Department of Health and Human Services

OFFICE OF

INSPECTOR GENERAL

STATE EFFORTS TO EXCLUDE 

340B DRUGS FROM 

MEDICAID MANAGED CARE 

REBATES

Suzanne Murrin

Deputy Inspector General for

Evaluation and Inspections

June 2016

OEI-05-14-00430
 

EXECUTIVE SUMMARY: STATE EFFORTS TO EXCLUDE 340B DRUGS 

FROM MEDICAID MANAGED CARE REBATES 

OEI-05-14-00430 

WHY WE DID THIS STUDY 

Manufacturer rebates for drugs paid through Medicaid managed care organizations 

(MCOs) are an increasingly important source of savings for both States and the Federal 

government. However, “duplicate discounts,” which occur when manufacturers pay 

Medicaid rebates on drugs sold at the already-discounted 340B price, are prohibited by 

law. Thus, for States to collect allowable rebates only and avoid duplicate discounts for 

drugs paid through MCOs, they must identify and exclude 340B drug claims. If a State 

does not accurately identify 340B drug claims, both duplicate discounts and forgone 

rebates—that is, unclaimed rebates to which States are legally entitled—may occur. 

Duplicate discounts result in manufacturers paying too much in rebates, while forgone 

rebates result in States paying too much for drugs. 

HOW WE DID THIS STUDY 

We conducted structured interviews with States that pay for drugs through MCOs to

determine how they identify 340B drug claims when collecting Medicaid rebates. We 

assessed States’ methods and identified potential vulnerabilities that could inhibit correct 

rebate collection. We did not attempt to determine whether duplicate discounts for MCO 

drugs had occurred. 

WHAT WE FOUND 

We found that, to identify 340B drug claims and correctly collect rebates for MCO drugs, 

most States use methods that identify providers using 340B-purchased drugs. However, 

we found that these provider-level methods may not accurately identify all individual 

340B drug claims, creating a risk of duplicate discounts and forgone rebates. By 

contrast, we found that methods that operate at the claim level can improve accuracy in 

identifying 340B drug claims, and thereby, help States correctly collect rebates. 

WHAT WE RECOMMEND 

We recommend that the Centers for Medicare & Medicaid Services (CMS) require States 

to use claim-level methods to identify 340B claims. CMS did not concur with our 

recommendation, noting that while it agrees with the importance of claim-level methods, 

the statute does not contemplate such a requirement for States. We continue to 

recommend that CMS require the use of claim-level methods to improve accuracy in 

identifying 340B claims and thereby reduce the risk of duplicate discounts and forgone 

rebates. 

We also recommend that the Health Resources and Services Administration (HRSA) 

clarify its guidance on preventing duplicate discounts for MCO drugs to align with this 

new requirement. HRSA concurred with our recommendation.
TABLE OF CONTENTS

Objectives ....................................................................................................1

Background..................................................................................................1

Methodology................................................................................................7

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

Most States use provider-level methods to identify 340B claims for 

MCO drugs.......................................................................................8

Provider-level methods may not accurately identify all 340B 

claims, creating a risk of duplicate discounts and forgone

rebates............................................................................................10

Claim-level methods can improve accuracy in identifying 340B 

claims.............................................................................................13

Conclusion and Recommendations............................................................16

Agency Comments and Office of Inspector General Response.....18

Appendices.................................................................................................19

A: Descriptions of Methods to Identify 340B Claims and Prevent 

Duplicate Discounts.......................................................................19

B: HRSA and CMS Policies Related to Duplicate Discounts for 

MCO Drugs....................................................................................21

C: Detailed Methodology..............................................................23

D: State-Specific Methods to Identify 340B Claims and Prevent 

Duplicate Discounts for MCO Drugs ............................................25

E: Agency Comments ...................................................................27

Acknowledgments......................................................................................31
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 1

OBJECTIVES

1. To describe States’ methods for identifying claims for 340B-purchased 

drugs paid through Medicaid managed care organizations (MCOs).

2. To identify potential vulnerabilities in States’ methods for correctly 

collecting rebates and preventing duplicate discounts for drugs paid 

through MCOs.

BACKGROUND

Manufacturer rebates for drugs paid through MCOs are an increasingly 

important source of savings for both States and the Federal government. 

From 2011 to 2014, the proportion of States paying for prescription drugs 

through MCOs rose from under one-quarter to over two-thirds.1 As more 

Medicaid drugs are paid through MCOs, the financial impact of States’ 

collection of rebates for those drugs—or failure to collect such rebates—

becomes increasingly significant.

States’ methods for identifying claims for drugs purchased under the 340B 

Program have both direct and indirect effects on rebate collection. The 

340B Program allows certain health care providers to purchase drugs at a 

discount. Duplicate discounts, which occur when manufacturers sell drugs 

at the discounted 340B price and later pay Medicaid rebates on the same 

drugs, are prohibited by law. To collect rebates correctly and prevent 

duplicate discounts, States must identify and exclude claims representing 

340B-purchased drugs. If States’ methods do not accurately identify 340B 

claims, however, States may end up forgoing rebates to which they are 

legally entitled. Moreover, manufacturer concerns about the effectiveness 

of States’ methods to prevent duplicate discounts can contribute to rebate 

disputes, as demonstrated in previous OIG work.2 Such disputes may 

impede or delay rebate payments, and require States to expend scarce 

resources to resolve them.

This study was conducted in response to a Congressional request.

Medicaid Prescription Drug Coverage

All 50 States and the District of Columbia (hereinafter referred to as 

States) offer prescription drug coverage as part of their Medicaid benefit 

packages. Medicaid reimbursement for covered outpatient drugs totaled 

 ____________________________________________________________ 

1

 Office of Inspector General (OIG), States’ Collection of Rebates for Drugs Paid 

Through Medicaid Managed Care Organizations Has Improved, OEI-05-14-00431, 

September 2015, p. 1. 

2

 OIG, Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-11-00580, 

August 2014. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 2

approximately $42 billion in 2014.3, 4 Covered outpatient drugs include 

drugs dispensed directly to patients at pharmacies (pharmacy drugs) and 

drugs administered by physicians or other medical practitioners to patients 

(physician-administered drugs).

States use two primary models to pay for drugs: fee-for-service (FFS) and 

MCOs. Under the FFS model, pharmacies and providers submit 

reimbursement claims for drugs directly to the State, and the State pays 

pharmacies and providers for those claims. Under the MCO model, States 

prospectively pay MCOs a fixed monthly amount for each Medicaid 

beneficiary, regardless of whether a beneficiary receives services during 

the month. Pharmacies and providers submit drug claims to MCOs under 

the MCO model. States may choose to use more than one payment model. 

For example, a State might pay for pharmacy drugs under the FFS model 

but pay for physician-administered drugs under the MCO model.

The Medicaid Drug Rebate Program

The Omnibus Budget Reconciliation Act of 1990 established the Medicaid 

Drug Rebate Program.5 The program requires that, for covered outpatient 

drugs (hereinafter referred to as drugs) to be eligible for Federal financial 

participation through Medicaid, manufacturers must pay rebates to States 

on these drugs when dispensed to Medicaid beneficiaries and paid for by 

Medicaid.6 States essentially share a portion of these rebates with the 

Federal government.7

In 2010, the Affordable Care Act (ACA) expanded the Medicaid Drug 

Rebate Program to require payment of rebates for MCO drugs.8 Prior to 

ACA, only FFS drugs were subject to rebates under the Medicaid Drug 

Rebate Program.

To collect rebates, States determine the amount of rebates owed to them 

for each quarter and send invoices to manufacturers. First, States 

determine the total number of units of each drug paid by Medicaid in the 

quarter. For FFS drugs, States calculate units from drug claims 

 ____________________________________________________________ 

3 The term “covered outpatient drug” is defined at 42 U.S.C. § 1396r-8(k)(2). 

4 OIG analysis of data from the Centers for Medicare and Medicaid Services’ (CMS) 

Medicaid Budget and Expenditure System (MBES) and Medicaid State drug utilization 

data, September 2015. We combined Medicaid fee-for-service expenditures from MBES 

and MCO expenditures from Medicaid State drug utilization data. This amount does not 

reflect rebates. 

5

 The Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, § 4401; 42 U.S.C. § 

1396r-8.

6

 42 U.S.C. §§ 1396r-8(a)(1) and 1396r-8(b)(1). 

7 42 U.S.C. § 1396r-8(b)(1). 

8

 ACA, P.L. 111-148 § 2501(c); 42 U.S.C. § 1396b(m)(2) and 42 U.S.C. § 1396r-8(b)(1). 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 3

reimbursed directly by the State. For MCO drugs, States calculate units 

from drug claims data provided by their MCOs.

9

 States then multiply the 

total number of units of each drug by the drug’s unit rebate amount to 

determine the total quarterly amount of rebates owed.10 Finally, States 

send invoices to manufacturers reflecting the total quarterly amount of 

rebates owed for the manufacturers’ drugs.

When a manufacturer, in good faith, believes that a State’s rebate invoice 

for a given drug is based on erroneous utilization data, the manufacturer 

may dispute the invoiced amount for that drug.11 Once a manufacturer 

initiates a dispute, it can withhold payment to States for the disputed 

invoiced amount.

The 340B Drug Pricing Program

The Veterans Health Care Act of 1992 established the 340B Drug Pricing 

Program.12 The 340B Program requires that, for drugs to be eligible for 

Federal financial participation through Medicaid, manufacturers must 

provide discounts on such drugs to certain eligible health care providers, 

known as covered entities.13, 14 To participate, covered entities must 

register with HRSA, the agency responsible for administering the 340B 

Program. Covered entities generally bill their patients’ insurance—

including Medicaid, if applicable—for 340B-purchased drugs that they 

dispense or administer.

340B-purchased drugs for Medicaid patients. Covered entities may 

decide to use either 340B-purchased drugs or non-340B-purchased drugs 

 ____________________________________________________________ 

9

 We refer to data on drug claims reimbursed directly by the State (for FFS drugs) or by 

MCOs (for MCO drugs) as drug utilization data. 

10 CMS uses drug pricing data provided by manufacturers to calculate the unit rebate 

amount for each drug according to a statutory formula. See 42 U.S.C. § 1396r-8(c). 

11 CMS, Sample Drug Rebate Agreement, § V(b). Accessed at http://www.medicaid.gov/ 

Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/ 

Downloads/SampleRebateAgreement.pdf on October 27, 2015. 

12 Veterans Health Care Act of 1992, P.L. 102-585 § 602; Public Health Service Act § 

340B; 42 U.S.C. § 256b. 

13 42 U.S.C. § 1396r-8(a)(1), 42 U.S.C. § 1396r-8(a)(5), and 42 U.S.C. § 256b(a)(1). 

14 42 U.S.C. § 256b(a)(4) enumerates the complete list of the types of entities eligible to 

become covered entities. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 4

for their Medicaid patients.15, 16 Covered entities might make the same 

decision for all of their Medicaid patients, or make different decisions for 

their FFS Medicaid patients and their MCO Medicaid patients.

Contract pharmacy arrangements. Covered entities may contract with 

one or more pharmacies, known as contract pharmacies, to dispense 

340B-purchased drugs on their behalf.17 Most contract pharmacies are 

retail pharmacies that serve the general public as well as patients of the 

covered entity or entities with which they contract. Contract pharmacies 

generally bill patients’ insurance—including Medicaid, if applicable—on 

behalf of the covered entity for 340B-purchased drugs dispensed to its 

patients.

Duplicate Discounts

Duplicate discounts occur when manufacturers sell drugs at a discount 

under the 340B Program and later pay Medicaid rebates on the same 

drugs. Duplicate discounts are prohibited by law for both FFS drugs and 

MCO drugs.18

 Figure 1 shows how duplicate discounts could occur in the 

Medicaid rebate process.

 ____________________________________________________________ 

15 The decision to use 340B-purchased drugs for Medicaid patients is often referred to as 

“carving in,” whereas the decision to use non-340B-purchased drugs for Medicaid 

patients is referred to as “carving out.” Covered entities may decide to use 

non-340B-purchased drugs for their Medicaid patients because payment rates make doing 

so more financially advantageous. State laws and/or billing rules may restrict covered 

entities’ ability to make this decision.

16 See, e.g., 65 Fed. Reg. 13983, 13984 (March 15, 2000). That guidance applies to FFS 

drugs because it was developed before the ACA expanded the Medicaid Drug Rebate 

Program to include MCO drugs. However, HRSA has proposed new guidance that 

would extend this policy to MCO drugs. See 80 Fed. Reg. 52300, 52309 (August 28, 

2015). 

17 See, e.g., 75 Fed. Reg. 10272 (March 5, 2010). Covered entities are permitted to use 

multiple contract pharmacy arrangements as long as they comply with applicable 

guidance. Id. at 10277-10278. 

18 42 U.S.C. § 256b(a)(5)(A)(i) and 42 U.S.C. § 1396r-8(j)(1). 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 5

Figure 1: How Duplicate Discounts Could Occur in the Medicaid Drug Rebate Process 

Covered Entity 

MCO Manufacturer 

State 

MCO 340B 

Claims 

FFS 340B 

Claims 

MCO Utilization 

Data (Includes 

340B Claims) 

Rebate Invoice 

(Mistakenly 

Includes 340B 

Claims) 

Discount 1: Drugs 

Sold at Reduced 340B 

Price 

Discount 2: Rebates 

for 340B-Purchased 

Drugs 

States play a key logistical role in preventing duplicate discounts because 

they invoice manufacturers for rebates. To collect rebates correctly and 

prevent duplicate discounts, States must ensure that FFS and MCO 

utilization data used to invoice manufacturers do not include claims 

representing 340B-purchased drugs (hereinafter referred to as 340B 

claims). In general, States do so by identifying 340B claims in utilization 

data and excluding them before compiling rebate invoices.

Methods for identifying 340B claims. A number of different methods are 

available to States for identifying 340B claims and preventing duplicate 

discounts, but they generally correspond to one of two types:

 Provider-level methods, which identify covered entities that use 

340B-purchased drugs for their Medicaid patients and exclude 

drug claims billed by those entities from utilization data. The most 

prominent provider-level method is HRSA’s Medicaid Exclusion 

File (MEF).

 Claim-level methods, which exclude individual drug claims that 

covered entities have explicitly identified as 340B claims from 

utilization data.

See Appendix A for detailed descriptions of methods to identify 340B 

claims and prevent duplicate discounts.

Federal policies on duplicate discounts for MCO drugs. Because 

duplicate discounts for MCO drugs are relevant to the 340B Program and

the Medicaid Drug Rebate Program, both HRSA and CMS have been 

involved in developing Federal policies on the topic. HRSA provides 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 6

direction to covered entities related to their participation in the program, 

including their role in preventing duplicate discounts. Importantly, in 

December 2014, HRSA issued a notice clarifying that the MEF is 

available to help prevent duplicate discounts specifically for FFS drugs.19 

CMS provides direction to States regarding MCO drugs and rebate 

collection under the Medicaid Drug Rebate Program. See Appendix B for 

details on HRSA and CMS policies related to duplicate discounts for 

MCO drugs.

Related Office of Inspector General Work

In recent years, OIG has published an extensive body of work on the 340B 

Program and MCO rebates.

OIG work on the 340B Program. In June 2011, OIG published a review of 

States’ FFS Medicaid reimbursement policies and oversight activities 

related to 340B-purchased drugs.20

 OIG found that over half of States had 

developed alternatives to MEF for correctly collecting rebates and 

preventing duplicate discounts for FFS drugs.

In February 2014, OIG published a review of 340B contract pharmacy 

arrangements.21 OIG found that contract pharmacy arrangements create 

complications in preventing duplicate discounts.

In August 2014, OIG published a review of manufacturer dispute 

resolution under the Medicaid Drug Rebate Program, highlighting 

duplicate discount concerns.22 OIG found that disputes between States and 

manufacturers related to 340B-purchased drugs occur frequently. OIG 

recommended that CMS inform States of the availability of 340B 

indicators, and CMS concurred with that recommendation.

OIG work on MCO rebates. In September 2015, OIG published a review 

of States’ collection of MCO rebates.23 That review was conducted in 

conjunction with this study. It was a follow-up to a September 2012 OIG 

report that found that less than half of States paying for drugs under the 

 ____________________________________________________________ 

19 The notice stated that it did not apply to the prevention of duplicate discounts for MCO 

drugs. See HRSA, 340B Drug Pricing Program Notice: Clarification on use of the 

Medicaid Exclusion File, Release No. 2014-1, December 12, 2014, p. 3. 

20 OIG, State Medicaid Policies and Oversight Activities Related to 340B-Purchased 

Drugs, OEI-05-09-00321, June 2011. 

21 OIG, Contract Pharmacy Arrangements in the 340B Program, OEI-05-13-00431, 

February 2014. 

22 OIG, Medicaid Drug Rebate Dispute Resolution Could Be Improved, 

OEI-05-11-00580, August 2014. 

23 OIG, States’ Collection of Rebates for Drugs Paid Through Medicaid Managed Care 

Organizations Has Improved, OEI-05-14-00431, September 2015. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 7

MCO model had invoiced manufacturers for MCO rebates.24 The 2015 

review found that a greater number of States are now paying for drugs 

under the MCO model, and that almost all of them are collecting MCO 

rebates.

METHODOLOGY

Scope

This report describes States’ methods for identifying 340B claims for 

MCO drugs and assesses vulnerabilities in those methods with respect to 

correctly collecting rebates and preventing duplicate discounts. We did 

not attempt to determine whether duplicate discounts for MCO drugs had 

actually occurred.

Data Collection and Analysis

To address our objectives, we administered electronic surveys, structured 

telephone interviews, and follow-up email inquiries with States between 

November 2014 and April 2015. From the survey results and analysis of 

additional CMS data sources, we identified 37 States that paid for drugs 

under the MCO model and collected rebates for those drugs. We 

conducted structured interviews and follow-up inquiries with those 37 

States to determine what methods they use to identify 340B claims for 

MCO drugs. We then assessed the methods reported by States to identify 

potential vulnerabilities. See Appendix C for a detailed description of our 

methodology.

Limitations

Our findings are based on survey and interview responses provided by 

States. We did not independently verify States’ interview responses 

regarding their methods for identifying 340B claims for MCO drugs.

Standards

This study was conducted in accordance with the Quality Standards for 

Inspection and Evaluation issued by the Council of the Inspectors General 

on Integrity and Efficiency.

 ____________________________________________________________ 

24 OIG, States’ Collection of Rebates for Drugs Paid Through Medicaid Managed Care 

Organizations, OEI-03-11-00480, September 2012. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 8

FINDINGS

Almost all (35) of the 37 States in our review reported having methods for 

identifying 340B claims for MCO drugs. Many of these 35 States 

reported using more than one method to do so. For example, some states 

used one method for MCO pharmacy drugs and another for MCO 

physician-administered drugs. Other states used one method as a primary 

and another as a secondary or backup.

One of the two remaining States reported that it did not have any methods 

for identifying 340B claims for MCO drugs at the time of our data 

collection, but planned to begin using a provider-level method. The other 

remaining State did not provide information regarding its method(s) for 

identifying 340B claims for MCO drugs.

Most States use provider-level methods to identify 

340B claims for MCO drugs

Thirty of the 35 States reported using provider-level methods in some 

capacity to identify 340B claims and prevent duplicate discounts for MCO 

drugs. Provider-level methods identify covered entities that use 

340B-purchased drugs for their Medicaid patients and allow States to 

exclude drug claims billed by those entities from utilization data. For 

example, HRSA’s MEF—the most commonly-used provider-level 

method—identifies all covered entities that have informed HRSA that they 

will use 340B-purchased drugs for their FFS Medicaid patients.

Of the 30 States that use provider-level methods, 22 reported using only

provider-level methods to identify 340B claims for either all of their MCO 

drugs or a segment of their MCO drugs (e.g., MCO pharmacy drugs, MCO 

physician-administered drugs). The remaining 8 States reported using 

provider-level methods in conjunction with another type of method, such 

as a claim-level method, for all or a segment of their MCO drugs.

Fourteen of the 35 States reported using claim-level methods in some 

capacity to identify 340B claims and prevent duplicate discounts for MCO 

drugs. Claim-level methods allow States to exclude individual drug 

claims that covered entities have explicitly identified as 340B claims from 

utilization data. Of the 14 States, 9 reported using only claim-level 

methods for all or a segment of their MCO drugs, whereas 5 reported 

using claim-level methods in conjunction with another type of method for 

all or a segment of their MCO drugs.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 9

Table 1 shows the number of States using different types of methods to 

identify 340B claims and prevent duplicate discounts for MCO drugs.

Table 1: Types of Methods Used by States to Identify 340B Claims for MCO Drugs 

Type of Method

Number of States Using 

This Type in Some 

Capacity for MCO Drugs 

Number of States Using

This Type Only for 

Some or All MCO Drugs

Number of States Using

This Type in Conjunction with Another 

Type for Some or All MCO Drugs

Provider-level 30 22 8

Claim-level 14 9 5

Other 6 2 4

 Overlap (15)

 Total 35

Source: OIG analysis of State interviews, 2015. 

See Appendix D for the specific method(s) used by each of the 35 States to 

identify 340B claims and prevent duplicate discounts for MCO drugs.

Many States use the Medicaid Exclusion File to identify 340B 

claims for MCO drugs and continued to do so despite HRSA 

guidance

Of the 30 States that use provider-level methods to identify 340B claims 

for MCO drugs, 24 reported using the MEF in some capacity. Of these 24 

States, 17 reported using only the MEF for all or a segment of their MCO 

drugs, whereas 7 reported using the MEF in conjunction with another 

method, such as a different provider-level method or a claim-level method, 

for all or a segment of their MCO drugs. Chart 1 shows use of the MEF 

among the 30 States that use provider-level methods to identify 340B 

claims for MCO drugs.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 10

Chart 1: Use of the MEF Among 30 States That Use Provider-Level Methods for MCO Drugs 

MEF Only

(17)

MEF in Conjunction 

with Another Method

(7)

No MEF

(6)

Source: OIG analysis of State interviews, 2015. 

In December 2014, HRSA issued a notice clarifying that the MEF is 

available to help prevent duplicate discounts specifically for FFS drugs.25 

The notice encouraged covered entities to work with their States to 

develop alternative strategies for preventing duplicate discounts for MCO 

drugs.

In April 2015, however, all 19 States that responded to our follow-up 

inquiries reported that they continued to use the MEF for MCO drugs. 

This included almost all (15 of 17) States that reported using only the 

MEF for all or a segment of their MCO drugs.

Provider-level methods may not accurately identify all 

340B claims, creating a risk of duplicate discounts and 

forgone rebates

States’ use of provider-level methods may not accurately identify 340B 

claims for some covered entities. Provider-level methods generally treat 

all drug claims from a given covered entity in the same way—that is, as 

either 340B claims or non-340B claims—and do not allow covered entities 

to differentiate among specific claims. In practice, however, a covered 

entity may submit both 340B claims and non-340B claims to Medicaid. 

This may occur because a covered entity: (1) makes different decisions on 

use of 340B-purchased drugs for its FFS Medicaid patients and its MCO 

 ____________________________________________________________ 

25 HRSA, 340B Drug Pricing Program Notice: Clarification on use of the Medicaid 

Exclusion File, Release No. 2014-1, December 12, 2014. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 11

Medicaid patients; and/or (2) must make exceptions to its decision to use 

340B-purchased drugs in certain situations.

For such covered entities, States’ use of provider-level methods creates a 

risk of duplicate discounts and forgone rebates. States using 

provider-level methods are likely to either erroneously include some 340B 

claims in rebate invoices (resulting in duplicate discounts) or erroneously 

exclude some non-340B claims from rebate invoices (resulting in forgone 

rebates).

Use of 340B-purchased drugs for FFS Medicaid patients and MCO 

Medicaid patients differs. Covered entities that decide to use 

340B-purchased drugs for their FFS Medicaid patients but not for their 

MCO Medicaid patients—or vice versa—will submit both 340B claims 

and non-340B claims to Medicaid. Provider-level methods are generally 

insufficient to distinguish between such entities’ 340B and non-340B 

claims.

Consider, for example, the 17 States that reported using only the MEF to 

identify 340B claims and prevent duplicate discounts for all or a segment 

of their MCO drugs. The MEF was designed to identify covered entities 

that decide to use 340B-purchased drugs for their FFS Medicaid patients. 

By using the MEF for MCO drugs, States are effectively assuming that 

covered entities are making the same decision on use of 340B-purchased 

drugs for all of their Medicaid patients, which may not be the case. 

Table 2 illustrates how this can cause States to incorrectly identify 340B 

claims, resulting in duplicate discounts and/or forgone rebates.

Table 2: Potential Duplicate Discounts and Forgone Rebates for States Using the MEF for MCO Drugs 

Type of Drugs Used 

for FFS Medicaid 

Patients

Entity in 

MEF?

State’s Action for 

MCO Rebates, per 

MEF

Type of Drugs Used 

for MCO Medicaid 

Patients

Result

Entity A 340B Yes Exclude Claims 340B  Duplicate Discount Prevented

Entity B Non-340B No Include Claims Non-340B  Allowable Rebate Invoiced

Entity C Non-340B No Include Claims 340B  Duplicate Discount

Entity D 340B Yes Exclude Claims Non-340B  Forgone Rebate

Source: OIG analysis of State interviews, 2015. 

For entities A and B, which make the same decision on use of 

340B-purchased drugs for their FFS Medicaid patients and their MCO 

Medicaid patients, use of the provider-level MEF has the desired result: 

duplicate discounts are prevented for entity A, and allowable rebates are 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 12

invoiced for entity B. However, for entities C and D, which make 

different decisions on use of 340B-purchased drugs for their FFS 

Medicaid patients and their MCO Medicaid patients, use of the 

provider-level MEF is problematic: entity C’s MCO claims are included 

in rebate invoices, resulting in duplicate discounts, and entity D’s MCO 

claims are excluded from rebate invoices, resulting in forgone rebates.

In a May 2015 working paper, the National Association of Medicaid 

Directors (NAMD) also highlighted this vulnerability. Specifically, 

NAMD noted that, with respect to States’ use of the MEF, covered entities 

that make different decisions on the use of 340B-purchased drugs for their 

FFS Medicaid patients and their MCO Medicaid patients present 

challenges for States.26

Some States that use provider-level methods have taken steps to address 

the risk of duplicate discounts and forgone rebates described above. Two 

States reported that they have begun efforts to track covered entities’ 

decisions on the use of 340B- or non-340B-purchased drugs separately for 

FFS Medicaid patients and MCO Medicaid patients. Alternatively, one 

State reported that it requires covered entities to make the same decision 

on the use of 340B- or non-340B-purchased drugs for their FFS Medicaid 

patients and their MCO Medicaid patients.

Exceptions to decisions to use 340B-purchased drugs. Even if covered 

entities generally use 340B-purchased drugs for both FFS Medicaid 

patients and MCO Medicaid patients, they may still submit non-340B 

claims to Medicaid in certain situations. Covered entities are sometimes 

unable to obtain or use 340B-purchased drugs, due to circumstances such 

as manufacturer supply limitations or the 340B Program’s orphan drug 

exclusion.27 In such situations, covered entities will likely use 

non-340B-purchased drugs for Medicaid patients and thus submit 

non-340B claims to Medicaid. However, if a State’s provider-level 

method indicates that the entities dispense 340B-purchased drugs to 

Medicaid (because they generally do so), the non-340B claims they submit 

will be incorrectly identified as 340B claims and excluded from rebate 

invoices, resulting in forgone rebates. While HRSA guidance recognizes 

 ____________________________________________________________ 

26 NAMD, Medicaid and the 340B Program: Alignment and Modernization 

Opportunities, May 13, 2015, p. 10. 

27 See, e.g., HRSA, Clarification of Non-Discrimination Policy, Release No. 2011-1.1, 

May 23, 2013 and 42 U.S.C. § 256b(e). 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 13

that these situations might occur, it does not provide specific policies to 

address the risk of forgone rebates.28

NAMD’s May 2015 working paper addresses this vulnerability as well. 

Specifically, NAMD stated that covered entities that generally use 

340B-purchased drugs for Medicaid patients do use non-340B-purchased 

drugs in certain situations. Moreover, NAMD noted that for States that 

use the MEF, no mechanism is in place for covered entities to notify States 

of these situations.29

Claim-level methods can improve accuracy in 

identifying 340B claims

Use of claim-level methods can help States more accurately identify 340B 

claims and thus reduce the risk of duplicate discounts and forgone rebates 

associated with provider-level methods. Unlike provider-level methods, 

claim-level methods allow covered entities to differentiate among specific 

claims—that is, to identify some of their drug claims as 340B claims and 

others as non-340B claims. For example, a covered entity that decides to 

use 340B-purchased drugs for MCO Medicaid patients only can use a 

State’s claim-level method to identify its MCO claims—but not its FFS 

claims—as 340B claims. Likewise, a covered entity that generally uses 

340B-purchased drugs for its Medicaid patients, but is unable to do so in 

certain situations, can use a State’s claim-level method to identify its drug 

claims as non-340B claims in those situations. In both cases, the State can 

correctly identify 340B claims and exclude them from its rebate invoices 

while including all other (non-340B) claims, thereby preventing both 

duplicate discounts and forgone rebates.

Alternatively, States may be able to achieve claim-level specificity 

through existing provider-level methods by directing covered entities to 

use a separate provider identifier for 340B claims. Specifically, each 

covered entity could use two separate provider identifiers (NPIs or 

Medicaid billing numbers) to bill Medicaid—one for 340B claims and one 

for non-340B claims. States could, in turn, ensure that their provider-level 

methods are configured to exclude claims from rebate invoices only when 

 ____________________________________________________________ 

28 HRSA’s December 2014 notice states only that covered entities must “have a 

mechanism in place to notify the State Medicaid agency” that non-340B-purchased drugs 

were used in such circumstances. See HRSA, 340B Drug Pricing Program Notice: 

Clarification on use of the Medicaid Exclusion File, Release No. 2014-1, December 12, 

2014, p. 2. HRSA’s proposed omnibus guidance reiterated this expectation, but did not 

provide additional detail. See 80 Fed. Reg. 52300, 52320 (August 27, 2015). 

29 NAMD, Medicaid and the 340B Program: Alignment and Modernization 

Opportunities, May 13, 2015, p. 8-9.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 14

billed using a covered entity’s 340B-specific provider identifier. If 

covered entities and States perform this process correctly, both duplicate 

discounts and forgone rebates could be effectively prevented.30

 However, 

covered entities’ use of multiple provider identifiers solely for the purpose 

of identifying individual 340B claims may create complications for other 

State and Federal oversight activities.

States may be able to use claim-level methods to identify 

340B-purchased drugs dispensed through contract 

pharmacies

Per HRSA guidance, covered entities should not dispense 340B-purchased 

drugs to Medicaid patients through their contract pharmacies, unless they 

have an arrangement to prevent duplicate discounts.31 If contract 

pharmacies do not dispense 340B-purchased drugs to Medicaid patients, 

States can collect rebates for the pharmacies’ drug claims without causing 

duplicate discounts to occur.

Ten States reported that if covered entities do dispense 340B-purchased 

drugs to MCO Medicaid patients through contract pharmacies, the States’

use of claim-level methods can accurately identify 340B claims and 

prevent duplicate discounts.32 Eight of these 10 States referenced their use 

of 340B indicators, whereas two States referenced their use of alternative 

claim-level methods.

Seven of the eight States that referenced their use of claim-level 340B 

indicators reported that contract pharmacies, like all of their State’s 

covered entities, should use 340B indicators if they submit 340B claims to 

 ____________________________________________________________ 

30 HRSA guidance contemplates this type of “separate identifier” arrangement, but not as 

a means of achieving claim-level specificity through provider-level methods. Rather, 

HRSA addresses this arrangement only with respect to multi-site covered entities that 

wish to have some sites use 340B-purchased drugs for Medicaid patients and other sites 

use non-340B-purchased drugs for Medicaid patients (i.e., by using a separate provider 

identifier for each site). See, e.g., HRSA, 340B Drug Pricing Program Notice: 

Clarification on use of the Medicaid Exclusion File, Release No. 2014-1, December 12, 

2014, p. 2 and 80 Fed. Reg. 52300, 52308-52309 (August 27, 2015). 

31 HRSA guidance allows contract pharmacies to dispense 340B-purchased drugs to 

Medicaid patients only if “the covered entity, the contract pharmacy, and the State 

Medicaid agency have established an arrangement to prevent duplicate discounts” and 

report the arrangement to HRSA. See 75 Fed. Reg. 10272, 10278 (March 5, 2010). That 

guidance applies to FFS drugs because it was developed before the ACA expanded the 

Medicaid Drug Rebate Program to include MCO drugs. However, HRSA has proposed 

new guidance that would extend this policy to MCO drugs. See 80 Fed. Reg. 52300, 

52309 (August 28, 2015). 

32 Previous OIG work found some covered entities whose contract pharmacies were 

dispensing 340B-purchased drugs to Medicaid patients but did not have arrangements to 

prevent duplicate discounts. See OIG, Contract Pharmacy Arrangements in the 340B 

Program, OEI-05-13-00431, February 2014, p. 13-14.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 15

MCOs. The one additional State reported using 340B indicators 

exclusively for contract pharmacies wishing to dispense 340B-purchased 

drugs to MCO Medicaid patients. By including 340B indicators, contract 

pharmacies allow the States to identify and exclude their 340B claims

from rebate invoices to ensure correct rebate collection and prevent 

duplicate discounts.

The structure of many contract pharmacy arrangements, however, creates 

technical challenges regarding the use of claim-level 340B indicators. 

Drugs dispensed by contract pharmacies on behalf of covered entities are 

often determined to be 340B-eligible retroactively—that is, after they have 

been dispensed to patients and billed. Contract pharmacies that operate 

this way cannot use 340B indicators when billing because they do not 

know the drug’s 340B eligibility status at that time.33

Six of the eight States reported that they expect contract pharmacies to

work around these technical challenges. Specifically, these States reported 

that if contract pharmacies determine 340B eligibility retroactively but 

still wish to dispense 340B-purchased drugs to MCO Medicaid patients, 

they should reverse any claims retroactively determined to be 

340B-eligible and re-submit them with 340B indicators.34

By contrast, two States reported developing alternative claim-level 

methods to accommodate contract pharmacies’ technical challenges. 

Specifically, these two States instruct contract pharmacies to regularly 

submit spreadsheets identifying all previously-billed claims that are 

retroactively determined to be 340B-eligible. To correctly collect rebates 

and prevent duplicate discounts, the States then remove all 340B claims 

identified in the spreadsheets from rebate invoices.35 Because contract 

pharmacies send the spreadsheets to the State after the drugs have been 

dispensed to patients and billed, they are able to identify drug claims 

retroactively determined to be 340B-eligible. However, this process 

requires greater effort and involvement by State staff.

 ____________________________________________________________ 

33 Ibid, p. 9, 14. See also NAMD, Medicaid and the 340B Program: Alignment and 

Modernization Opportunities, May 13, 2015, p. 11. 

34 While some States reported that they were aware of the NCPDP Telecommunication 

standard’s N1 transaction—which allows providers to add 340B indicators to 

previously-submitted claims without reversing and re-submitting them—none reported 

using it. 

35 The States may need to adjust previous quarters’ rebate invoices—instead of removing 

340B claims prior to invoicing—due to timing issues. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 16

CONCLUSION AND RECOMMENDATIONS

Effective methods for identifying 340B claims are needed to ensure 

compliance with the statutory prohibition on duplicate discounts, but are 

also a critical component of States’ ability to achieve savings under the 

Medicaid Drug Rebate Program. If States’ methods do not accurately 

identify 340B claims, States can end up forgoing rebates to which they are 

entitled. They also may be more likely to face rebate disputes that require 

additional resources and impede or delay rebate payments.

Nevertheless, we found that most States use provider-level methods—

which may not accurately identify all 340B claims—for MCO drugs. 

Moreover, we found that many States continued to use the MEF to identify 

340B claims for MCO drugs, even after HRSA’s December 2014 notice 

clarified that the MEF is available to help prevent duplicate discounts 

specifically for FFS drugs.

Accordingly, we recommend that CMS:

Require the use of claim-level methods to identify 340B claims

CMS should require that States use claim-level methods to identify claims 

for 340B-purchased drugs. As described in the findings of this report, 

claim-level methods can help States more accurately identify 340B claims, 

and thus reduce the risk of duplicate discounts and forgone rebates 

associated with provider-level methods.

CMS could afford States flexibility in complying with this requirement. 

States could use claim-level 340B indicators (specific data elements on 

claims transactions), for example, as a number of States already do for 

MCO drugs. States could instead opt to use alternative claim-level 

methods, such as spreadsheets identifying individual 340B claims, to 

avoid the technical challenges that 340B indicators pose for many contract 

pharmacy arrangements.

OIG acknowledges that methods to identify 340B claims may not be 

needed in States that require covered entities to use non-340B-purchased 

drugs for their Medicaid patients.

We also recommend that HRSA:

Clarify its guidance on preventing duplicate discounts for 

MCO drugs

In finalizing its August 2015 proposed omnibus guidance, HRSA should 

clarify that, for MCO drugs, covered entities must follow State 

instructions to facilitate States’ claim-level identification of 

340B-purchased drugs. As proposed, HRSA’s omnibus guidance suggests 

creating a new exclusion file (a provider-level method) to account for 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 17

covered entities’ decisions on the use of 340B- or non-340B-purchased 

drugs for their MCO Medicaid patients. However, as we recommend 

above, CMS should instead require States to use claim-level methods to 

identify 340B claims. Accordingly, a new MCO-specific exclusion file 

would not be necessary for States to correctly collect rebates and prevent 

duplicate discounts for MCO drugs. While HRSA’s proposed omnibus 

guidance does note that covered entities may be required to follow 

State-specific billing rules36, we recommend that HRSA further emphasize 

this point for MCO drugs and remove references to a new MCO-specific 

exclusion file.

 ____________________________________________________________ 

36 80 Fed. Reg. 52300, 52309 (August 28, 2015). 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 18

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE

CMS did not concur with our first recommendation to require the use of 

claim-level methods to identify 340B claims. CMS stated that it agrees 

with the importance of claim-level methods, but that the statute does not 

contemplate such a requirement for States. CMS noted that States may 

develop their own billing instructions as a way to comply with the 

requirement to prevent duplicate discounts. Finally, CMS stated that it 

will continue to provide technical assistance to States as needed.

OIG continues to recommend that CMS require the use of claim-level 

methods to identify 340B claims. We believe that claim-level methods 

can improve accuracy in identifying 340B claims, and thereby reduce the 

risk of duplicate discounts and forgone rebates. We acknowledge that the 

statute does not explicitly direct CMS to require States’ use of claim-level 

methods. However, as CMS notes, States have the primary role of 

identifying and excluding 340B claims to correctly collect rebates and 

prevent statutorily-prohibited duplicate discounts.

HRSA concurred with our recommendation to clarify its guidance on 

preventing duplicate discounts for MCO drugs. However, HRSA stated 

that it will need to consider public comments received on its proposed 

omnibus guidance prior to implementing our recommendation.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 19

APPENDIX A

Descriptions of Methods to Identify 340B Claims and Prevent 

Duplicate Discounts 

Provider-level methods. Provider-level methods identify covered entities 

that use 340B-purchased drugs for their Medicaid patients and exclude 

drug claims billed by those entities from utilization data.

The most prominent provider-level method is the Medicaid Exclusion File 

(MEF). The MEF, which is maintained by HRSA and published quarterly, 

contains provider identifiers, such as national provider identifiers (NPIs) 

and Medicaid billing numbers, for all covered entities that have informed 

HRSA they will use 340B-purchased drugs for their FFS Medicaid 

patients for the relevant quarter.37 Accordingly, States can compare 

provider identifiers on drug claims for a quarter to the provider identifiers 

contained in that quarter’s MEF, and exclude all matching claims from 

utilization data when compiling rebate invoices.

Self-developed lists of covered entities are another type of provider-level 

method. These lists generally contain provider identifiers for covered 

entities that have been identified as using 340B-purchased drugs for their 

Medicaid patients, and can be applied in a similar manner as the MEF to 

exclude 340B claims from rebate invoices. Unlike the MEF, however, 

these lists are compiled and maintained independently by States, rather 

than HRSA.

Claim-level methods. Claim-level methods exclude individual drug claims 

that covered entities have explicitly identified as 340B claims from 

utilization data.

In the most common claim-level method, States direct covered entities to 

include specific data elements (hereinafter referred to as 340B indicators) 

on drug claims, in accordance with industry-accepted transaction 

standards, to identify them as 340B claims. For pharmacy drugs, the 

National Council on Prescription Drug Programs (NCPDP) 

Telecommunication standard contains a “submission clarification code” 

 ____________________________________________________________ 

37 The Veterans Health Care Act of 1992 directed the Secretary to develop a mechanism 

to prevent duplicate discounts. See 42 U.S.C. § 256b(a)(5)(A)(ii). HRSA developed 

MEF as that mechanism. See 58 Fed. Reg. 34058 (June 23, 1993) and HRSA, 340B 

Drug Pricing Program Notice: Clarification on use of the Medicaid Exclusion File, 

Release No. 2014-1, December 12, 2014. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 20

field that can be populated with a value of “20” to identify a 340B claim.38 

For physician-administered drugs, the American National Standards 

Institute’s (ANSI) Accredited Standards Committee (ASC) X12 837P 

standard contains a “UD” modifier value that can be added to identify a 

340B claim.39 Accordingly, States can exclude drug claims with 340B 

indicators from utilization data when compiling rebate invoices.

States also can employ claim-level methods using alternative mechanisms. 

For example, States can require covered entities that use 340B-purchased 

drugs for their Medicaid patients to compile and submit spreadsheets 

identifying individual 340B claims. States can exclude the drug claims 

identified in such spreadsheets from utilization data when compiling 

rebate invoices.

Other methods. Other methods attempt to correctly collect rebates by 

ensuring that utilization data contains no 340B claims that need to be 

excluded.

For example, States can require covered entities to use 

non-340B-purchased drugs for their Medicaid patients (i.e., “carve out”). 

If all of a State’s covered entities correctly do so, the State’s utilization 

data will not include any 340B claims. Accordingly, the State can compile 

rebate invoices for manufacturers from its utilization data without causing 

duplicate discounts to occur.

Alternatively, for MCO drugs, States can delegate the process of excluding 

340B claims from utilization data to MCOs. If MCOs correctly exclude 

340B claims from their utilization data before providing such data to 

States, States can compile rebate invoices for manufacturers from MCO 

utilization data without causing duplicate discounts for MCO drugs to 

occur.

 ____________________________________________________________ 

38 The submission clarification code field can be populated with a value of 20 on the 

initial drug claim (“B1”) transaction, as well as on a subsequent information reporting 

(“N1”) transaction, which allows providers to amend or revise information from a 

previously-submitted B1 transaction. See NCPDP, 340B Information Exchange 

Reference Guide Version 1.0, July 2011.

39 While not explicitly defined by ANSI ASC X12 as identifying 340B claims, the UD 

modifier is often used for this purpose. See, e.g., Apexus 340B Prime Vendor Program, 

340B & Medicaid, p. 1. Accessed at 

https://docs.340bpvp.com/documents/public/resourcecenter/340B_Medicaid.pdf on 

January 20, 2016. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 21

APPENDIX B

HRSA and CMS Policies Related to Duplicate Discounts for 

MCO Drugs 

HRSA’s existing guidance on use of the Medicaid Exclusion File. HRSA 

guidance states that the Medicaid Exclusion File (MEF) is the official data 

source regarding covered entities that bill FFS Medicaid for 

340B-purchased drugs, but that it is not applicable to MCO drugs.

When HRSA first established the MEF in 1993, the Medicaid Drug Rebate 

Program applied only to FFS drugs. Accordingly, HRSA’s pre-ACA 

guidance did not distinguish between FFS drugs and MCO drugs.40 In 

2010, the ACA expanded the Medicaid Drug Rebate Program to include 

MCO drugs.

In December 2014, HRSA issued a notice clarifying that the MEF is 

available to help prevent duplicate discounts specifically for FFS drugs. 

The notice encouraged covered entities to work with their States to 

develop alternate strategies for preventing duplicate discounts for MCO 

drugs.41

HRSA’s existing guidance on contract pharmacies and Medicaid. HRSA 

guidance allows contract pharmacies to dispense 340B-purchased drugs to 

FFS Medicaid patients only if “the covered entity, the contract pharmacy, 

and the State Medicaid agency have established an arrangement to prevent 

duplicate discounts” and report the arrangement to HRSA.42

HRSA’s December 2014 notice did not provide any additional guidance on 

contract pharmacy requirements related to preventing duplicate discounts 

specifically for MCO drugs.

HRSA’s proposed omnibus guidance. In August 2015, HRSA issued 

proposed omnibus guidance on the 340B Program that explicitly 

addressed the issue of duplicate discounts for MCO drugs, among other 

topics.43

 In that proposed guidance, HRSA suggested creating a new 

exclusion file to account for covered entities’ decisions on use of 340B- or 

non-340B-purchased drugs for their MCO Medicaid patients, but the 

operational details are yet to be defined. The proposed guidance continues 

 ____________________________________________________________ 

40 See 58 Fed. Reg. 27293 (May 7, 1993), 58 Fed. Reg. 34058 (June 23, 1993), and 65 

Fed. Reg. 13983 (March 15, 2000). 

41 HRSA, 340B Drug Pricing Program Notice: Clarification on use of the Medicaid 

Exclusion File, Release No. 2014-1, December 12, 2014. 

42 75 Fed. Reg. 10272, 10278 (March 5, 2010). 

43 80 Fed. Reg. 52300, 52309 (August 28, 2015). 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 22

to encourage covered entities, States, and MCOs to work together on 

preventing duplicate discounts for MCO drugs.

The proposed guidance would also explicitly apply HRSA’s existing 

guidance on contract pharmacies and Medicaid to MCO drugs as well as 

FFS drugs.44

CMS’s final rule on covered outpatient drugs. In February 2016, CMS 

issued a final rule on covered outpatient drugs that discussed duplicate 

discounts for MCO drugs; however, it did not implement any new 

regulations on the topic.45 In the preamble of that final rule, CMS noted 

that States are responsible for ensuring that duplicate discounts for MCO 

drugs do not occur. CMS also stated that States should ensure that their 

MCOs have procedures in place to exclude 340B claims from utilization 

data. Finally, CMS encouraged States to work with their MCOs and 

covered entities on preventing duplicate discounts for MCO drugs.

CMS’s final rule on MCOs. In May 2016, CMS issued a final rule on 

MCOs that included provisions relating to duplicate discounts for MCO 

drugs.46 The final rule mandated that State contracts require MCOs to 

establish procedures for excluding 340B claims from utilization data 

provided to States.47 However, the final rule did not specify what 

method(s) MCOs should use to do so.

 ____________________________________________________________ 

44 See 80 Fed. Reg. 52300, 52309 (August 28, 2015). While HRSA’s existing guidance 

on contract pharmacies and Medicaid does not distinguish between FFS drugs and MCO 

drugs, its proposed omnibus guidance addresses dispensing of 340B-purchased drugs to 

“Medicaid FFS and/or MCO patients” through contract pharmacies.

45 81 Fed. Reg. 5170 (February 1, 2016). 

46 81 Fed. Reg. 27498 (May 6, 2016). 

47 See 42 C.F.R. § 438.3(s)(3) at 81 Fed. Reg. 27498, 27857 (May 6, 2016). This 

requirement does not apply to States that require submission of MCO claims data from 

covered entities directly. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 23

APPENDIX C

Detailed Methodology 

State surveys. In November 2014, we surveyed all 51 States to identify 

States that paid for drugs under the MCO model. We sent the surveys to 

State Medicaid pharmacy directors with instructions to delegate to other 

State staff as appropriate.48 We asked whether States paid for either 

pharmacy drugs or physician-administered drugs through MCOs from July 

1, 2013 to June 30, 2014, and whether they had invoiced and collected 

rebates for those drugs. We received responses from all 51 States for a 

100-percent response rate. Of the 51 States, 42 reported that they paid for 

all or some drugs through MCOs between July 1, 2013 and June 30, 2014, 

whereas 9 States reported that they did not pay for drugs through MCOs.

We confirmed survey responses of the nine States that reported that they 

did not pay for drugs through MCOs using three CMS data sources. We 

checked these data sources for any evidence suggesting that the States had 

paid for drugs through MCOs. Specifically, we checked CMS’s National 

Summary of State Medicaid Managed Care Programs report from 2012 for 

any listed plans with outpatient drug coverage.49 We also checked CMS64 expenditure data and Medicaid drug utilization data, which States send 

to CMS, for any dollar amounts associated with drugs paid through 

MCOs. If we found any such evidence, we contacted the State to resolve 

the discrepancy and confirm that it did not pay for drugs through MCOs.

We excluded 5 of the 42 States that paid for drugs through MCOs from 

our analysis. These five States reported that they do not collect any MCO 

rebates; accordingly, they do not need methods for identifying 340B 

claims for MCO drugs. Four of the five States reported that they paid for 

only a small volume of drugs through MCOs (e.g., for a small number of 

beneficiaries enrolled in Program of All Inclusive Care for the Elderly 

(PACE) plans). These four States reported that they do not collect MCO 

rebates because it is not cost-effective to do so for such a small volume of 

drugs. The fifth State reported that its only MCO was an integrated health 

system that is itself a covered entity. Accordingly, the State considers all 

drugs paid through the MCO to be 340B-purchased and thus not subject to 

rebates.

 ____________________________________________________________ 

48 In many cases, States had their rebate vendors—i.e., private contractors that assist 

States in the process of compiling drug utilization data, invoicing manufacturers, and/or 

collecting rebate payments—respond to some or all survey questions. Throughout this 

report, we attribute survey and interview responses from rebate vendors to the relevant 

State. 

49 This was the most current available version of the report. 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 24

State interviews. In November and December 2014, we conducted 

structured interviews with staff from the remaining 37 States. We asked 

States to describe their methods for identifying 340B claims to collect 

rebates correctly and prevent duplicate discounts for MCO drugs. We also 

asked specifically about any differences in the States’ methods for 

pharmacy MCO drugs and physician-administered MCO drugs, as well as 

MCO drugs dispensed by contract pharmacies.

State follow-up inquiries. In April 2015, we sent follow-up email inquiries 

to 23 of the 24 States that reported using the MEF to identify 340B claims 

for MCO drugs. We did so because HRSA’s December 2014 notice 

clarified that the MEF was not intended for use in identifying 340B claims 

and preventing duplicate discounts for MCO drugs. We did not send a 

follow-up email inquiry to the one additional State because we did not 

initially identify it as having reported use of the MEF for MCO drugs. In 

the follow-up inquiries, we asked States whether they were still using the 

MEF in the same capacity for MCO drugs.

Identification of potential vulnerabilities. After completing the structured 

interviews and follow-up inquiries, we assessed the methods reported by 

States to identify any potential vulnerabilities. Specifically, we assessed 

whether, and in what circumstances, the methods reported by States could 

allow duplicate discounts and/or forgone rebates to occur.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 25

APPENDIX D

State-Specific Methods to Identify 340B Claims and Prevent Duplicate Discounts 

for MCO Drugs 

State Description of Methods Used for MCO Drugs

Arizona Provider-level: self-developed list of covered entities

California Provider-level: MEF

Claim-level: 340B indicators

Delaware Provider-level: self-developed list of covered entities

Florida Provider-level: MEF

Georgia Provider-level: MEF; self-developed list of covered entities

Hawaii Claim-level: spreadsheet

Illinois Claim-level: 340B indicators

Indiana Provider-level: MEF

Iowa Provider-level: MEF

Claim-level: 340B indicators

Kansas Provider-level: MEF

Kentucky Provider-level: MEF

Louisiana Provider-level: MEF

Maryland Provider-level: self-developed list of covered entities (physician-administered drugs)

Claim-level: 340B indicators (pharmacy drugs)

Massachusetts Claim-level: 340B indicators

Michigan Provider-level: MEF; self-developed list of covered entities

Other: list of specific drugs for certain types of covered entities

Minnesota Provider-level: MEF

Claim-level: 340B indicators (exclusively for contract pharmacies)

Mississippi Provider-level: MEF

Nebraska Provider-level: self-developed list of covered entities

Nevada Provider-level: MEF

Other: delegation to MCOs

New Hampshire Other: required use of non-340B-purchased drugs for Medicaid

New Jersey Provider-level: MEF

New Mexico Provider-level: MEF; self-developed list of covered entities

Claim-level: 340B indicators

New York Provider-level: MEF

Claim-level: 340B indicators
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 26

State-Specific Methods to Identify 340B Claims and Prevent Duplicate Discounts 

for MCO Drugs (Continued) 

State Description of Methods Used for MCO Drugs

North Dakota Provider-level: self-developed list of covered entities

Other: required use of non-340B-purchased drugs for Medicaid

Ohio Provider-level: MEF

Oregon Provider-level: MEF; self-developed list of covered entities

Claim-level: spreadsheet (exclusively for contract pharmacies)

Pennsylvania Provider-level: MEF

South Carolina Provider-level: MEF

Tennessee Provider-level: MEF

Texas Provider-level: MEF (physician-administered drugs)

Claim-level: 340B indicators (pharmacy drugs)

Utah Claim-level: 340B indicators (pharmacy drugs)

Other: required use of non-340B-purchased drugs for Medicaid (physician-administered drugs)

Virginia Provider-level: MEF

Claim-level: 340B indicators

Washington Provider-level: MEF

West Virginia Provider-level: self-developed list of covered entities (physician-administered drugs)

Claim-level: 340B indicators (pharmacy MCO drugs)

Wisconsin Provider-level: MEF

Other: delegation to MCOs

Source: OIG analysis of State interviews, 2015.
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 27

APPENDIX E

Agency Comments 
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 28
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 29
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 30
 

State Efforts to Exclude 340B Drugs From Medicaid Managed Care Rebates (OEI-05-14-00430) 31

ACKNOWLEDGMENTS

This report was prepared under the direction of Thomas Komaniecki, 

Regional Inspector General for Evaluation and Inspections in the Chicago 

regional office, and Laura Kordish, Deputy Regional Inspector General. 

Adam Freeman and Kelly Waldhoff served as team leaders for this study. 

Central office staff who provided support include Althea Hosein, Meghan 

Kearns, and Joanne Legomsky.
Office of Inspector General

http://oig.hhs.gov 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95452, as 

amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of individuals served by those programs. 

This statutory mission is carried out through a nationwide network of audits, investigations, 

and inspections conducted by the following operating components: 

Office of Audit Services 

The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 

audits with its own audit resources or by overseeing audit work done by others. Audits 

examine the performance of HHS programs and/or its grantees and contractors in carrying 

out their respective responsibilities and are intended to provide independent assessments of 

HHS programs and operations. These assessments help reduce waste, abuse, and 

mismanagement and promote economy and efficiency throughout HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable information on significant 

issues. These evaluations focus on preventing fraud, waste, or abuse and promoting 

economy, efficiency, and effectiveness of departmental programs. To promote impact, OEI 

reports also present practical recommendations for improving program operations. 

Office of Investigations 

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

of fraud and misconduct related to HHS programs, operations, and individuals. With 

investigators working in all 50 States and the District of Columbia, OI utilizes its resources 

by actively coordinating with the Department of Justice and other Federal, State, and local 

law enforcement authorities. The investigative efforts of OI often lead to criminal 

convictions, administrative sanctions, and/or civil monetary penalties. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support for OIG’s internal operations. OCIG represents OIG in all civil and 

administrative fraud and abuse cases involving HHS programs, including False Claims Act, 

program exclusion, and civil monetary penalty cases. In connection with these cases, OCIG 

also negotiates and monitors corporate integrity agreements. OCIG renders advisory 

opinions, issues compliance program guidance, publishes fraud alerts, and provides other 

guidance to the health care industry concerning the anti-kickback statute and other OIG 

enforcement authorities.