered entities) will hereinafter 
be referred to as 340B expenditures. 
 
23 Part B  340B and non-340B expenditure figures exclude hospitals that are  paid at cost 
 
rather  than under OPPS  (e.g., CAHs, hospitals of the Indian Health  Service).  The 

340B expenditures associated with these types of entities totaled $329 million.  

 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   8 
  Overall, 398 of the 420 HCPCS codes with 340B expenditures had 
payment amounts that exceeded 340B ceiling prices in 2013 (see 
Table 2).24, 25  Of these 398 HCPCS codes, payment amounts for 149 codes 
exceeded 340B ceiling prices by between 25 percent and 49 percent, and  
payment amounts for 95 of the 398 HCPCS codes were more than double 
the 340B ceiling prices.    
 
For 35 HCPCS codes, the difference between the Part B payment amount 
and the 340B ceiling price was so large that, in at least one quarter of 
2013, the beneficiarys coinsurance alone (i.e., 20 percent) was greater 
than the amount a covered entity spent to acquire the drug.26  For example, 
covered entities spent $737 per treatment in the first quarter of 2013 to 
acquire a drug that is used to treat bladder cancer; however, beneficiaries 
owed approximately $831 per treatmenti.e., 13 percent more than the 
drug costthrough coinsurance paid to the covered entity.  Meanwhile, in 
addition to receiving this coinsurance, the covered entities also received 
$3,325 per treatment in reimbursement from Medicare. 
Table 2: Median Differences between Part B Payment Amounts and 340B 
Ceiling Prices for HCPCS Codes with 340B Expenditures in 2013  
Relation of Payment Amounts 
Percentage Difference   Number of HCPCS Codes  
to 340B Ceiling Prices 
Payment amounts less than 
Total  22 
340B ceiling prices 
Less than 25%   79 
2549%  149 
5079%  53 
Payment amounts greater than 
340B ceiling prices 
80100%  22 
More than 100%   95 
Total  398 
Grand Total   420 
 Source:  OIG analysis of 340B ceiling  prices and Part  B payment amounts. 
____________________________________________________________ 
24 Of the 472  HCPCS codes under review, 52  did not have 340B expenditures in  2013.  
25 Of the 22  HCPCS codes with  payment amounts that were less than  340B ceiling prices, 
14 had payment amounts that were below 340B ceiling prices by 25 percent or less.  
Because we did not collect actual acquisition costs for 340B-purchased drugs, we could 
not  determine whether covered entities were actually reimbursed less than  their costs for 
these 22 drugs, or whether they instead  paid less than the 340B ceiling price through the 
Prime Vendor  Program or other non-340B distribution channels.  
26 In some instances, certain covered entities may waive all or part of the beneficiarys 
coinsurance (Medicare Benefit Policy Manual, ch. 13  80.1).  We  did not confirm  
whether beneficiaries in fact paid the Part  B coinsurance for 340B-purchased drugs.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   9 
  Covered entities retained thousands more per beneficiary than 
noncovered entities for five high-expenditure cancer drugs in 
2013 
Because covered entities acquired most Part B drugs from manufacturers 
at lower prices than did other providers, they were able to retain a greater  
spread between Part B payment amounts and acquisition costs than 
noncovered entities. For example, providers not enrolled in the 
340B Program retained less than $1,000 per beneficiary treated with one 
of five high-expenditure cancer drugs in 2013.  That same year, covered 
entities retained between $5,749 and $13,336 per beneficiary for the same  
drugs because they were able to acquire the drugs using 340B discounts 
(see Table 3).   
Table 3: Acquisition Costs and Payment Differentials Per Beneficiary for Five High-Expenditure  
Cancer Drugs in 2013  
Noncovered Entities   Covered Entities  
Cancer  Spread Between 
2013 Part B  2013 Acquisition  Spread Between  2013 Part B  2013 Acquisition 
Drug   Payment and 
Payment Per  Cost Per  Payment and  Payment Per  Cost per 
Acquisition Cost  
Beneficiary   Beneficiary   Acquisition Cost   Beneficiary   Beneficiary  
1  $21,671  $20,895   $776  $20,517   $14,768   $5,749  
2  $22,767  $21,865   $902  $18,506   $9,268   $9,238  
3  $23,900  $23,046   $854  $22,573   $13,411   $9,162  
4  $21,662  $20,898   $764  $20,044   $8,914  $11,130  
5  $28,653  $27,694   $959  $27,207   $13,871  $13,336  
Source: OIG analysis of 2013 340B ceiling prices, Part B payment amounts, and NCH claims from the hospital outpatient, DME, and physician-office settings. 
Note:  The term noncovered entities refers  to providers not enrolled in the 340B Program.  
Alternative payment methodologies could redistribute 
the financial benefits of the 340B program among 
covered entities, Medicare, and Medicare beneficiaries 
Medicare and its beneficiaries paid covered entities $3.5 billion 
($1.3 billion more than acquisition cost) for Part B drugs in 2013.  
Currently, Medicare and its beneficiaries do not share in the savings 
resulting from the 340B Program; covered entities retain the entire 
discount. In response to ongoing policy-level discussions regarding the 
intersection of 340B and other government programs, we developed three 
shared-savings scenarios that demonstrate the financial impact on covered 
entities, Medicare, and Medicare beneficiaries if policymakers were to 
decide to implement low, medium, or  high levels of Medicare participation 
in 340B cost savings. Under these three scenarios, total Part B drug 
expenditures for Medicare and its beneficiaries could have been reduced 
by $162 million to $1.1 billion while allowing covered entities to retain 
from $211 million to $1.1 billion (see Table 4).  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   10 
  Payment scenario 1: 100 percent of ASP 
Most Part B drugs are paid for at 106 percent of ASP.   A cited reason for 
the 6 percent add-on above ASP is to ensure that providers are 
adequately reimbursed for drug costs.27 If the current 6 percent add-on to 
ASP for 340B-purchased drugs were removed and Part B payments were 
instead set at ASP, Medicare expenditures would have been reduced by 
$162 million (5 percent) in 2013; $32 million of this total reduction would 
have been realized by beneficiaries in the form of reduced coinsurance.28   
Under this scenario, covered entities would have still retained $1.1 billion 
in the spread between acquisition costs and Part B payments.   
Payment scenario 2: Equally shared savings 
Paying for 340B-purchased drugs at ASP minus 14.4 percent would have 
allowed Medicare and covered entities to have equally shared the 
340B discount in 2013. In other words, the savings attributable to the 
340B prices would have been split evenly between covered entities and 
Medicare (and its beneficiaries). If Part B had reimbursed covered entities 
at ASP minus 14.4 percent in 2013, Medicare expenditures would have 
been reduced by $638 million (18 percent) while covered entities would 
have retained $638 million in the spread between drug acquisition costs 
and Part B payments.  Of the $638 million in total reduced spending, 
$128 million would have been realized by beneficiaries in the form of 
reduced coinsurance.  
Payment scenario 3:  340B ceiling price plus 6 percent of ASP  
Under a methodology whereby 340B-purchased drugs would be paid for 
at the 340B ceiling price plus 6 percent of ASP, covered entities would 
receive approximately the same spread as they would receive on drugs not 
purchased at 340B prices (i.e., purchased outside of the 340B Program).  
The add-on above the ceiling price would be intended to ensure that 
covered entities are adequately reimbursed for drug costs and that there is  
not a disincentive for covered entities to provide 340B-purchased drugs to 
Medicare beneficiaries. Reimbursing covered entities at ceiling price plus 
6 percent of ASP would have reduced Medicare expenditures by 
$1.1 billion (31 percent) in 2013; $213 million of this total reduction 
would have been realized by beneficiaries in the form of reduced 
____________________________________________________________ 
27 U.S. Department of  Health and Human Services, Medicare Part B Reimbursement of 
Prescription Drugs, June 2014.  
28 In most cases, Part B expenditures for a drug divided by the number of  units  
reimbursed did not exactly equal the payment amount  (i.e.,  106 percent  of  ASP) in a 
given quarter.   Therefore, potential expenditures under a 100 percent of  ASP payment  
scenario  would not have been  reduced by exactly 6 percent.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   11 
  coinsurance.  Covered entities would have retained $211 million in the 
spread between acquisition costs and Part B payments.   
Table 4: Potential 2013 Part B Expenditures Under Shared-Savings Payment Scenarios  
Reduction in  Percentage   
Expenditures for  Expenditures   Reduction in  Beneficiaries  Amount  
Payment Scenario   340B-Purchased  (Vs. Current  Expenditures for  Share of  Retained by  
Drugs   Payment  340B-Purchased  Reduction   Covered Entities  
Methodology)   Drugs  
Current Payment  
(For Most Drugs,  $3,479,817,670  --  -- --  $1,276,799,208 
106 Percent of  ASP)  
100 Percent of  ASP   $3,317,914,493  $161,903,177  5%   $32,380,635   $1,114,896,031  
Equal Sharing (ASP  
$2,841,421,124  $638,396,546  18%  $127,679,309  $638,402,662  
Minus 14.4 Percent) 
340B Ceiling Price 
Plus 6 Percent of  $2,414,247,516   $1,065,570,154  31%  $213,114,031  $211,229,054  
ASP 
Source:  OIG analysis of 2013 340B ceiling prices, Part B payment amounts, and NCH claims  from the hospital outpatient, DME, and 
physician-office settings. 
   
 
   
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   12 
  CONCLUSION 
Congress created the 340B Program to assist providers serving vulnerable 
patient populations by allowing them  to purchase outpatient drugs at 
discounted prices. Our findings illustrate the financial benefits that these 
discounts provide for participating entities.  In 2013, covered entities 
retained $1.3 billion in Part B payments because of the spread between 
Medicare payment amounts and 340B ceiling prices.  The 340B statute 
does not restrict how covered entities may use these funds.   
Proposals for restructuring the 340B Program have been a topic of 
significant debate, including the issue of whether Federal insurance 
programs and their beneficiaries should share in the benefits of the 
discounted prices. We examined a number of potential payment scenarios 
that show how Medicare and its beneficiaries, who together spent 
$3.5 billion on 340B-purchased drugs in 2013, could share in 
340B discountssomething that is not possible under the current design 
of the 340B Program and Part B payment rules.  The payment scenarios 
explored in this report would have reduced Medicare expenditures for 
Part B drugs between $162 million to $1.1 billion in 2013 while still 
allowing covered entities to retain between $211 million and $1.1 billion 
in 340B discounts. It is important to note that our analysis was entirely 
financial. We did not examine the effect these changes would have on 
covered entities ability to serve their communities. 
OIG has produced an extensive body of work examining the 
340B Program from various angles.  As stakeholders debate the nature of 
340B discounts and whether changes should be made to enable Medicare 
and/or Medicaid to share in these savings, this report presents an 
independent analysis to inform  the ongoing discussion and to support 
congressional and Administration decisionmakers efforts in striking a 
balance among the needs of these vital programs.  
In implementing any changes, it would be essential for any payment 
methodology to provide enough financial incentives to ensure that covered 
entities continue to purchase Part B drugs through the 340B Program.  
Without such incentives, it may be more financially advantageous for 
covered entities to dispense non-340B drugs to Medicare patients, 
depriving both the entities and Medicare of the benefits of the 
340B Program. 
Furthermore, it is also necessary that any payment methodology 
specifically for 340B-purchased drugs addresses issues in identifying these 
drugs on Part B claims.  Currently, there are no identifiers used on Part B 
claims that would allow Medicare to identify when a 340B-purchased drug 
was provided to a beneficiary.  Because drugs purchased at 340B prices 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   13 
  are challenging to identify on Medicare claims, CMS may risk incorrectly 
including or excluding these drugs from a shared-savings payment 
methodology.       
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   14 
  APPENDIX A 
Calculation of AMP, URA, and 340B Ceiling Prices  
Under their Medicaid drug rebate agreements and pursuant to section 
1927(b)(3) of the Act, manufacturers must provide CMS with the AMP for 
each of their NDCs on a monthly and quarterly basis.29,  30  Effective 
October 2010, ACA revised the definition of AMP to be the average 
price paid to the manufacturer for the drug in the United States by 
(1) wholesalers for drugs distributed to retail community pharmacies and 
(2) retail community pharmacies that  purchase drugs directly from the 
manufacturer. 
In the Medicaid drug rebate program, drugs are generally categorized as 
one of three types: single-source, innovator multiple-source, or 
noninnovator multiple-source.  In general terms, a single-source drug 
would typically be a brand-name  product with no available generic 
versions. An innovator multiple-source drug would typically be a 
brand-name product that has available generic versions.  A noninnovator 
multiple-source drug would typically be a generic version of any innovator 
product. Manufacturers provide CMS with the drug category for each of 
their NDCs in conjunction with AMP data. 
Manufacturers of single-source and innovator multiple-source drugs must 
also provide CMS with the best price for each NDC.31  Best price is 
defined in section 1927(c)(1)(C) of the Act as the lowest price available 
from the manufacturer during the rebate period to any wholesaler, retailer,  
provider, health maintenance organization, nonprofit entity, or 
governmental entity within the United States, with certain exceptions.  
Manufacturers of noninnovator multiple-source drugs are not required to 
provide best prices for those NDCs. 
For rebate purposes, manufacturers must provide AMP and best-price data 
to CMS within 30 days of the end of each quarter.32 CMS uses this 
information to calculate a URA every quarter for each NDC included in 
the Medicaid drug rebate program.  Pursuant to section 1927(c) of the Act, 
the formula used to calculate the URA depends on the drug category 
____________________________________________________________ 
29 For Federal financial participation to  be available for covered outpatient drugs 

provided  under Medicaid, manufacturers must enter into rebate agreements with the 

Secretary of Health and Human Services and pay quarterly rebates to  State Medicaid 

agencies.  Sections 1927(a)(1) and (b)(1)  of  the Act. 

30 Section 1927(b)(3)  of the Act.  See also  42  CFR   447.510. 

31 Section 1927(b)(3)(A)(i)(II) of the Act. 

32 42 CFR   447.510(a). 

 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   15 
  reported by the manufacturer.  The basic URA for a noninnovator 
multiple-source drug is 13 percent of the AMP.   The basic URA for a 
single-source or innovator multiple-source drug is the greater of 
23.1 percent of the AMP or the difference between the AMP and best 
price.33  In addition, for drugs approved exclusively for pediatric 
indications and certain blood-clotting  factors, the basic rebate is the 
greater of 17.1 percent of AMP or the difference between the AMP and the 
best price. If the AMP for a brand-name drug has risen faster than 
inflation, the drugs manufacturer must pay an additional rebate over and  
above the basic URA.34  
The AMP and URA used in the 340B ceiling price formula are based on 
the lowest identifiable amount of each drug, such as a tablet, capsule, or  
milliliter.35   Therefore, the 340B ceiling price applies to each unit of the 
drug that the covered entity purchasesfor example, $1 per pill.  To  
implement the 340B requirements in practice, the per-unit 340B ceiling 
price must be multiplied by the drug package size at which covered 
entities purchase drugsfor example, a bottle of 100 tablets.   
HRSA calculates 340B ceiling prices each quarter.   However, because of 
confidentiality provisions related to pricing data, the agency does not 
share 340B ceiling prices with covered entities; effectively, the covered 
entities must rely on manufacturers to charge the appropriate amount for 
eligible drug purchases.36, 37  If a manufacturer fails to sell eligible drugs to 
covered entities at or below the 340B ceiling price, it may be required to 
____________________________________________________________ 
33 Section 1927(c)  of the Act. 
34 Section 1927(c)(2) of the Act.  To  determine whether a brand-name drug is subject to  
the increased rebate amount,  CMS compares the reported AMP for a given quarter to its 
inflation-adjusted  baseline AMP.  The baseline AMP for a drug is the AMP for the first 
quarter after the drugs initial market date.  To adjust the baseline AMP for inflation,  
CMS first  divides the baseline AMP by the baseline consumer price index for all urban  
consumers (consumer price index), which is the consumer price index for the first month 
prior to the first quarter after the drugs initial market date.  The result of that calculation  
is then multiplied  by the quarterly consumer price index, which is the consumer price 
index for the month prior to the quarter being  calculated.  If the reported AMP is greater 
than the inflation-adjusted baseline AMP, then the difference is added to the URA. 
35  Sample Medicaid  Drug Rebate Agreement, Section I, accessed at 
http://www.medicaid.gov/medicaid-chip-program-information/by-
topics/benefits/prescription-drugs/downloads/samplerebateagreement.pdf on  
March  6, 2014.  See 77 Fed Reg.  5318, 5328 (Feb. 2, 2012).  
36 Section 1927(b)(3)(D) of the Act.  
37 In May 2015, HRSA announced that covered entities will have access to  a new 
340B  pricing system that would allow them to  view 340B ceiling prices.   See 
http://www.hrsa.gov/opa/updates/2015/may.html. At the time of our review, this system  
had not  been implemented.   
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   16 
  reimburse for discounts withheld and can be terminated from both the 
340B Program and the Medicaid drug rebate program.38 
   
 ____________________________________________________________ 
38 42  U.S.C.   256b(d)(1)(B)(ii); Section  1927(b)(4)(B) of the Act.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   17 
  APPENDIX B 
Medicare Part B Payments for Prescription Drugs 
Medicare beneficiaries can receive Part B drugs through hospital 
outpatient departments, physicians offices, and DME suppliers.   
Payments in the hospital outpatient setting. Medicare pays most hospital 
outpatient departments for Part B drugs on the basis of ASPs, but only 
when the drugs are considered separately payable.39, 40   A drug is 
separately payable when (1) its estimated per-drug, per-day costs are 
greater than $80 (for 2013), or (2) it has been granted pass-through 
status by CMS, regardless of whether the cost exceeds the $80-per-day 
packaging threshold.41, 42, 43   In contrast, packaged drugs are inexpensive 
Part B drugs that do not exceed the packaging threshold and are also not 
pass-through drugs.  CMS does not make separate payments for packaged 
drugs; it includes payment for these drugs as part of the payment for the 
treatment during which the drugs are administered.44  
The Act does not define a set payment methodology (e.g., 106 percent of 
ASP) for certain separately payable drugs administered in a hospital 
outpatient setting. Rather, through the rulemaking process, CMS annually 
updates the ASP-based payment methodology for separately payable drugs 
that are not pass-through drugs, and publishes a quarterly file on its Web 
site listing payment amounts for these drugs.  For 2013, CMS set the 
Medicare payment amount for non-pass-through separately payable drugs 
____________________________________________________________ 
39 CAHs; certain hospitals in Maryland;  hospitals located  outside one of the 50 States, the 

District of Columbia, and Puerto Rico; and hospitals of the Indian  Health  Service are not  

paid on the basis of ASPs.  They are excluded  from OPPS and are paid at cost. 42 CFR 
 
 419.20(b).
  
40  Medicare Claims Processing Manual, ch. 4   10.3. 
 
41 77 Fed. Reg. 68210, 68377  (Nov. 15, 2012).   

42 Section 1833(t)(6)(A) of the Act provides for temporary additional payments, or  

transitional pass-through payments, for certain drugs, including new drugs and 
 
orphan drugs.  Section  1833(t)(6)(A)(i)  of the Act defines orphan drugs as drugs that 

are used for a rare disease or condition with respect to which the drug has been 

designated as an  orphan drug  under section  526 of the Federal Food, Drug, and Cosmetic 

Act. 

43 The packaging threshold refers to the packaging of  payment for dependent, 
 
ancillary, supportive, and adjunctive items and services into the payment for the primary 
 
independent service.  In  2013, drugs with a per-day cost of less than  or equal to $80  were  

packaged  under the service  with  which the drug was administered. 

44 CMS, Hospital Outpatient Prospective Payment System, December 2014. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   18 
  at 106 percent of the volume-weighted ASP.45   The payment method for 
pass-through drugs was equal to 106 percent of ASP in 2013.46 Medicare 
beneficiaries are responsible for 20 percent of Medicare payments in 
coinsurance.    
Payments in the physician-office and DME supplier settings. Medicare 
also pays physicians and DME suppliers for most Part B covered drugs 
using a methodology based on ASPs.47  Payment amounts for most Part B 
drugs are statutorily set at 106 percent of the volume-weighted ASPs.  
Each quarter, CMS publishes on its Web site a payment-amount file that 
includes payment amounts for drugs that could be billed in the 
physician-office and/or DME setting.  Likewise, DME Medicare 
Administrative Contractors (MACs) also publish each quarter on their 
Web sites payment-amount files for drugs that could be billed in the DME  
setting.   
 
 
 
____________________________________________________________ 
45 77 Fed. Reg. 68216  (Nov. 15, 2012).  Part B  claims dated on  or after April 1, 2013, 

incur a 2-percent reduction in payment in accordance with the Budget Control Act of 

2011 and the American Taxpayer Relief Act of 2012 (i.e., sequestration).  This 

mandatory payment reduction is applied after the beneficiarys coinsurance has been
  
determined, resulting in a payment rate for most Part B drugs of 104.3 percent of the 

volume-weighted ASP.  For further explanation,  see http://www.cms.gov/outreach-and-
education/outreach/ffsprovpartprog/downloads/2013-03-08-standalone.pdf. 
 
46 77 Fed. Reg. 68210, 68367  (Nov. 15, 2012).   

47 Several Part B drugs, including certain vaccines, blood  products, and DME infusion  

drugs, are paid for  on the basis of  AWPs and not on the basis of  ASPs.  Sections 
 
1847A(a)(1) and 1842(o)(1)  of the Act. See also  Medicare Claims Processing Manual, 

ch. 17  20.1.3. 
  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   19 
  APPENDIX C 
Detailed Methodology 
Data Sources and Collection 
Part B Payment Amounts and ASPs.  We used CMSs first-quarter 2013 
through second-quarter 2014 payment amount files to obtain the 
ASP-based payment amounts in the hospital outpatient, DME, and 
physician-office settings and to calculate ASPs for Part B HCPCS codes.48   
We used CMSs 2013 quarterly payment amount files and DME MACs  
quarterly 2013 payment files to obtain AWP-based payment amounts for 
each DME infusion HCPCS code under review.49   
ASP Data.  We obtained from CMS the quarterly ASP background files for 
the third and fourth quarters of 2012 and the first and second quarters of 2013  
on which 2013 ASP-based payment amounts were based.50   The 
background files link ASP-based HCPCS codes to the related NDCs 
included in the ASP calculation, including a determination of how many 
units of a given NDC are represented by the HCPCS code. We also 
obtained from the background files the quarterly ASPs and number of 
units sold as reported by manufacturers for all NDCs associated with the 
relevant HCPCS codes.  Because there is a two-quarter lag between the sales 
period for which ASPs are reported and the effective date of the Part B 
payment amounts, we obtained background files for the third and fourth 
quarters of 2012 and the first and second quarters of 2013.   
Paid Part B Claims. On April 29, 2014, we obtained from the NCH all 
2013 paid claims (i.e., claims from the hospital outpatient, 
physician-office, and DME settings) for all drug HCPCS codes to 
____________________________________________________________ 
48 Because there  is a two-quarter lag between the sales period for which ASPs are  
reported and the effective date of the Part B payment amounts, we obtained first-quarter 
and second-quarter  2014  payment amount files to calculate ASPs for the third  quarter and  
fourth quarter of  2013.  
49 DME infusion drugs are paid for  on the basis of  ASPs if they were compounded  or  
furnished incident to a professional service.   Otherwise, they are paid  on the basis of  
AWPs that were in effect on  October 1, 2003.  See section 1842(o)(1)(D)(i) of the Act 
and Medicare Claims Processing Manual,  ch. 17  20.1.3.   
50 Because Medicare Part B reimbursement for outpatient drugs  is based on HCPCS 
codes rather than  on NDCs and more than  one NDC may meet the definition of a 
particular HCPCS code, CMS has developed the background  file and the crosswalk file to  
crosswalk NDCs to their matching HCPCS codes.  Both files are released quarterly by  
CMS and CMS uses information in these files to calculate volume-weighted  ASPs for 
covered HCPCS codes;  however, the background  file is not publicly available because it  
contains manufacturer-reported information on ASPs and units sold.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   20 
  determine quarterly utilization and spending.51, 52   To identify the providers 
who billed and received payments, we obtained provider identifiers listed 
on each claim (i.e., NPIs and TINs).53   
Covered Entities Database. We obtained the covered entities database 
from HRSA on April 3, 2014, and used it to identify covered entities 
eligible to purchase drugs at 340B prices in 2013.  The 340B Program  
requires each location (i.e., covered entity site) to be registered  
individually in HRSAs  covered entities database.54   We obtained NPIs, 
Medicare Provider Numbers, Medicaid Provider Numbers, and 
HRSA-assigned identification numbers for covered entity sites listed in 
the covered entities database. 
For each covered entity site, we used the covered entities database to 
obtain the participation start and termination dates and the codes for 
covered entity type (e.g., CAH, DSH).55    
Medicaid Exclusion File. We obtained the Medicaid Exclusion File from  
HRSA on May 26, 2015, to identify covered entity sites that should not 
use 340B-purchased drugs for their Medicaid patients (i.e., covered 
entities that use the carve out approach), including for 
Medicare/Medicaid dual-eligibles. 
Medicare Enrollment Database. We obtained the Medicare beneficiary 
enrollment database from CMS to identify dual-eligible beneficiaries.   
Medicare Provider Enrollment, Chain, and Ownership System. We used 
the Medicare Provider Enrollment, Chain, and Ownership System 
 ____________________________________________________________ 
51 Previous  OIG work showed that the number of units listed  in claims for blood-clotting 
factors often underrepresent the actual number of HCPCS units reimbursed by a 
substantial margin.  We calculated the correct number of Medicare units by dividing the  
total Part B spending in each setting by the Part B payment amount in each quarter in that  
particular setting.  See OIG, Medicare Could Collect Billions if Pharmaceutical  
Manufacturers Were Required to Pay Rebates for Part B Drugs, OEI-12-12-00260, 
September 2013.    
52 Hospital outpatient claims refer to any claims in the NCH institutional outpatient file, 
which includes not only hospitals but also entities such as clinics or health  centers.  We 
only included  hospital outpatient claims if they were paid  under OPPS.  Therefore,  
CAHs; certain  hospitals in Maryland;  hospitals located  outside one of the 50 States, the 
District of Columbia, and Puerto Rico; and hospitals of the Indian  Health  Service were 
excluded from our analysis because they are  excluded from OPPS.   
53 The NPI is a unique  10-digit identification number for health care providers (both 
individual providers and organizational providers).  On DME and physician claims, the 
TIN represents the entity that received payment from Medicare. 
54 HRSA, 340B Hot Topics. Accessed at http://www.hrsa.gov/opa/updates/  
august2014.html on February 18, 2015. 
 
55 HRSA, 340B Program Acronyms for Covered Entity Types and/or Grantees. Accessed 

at http://opanet.hrsa.gov/opa/CoveredEntityAcronyms.aspx on  February 18, 2015. 
 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   21 
  (PECOS) to obtain the names and addresses of organizations associated 
with TINs listed on paid drug claims from DME and physician-office 
settings. 
National Plan and Provider Enumeration System. We used the National 
Plan and Provider Enumeration System (NPPES) to identify NPIs that had 
been crosswalked to Medicare Provider Numbers and Medicaid 
Provider Numbers listed in the covered entities database.56       
340B Ceiling Price, AMP, and URA Data. For every NDC associated with 
the HCPCS codes under review, we obtained from HRSA the 340B ceiling 
prices that were in effect in each quarter of 2013.  We also obtained from  
HRSA and CMS the manufacturer-reported AMPs and Medicaid URAs on 
which 340B ceiling prices were based. 
Data Analysis  
Selection of NDCs Used in Payment Amount Calculations. A total of  
636 HCPCS codes paid for on the basis of ASPs were listed in CMSs 
2013 quarterly payment amount files.  Using CMSs quarterly ASP  
background files, we selected the NDCs that were used to calculate the 
ASP-based Part B payment amounts for 2013 for each of the 636 HCPCS 
code under review.  We removed 68 HCPCS codes because none of the 
associated NDCs had ASPs that were included in payment-amount 
calculations.57  
Calculation of HCPCS Code 340B Ceiling Prices. 340B ceiling prices 
(i.e., the maximum amount that covered entities pay for 340B-purchased 
drugs) are calculated for the entire package of a drug represented by the 
NDC. Because units of a drug represented by an NDC often differ from  
the units of a drug represented by a HCPCS code, we converted the 340B  
ceiling price for each NDC under review to HCPCS code units.58   We first  
divided HRSAs per-package 340B ceiling price by the package size to 
calculate a per-unit 340B ceiling price for each NDC.  If HRSA-reported 
340B ceiling prices were not available, we used manufacturer-reported 
AMPs and URAs to calculate the NDCs per-unit 340B ceiling price using 
the statutory formula (i.e. AMP minus URA).  We then multiplied the 
____________________________________________________________ 
56 CMS issued  NPIs beginning in  2005 to meet a requirement of the Health Insurance 
Portability and Accountability Act of 1996.  The NPI was implemented as a single 
national identifier for use in  standard electronic health care transactions; it was meant to  
replace Medicaid Provider  Numbers, Medicare Provider  Numbers, and other identifiers  
that providers use to  bill specific health  plans.     
57 The ASPs associated with these NDCs were either not reported  by manufacturers or 
were deemed unusable by CMS.   

58 Because 340B ceiling prices are the maximum price a manufacturer should charge  

covered entities, they serve as a proxy  for covered entities drug acquisition costs. 

 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   22 
  per-unit 340B ceiling price by the total number of units of a drug 
contained in the HCPCS code to calculate a 340B ceiling price per 
HCPCS unit for each NDC. 
We removed 74 HCPCS codes because none of their associated NDCs had 
a 340B ceiling price, AMP, or URA.  We removed an additional four 
HCPCS codes because of concerns about the accuracy of pricing data.   
We then calculated a weighted 340B ceiling price for each of the 
490 remaining HCPCS codes.  We used CMSs 2013 quarterly ASP  
background files to determine the percentage of total sales that each 
associated NDC represented within a HCPCS code (i.e., one NDC 
represented 10 percent of total sales, another NDC represented 
15 percent), and then weighted each NDCs 340B ceiling price by this 
percentage to determine an overall 340B ceiling price for each HCPCS 
code in every quarter.  
Identifying Covered Entities Enrolled in the 340B Program. Using the 
participation start and termination end dates listed in HRSAs covered 
entities database, we removed covered entity sites that were not enrolled in 
the 340B Program in at least one quarter of 2013.  There were 
25,039 covered entity sites that participated in the 340B Program for at 
least one quarter of 2013.59    
Identifying Hospital Outpatient Claims  Associated With Covered Entities. 
We obtained paid hospital outpatient claims for the 490 HCPCS codes 
under review.  Because Part B claims do not identify whether the claim is 
for a 340B-purchased drug, we obtained the NPIs of covered entity sites 
from HRSAs database.  If a covered entity site did not have an NPI listed 
in HRSAs database, we used NPPES to crosswalk its Medicare Provider 
Numbers and Medicaid Provider Numbers (i.e., alternate identifiers) to 
NPIs. A Medicaid Provider Number or Medicare Provider Number may 
be associated with multiple NPIs, and a covered entity may not use all 
NPIs to bill Medicare for 340B-purchased drugs.  Because there was no 
way to identify the specific NPI that a covered entity site uses to bill 
Medicare for 340B-purchased drugs, we kept covered entity sites in our 
analysis of 340B hospital expenditures only if they were associated with a 
single NPI. 
Because some covered entities (typically nonhospitals) are not required to 
provide their NPIs or alternate identifiers to HRSA upon applying to 
participate in the 340B Program, 7,688 covered entity sites enrolled in the 
340B Program in 2013 did not have an NPI or alternate identifier listed in 
____________________________________________________________ 
59  We included a covered entity site in  our analysis in a particular quarter if it was 
enrolled in the  340B Program for the  entire quarter. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   23 
  the covered entities database.  After we removed covered entity sites with  
identifiers that crosswalked to multiple NPIs, covered entity sites with 
identifiers that did not crosswalk to any NPIs, and covered entity sites 
with no identifiers listed in the database, 14,878 covered entity sites 
remained in our analysis of 340B hospital outpatient expenditures (see 
Table 5).  We matched the NPIs associated with these covered entity sites 
to hospital outpatient claims. 
Table 5: Summary of Covered Entities Included in 340B Hospital 
Outpatient Expenditure Analysis  
Whether 
Number of Covered 
Included in   Reason  
Entity Sites  
Analysis  
NPI listed in database  9,014  
Included in 
Alternate identifier crosswalked to a single NPI  5,864  
analysis 
Total included in analysis   14,878  
Alternate identifier crosswalked to multiple NPIs  1,772  
Alternate identifier not crosswalked to any NPIs   701 
Not included in 
analysis 
No NPI or alternate identifier listed in database   7,688  
Total excluded from analysis   10,161  
TOTAL ENROLLED  IN THE 340B PROGRAM IN 2013   25,039  
Source:  OIG analysis of NPPES and HRSAs covered entities database downloaded on April 3, 2014. 
Identifying DME and Physician-Office Claims Associated With Covered 
Entities. We obtained paid DME and physician claims for the 490 HCPCS 
codes under review.  Resource constraints required that we select a sample 
of claims.  Therefore, we selected all claims for providers that constituted 
95 percent of spending in the physician-office setting and claims for 
providers that constituted 98 percent of spending in the DME setting.   
Although physicians are not considered covered entities, a previous study 
found that physicians associated with covered entities may bill Part B with 
their personal NPIs and organizational TINs instead of the covered 
entities NPIs (i.e., the physician performs the service, but the entity 
receives the payment).60, 61  Because physicians do not individually register 
with the 340B Program, their personal NPIs would not be in HRSAs  
database of covered entities.  To identify drug claims submitted by 
____________________________________________________________ 
60 OIG,  Medicare Could Collect Billions if Pharmaceutical  Manufacturers Were 
Required to Pay Rebates for Part B Drugs, OEI-12-12-00260, September 2013.    
61 On Part B physician and  DME claims submitted by a physician or supplier associated  
with a covered  entity, the TIN represents the entity that received  payment from Medicare. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   24 
  covered entities in nonhospital outpatient settings, we obtained the 
organizational TIN on each physician-office and DME drug claim  
included in our analysis. We then matched the TINs to PECOS to obtain 
the associated name and address of the organization for which the 
physician is an employee.  Finally, we matched the name and address of 
the organization to HRSAs covered entities database to determine whether 
each organization that submitted a paid claim is a covered entity.  We  
manually checked each match to ensure that the TIN represents a covered 
entity.   
Identifying Claims for Drugs Not Eligible for 340B Pricing.   After 
removing HCPCS codes with no paid Part B claims in our sample, we 
identified claims submitted by carve-out covered entities for 
dual-eligible beneficiaries. Drugs listed on these claims should not have 
been purchased at 340B prices. We first matched hospital outpatient, 
DME, and physician-office claims submitted by covered entities to the 
Medicaid Exclusion File using HRSA-assigned identification numbers 
associated with each provider for covered entity sites.  Covered entities 
not listed in the Medicaid Exclusion File are carve-out covered entities.  
We then identified whether the claims submitted by carve-out covered 
entities were for dual-eligible beneficiaries by matching Medicare Health 
Insurance Claim Numbers (HICs) on the claims to the Medicare 
beneficiary enrollment database.   
We also removed claims for six vaccine HCPCS codes because vaccines 
are not eligible for 340B pricing.62  Claims for 472 HCPCS codes 
accounting for 86 percent ($19 billion) of total Part B drug expenditures in 
2013 remained in our analysis (see Table 6). 
Table 6: Summary of Part B Drug HCPCS Codes Included in Analysis  
Number of  
Description  
HCPCS Codes  
HCPCS codes paid on the basis of ASPs in at least one setting  636 
After removing NDCs excluded from  payment amount calculations   568 
After removing HCPCS codes for which 340B ceiling prices could not be 
494 
calculated 
After removing NDCs with potentially inaccurate pricing data   490 
HCPCS codes with Part B expenditures in our sample  478 
After removing 6 HCPCS codes representing vaccines  472 
____________________________________________________________ 
62 Vaccines are not considered to  be covered outpatient drugs  for purposes of the  
Medicaid drug  rebate  program.  See, e.g., Section 1927(k)(2) of the Act.   Accordingly,  
they are not subject to the 340B  program.  42  U.S.C.   256b(b)(2).    
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   25 
  Source: OIG analysis of quarterly 2013 Part B payment amount  files, CMS and HRSA pricing data, and 2013 NCH 
 
claims from the  hospital  outpatient, DME, and physician-office  settings. 
Summarizing Part B Spending for 340B-Purchased Drugs.  We  divided 
claims for the 472 HCPCS codes into two groups based on whether the 
claims represented 340B or non-340B purchases.  We compared 2013 
hospital outpatient, DME, and physician-office expenditures for 
340B-purchased drugs and non-340B drugs. 
Comparison of 340B Ceiling Prices to Part B Payment Amounts. For each 
HCPCS code with 340B expenditures, we calculated the percentage 
difference between the codes quarterly payment amount in each setting 
(i.e., hospital outpatient, DME, and physician office) and its 340B ceiling 
price. We then calculated a median difference across all quarters to 
determine the annual percentage difference between Part B payment 
amounts and 340B ceiling prices for each individual HCPCS code. 
For each quarter, we also estimated the aggregate difference between 
340B ceiling prices and Medicare payment amounts among all codes by 
multiplying each HCPCS codes 340B utilization by its 340B ceiling price 
(i.e., the estimated drug acquisition cost for covered entities), summing the 
quarterly estimates, and comparing the result to Part B 340B expenditures.   
Comparing Estimated Acquisition Costs Per Beneficiary For HCPCS 
Codes Representing High-Expenditure Cancer Drugs. We examined the 
highest expenditure Part B HCPCS codes in 2013 and determined that 7 of  
the 11 highest expenditure drugs are used in chemotherapy.  Therefore, we 
selected a purposive sample of five high-expenditure HCPCS codes 
representing cancer drugs.63  For each HCPCS code, we compared the 
acquisition costs for covered entities to those for other providers.  To  
estimate how much covered entities spent per beneficiary to acquire the 
cancer drugs, we multiplied each HCPCS codes quarterly 340B ceiling 
price by the number of 340B units and divided the result by the total 
number of beneficiaries who received the 340B-priced drug in 2013.64,  65     
We also estimated how much providers not participating in the 
340B Program (i.e., noncovered entities) paid to acquire the same  
high-expenditure drugs.  Because ASPs are based on actual sales in the 
marketplace, we concluded that they provide a reasonable estimate of 
acquisition costs for noncovered entities.  For each quarter, we divided 
____________________________________________________________ 
63 Expenditures for each HCPCS code were at least $300 million in  2013. 
64 To avoid duplication,  when calculating  per-beneficiary acquisition costs and 
per-beneficiary Part B expenditures, we removed claims for beneficiaries who received 
the drug from both a covered  entity and  a provider not enrolled in the 340B Program.  
65 Average units per beneficiary were approximately equal between covered entities and 
providers not enrolled in the 340B Program.  
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   26 
  each HCPCS codes quarterly ASP-based payment amount by 1.06 to 
calculate ASPs.66   We then multiplied each HCPCS codes quarterly ASP  
by non-340B utilization and divided the result by the number of 
beneficiaries who received the nondiscounted drug to estimate how much 
noncovered entities spent per beneficiary to acquire the drug.  We  
conducted this analysis for each quarter of 2013 and summed the quarterly 
results. For each HCPCS code, we calculated the difference between 
acquisition costs for covered entities and noncovered entities.   
We then estimated the difference between Part B payments and acquisition 
costs for covered entities and noncovered entities for each cancer drug.  
We calculated how much covered entities received per Medicare 
beneficiary for the cancer drugs by dividing 340B expenditures for each 
HCPCS code by the number of beneficiaries that received the 340B-priced 
drug. We calculated how much noncovered entities received per Medicare 
beneficiary by dividing non-340B expenditures for each HCPCS code by 
the number of beneficiaries that received the non-discounted drug. 
Calculation of Spending Reductions Under a Shared Savings Model. 
We determined pricing point options that would have allowed Medicare to 
share varying portions of the 340B discount in 2013 while keeping with 
the ASP-based payment methodology framework in Part B.  We calculated 
the following pricing point scenarios under a shared savings model:  
(1) volume-weighted ASP (i.e., 100 percent of ASP), (2) volume-weighted 
ASP minus 14.4 percent, and (3) 340B ceiling price plus 6 percent of 
volume-weighted ASP. 
 	  Volume-weighted ASP.    We multiplied each HCPCS codes  ASP  
by its 340B utilization to determine how much would have been 
spent if payments for 340B-purchased drugs had been set at 
100 percent of the HCPCS codes volume-weighted ASP.67    
	   ASP minus 14.4 percent.  Under the current Part B payment 
methodology, covered entities retain the entire savings attributable 
to the 340B Program.  We examined expenditures under a payment 
model that would allow Medicare and covered entities to equally 
share in the 340B discounts. We first divided in half the spread 
between total Part B payments for 340B-purchased drugs and 
____________________________________________________________ 
66 There is a two-quarter lag between the time when  ASP sales occur and when Medicare 
payment amounts reflect those sales.  As a result,  ASPs in  a given quarter were calculated 
using ASP-based payment  amounts from  two  quarters  later (e.g., fourth-quarter 2013  
ASPs were calculated by dividing second-quarter 2014  payment amounts by 1.06).   
67  We calculated ASPs by dividing 2013  payment amounts by 1.06.  In a small number of 
instances (six  per quarter, at  most), a drugs ASP-based payment amount  was set at  
103 percent of the average manufacturer price rather than at 106 percent of the ASP.  In  
these cases, we divided the payment amount  by 1.03.      
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   27 
  acquisition costs for those drugs to estimate how much covered 
entities would retain under a payment model for equal sharing of 
savings. We determined that Medicare would need to pay covered 
entities for 340B-purchased drugs at ASP minus 14.4 percent to 
achieve this new spread. We calculated each HCPCS codes  
quarterly payment amount under the ASP minus 14.4 percent 
methodology using CMSs payment amount file and multiplied the 
revised payment amount by the HCPCS codes 340B utilization for 
each quarter of 2013. 
 	  340B ceiling price plus 6 percent of ASP.   We estimated how 
much Part B would pay for 340B-purchased drugs if it had paid at 
the 340B price plus the same  add-on that noncovered entities 
receive for Part B drugs. For each quarter, we calculated each  
HCPCS codes quarterly payment amount under the 340B ceiling 
price plus 6 percent of ASP by multiplying each HCPCS codes  
ASP by .06 and adding the result to the HCPCS codes ceiling 
price.68  We then multiplied each HCPCS codes revised payment 
amount by its 340B utilization for each quarter of 2013.  
We conducted this analysis for each quarter and then summed the results 
to estimate potential 2013 expenditures under each pricing point.  We  
calculated the difference between potential expenditures under each 
pricing point and actual Part B 340B expenditures to determine how much  
total Part B spending for 340B-purchased drugs could have been reduced 
by in 2013. We calculated 20 percent of potential spending reductions to 
estimate how much beneficiaries total coinsurance payments could have 
been lowered under each pricing point.  Finally, we estimated how much 
above cost Part B would have paid covered entities under each pricing 
point by subtracting total acquisition costs from potential expenditures.   
Limitations 
We did not review Part B claims, pricing data, or covered entity 
enrollment data for accuracy.  Because there is no identifier on Part B 
claims indicating that a drug was purchased through the 340B Program, 
we could not confirm that claims submitted by covered entities were in 
fact for drugs purchased at or below the 340B discount price. 
We eliminated from our analysis of 340B expenditures in the hospital 
outpatient setting more than 10,000 covered entity sites listed in the 
covered entities database because we could not identify the NPIs with 
which covered entities would bill Part B in the hospital outpatient setting.  
____________________________________________________________ 
68  Because we did not have access to actual 340B prices paid by covered entities, we used 
340B ceiling  prices as proxies for the drug costs. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   28 
  As a result, any claims for 340B-purchased drugs potentially made by 
these covered entities were not included in our estimates.  Furthermore, 
we used 340B ceiling prices (i.e., the maximum amount that a covered 
entity paid a manufacturer to acquire a drug) instead of actual 340B prices 
in our calculations. For example, covered entities that participate in the 
Prime Vendor Program purchase drugs at an average discount of 
10 percent below the 340B ceiling price. 69  As a result, we may have 
overestimated covered entities acquisition costs and underestimated 
potential payment reductions under a shared-savings methodology by 
approximately 10 percent. 
Under the PHS Act, drugs with orphan designations are excluded from  
the 340B Program for newly eligible covered entity types (certain 
childrens hospitals, certain freestanding cancer hospitals, CAHs, rural 
referral centers, and sole community hospitals).70  At the time of our 
review, the Act was interpreted to require manufacturers to offer certain 
covered entities 340B pricing on drugs that had received an orphan 
designation when those drugs were used to treat conditions other than 
those for which they received their orphan designation.71 Because (1) we 
could not determine the indication for which a drug was administered, 
(2) there are complexities in crosswalking the names of orphan drugs to 
the 420 drug HCPCS codes with 340B expenditures in 2013, and 
(3) payments to the newly eligible covered entity types did not account for 
a significant portion of Part B drug spending, we did not remove orphan 
drugs from our analysis for these types of covered entities.   
Under sequestration, the effective payment rate for Part B drugs was 
reduced between 1 and 2 percent after April 1, 2013.72   Neither the 
published payment amounts nor expenditure data reflect these reductions.   
Therefore, we did not take any sequestration-related payment reductions 
into account when comparing 340B ceiling prices to Part B payment 
amounts or when estimating expenditure decreases under a revised 
payment methodology for 340B-purchased drugs.   
We included 472 HCPCS codes accounting for 86 percent ($19 billion) of 
total Part B expenditures in our review.  Findings related to the purposive 
____________________________________________________________ 
69 U.S. Department of  Health and Human Services, HRSA  FY2015 Budget Justification.    
70 Section 340B(e) of the PHS  Act.   (For more on orphan  drugs, see footnote 42, p. 15.)  
71 HRSA, Interpretive Rule:  Implementation of the Exclusion of  Orphan  Drugs for 
Certain Covered Entities Under the 340B  Program. HRSAs interpretation was struck  
down in Federal court on October 14, 2015, and the interpretive rule has been vacated. 
72 CMS, Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) 
ProgramSequestration, CMS Medicare FFS Provider  e-News, March 8, 2013. 
Accessed at http://www.cms.gov/outreach-and-education/outreach/ffsprovpartprog/ 
downloads/2013-03-08-standalone.pdf on  April 10, 2015. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   29 
  sample of 472 HCPCS codes cannot be generalized to all Part B drug 
HCPCS codes.   
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   30 
  ACKNOWLEDGMENTS 
This report was prepared under the direction of Dave Tawes, Regional 
Inspector General for Evaluation and Inspections in the Baltimore regional 
office, and Louise Schoggen, Assistant Regional Inspector General.  
Bahar Adili served as the lead analyst for this study.  Central office staff  
who provided support include Mandy Brooks, Berivan Demir Neubert, 
Meghan Kearns, and Christine Moritz. 
 
Part B Payments for 340B-Purchased Drugs (OEI-12-14-00030)   31 
   
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