Department of Health and Human Services
 
OFFICE OF  

INSPECTOR GENERAL  

D
EFICIENCIES IN THE  

O 340B D
VERSIGHT OF THE  RUG  

P P
RICING  ROGRAM 

Daniel R. Levinson 

Inspector General  

October 2005 

OEI-05-02-00072 
 Office of Inspector General 
 
http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 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 beneficiaries 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 all 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 in order to reduce waste, abuse, and mismanagement and to promote 
economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts management and program evaluations 
(called inspections) that focus on issues of concern to HHS, Congress, and the public.  The 
findings and recommendations contained in the inspections generate rapid, accurate, and up-to-
date information on the efficiency, vulnerability, and effectiveness of departmental programs.  
OEI also oversees State Medicaid Fraud Control Units which investigate and prosecute fraud 
and patient abuse in the Medicaid program. 
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations of 
allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment 
by providers.  The investigative efforts of OI lead to criminal convictions, administrative 
sanctions, 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 
in OIGs internal operations.  OCIG imposes program exclusions and civil monetary penalties 
on health care providers and litigates those actions within HHS.  OCIG also represents OIG in 
the global settlement of cases arising under the Civil False Claims Act, develops and monitors 
corporate integrity agreements, develops compliance program guidances, renders advisory 
opinions on OIG sanctions to the health care community, and issues fraud alerts and other 
industry guidance.    E X E C U T I V E   S U M M A R Y   
  
OBJECTIVE 
To assess the ability of the Health Resources and Services 
Administration (HRSA) to ensure that entities participating in the 340B 
Drug Pricing Program are able to purchase products at or below a 
statutorily established ceiling price. 
BACKGROUND 
In 1992, Congress amended section 340B of the Public Health Service 
Act (PHS Act), 42 U.S.C. 2566, to establish the 340B Drug Pricing 
Program (340B Program).  Pursuant to the PHS Act, manufacturers 
agree to charge certain covered entities at or below a specified 
maximum price for outpatient drug purchases, known as the 340B 
ceiling price. Covered entities include public hospitals, AIDS Drug 
Assistance Programs, and community health centers, which serve some 
of the countrys most vulnerable populations.  HRSA oversees the 340B 
Program, managing the pricing arrangements among the 702 
participating manufacturers and nearly 12,000 entities.  Participating 
entities spent an estimated $3.4 billion on outpatient drugs in calendar 
year 2003. 
The Government and pharmaceutical manufacturers separately 
calculate a 340B ceiling price each quarter.  The Governments 
calculation is intended to be used in program oversight, while the 
manufacturers calculation is the price used in sales to participating 
entities.  The 340B price is based on required sales data that 
manufacturers must report to the Government for the purposes of the 
Medicaid Drug Rebate program.  Manufacturers and the Government 
use the same pricing data and formula to calculate 340B ceiling prices.  
Due to provisions and policies protecting the manufacturers pricing 
data, neither the Governments nor the manufacturers ceiling prices 
are disclosed to the covered entities. 
In June 2004, the Office of Inspector General (OIG) issued a report 
entitled Appropriateness of 340B Drug Prices (OEI-05-02-00070), 
which evaluated whether participants in the 340B Program received the 
prices to which they are entitled by law.  During follow-up work on the 
report, we uncovered a number of problems with the data used to 
develop the reports findings.  Therefore, we withdrew this report on 
October 21, 2004, and conducted a focused review of the Governments 
340B ceiling prices. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  i  E X E C U T I V E   S U M M A R Y  
For this review on the deficiencies in the oversight of the 340B Program, 
we thoroughly analyzed the data previously collected for 
Appropriateness of 340B Drug Prices, which included a sample of 
entity invoices and the Centers for Medicare & Medicaid Services (CMS) 
ceiling price calculations for the third quarter of 2002.  We also 
reviewed and further evaluated CMSs reported analysis on the 
completeness of 340B ceiling prices effective in the first quarter of 2005.  
We interviewed both CMS and HRSA staff about the 340B ceiling price 
calculation and oversight of the 340B Program. 
FINDINGS 
Due to systemic problems with the accuracy and reliability of the 
Governments record of 340B ceiling prices, HRSA is unable to 
appropriately oversee the 340B Program. HRSA needs an accurate 
record of 340B ceiling prices to verify that entities receive the discount 
to which they are entitled by law.  A review of CMSs analysis of the 
first quarter 2005 340B ceiling prices revealed significant problems with 
the underlying data used in its calculation.  In particular, the 
Governments record was missing 28 percent of the 340B ceiling prices.  
Further, 8 percent of its prices did not include the 340B discount, 
producing inaccurate ceiling prices.  Finally, HRSA received a 
substantial amount of information that was not relevant to the 340B 
program, but upon which it inappropriately relied in conducting 
analyses and performing its oversight role. 
HRSAs oversight of the program is further hindered by the lack of 
detailed, written procedures for calculating 340B ceiling prices.  
Consequently, the 340B ceiling prices calculated by CMS used 
incomplete package size information, which yielded incorrect ceiling 
prices.  HRSA also has no procedure to convert ceiling prices with 
negative values into practical ceiling prices.  
HRSA lacks the oversight mechanisms and authority to ensure that 
340B entities pay at or below the 340B ceiling price. Until September 
2005, HRSA relied on CMS to calculate 340B ceiling prices and, while 
HRSA anticipates calculating the price now, it has yet to establish a 
system to perform the calculations itself.  In line with this new 
responsibility, HRSA does not systematically compare its record of 340B 
ceiling prices to the ceiling prices calculated by pharmaceutical 
manufacturers to identify any discrepancies. HRSA also does not 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  ii  E X E C U T I V E   S U M M A R Y 
   
perform program monitoring designed to ensure that 340B participants 
receive the 340B ceiling price.   
Confidentiality provisions related to disclosure of 340B ceiling prices 
further hamper HRSAs ability to effectively implement its prime 
vendor program which, besides offering distribution services through a 
network of wholesalers, is intended to negotiate subceiling discounts for 
participating entities.  Finally, HRSA does not have the authority to 
enforce compliance with either the PHS Act or the Pharmaceutical 
Pricing Agreement, which is the formal agreement between HRSA and 
manufacturers participating in the 340B Program.  
Participating entities cannot independently verify that they receive 
the correct 340B discount due to confidentiality provisions. Entities 
participating in the 340B Program do not have access to 340B ceiling 
prices.  Therefore, entities are unable to determine the prices to which 
they are entitled under the 340B statute and whether they receive 
them. 
RECOMMENDATIONS 
CMS and HRSA should work together to ensure accurate and timely 
pricing data for the Governments official record of 340B ceiling 
prices. CMS and HRSA have already engaged in discussions about 
calculating the 340B ceiling price. On September 19, 2005, CMS and 
HRSA signed a new Intra-Agency Agreement, retroactively effective for 
Fiscal Year 2005, which states that HRSA will continue to receive 
pricing data from CMS, but will itself calculate the governments 340B 
ceiling price. We encourage HRSA and CMS to continue to work 
together to improve the accuracy and timeliness of the pricing data 
CMS has agreed to provide HRSA.   
HRSA should establish detailed standards for its calculation of 340B 
ceiling prices. To prevent the types of errors we discovered in CMSs 
calculation of the 340B ceiling price, we suggest that HRSA take action 
to ensure the accuracy of its calculations.  In particular, HRSA needs to 
develop specific policies around correctly calculating the 340B ceiling 
prices.  HRSAs standards should include specifics on the use of correct 
package sizes and a conversion factor for negative ceiling prices. 
HRSA should institute oversight mechanisms to validate its 340B 
price calculations and the prices charged to participating entities. 
We suggest these mechanisms include: 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  iii  E X E C U T I V E   S U M M A R Y 
   
 	  Comparing the Governments official 340B ceiling prices to the 
manufacturers ceiling prices each quarter to detect discrepancies; 
 	  Spot-checking covered entity invoices against ceiling price data to 
ensure that entities are charged at or below 340B ceiling prices; and 
 	  Selectively auditing manufacturers, wholesalers, and covered 
entities to ensure the integrity of the discount program. 
HRSA should seek authority to establish penalties for PHS Act 
violations. HRSA should propose a legislative package that might 
include a variety of sanctions, such as fines and civil monetary 
penalties, for manufacturer or wholesaler violations of the 340B 
Program requirements.  We recommend that HRSA consider as a model 
CMSs statutory authority to enforce the Medicaid rebate program, 
pursuant to  1927(b)(3)(C)(i) of the Social Security Act, and seek 
similar authorities with respect to enforcement of the 340B Program. 
HRSA should provide participating entities with secure access to 
certain pricing data to help approximate 340B ceiling prices. We 
suggest that HRSA develop a price verification system by which entities 
can submit prices to determine whether they comply with the 340B 
discount requirements, while protecting the confidentiality of protected 
data. We additionally suggest that HRSA reinstate the publication of its 
340B prime vendor programs selling prices on the agency Web site so 
covered entities can validate the prices they are charged. 
AGENCY COMMENTS 
HRSA and CMS concur with most of our recommendations.  The 
complete text of the comments can be found in Appendix B. 
Based on the issues raised and recommendations offered in our 
withdrawn report, HRSA and CMS have already engaged in numerous 
technical discussions about calculating the 340B ceiling price. As a 
result of these discussions, HRSA will continue to receive pricing data 
from CMS, but will itself calculate the Governments 340B ceiling price. 
To improve the quality and timeliness of the data sent to HRSA, CMS 
has agreed to reiterate the 30-day pricing data submission requirement 
for manufacturers and will consider referring appropriate cases of late 
submission to OIG to levy penalties.  HRSA commented that it will 
work with CMS to maximize the acquisition of manufacturers data as 
well as resolve problems related to missing data.  HRSA also agreed to 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  iv  E X E C U T I V E   S U M M A R Y  
publish detailed standards for the calculation of 340B ceiling prices to 
its Web site. 
In response to our recommended steps for instituting oversight to 
improve the integrity of 340B ceiling prices, HRSA stated its intent to 
review the data that manufacturers and entities voluntarily submit, to 
the extent that resources permit. For more intensive audits of the 340B 
Program, HRSA deferred to its reliance upon OIG audits and 
evaluations. 
HRSA does not support our recommendation to seek legislation to 
establish penalties for violations of the PHS Act, preferring to first 
acquire experience with its planned changes.  Finally, HRSA does not 
concur with our recommendation that it reinstate the publication of 
HRSAs 340B prime vendor programs selling price on the agency Web 
site. 
OFFICE OF INSPECTOR GENERAL RESPONSE 
We are encouraged that CMS and HRSA concur with most of our 
recommendations and have already taken steps to improve the 
calculation of the 340B ceiling price.  We also support HRSAs stated 
intention to compare the manufacturers data currently received 
voluntarily to the ceiling price and review the prices charged to entities; 
however, we do not believe this represents an adequate approach to 
oversight of the program.  While this level of review might prove helpful 
in some instances, it will only cover the number of limited 
manufacturers and entities who choose to supply drug pricing data.   
We are concerned about the limited nature of HRSAs own plans for 
oversight of the 340B Program.  While OIG is committed to ensuring the 
integrity of the HHS programs, we believe that routine oversight is an 
agencys responsibility. Therefore, we maintain that HRSA itself needs 
to develop a comprehensive auditing program. 
We also do not agree with HRSA that it is best to wait to seek authority 
to establish penalties for violations of the PHS Act.  Rather, we believe 
that the ability to impose fines and civil penalties is essential in 
ensuring that entities receive the full 340B discount. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  v    T A B L E   O F   C O N T E N T S   
  
EXECUTIVE SUMMARY ........................................  i
 
INTRODUCTION ................................................ 1 
 
FINDINGS ...................................................... 10  

Systemic data problemsh  inder HRSA oversight. . . . . . . . . . . . . .  10  
  
HRSA lacks oversight mechanisms and authority  . . . . . . . . . . . .  15  
  
Entities cannot verify prices themselves . . . . . . . . . . . . . . . . . . . .  18  
  
RECOMMENDATIONS ......................................... 20  

AGENCY COMMENTS ......................................... 23  

OFFICE OF IN SPECTOR GENERAL RESPONSE ........... 24  

ENDNOTES ..................................................... 26  

APPENDIXES  ................................................. 28  

A: Programs Eligible to Participate in 340B ................... 28  

B: Agency Comments ....................................... 29  

ACKNOWLEDGMENTS ......................................... 37 
   I N T R O D U C T I O N   
  
OBJECTIVE 
To assess the ability of the Health Resources and Services 
Administration (HRSA) to ensure that entities participating in the 
340B Drug Pricing Program are able to purchase products at or below a 
statutorily established ceiling price. 
BACKGROUND 
In June 2004 the Office of Inspector General (OIG) issued a report 
entitled Appropriateness of 340B Drug Prices (OEI-05-02-00070), 
which evaluated whether participants in HRSAs 340B Drug Pricing 
Program (340B Program) were able to purchase their products at or 
below established ceiling prices as specified in the Public Health Service 
Act (PHS Act). Because the formula for 340B ceiling prices contains 
protected manufacturer pricing information, the entities cannot access 
the ceiling price to verify the accuracy of their charges, nor can HRSA 
precisely identify potential overcharges.  Therefore, we analyzed 
whether 340B entities were being charged at or below the ceiling prices. 
For the June 2004 report, we applied quality assurance standards to 
ensure the sufficiency, competency, and relevancy of the Governments 
record of the 340B ceiling price data per Government Auditing 
Standards.1  Following our integrity checks, we presumed the 
Governments 340B ceiling price data to be reliable.   
After the publication of the report, however, we discovered a number of 
problems with the underlying data used to support the first of the 
reports four findings.  A comparison of the Governments ceiling prices 
to industry pricing data, along with interviews with CMS staff, led us to 
conclude that CMS provided us with 340B ceiling prices for the wrong 
timeframe. Based on our data concerns, we withdrew the report on 
October 21, 2004.   
After receiving the data for the correct timeframe, our review revealed 
other, more subtle, embedded issues that caused us to further question 
the validity of the data.  Thus, we determined that we would not use 
that data to report whether 340B entities receive drugs at or below the 
statutory discount. The report that follows describes the various data 
problems that need to be addressed prior to drawing such conclusions. 
This report restates the findings related to HRSAs limited oversight as 
previously noted in Appropriateness of 340B Drug Prices and 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  1  I N T R O D U C T I O N  
introduces new concerns regarding the data used to provide appropriate 
oversight. Once we are assured that the data issues have been resolved, 
we intend to begin work on a new study to examine if and to what 
extent entities pay at or below 340B ceiling prices. 
The 340B Drug Discount Program 
In 1992, Congress amended section 340B of the PHS Act, Limitations 
on Prices of Drugs Purchased by Covered Entities, to create the 340B 
Program.  Under the 340B Pharmaceutical Pricing Agreement (the 
agreement), a manufacturer agrees to sell covered drugs at or below  
a specified ceiling price to certain PHS and Government-supported 
facilities, called covered entities, which serve some of the countrys most 
vulnerable patient populations.  These entities include community 
health centers, Ryan White grantees, and disproportionate share 
hospitals, among others (for a complete list, see Appendix A).  Through 
the 340B Program, outpatient prescription drug costs are reduced by an 
estimated 20 to 50 percent.2  Participating entities spent an estimated 
$3.4 billion on outpatient drugs in calendar year 2003.3 HRSA is 
responsible for interpreting, implementing, and overseeing compliance 
with section 340B on behalf of the estimated 12,000 participating 
entities. 
HRSA also maintains the electronic database of participating covered 
entities.  Entities must notify HRSA of their intention to participate by 
completing and submitting appropriate registration forms.  Upon 
receipt, HRSA adds the entity to the participating database and the 
entity is eligible to receive pharmaceuticals at the 340B discounted 
price beginning the next calendar quarter.  Manufacturers rely on this 
list to verify an entitys eligibility for the 340B discount and use the 
contact information for shipping and billing purposes.   
Section 340B(a)(8) of the PHS Act requires the Government to establish 
a prime vendor program to facilitate the delivery of covered outpatient 
drugs.  HRSAs prime vendor serves its participants in three primary 
roles: negotiating prices below the 340B ceiling prices, establishing 
distribution solutions and networks that improve access to affordable 
medications, and providing other services designed to simplify 
participation in the 340B Program. Participation in the prime vendor 
program is voluntary. 
Calculation of 340B Ceiling Prices 
The drug discount that manufacturers must provide to participating 
entities is calculated according to a formula tied to the calculation of the 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  2  I N T R O D U C T I O N  
  
Medicaid drug rebate amount and to manufacturers figures for a drugs 
average manufacturer price (AMP) and its best price offered during a 
quarter.  Specifically, the 340B discount is equal to the AMP reduced by 
Medicaids unit rebate amount (URA), which CMS calculates based on a 
formula stipulated in the Omnibus Budget Reconciliation Act of 1990 
(OBRA 90).4 
Pursuant to the PHS Act, inputs to the 340B discount formula are based 
on the smallest dispensable unit of each drug, such as a tablet, capsule, 
or milliliter.  Therefore, taken literally, the discount yields a price that 
applies to each unit of the product that the entity purchasesfor 
example, $1 per pill.  Though it is not explicitly stated in law, the 
per-unit result of the ceiling price calculation must be multiplied by the 
drug package size to practically apply the discount to the way in which 
entities, such as hospitals, purchase productsfor example, a bottle of 
100 tablets versus an individual tablet.   
Manufacturers report the product package size when applying for a 
National Drug Code (NDC) from the Food and Drug Administration 
(FDA).  The NDC is a three-segment universal product identifier for 
drugs. FDA assigns the first segment of the code, which identifies the 
manufacturer.  Manufacturers determine the second and third 
segmentsthe product code and package size codeand report this 
information to the FDA.  Manufacturers report this same information to 
third-party contracted providers of prescription drug information, such 
as First Databank and Medispan, which sell the information to States, 
insurance companies, and CMS. 
Pharmaceutical manufacturers and the Government each calculate 
340B ceiling prices each quarter.  Pharmaceutical manufacturers 
calculated 340B ceiling prices are used in sales to covered entities.  
Manufacturers are not required to share their 340B ceiling prices with 
the Government.  However, manufacturers are required to submit sales 
data to CMS for the Medicaid drug rebate program. In the past, CMS 
used this manufacturer-reported data to calculate the Governments 
official 340B ceiling prices on behalf of HRSA.  On September 19, 2005, 
HRSA and CMS agreed that HRSA would be responsible for calculating 
340B ceiling prices. 
HRSA needs official Government 340B ceiling prices to verify that the 
selling price to covered entities does not exceed the statutory ceiling 
price and for research, analysis, audit and dispute resolution 
purposes.5  HRSA receives information on 340B selling prices from 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  3  I N T R O D U C T I O N  
manufacturers that elect to send their 340B prices to HRSA and from 
covered entities that have questions or concerns on the accuracy of the 
prices they pay.   
Manufacturers calculation of 340B ceiling prices.  Under the PHS Act, 
manufacturers agree to charge covered entities at or below a maximum 
price calculated using specific sales and pricing data defined under the 
Social Security Act (the SSA Act) and used to calculate the Medicaid 
Drug Rebate amount.  Section 340B(10) states that nothing shall 
prohibit a manufacturer from charging a price for a drug that is lower 
than the maximum price calculated using the specified formula.  
Manufacturers are responsible for ensuring that the 340B discount is 
passed on to the covered entity, regardless of whether the entity 
purchases drugs from a wholesaler or directly from the manufacturer.6 
HRSA staff stated that it is acceptable for wholesalers to charge covered 
entities 340B ceiling prices plus a distribution fee, which varies based 
on standard business practice. If a manufacturer fails to sell covered 
drugs at or below the ceiling price, it may be required to reimburse for 
discounts withheld and can be terminated from both the 340B and 
Medicaid Drug Rebate programs. 
Governments official calculation of 340B ceiling prices. HRSA and CMS 
negotiated a new Intra-Agency Agreement and Data Use Agreement on 
September 19, 2005.  Under the Agreement, HRSA will receive pricing 
data from CMS effective during Fiscal Year (FY) 2005, but will itself 
calculate the Governments 340B ceiling price. Prior to this agreement 
and covering the period of this report, CMS calculated the 340B ceiling 
prices on behalf of HRSA each quarter.  Although CMS and HRSA have 
yet to negotiate an Agreement for FY 2006, OIG understands that 
HRSA will continue to be responsible for calculating 340B ceiling price. 
Pursuant to the Intra-Agency Agreement, CMS provides HRSA with an 
electronic file containing the pricing data components needed to 
calculate 340B ceiling prices. These elements include the 
manufacturers reported AMP and CMSs calculation of the URA for 
each NDC, which CMS sends HRSA approximately 45 days after a 
quarters end.  HRSA stated that it intends to use package size data 
from First Databank, a contractor that provides prescription drug 
information reported by manufacturers. 
Chart 1 illustrates the two ways in which CMS and pharmaceutical 
manufacturers calculate 340B ceiling prices.   
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  4  I N T R O D U C T I O N  
CHART 1:   340B PRICING DATA AND PURCHASE FLOW  
Government record of 340B ceiling prices  Manufacturers calculation 
and dissemination of 340B 
ceiling prices 
Pharmaceutical 
Manufacturers 
send package  Manufacturers 
First Data Bank  size information 
(FDB) 
Manufacturers send 
340B ceiling price to 
FDB supplies HRSA with  Manufacturers  wholesalers 
package size data  send pricing 
data to CMS 
CMS  Wholesalers 
CMS will send HRSA  Wholesalers sell drugs 
manufacturers price  at 340B ceiling price + 
data needed to  distribution fee to 
calculate ceiling prices  entities 
HRSA  As of 10/01/05,  340B 
HRSA calculates 
Entities 
340B ceiling prices 
Confidentiality of Ceiling Price Information 
OBRA 90 stipulates that information disclosed by manufacturers, 
including AMP and Best Price . . . shall not be disclosed by the 
Secretary . . . in a form which discloses the identity of the manufacturer, 
or the prices charged by the manufacturer, except as necessary to carry 
out the provisions of the Act.7  Because of this provision, the 340B 
covered entities are not given access to the AMP, Best Price, or the 
calculated ceiling price.  However, language in the Pharmaceutical 
Pricing Agreement states that the confidentiality protections only 
extend to the 340B ceiling price, not to the 340B selling price, to which 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  5  I N T R O D U C T I O N  
entities have access through their wholesaler price lists. The 
Pharmaceutical Pricing Agreement states:  
Section 340B requires the manufacturers to charge a price for 
covered outpatient drugs that will not exceed the amount 
determined under a statutory formula.  This charged price, termed 
the 340B Selling Price, is provided to wholesalers and covered 
entities by manufacturers and is available in the marketplace for 
the buying and selling of drugs by covered entities and is 
considered separate from the ceiling price as generated by the 
MDRI [CMSs Medicaid Drug Rebate Initiative] data elements.8 
Related OIG Work 
In June 2004, OIG also issued Deficiencies in the 340B Drug Discount 
Programs Database (OEI-05-02-00071), which reviewed the quality 
and timeliness of HRSAs database containing information on 340B 
entity enrollment.  The PHS Act requires HRSA to maintain an 
electronic listing of all the entities enrolled in the 340B Program.  
Pharmaceutical manufacturers refer to the listing to verify entities 
eligibility for the ceiling price and to ensure that their drugs are 
shipped to legitimate sites. 
We found the enrollment database to be a poor source of information on 
participating 340B entities.  Thirty-eight percent of our sampled entities 
were listed as enrolled, but do not actually participate in the 340B 
Program.  The database had incorrect addresses for 43 percent of 
sampled entities and did not provide essential information on the 
entities billing and shipping arrangements. According to interviews 
with nine major pharmaceutical corporations, the extent of incorrect 
addresses listed in the database hinders their ability to effectively 
identify entities eligible for the discount program. 
We recommended that HRSA develop a strategic plan for improved 
management of the 340B database and HRSA is currently taking steps 
to address this recommendation.   
METHODOLOGY 
The findings in this report rely on data from two points in time.  First, 
we used ceiling prices from the quarter effective during September 
2002, which includes July, August, and September.  These are the data 
originally collected for the now-withdrawn Appropriateness of 340B 
Drug Prices.  Second, to provide further information on the accuracy of 
the Governments 340B ceiling prices, we examined an analysis 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  6  I N T R O D U C T I O N  
conducted by CMS on pricing data used to calculate the 340B ceiling 
prices effective during the first quarter (January to March) of calendar 
year 2005. 
Governments Official Record of the 340B ceiling price 
CMS 2002 ceiling prices. For Appropriateness of 340B Drug Prices, we 
requested CMSs confidential data used to calculate 340B ceiling prices 
for the quarter effective during September 2002, which includes July, 
August, and September. We requested invoices from a sample of 
participating entities for purchases made during the same month. 
Upon receipt of the data, we applied quality assurance standards to 
ensure the sufficiency, competency, and relevancy of the Governments 
record of the 340B ceiling price data per Government Auditing 
Standards.  Following our integrity checks, we presumed the 
Governments 340B ceiling price data to be reliable.   
Following the publication of the report, however, we discovered a 
number of problems with the underlying data used to support the first 
of the reports four findings.  A comparison of the Governments ceiling 
prices to industry pricing data, along with followup with CMS staff, led 
us to conclude that CMS had provided us with 340B ceiling prices for 
the wrong timeframe.  Therefore, we requested that CMS extract the 
ceiling prices for the appropriate timeframe and received the correct 
data in November 2004. 
Our analysis of the ceiling price data for the correct timeframe revealed 
serious data issues that caused us to further question the validity of the 
data. During our followup on Appropriateness of 340B Drug Prices, 
we discovered issues with the Governments package size data.  
Therefore, we reassessed the package size data CMS used in the 
calculation of the 340B ceiling price. 
To compile an accurate and verified list of package sizes, we compared 
the package size information listed in CMSs 2002 third-quarter ceiling 
prices against the package size information maintained by First 
Databank.  CMS reported that it relied on First Databank for the 340B 
package size information.  For those drug products for which there was 
a discrepancy between CMS and First Databanks information, we 
replaced CMSs package size with First Databanks package size.  For 
the 10 drug products for which First Databank did not have 
information, we compared CMSs package size data to data maintained 
by FDA and replaced CMSs package size where applicable.  
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  7  I N T R O D U C T I O N  
We also analyzed the 2002 data in great detail to uncover other, less-
obvious data issues. 
CMS 2005 ceiling prices.  In addition to our analysis of the 2002 340B 
ceiling price data, we also examined an analysis that CMS conducted on 
ceiling prices effective for the first quarter of calendar year 2005.  CMS 
conducted this analysis to assess the completeness of the data and to 
identify causes for missing data or instances in which ceiling prices 
were equal to zero.  This initial analysis provided descriptive statistics 
on which data elements were missingfor example, AMP, Best Price, 
and package sizewhich could then result in missing 340B ceiling 
prices.  Given that CMS staff had the ability to analyze data used for 
the Medicaid program more thoroughly than we could for the purposes 
of this report, we felt it was important to include the findings of their 
analysis. Additionally, the analysis CMS conducted covers 2005much 
more recent than our 2002 analysisshowing that the concerns with 
the 340B data persist.   
We verified the accuracy and reliability of the analysis conducted by 
CMS by duplicating the analysis where possible and by meeting with 
CMS analysts to review the methods used in the analysis.   
We also used the data CMS provided to create two categories from 
which to assess the data: those NDCs that should have ceiling prices 
and those NDCs that should not have ceiling prices.  This approach 
differs from CMSs analysis of the data, which evaluates the overall 
completeness of the categories combined.  Because we felt inclusion of 
NDCs that should not have ceiling prices would skew the results of our 
analysis, we did not include them in our overall estimations.  
Consequently, our results and basis for findings differ from what CMS 
originally reported. 
Interviews and Document Review 
To assess the adequacy of 340B Program oversight, we reviewed 
relevant statutes, the Pharmaceutical Pricing Agreement, and HRSA 
program memoranda.  We also interviewed officials from CMS and 
HRSA. We requested documentation of the Governments process for 
calculating the 340B ceiling price, but neither CMS nor HRSA could 
provide such information. 
Limitations 
We did not review CMSs oversight of manufacturer-reported prices 
required by OBRA 90.  We did not audit the accuracy of manufacturers 
reported prices. We relied on CMSs analysis of 340B ceiling prices for 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  8  II NN TT RR OO DD UU CC TT II OO NN
the first quarter of 2005, verifying and testing its conclusions where 
possible. Lastly, we did not assess whether price discrepancies or 
overcharges are occurring. 
Our results describe challenges related to the Governments ceiling 
prices as calculated by CMS. With the 2005 Intra-Agency Agreement, 
HRSA, rather than CMS, will be calculating the 340B prices. 
Despite this change, HRSA will rely on the same pricing data and will 
continue to face the same challenges CMS faced in ensuring that the 
340B ceiling prices are accurate. 
Standards 
We conducted our review in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency. 
OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  9    F I N D I N G S 
   
Due to systemic problems with the accuracy and  As the administrator of the 340B 
reliability of the Governments record of the 340B  Program, HRSAs responsibilities 
extend to overseeing the validity 
ceiling price, HRSA is unable to appropriately 
of the ceiling price data used to 
oversee the 340B Program 
monitor the program.  HRSA 
needs the quarterly 340B ceiling 
price to verify that the 340B covered entities receive the discount to 
which they are entitled by law.  Based on reviews of the data collected, 
we found the 340B ceiling prices HRSA received from CMS to be so 
problematic that they are of little use to the agencys oversight of the 
340B Program. 
The official 340B price record was missing 28 percent of the ceiling prices 
The 340B ceiling price file for the first quarter of 2005 was missing 28 
percent of the prices needed for appropriate program oversight.  For 49 
percent of these missing ceiling prices, the file did not contain the AMP.  
For 29 percent, the products were missing package size data.  For the 
remaining 21 percent, the products had neither the AMP nor the 
package size.9 
Missing AMP data are most likely the result of manufacturers not 
reporting or delaying submission of AMP data to CMS.  Manufacturers 
are required to report their drugs AMP and the single best price within 
30 days after a quarters end so that CMS can calculate the drugs URA.  
If the data are late, the Secretary may impose a civil monetary penalty 
for failure to provide timely information on AMP or the best price.10 
Instead of seeking penalties, CMS staff typically notify the 
manufacturers of the missing data and request prompt submission. 
Manufacturers typically include previously missing data with their next 
quarters submission.  
While late submission of pricing data may delay, rather than prevent, 
State Medicaid agencies rebate collections, it has a more immediate 
impact on the 340B Program because HRSA will be unable to calculate 
ceiling prices at the time they are needed for the 340B Program. 
Further, although CMS will supply HRSA with a separate file of 
previously missing pricing data along with the quarterly updates, HRSA 
does not have a policy in place to use the file to update the official 
ceiling prices. Therefore, any missing ceiling prices will remain 
missing. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  10  F I N D I N G S  
Eight percent of the Governments 340B ceiling prices were inaccurate 
because the calculation did not include the 340B discount 
To correctly calculate a 340B ceiling price, HRSA will need the drugs 
AMP, URA, and package size.  Based on our analysis of the 37,067 
official CMS-calculated 340B ceiling prices for the first quarter of 2005, 
8 percent were inaccurate because the price did not include the URA. 
The URAs were not included because CMSs validity test for a 
manufacturers AMP submission, known as the 50/50 edit,11 rejected 
the AMP. Without an AMP, CMS does not calculate a URA, so the 
ceiling price submitted to HRSA was equal to AMP-0.  Thus, HRSA 
received ceiling prices that appeared to be complete, but did not include 
the 340B discount. 
For 90 percent of the records with no URA, package size information is 
available.  However, the 340B ceiling price was overstated because the 
ceiling price is equal to (AMP-0) multiplied by the package size, which 
did not include the discount. 
For the remaining 10 percent of the records, HRSAs file was missing 
both the URA and package size.  Again, HRSA received data that 
appeared complete, but in reality were incorrect and dramatically 
understated the real ceiling price.  This is because the ceiling price was 
the equivalent of the unit (AMP-0) multiplied by a blank field (a result 
of no package size data), therefore generating a price that did not 
represent the price for the full product purchased and which did not 
include the discount. 
According to CMS staff, when CMS received a manufacturers corrected 
pricing information at a later date in response to its 50/50 request, the 
revised AMPs and URAs were sent to HRSA in a separate file; however, 
HRSA did not have a policy to make adjustments to the official ceiling 
prices, so the prices remain inaccurate. 
The Governments record of 340B ceiling prices included a substantial 
amount of information that is unnecessary to the discount program and 
upon which HRSA inappropriately relied on in its oversight role 
According to CMSs analysis, the Governments official record of the 
340B ceiling prices included information about 95,928 NDCs, which is 
nearly 50,000 more than the number of active NDCs listed in CMSs 
Medicaid Drug Rebate database for the same timeframe.  Thus, 46 
percent of the records that HRSA had received from CMS were 
irrelevant to the 340B Program.  To further complicate this matter, 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  11  F I N D I N G S  
HRSA inappropriately relied on some of this irrelevant information in 
its limited program oversight efforts. 
Based on CMSs analysis, the 340B ceiling price file generated each 
quarter included all products with a termination date after November 
30, 1993; products with future market dates; and terminated 
manufacturers. CMS staff were unable to explain why the file 
contained this extraneous information. They stated that that was how 
the file was set up in the early 1990s.  HRSA also could not explain why 
the information was included and had no documentation as to why it is 
included.  Neither CMS nor HRSA was aware of the unnecessary 
information because neither agency had reviewed or questioned the 
data or the resulting 340B ceiling price since the program was 
established. 
None of the information pertaining to terminated manufacturers or 
terminated products should be used for 340B ceiling price purposes.  
However, in November 2004, HRSA reported the results of its analysis 
on the completeness of CMSs ceiling price file and included these 
expired NDCs in the universe.  Because HRSAs universe was 
overstated, it concluded that 60 percent of the ceiling price data were 
missing and requested a response from CMS.  When the irrelevant data 
are excluded, however, the actual error rate is 28 percent. 
The lack of established technical procedures for calculating the 
Governments record of 340B ceiling prices resulted in unreliable data 
According to CMS and HRSA staff, no established written procedures 
exist for calculating the 340B ceiling price.  Neither CMS nor HRSA has 
a 340B ceiling price operations guide or manual that explicitly states 
policies for calculating the ceiling prices.  The staff at both agencies do 
not know who set up the initial Intra-Agency Agreement or how the 
calculation was originally determined.  Instead, as CMS staff explained, 
the policies for calculating the ceiling prices have been orally passed 
down since the early 1990s.  CMS officials have never questioned the 
policies for calculating the ceiling price because HRSA never raised any 
issues with the outcomes. 
A general lack of detailed procedures for calculating the 340B ceiling 
price results in unreliable data with which to oversee the 340B Program 
and could lead to inappropriate enforcement actions.  For example, if 
HRSA had conducted a review of the appropriateness of entities prices 
using the data CMS generated, the improper 340B ceiling prices would 
have produced faulty results and potentially misleading information. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  12  F I N D I N G S  
Due to the absence of established procedures, the 340B ceiling price was 
calculated using incorrect package size information. CMS was using 
incomplete information on a products package size, thereby calculating 
and supplying HRSA with incorrect 340B ceiling prices.  Based on our 
analysis of the ceiling prices from 2002, we estimate that incorrect 
package size data significantly affected 6 percent of the 3,000 prices we 
reviewed.  HRSA had never examined the completeness of package size 
information or specified to CMS the type or source for package size data 
needed to calculate 340B ceiling prices. 
To correctly compute 340B ceiling prices, it is necessary to multiply the 
Medicaid unit price by the products total package size.  To define a 
products package size, it is necessary to multiply the number of units in 
a bottle or vial by the number of  bottles or vials that are packaged and 
sold together. This is typically expressed in a unit X amount notation. 
For example, 100 pills sold in a bottle would have a total package size of 
100 X 1=100. 
In our analysis of package size data, we found that the ceiling prices 
calculated by CMS included only units in calculating the 340B ceiling 
price, rather than correctly multiplying units X amount to determine 
the total package size. When CMS used the package size information 
from First Databank, it only captured the field containing units, not the 
second field listing the amount. 
Package size problems are rarely found in drug products delivered as 
pills. For these products, it is easy to identify the unit as a pill and the 
amount as the bottle that contains them. Using the example from 
above, 100 pills sold in a bottle would have a total package size of 
100 X 1. In these cases, since the amount, or multiplier, is one, the 
information on units previously captured by CMS and the total package 
size necessary to correctly calculate the 340B ceiling price are the same. 
However, for products measured by liquid volume or weight, such as 
inhalers, ointments, or products sold in vials, incomplete package size 
information does present a problem. In these cases, it can be difficult to 
determine what constitutes a unit and what constitutes the amount.  In 
many of these cases, the manufacturer specifies the amount as a 
number greater than one. 
For example, the manufacturer may report the total package size for a 
liquid prescription drug as 3 mL X 5, equal to 3 milliliters of product 
in each of 5 vials.  In this case, it is necessary to multiply the unit X 
amount, or the number of milliliters (3) by the number of vials (5), 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  13  F I N D I N G
 
S 
which results in a total package size of 15.  Using only the units, the 
calculated 340B ceiling price would underestimate the actual 340B 
ceiling price by a factor of 5.   
As this example illustrates, the miscalculation of the ceiling price due to 
incomplete package size information may significantly understate the 
price.  In our review of CMSs listed package sizes, we discovered cases 
in which the ceiling price was 50 percent lower than the actual ceiling 
price calculated using the correct package size. 
Our review of FDA and First Databank package size data, which are 
both reported by manufacturers, yielded marked discrepancies that 
raise questions about potential problems with the general consistency 
and reliability of manufacturers package size reporting.  Manufacturers 
are not held to any specific standards when reporting the package size, 
so determining the correct amount for the purposes of calculating the 
340B ceiling price is complicated and affects the entire pharmaceutical 
industry. 
HRSA has no procedure for converting negative ceiling price values received 
from CMS into practical ceiling prices.  HRSA does not have an official 
policy regarding how to convert negative prices to reflect positive, and 
therefore practical, ceiling prices. HRSA has never communicated with 
CMS about the incidence of negative ceiling prices, nor did it perform 
the necessary conversions for its record of 340B ceiling prices.  Our 
review of CMSs 3rd quarter 2002 data found 117 products with negative 
prices. 
Because the 340B ceiling price formula is essentially AMP minus URA, 
negative ceiling prices occur when the discount, the drugs URA, is 
greater than the base price, the AMP.  This situation creates a negative 
price that is meaningless in the marketplace.  HRSA recommends to 
manufacturers that if the ceiling price calculation yields a negative 
number, it expects the manufacturer to charge the entity a penny.  
However, HRSA has not provided official guidance on this issue or 
updated its records to reflect this expectation.   
If HRSA uses data containing negative ceiling prices to determine if 
entities paid at or below 340B ceiling prices, the results will be skewed. 
Mathematically, subtracting a negative number is the same as adding a 
positive; therefore, the presence of negative figures in the Governments 
official record would seriously distort any assessment of price 
discrepancies.  For example, if the covered entity actually paid $0.01 for 
a product, but HRSAs uncorrected data had a ceiling price of -$2.50, the 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  14  F I N D I N G S  
subtraction of $0.01 minus (-$2.50) would result in a positive $2.51 
overcharge.  In reality the manufacturer may have charged the entity a 
penny, which is the amount it should have charged per HRSAs 
recommendation; however, the comparison of these two prices would 
show an overcharge.  These false positives might cause HRSA to draw 
invalid conclusions about compliance with the discount requirements. 
Even if HRSAs record of the 
HRSA lacks the oversight mechanisms and 
ceiling price were completely and 
authority to ensure that 340B entities pay at or 
accurately calculated, HRSA does 
below the 340B ceiling price 
not use the information to oversee 
the 340B Program because it lacks 
the necessary mechanisms and authorities.  HRSA has no process for 
ensuring that participating entities receive the price to which they are 
entitled.  HRSA also does not have the statutory authority to enforce 
compliance with the PHS Act or the the Pharmaceutical Pricing 
Agreement, or to effectively implement its prime vendor program.  
While manufacturers have a vested interest in complying with the 
terms of the PHS Act and the Pharmaceutical Pricing Agreement, 
HRSA has not pursued increased authority or developed a plan 
designed to ensure the integrity of the 340B Program. 
HRSA has no system for ensuring that entities participating in the 340B 
Drug Discount Program receive the statutory discount 
According to interviews with HRSA officials, the agency has no reliable 
way to document that entities purchasing drugs under the 340B 
discount are actually receiving the discount to which they are entitled.12 
Because confidentiality provisions of OBRA 90 prevent the disclosure of 
340B pricing data to the entities, HRSA has the primary responsibility 
of ensuring that the programs participants do not pay more than the 
340B ceiling price. However, we found that HRSA does not conduct 
audits or spot checks of entities or manufacturers prices, citing 
insufficient authority. 
HRSA does not compare the 340B ceiling prices calculated by CMS to 
pharmaceutical manufacturers 340B ceiling prices 
HRSA does not verify the official Government 340B ceiling prices 
against manufacturers 340B ceiling prices to detect discrepancies.  
Manufacturers must calculate their ceiling prices to participate in the 
340B Program, but they are not required to report their final ceiling 
prices to HRSA.  However, manufacturers sign the Pharmaceutical 
Pricing Agreement, which states they must charge entities at or below 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  15  F I N D I N G S  
the ceiling price and can face consequences for violating the terms of the 
agreement. Theoretically, the Government and the manufacturers 
should calculate the same ceiling price because they use the same 
numbers.  However, HRSA does not check and thus is unable to detect 
whether manufacturers perform the calculation properly and whether 
entities are paying at the correct ceiling price. 
HRSA has no statutory authority to enforce compliance with the PHS Act or 
the Pharmaceutical Pricing Agreement,  or to effectively implement its prime 
vendor program 
HRSA does not have the necessary legislative, regulatory, or contractual 
authority to effectively oversee the 340B Program.  Unlike the Medicaid 
Rebate Program statute, the PHS Act does not impose civil penalties for 
noncompliance with the 340B Program requirements.  Instead, the PHS 
Act, in accordance with its predecessor, the SSA Act, states that 
manufacturers must comply with the terms of the 340B Program or be 
terminated from participation in the Medicaid and 340B Programs.13 
Currently, HRSA has guidance on a voluntary process for resolving 
disputes between manufacturers and entities,14 but, according to 
interviews with HRSA staff, pharamaceutical manufacturers, entities, 
and other industry experts, no one has engaged in the dispute 
resolution process. 
HRSAs only statutory authority to enforce 340B Program requirements 
may be too extreme to actually use; in addition, other authorities 
mentioned in program guidance are ambiguous.  According to 340B 
Program guidelines, if HRSA determines that a manufacturer has 
violated the provisions of section 340B of the PHS Act, the 
manufacturers Pharmaceutical Pricing Agreement could be terminated 
or other actions taken, as deemed appropriate.15  However, 
terminating a manufacturers participation is an extremely severe 
sanction, given the effect terminating a manufacturer would have on 
access to medications for the millions of Medicaid and 340B 
beneficiaries. Further, it is unclear what other actions HRSA can 
take. 
Because HRSAs informal dispute resolution process is voluntary, 
covered entities or manufacturers are not required to participate.  If a 
covered entity believes that a manufacturer is charging a price for a 
covered drug that exceeds the ceiling price, it can submit a written 
request for a review of the dispute, but this does not guarantee the 
resolution of such dispute.  If the manufacturer does not cooperate with 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  16  F I N D I N G S  
the resolution process because there is no requirement to do so, HRSA 
cannot enforce the consequences for violations as stated in HRSAs 
Pharmaceutical Pricing Agreement.  
Pursuant to this Agreement, if a manufacturer is noncompliant, the 
HHS Secretary may require the manufacturer to reimburse the entity 
for discounts withheld.16 However, the directive to reimburse 
overcharges is only found in the agreement, which does not have the 
same force as a contract and is not reinforced by the PHS Act. 
Even when HRSA attempts action against violators of the 340B 
Program, its lack of legal authority makes it challenging to enforce its 
guidelines. For example, in 2003, OIG issued a report citing five 
manufacturers with charging 340B providers $6.1 million more than 
they should have under the law.17  In September 2004, HRSA issued 
letters to each of the drug companies identified in the audit requesting 
that they develop action plans that include refunding covered entities 
for overcharges.  According to HRSA, the companies have responded to 
the letters, but refunds have yet to be recovered. 
To further illustrate the ineffectiveness of HRSAs current authorities, in 
2001, HRSA itself discovered overcharges based on entities invoices, but 
did not pursue the issue further, citing insufficient authority.  The Public 
Hospital Pharmacy Coalition, an organization that represents the 
interests of public hospitals participating in the 340B Program, 
submitted six hospitals sales data to HRSA for price verification. 
HRSA analysts found that 37 of the 50 drug prices exceeded the ceiling 
price, but could not provide specific information on the extent of the 
overcharges.  Instead, HRSA informed the coalition that the differences 
ranged from 10 to 100 percent over the 340B ceiling price.  Despite the 
evidence, HRSA did not initiate the dispute resolution process or take 
other action to resolve this issue. 
Insufficient legal authority also hampers HRSAs ability to effectively 
implement its prime vendor program.  Section 340B(8) of the PHS Act 
requires HRSA to establish a prime vendor program that negotiates 
discounts below the ceiling price based on the buying power of the 
participating entities.  However, HRSA does not have the specified 
authority to disclose the 340B ceiling prices to its prime vendor for the 
stated purpose of negotiation.  As a result, the prime vendors ability to 
perform its assigned role is challenged by the lack of information. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  17  F I N D I N G S   
  
Participating entities cannot independently  Pursuant to the confidentiality provisions 
verify that they receive the correct 340B price  in OBRA 90 regarding manufacturers 
pricing information, covered entities do 
due to confidentiality provisions 
not have access to confidential drug 
pricing information used to calculate the 340B discountAMP, best 
price, and URA. Therefore, HRSA cannot share 340B ceiling prices with 
the entities. 
HRSAs 340B Program guidance states that confidential drug pricing 
information includes both best price and average manufacturer price. 
The quoted price and actual price given by the manufacturer to the 
covered entity is not confidential.18 The selling price that 
manufacturers provide to wholesalers and entities is considered public 
information because it is not data reported to the Government for the 
purpose of the Medicaid program or the 340B Program.  Also, since the 
340B discount is a ceiling price, a variety of selling prices can exist 
under the ceiling. 
In a 2004 survey of 340B participants, commissioned by HRSA and 
conducted by Mathematica Policy Research, 23 percent of respondents 
complained about the lack of price transparency.  Entities may submit 
written requests to HRSA for 340B price approximations, but survey 
respondents viewed this process as cumbersome and inefficient.19 
HRSA staff confirmed that they are only able to review price requests 
limited to 10 products at a time due to staffing limitations.  Further, 
due to the confidentiality provisions, HRSA can only provide a general 
indication to the entity on whether the price is over the ceiling.  In other 
words, if an entitys reported price exceeds the ceiling price, HRSA can 
inform the entity of the overcharge, but not the extent of the overcharge.   
In October 2000, HRSA attempted to provide entities with a tool to 
verify prices but was ultimately unsuccessful.  HRSA posted the selling 
prices of 207 commonly prescribed drugs (negotiated by and purchased 
through its prime vendor) on its Web site to demonstrate the prices 
entities could receive if they signed up for the prime vendor program. 
However, due to industry complaints that the publication violated the 
confidentiality provisions stated in the Medicaid statute, HRSA 
removed the list in January 2001.20  This action removed the only tool 
entities had to verify discounts.  HRSA does not currently post any 
information related to price on its Web site or elsewhere. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  18  F I N D I N G S  
Since HRSA cannot share the protected data and is faced with industry 
opposition to supplying sales data, entities are unable to determine or 
approximate whether their purchases are at or below the 340B ceiling 
price.  Absent such data, entities either assume that the manufacturers 
reported price is compliant with the law or expend significant resources 
to obtain drug pricing information from secondary sources (including 
wholesalers, consultants, and other purchasers). 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  19    R E C O M M E N D A T I O N S   
  
Our findings point to systemic problems with HRSAs oversight of the 
340B Program and with the data used in the calculation of 340B ceiling 
prices.  HRSAs 340B ceiling price has not historically been based on 
accurate pricing information and we have concerns about the continued 
problems posed by inaccurate and incomplete data.  Even if HRSA did 
possess accurate ceiling prices, we believe that it does not have 
appropriate mechanisms in place to ensure that entities are charged at 
or below the appropriate ceiling price. HRSA also does not have the 
authority to enforce the terms of the PHS Act.  Finally, confidentiality 
provisions prevent HRSA from sharing the 340B ceiling price data with 
covered entities so they can verify that they are receiving the price to 
which they are entitled.  As a result, it is nearly impossible for HRSA to 
assess whether the 340B Program is being implemented as intended to 
stretch Federal resources as far as possible, to reach more eligible 
patients and provide more comprehensive services.21 
HRSAs ability to protect the integrity of the 340B Program is not 
only crucial to the thousands of Federal grantees and public hospitals 
whose patients currently benefit from the discount, but is also 
important to the growing number of future beneficiaries. Due to a 
change enacted by the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003, rural and urban hospitals with fewer than 
100 beds now meet the eligibility criteria to enroll in the 340B 
Program.22  State Medicaid Directors are also seeking ways to cover 
the pharmaceutical needs of some Medicaid beneficiaries using the 
340B discount price, which is typically lower than the Medicaid 
rebate.  Finally, the Presidents proposed budget for fiscal year 2006 
completes the Administrations 5-year commitment to create 1,200 
new or expanded health center sites serving an estimated additional 
6.1 million people.23  Each new site will be eligible for the 340B 
Program.  These beneficiaries depend on receiving discounted 
prescription drugs through the 340B Program; therefore, it is 
essential that the program receive appropriate oversight. 
The following recommendations focus on improving HRSAs oversight 
of the 340B Program as it relates to the integrity of its ceiling prices, 
as well as its ability to ensure that entities pay no more than the 
appropriate price.  
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  20  R 	E C O M M E N D A T I O N S  
CMS and HRSA should work together to ensure accurate and timely 
pricing data for the Governments official record of 340B ceiling prices 
CMS and HRSA have already engaged in discussions about calculating 
the 340B ceiling price. On September 19, 2005, CMS and HRSA signed 
a new Intra-Agency Agreement, which states that HRSA will receive 
pricing data effective during FY 2005 from CMS, but will itself calculate 
the Governments 340B ceiling price. We encourage CMS and HRSA to 
continue to work together to improve the accuracy and timeliness of the 
pricing data CMS has agreed to provide HRSA.  Additionally, because 
no Agreement has been signed for FY 2006, we anticipate the need for 
continued cooperation to ensure that there is no interruption in the 
calculation of the 340B ceiling prices used to monitor the program. To 
improve the data contained in the 340B ceiling price file, CMS and 
HRSA should: 
 	  Restate the need for manufacturers to provide complete and timely 
pricing data, as required by OBRA 90;  if manufacturers pricing 
data submissions do not comply with the 30-day requirements, CMS 
should consider making referrals to OIG to levy penalties for late 
data in appropriate cases; 
 	  Determine a solution for updating missing prices so HRSAs record 
is complete; and  
 	  Eliminate data that are not relevant to the 340B Program, such as 
terminated products and labelers, as well as products with future 
market dates.   
HRSA should establish detailed standards for the calculation of 340B ceiling 
prices 
To prevent the types of errors we discovered in CMSs calculation of the 
340B ceiling price, we suggest that HRSA take action to ensure the 
accuracy of its calculations.  In particular, HRSA needs to develop 
specific policies around correctly calculating 340B ceiling prices.  
HRSAs standards should include specifics on the use of correct package 
sizes and a conversion of negative ceiling prices.  
HRSA should institute oversight mechanisms to validate its 340B price 
calculations and the prices charged to participating entities 
We suggest that this oversight protocol include: 
 	  Comparing the Governments official 340B ceiling prices to the 
manufacturers ceiling prices each quarter to detect discrepancies. 
HRSA could accomplish this by requesting that manufacturers 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  21  R 	E C O M M E N D A T I O N S  
submit either a sample of 340B prices or send all 340B prices 
directly to HRSA each quarter. 
 	  Spot-checking entity invoices to ensure that entities are charged at 
or below 340B ceiling prices.  
 	  Selectively auditing manufacturers, wholesalers, and covered 
entities to ensure the integrity of the 340B Program. 
HRSA should seek authority to establish penalties for violations of the    
PHS Act 
Other than exclusion from participation in the Medicaid drug rebate 
and 340B programs, HRSA has no effective penalties to use for 
violations of the PHS Act or the Pharmaceutical Pricing Agreement. 
HRSA should propose a legislative package that might include a variety 
of sanctions, such as fines and civil monetary penalties.  We recommend 
that HRSA consider as a model CMSs statutory authority to enforce the 
Medicaid rebate program, pursuant to  1927(b)(3)(C)(i) of the Social 
Security Act, and seek similar authorities with respect to enforcement of 
the 340B Program. 
HRSA should provide covered entities with secured access to certain 
pricing data to help approximate 340B ceiling prices 
To optimize 340B savings and maximize the efficiency of the covered 
entities role in the program, we suggest two methods to help entities 
detect differences between the price they pay and the price they are 
entitled to under the law: 
1.  	 HRSA could design a mechanism that allows participating entities 
to assess whether prices exceed the ceiling price. Because OBRA 90 
requires the HHS Secretary to keep components of the 340B ceiling 
priceAMP and Best Priceconfidential, HRSA may not disclose 
the 340B ceiling price to the entities.  Presently, HRSA can 
informally review a limited number of prices on behalf of the entities 
and inform them if their prices exceed the ceiling price.  However, to 
protect confidential data, it cannot reveal the extent of any 
overcharge.  
We suggest that HRSA develop a price verification system that 
informs entities if they are paying above the ceiling price.  Entities 
should have enough information to, at the very least, submit prices 
to determine whether they comply with the 340B discount 
requirements.  Through this system, entities should be able to 
identify potential vulnerabilities and pursue further communication 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  22  RR 	EE CC OO MM MM EE NN DD AA TT II OO NN SS  
with HRSA or the manufacturer. One suggestion is to institute a 
password-protected, Web-based query function to allow entities to 
check the prices they paid against 340B ceiling prices, while still 
protecting the confidentiality of the manufacturers data. For 
example, entities could enter the price they paid for a drug and 
receive a response if it exceeds the ceiling price within a specified 
percentage (for example, within 5 percent). Alternatively, entities 
could submit the prices paid for a market basket of products to 
obtain information about the appropriateness of the charges in the 
aggregate. 
2.  	 HRSA could reinstate the publication of its 340B prime vendor 
programs selling price list on the agency Web site so covered 
entities could estimate the potential savings available to them. 
Pursuant to HRSAs entity guidelines, confidential pricing 
information includes both the best price and the AMP; however, the 
quoted price and the actual price given by the manufacturer to the 
entity are not confidential.24 
Because the absence of an offical 340B price list presents a major 
challenge to participation in the 340B Program, we suggest that 
HRSA maximize the use of its prime vendor to provide 
nonconfidential pricing information to covered entities. HRSAs 
posting of the agencys prime vendor programs prices in 2000 did 
not reveal information protected by OBRA 90; rather, HRSAs 
information included quoted and/or actual wholesaler prices that are 
widely available in the marketplace. The reinstatement of this list 
would provide entities with a tool to compare the prices they pay to 
a source that is overseen by the prime vendor. 
AGENCY COMMENTS 
HRSA and CMS concurred with most of our recommendations. The 
complete text of the comments can be found in Appendix B. 
Based on the issues raised and recommedations offered in our 
withdrawn report, HRSA and CMS have already engaged in numerous 
technical discussions about calculating the 340B ceiling price. As a 
result of these discussions, HRSA and CMS negotiated a new Intra-
Agency Agreement and Data Use Agreement. Under this Agreement, 
HRSA will receive pricing data from CMS effective during FY 2005, but 
will itself calculate the Governments 340B ceiling price. To improve 
the quality and timeliness of the data sent to HRSA, CMS has agreed to 
OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  23  reiterate the 30-day pricing data submission requirement for 
manufacturers and will consider referring appropriate cases of late 
submission to OIG to levy penalties.  HRSA commented that it will 
work with CMS to maximize the acquisition of manufacturers data as 
well as resolve problems related to missing data.  HRSA also agreed to 
publish detailed standards for the calculation of 340B ceiling prices on 
its Web site. 
In response to our recommended steps for instituting oversight to 
improve the integrity of 340B ceiling prices, HRSA stated its intent to 
review the data that manufacturers and entities voluntarily submit, to 
the extent that resources permit.  HRSA stated that it further intends 
to compare manufacturers pricing data, provided through wholesalers 
to its Prime Vendor Program, to its 340B ceiling prices.  For more 
intensive audits of the 340B Program, HRSA deferred to its reliance 
upon OIG audits and evaluations. 
HRSA does not support our recommendation to seek legislation to 
establish penalties for violations of the PHS Act, preferring to first 
acquire experience with its planned changes.  Finally, HRSA does not 
concur with our recommendation that it reinstate the publication of 
HRSAs 340B prime vendor programs selling price on the agency Web 
site. HRSA stated that it is exploring other options.   
OFFICE OF INSPECTOR GENERAL RESPONSE 
We are encouraged that CMS and HRSA concur with most of our 
recommendations and have already taken steps to improve the 
calculation of the 340B ceiling price.  In addition, we support HRSAs 
intention to publish detailed standards for the calculation of the 340B 
price. However, HRSA did not indicate an approximate timeline for 
posting this information or provide details on what we should expect of 
the standards. 
We also support HRSAs stated intention to compare the manufacturers 
data currently received on a voluntary basis to the ceiling price and 
review the prices charged to entities; however, we do not believe this 
represents an adequate approach toward oversight of the program. 
While this level of review might prove helpful in some instances, it will 
only cover the number of limited manufacturers and entities who choose 
to voluntarily supply drug pricing data.  Comparing manufacturers 
selling prices to the official Government 340B prices represents a 
positive step toward comprehensive oversight.    
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  24  We are concerned about the limited nature of HRSAs own plans for 
oversight of the 340B Program.  While OIG is committed to ensuring the 
integrity of the HHS programs, we believe that routine oversight is an 
agencys responsibility. Therefore, we maintain that HRSA itself needs 
to develop a comprehensive auditing program. 
We also do not agree with HRSA that it is best to wait to seek authority 
to establish penalties for violations of the PHS Act.  Rather, we believe 
that the ability to impose fines and civil penalities is essential in 
ensuring that entities receive the full 340B discount. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  25    E N D N O T E S   
  
1   OIG quality assurance standards are based on the Government 
Auditing Standards, 2004. 
2  Total purchase estimates from the Office of Pharmacy Affairs, 2003. 
3  340B entity expenditures are based on estimates from the Director of 
HRSAs Office of Pharmacy Affairs in a presentation to the 340B 
Coalition on July 14, 2003.  This is the most recent estimate available. 
4  Section 1927 of the Social Security Act, 42 U.S.C. 1396s, defines the 
sales information drug manufacturers must provide to CMS, including 
the AMP and Best Price for the total sales of each covered outpatient 
drug over a quarters time. 
5  Intra-Agency Agreement signed between CMS and HRSA, 2004. 
6  Guidance Regarding Section 602 of the Veterans Health Care Act of 
1992 Limitation on Prices of Drugs Purchased by Covered Entities,     
58 FR 27291, December 29, 1993. 
7  Section 1927(b)(3)(D)(i) of the Social Security Act, 42 U.S.C. 1396r-    
8(b)(3)(D)(i). 
8  Intra-Agency Agreement signed between CMS and HRSA, 2004. 
9  Totals do not equal 100 due to rounding. 
10  The amount of the penalty, as set forth in section 1927(b)(3)(C)(i) of 
the Act, is $10,000 for each day in which such information has not been 
provided.  The Secretary has delegated the responsibility of imposing 
such penalties to OIG when CMS identifies instances in which 
manufacturers are in violation of the 30-day submission requirement. 
11 The 50/50 edit was designed to reject an AMP when it is either 50 
percent higher or lower than the manufacturers submission from the 
previous quarter.  When the 50/50 edit detects faulty AMP values, 
CMS sends a report to the manufacturer requesting corrected 
information. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  26  12  OIG interview with HRSAs Office of Pharmacy Affairs, June 2003. 
13 42 U.S.C. 1396r-8(b)(4)(B). 
14 59 FR 30023, May 13, 1994. 
15  61 FR 65413, December 12, 1996. 
16  Pharmaceutical Pricing Agreement, section IV, Dispute Resolution, 
subsection (c). 
17  Office of Inspector General, Pharmaceutical Manufacturers 
Overcharged 340B Entities, A-06-01-00060, March 10, 2003. 
18  58 FR 68922, December 29, 1993. 
19  Mathematica Policy Research, Inc., August 30, 2004, The PHS 340B 
Drug Discount Program: Results of a Survey of Eligible Entities. 
20  Pharmaceutical Researchers and Manufacturers of America letter to 
HRSA, January 16, 2001. 
21  H.R. Rpt. 102-384, 102nd Cong., 2nd session, part 2, at 12 (1992). 
22  Medicare Prescription Drug, Improvement, and Modernization Act of 
2003, section 402, increased the Medicare Disproportionate Share 
Hospital cap from 5.25 percent to 12 percent.  (SSA 1886(d)(5)(F)(xiv) 
23  Presidents Budget FY 2006, Advancing the Health, Safety, and   
Well-Being of Our People, pp. 3-4. 
24  59 FR 25110, May 13, 1994. 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  27    A P P E N D I X   ~   A   
  
Programs Eligible to Participate in 340B: 
Community health centers 
Tuberculosis clinics 
Sexually transmitted disease clinics 
Disproportionate share hospitals 
Migrant health clinics 
Healthcare for the homeless centers 
Federally qualified health center look-alikes 
Hemophilia treatment centers 
Ryan White Title I 
Ryan White Title II (direct purchase) 
Ryan White Title II (rebate option) 
Ryan White Title III  
Public housing clinics 
School-based programs 
Special Projects of National Significance 
Black lung clinics 
Urban Indian organizations 
Federally qualified health centers funded by the Office of 
Tribal Programs 

Family planning clinics 

  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  28    A P P E N D I X   ~   B   

  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  29    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  30    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  31    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  32    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  33    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  34    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  35    OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  36    A C K N O W L E D G M E N T S   
  
This report was prepared under the direction of William C. Moran, 
Regional Inspector General for Evaluation and Inspections in the 
Chicago regional office, and Ann T. Maxwell, Assistant Regional 
Inspector General.  Other principal Office of Evaluation and Inspections 
staff who contributed include: 
Madeline Francescatti, Team Leader 
Tom Komaniecki, Program Analyst 
Suzanne Bailey, Program Analyst 
Ayana Everett, Program Specialist 
Elise Stein, Director, Public Health and Human Services 
Barbara Tedesco, Mathematical Statistician 
  OEI-05-02-00072  DEFICIENCIES IN THE OVERSIGHT OF THE 340B DRUG PRICING PROGRAM  37