U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

26–929 2018

EXAMINING HRSA’S OVERSIGHT OF THE 340B 

DRUG PRICING PROGRAM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND 

INVESTIGATIONS 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

JULY 18, 2017 

Serial No. 115–46 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

(II) 

COMMITTEE ON ENERGY AND COMMERCE 

GREG WALDEN, Oregon 

Chairman 

JOE BARTON, Texas 

Vice Chairman 

FRED UPTON, Michigan 

JOHN SHIMKUS, Illinois 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

TIM WALBERG, Michigan 

MIMI WALTERS, California 

RYAN A. COSTELLO, Pennsylvania 

EARL L. ‘‘BUDDY’’ CARTER, Georgia 

FRANK PALLONE, JR., New Jersey 

Ranking Member 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

BEN RAY LUJA ́ N, New Mexico 

PAUL TONKO, New York 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

RAUL RUIZ, California 

SCOTT H. PETERS, California 

DEBBIE DINGELL, Michigan 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

TIM MURPHY, Pennsylvania 

Chairman 

H. MORGAN GRIFFITH, Virginia 

Vice Chairman 

JOE BARTON, Texas 

MICHAEL C. BURGESS, Texas 

SUSAN W. BROOKS, Indiana 

CHRIS COLLINS, New York 

TIM WALBERG, Michigan 

MIMI WALTERS, California 

RYAN A. COSTELLO, Pennsylvania 

EARL L. ‘‘BUDDY’’ CARTER, Georgia 

GREG WALDEN, Oregon (ex officio) 

DIANA DEGETTE, Colorado 

Ranking Member 

JANICE D. SCHAKOWSKY, Illinois 

KATHY CASTOR, Florida 

PAUL TONKO, New York 

YVETTE D. CLARKE, New York 

RAUL RUIZ, California 

SCOTT H. PETERS, California 

FRANK PALLONE, JR., New Jersey (ex 

officio) 

(III) 

C O N T E N T S 

Page 

Hon. Tim Murphy, a Representative in Congress from the Commonwealth 

of Pennsylvania, opening statement ................................................................... 1 

Prepared statement .......................................................................................... 3 

Hon. Diana DeGette, a Representative in Congress from the state of Colorado, 

opening statement ................................................................................................ 4 

Hon. Greg Walden, a Representative in Congress from the State of Oregon, 

opening statement ................................................................................................ 6 

Prepared statement .......................................................................................... 8 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 9 

WITNESSES

Capt. Krista M. Pedley, PHARMD, MS, Director, Office of Pharmacy Affairs, 

Health Resources and Services Administration, U.S. Department of Health 

and Human Services ............................................................................................ 11 

Prepared statement .......................................................................................... 14 

Answers to submitted questions ...................................................................... 96 

Erin Bliss, Assistant Inspector General, Office of Evaluation And Inspections, 

Office of Inspector General, U.S. Department of Health and Human Services ......................................................................................................................... 20 

Prepared statement .......................................................................................... 22 

Answers to submitted questions ...................................................................... 102 

Debra Draper, Director, Health Care, Government Accountability Office ......... 31 

Prepared statement .......................................................................................... 33 

SUBMITTED MATERIAL

Subcommittee memorandum .................................................................................. 82 

(1) 

EXAMINING HRSA’S OVERSIGHT OF THE 340B 

DRUG PRICING PROGRAM 

TUESDAY, JULY 18, 2017 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to call, at 10:18 a.m., in room 

2322 Rayburn House Office Building, Hon. Tim Murphy (chairman 

of the subcommittee) presiding. 

Present: Representatives Murphy, Griffith, Burgess, Brooks, Collins, Barton, Walberg, Walters, Costello, Carter, Walden (ex officio), 

DeGette, Schakowsky, Castor, Tonko, Clarke, Ruiz, Peters, and 

Pallone (ex officio). 

Staff present: Ali Fulling, Legislative Clerk, Oversight and Investigations; Brighton Haslett, Counsel, Oversight and Investigations; 

Brittany Havens, Professional Staff, Oversight and Investigations; 

Katie McKeogh, Press Assistant; Jennifer Sherman, Press Secretary; Alan Slobodin, Chief Investigative Counsel, Oversight and 

Investigations; Sam Spector, Policy Coordinator, Oversight and Investigations; Josh Trent, Deputy Chief Health Counsel, Health; 

Natalie Turner, Counsel, Oversight and Investigations; Christina 

Calce, Minority Counsel; Jeff Carroll, Minority Staff Director; Chris 

Knauer, Minority Oversight Staff Director; Miles Lichtman, Minority Policy Analyst; Kevin McAloon, Minority Professional Staff 

Member; Rachel Pryor, Minority Senior Health Policy Advisor; and 

C. J. Young, Minority Press Secretary. 

OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA 

Mr. MURPHY. Good morning. 

Today’s Subcommittee on Oversight and Investigation is holding 

a hearing entitled, ‘‘Examining HRSA’s Oversight of the 340B Drug 

Pricing Program.’’ The 340B program was created by Congress in 

1992 and mandates that drug manufacturers provide outpatient 

drugs to eligible entities at reduced prices in order for the manufacturers to remain eligible for reimbursement through entitlement 

programs such as Medicaid and Medicare. 

Now, the 340B program covers entities, which are like hospitals 

and other nonprofit health care organizations, that have certain 

federal designations or receive funding from specific federal programs. They are eligible for the 340B program by receiving certain 

federal grants administered by different agencies within HHS. HosVerDate Nov 24 2008 12:07 Feb 23, 2018 Jkt 037690 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-46 CHRIS
2 

pitals eligible for the 340B program include certain disproportionate share hospitals, children’s hospitals, freestanding cancer 

hospitals, rural referral centers, sole community hospitals, and critical access hospitals. 

The Health Resources and Services Administration, or HRSA, an 

agency in the U.S. Department of Health and Human Services is 

tasked with accepting applications and overseeing the covered hospitals and clinics. 

HRSA faces several challenges in conducting oversight of the 

340B program, one of which is the lack of reporting requirements 

in the 340B statute. Participating hospitals save between 25 to 50 

percent of the average wholesale price for covered outpatient drugs. 

They saved $6 billion on drug expenditures in fiscal year 2016, according to the HHS Office of Inspector General estimates. Hospitals 

are not required to report their annual savings through participation in the program or how they use the money saved. 

For many of these covered entities, those savings are vital to the 

entities’ survival, particularly those that serve a large percentage 

of indigent patients and operate at a loss each year. Other entities 

reinvest those savings in patient care, expanding access to patient 

care by opening centers in rural and underserved areas or passing 

along the savings to patients by providing discounted drugs. However, as with so many federal programs, there are instances of errors and misuse. 

Specialists, oncologists in particular, have told stories to us of 

their grave concerns about the way some entities use the 340B program. For example, one store involves a doctor who referred many 

uninsured young breast cancer patients to a 340B hospital to receive cancer treatments but watched as 16 of those patients were 

placed on a wait list for care, simply waiting for treatment while 

their cancer progressed from entirely treatable to potentially life 

threatening. According to this doctor, the wait list was not due to 

an overall capacity issue. Instead, it was because the hospital simply chose to set a cap on the number of uninsured patients they 

would treat. 

I hope that instances like this are outliers—the exception to the 

rule. The integrity of the 340B program must be protected. HRSA 

must be able to conduct oversight in a way that allows it to uncover fraud and noncompliance. Indeed, HRSA audits from fiscal 

year 2012 to fiscal year 2016 demonstrate that noncomplying entities violate program requirements through duplicate discounts, diversion to ineligible patients and facilities, and incorrect database 

reporting. Unfortunately, while HRSA has made improvements to 

their oversight efforts in recent years, the agency simply may not 

have the resources to adequately safeguard the program. 

The program has experienced dramatic growth in recent years, 

due in part to program expansions in the patient protections in the 

Affordable Care Act. At a hearing before the Health subcommittee 

in 2015 we learned that from 2001 to 2011 the number of covered 

entities participating in the program roughly doubled. The most recent data shows that from 2011 to 2017 the number of entities has 

nearly quadrupled. HRSA indicates that as of October 2016, 12,148 

covered entities were participating in the 340B program. 

3 

Despite that growth, HRSA maintains only 22 staff to oversee 

the 340B program and conducts roughly 200 audits per year. While 

HRSA has increased the number of audits conducted annually, 

which the committee applauds HRSA for, that number is still 

dwarfed by the vast number of participating entities and manufacturers. Now, listen to this. At the current level of annual audits 

conducted, HRSA is auditing a mere 1.6 percent covered entities. 

That’s 1.6 percent. That is all. Further, because HRSA’s audits consist of only a sample of drugs within each entity, these audits cover 

just a fraction of a fraction of the program. Despite that, HRSA’s 

audits have uncovered between 63 and 82 percent of audited entities to be noncompliant with program requirements since 2012. 

Needless to say, that is a concern. What would more intensive oversight including additional audits further reveal? What is the outcome if the hospital is found to be in noncompliance with diversion, 

duplication, or incorrect data? 

Well, nothing. No one has ever lost a 340B eligibility because of 

these problems. I thank HRSA for their cooperation for using audit 

documents before this hearing in response to the committee’s request last month. 

We are in the process of reviewing these documents to gain a 

better understanding of the audit process and may have more follow-up questions at a later date. 

Now, I am a big supporter of the 340B program. I will continue 

to defend them. But I don’t buy the argument that some have presented to me that says show me someone who got caught, because 

chances are 94 percent that no one is even going to look at you, 

and so you won’t be audited, and 100 percent chance that nothing 

is going to happen afterwards. That is why we are here, to find out 

is there a concern or not a concern. 

And we welcome all the witnesses today too and look forward to 

hearing HRSA’s oversight efforts, the challenges HRSA faces and 

how this committee can best enable HRSA to overcome these challenges. 

I now yield 5 minutes to Ms. DeGette. 

[The prepared statement of Mr. Murphy follows:] 

PREPARED STATEMENT OF HON. TIM MURPHY

Today, the subcommittee is holding a hearing entitled ‘‘Examining HRSA’s Oversight of the 340B Drug Pricing Program.’’ The 340B program was created by Congress in 1992 and mandates that drug manufacturers provide outpatient drugs to 

eligible entities at reduced prices in order for the manufacturers to remain eligible 

for reimbursements through entitlement programs such as Medicaid and Medicare. 

340B program-covered entities are nonprofit health care organizations that have 

certain federal designations or receive funding from specific federal programs. Federal grantees are eligible for the 340B program by receiving certain federal grants 

administered by different agencies within HHS. Hospitals eligible for the 340B program include certain Disproportionate Share Hospitals, children’s hospitals, freestanding cancer hospitals, rural referral centers, sole community hospitals, and critical access hospitals. 

The Health Resources and Services Administration, or ‘‘HRSA,’’ an agency in the 

U.S. Department of Health and Human Services, is tasked with accepting applications and overseeing covered entities. 

HRSA faces several challenges in conducting oversight of the 340B program, one 

of which is the lack of reporting requirements in the 340B statute. Participating entities save between 25–50 percent of the average wholesale price for covered outpatient drugs, and according to the HHS Office of Inspector General’s estimates, 

4 

covered entities saved $6 billion on drug expenditures in Fiscal Year 2016. However, 

covered entities are not required to report their annual savings through participation in the program, or how they use the money saved. 

For many of these covered entities, those savings are vital to the entity’s survival, 

particularly those that serve a large percentage of indigent patients and operate at 

a loss each year. Other entities reinvest those savings in patient care, expanding 

access to patient care by opening centers in rural and underserved areas or passing 

along the savings to patients by providing discounted drugs. However, as with so 

many federal programs, there are instances of errors and misuse. 

Specialists, oncologists in particular, have told me stories of their grave concerns 

about the way some entities use the 340B program. For example, one story involves 

a doctor who referred many uninsured, young breast cancer patients to a 340B hospital to receive cancer treatments, but watched as 16 of those patients were placed 

on a waitlist for care, simply waiting for treatment while their cancer progressed 

from entirely treatable, to potentially life-threatening. According to this doctor, the 

waitlist was not due to an overall capacity issue. Instead, it was because the hospital simply chose to set a cap on the number of uninsured patients they would 

treat. 

I hope that these instances are outliers—the exception to the rule. The integrity 

of the 340B program must be protected. HRSA must be able to conduct oversight 

in a way that allows it to uncover fraud and non-compliance. Indeed, HRSA audits 

from FY 2012 to FY 2016 demonstrate that non-complying entities violate program 

requirements through duplicate discounts, diversion to ineligible patients and facilities, and incorrect database reporting. Unfortunately, while HRSA has made improvements to their oversight efforts in recent years, the agency simply may not 

have the resources to adequately safeguard the program. 

The program has experienced dramatic growth in recent years, due in part to program expansions in the Patient Protection and Affordable Care Act. At a hearing 

before the Health Subcommittee in 2015, we learned that from 2001 to 2011, the 

number of covered entities participating in the program roughly doubled. The most 

recent data shows that from 2011 to 2017, the number of entities has nearly quadrupled. HRSA indicates that as of October 2016, 12,148 covered entities were participating in the 340B program. 

Despite that growth, HRSA maintains only 22 staff to oversee the 340B program, 

and conducts roughly 200 audits annually. While HRSA has increased the number 

of audits conducted annually, which the Committee applauds HRSA for, that number is still dwarfed by the vast number of participating entities and manufacturers. 

At the current level of annual audits conducted, HRSA is auditing a mere 1.6% of 

covered entities annually. Further, because HRSA’s audits consist of only a sample 

of drugs within each entity, these audits cover just a fraction of a fraction of the 

program. Despite that, HRSA’s audits have uncovered between 63 and 82 percent 

of audited entities to be non-compliant with program requirements since 2012. What 

would more intensive oversight, including additional audits, further reveal? 

I thank HRSA for their cooperation in producing audit documents before this 

hearing in response to the Committee’s request last month. We’re in the process of 

reviewing these documents to gain a better understanding of the audit process and 

may have more follow-up questions at a later date. 

I welcome the witnesses appearing before us today and look forward to hearing 

about HRSA’s oversight efforts, the challenges HRSA faces, and how this committee 

can best enable HRSA to overcome those challenges. 

OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF COLORADO 

Ms. DEGETTE. Thank you so much, Mr. Chairman. 

Mr. Chairman, Congress created the 340B drug discount program 25 years ago to help safety net providers leverage their scarce 

resources to serve more people, especially people in low-income and 

vulnerable areas. Thanks to this program, providers across the 

country have been able to purchase discounted pharmaceuticals 

and expand and improve their services. 

5 

I think we can stipulate that 340B is critical to provide critical 

medical services to low-income people. But we also can stipulate 

that we need to make sure that our oversight remains robust. 

340B drug discounts allow eligible hospitals and other designated 

providers including community health centers, state and local 

health departments and family clinics to make the most of their 

limited resources. But as the Government Accountability Office and 

the HHS Office of Inspector General have found, there is a need 

for more oversight of this important program to ensure that it 

achieves its critical mission. 

GAO and OIG have conducted several reviews of the 340B program and have repeatedly underscored that it needs more effective 

oversight. Of course, to conduct that oversight, HRSA must have 

the tools it needs to implement better controls over the program. 

These tools may require additional authority from Congress, which 

I would like to explore today, and also, given the size of the agency, 

if you want more robust oversight you are going to have to give 

more funding. 

I also want to point out, Mr. Chairman, that I am troubled by 

the rule that the Centers for Medicare and Medicaid proposed last 

week which would dramatically reduce reimbursements to Medicare Part B drugs for 340B hospitals. The Trump administration 

claimed that this proposed rule was an important step to lower the 

cost of drugs to the American people. Unfortunately, that statement seems more fantasy than reality. 

The proposed rule will do nothing to achieve the goal of making 

prescription drugs more affordable to the general population. Reducing the repayment rate that 340B hospitals receive for Medicare 

Part B drugs does nothing to get to the root of high drug prices, 

and frankly, it tries to solve one problem by creating many others. 

Rather than rolling up its sleeve and attempting to address the actual cost of high drug prices, the administration’s proposed rule instead threatens to undermine the important safety net mission of 

340B hospitals. 

Many 340B hospitals are what are called disproportionate share 

safety net hospitals—the DSH hospitals. This means they often 

serve low-income and rural communities and take on patients other 

parts of the health care system either cannot or will not impact. 

In my district in Denver, Colorado, we have a number of these 

DSH hospitals including St. Joseph Hospital, which is a part of 

SCL Health, and SCL Health operates six other 340B hospitals and 

provides essential often uncompensated care which 340B drug discounts have helped to fund. 

Now, the reduced payment rate pulls the rug out from under providers like St. Jo’s and puts the patients they serve at risk of losing 

access to care. As you know, Mr. Chairman, many of my colleagues 

and I have asked this subcommittee to open an investigation into 

why drug prices are so high and how we can address this problem. 

I think we need a robust investigation and a series of hearings 

that explore in-depth the reasons for exorbitant costs of drugs and 

why the prices continue to rise. 

Unfortunately, I don’t think this hearing nor the rule proposed 

by CMS last week addresses the broad problem of high drug prices. 

I know that all of us are dedicated to ensuring that the 340B proVerDate Nov 24 2008 12:07 Feb 23, 2018 Jkt 037690 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-46 CHRIS
6 

gram achieves its critical mission of helping providers serve the indigent. I want to make sure, like you do, that sound controls are 

in place to prevent abuse. 

And, Mr. Chairman, while I am glad to work with you to address 

some of the problems of the 340B program, the concerns associated 

with it are fundamentally separate from the high cost of drugs in 

the U.S. and I believe the issue should be treated differently. Put 

simply, the committee should hold hearings, we should take meaningful action on the high cost of drugs and the rising costs. In the 

meantime, I look forward to hearing from the witnesses today 

about what we can to do strengthen our safety net and to improve 

HRSA’s oversight of the 340B program. 

With that, I yield back. Thanks. 

Mr. MURPHY. The gentlelady yields back. 

I now recognize the chairman of the full committee, Mr. Walden. 

OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON 

Mr. WALDEN. Thank you, Mr. Chairman, for this hearing. The 

committee is already ramped up its top to bottom oversight of 

many aspects of the cost drivers in our health care system and we 

have more work to do. 

The subcommittee’s hearing on 340B drug pricing program and 

the oversight role of the Health Resources and Services Administration, or HRSA, is part of this broader review and we appreciate 

our witnesses here today. 

Since its creation by Congress in 1992, the 340B drug pricing 

program has provided lifesaving medicines at reduced prices to certain safety net health care providers. Indeed, this program has 

helped these providers, known as covered entities, stretch scarce 

federal dollars as far as possible to better serve uninsured and 

under insured patients across the country. HRSA estimated that in 

2015 covered entities saved about $6 billion on 340B drugs through 

their participation in the program. 

For a variety of reasons, participation by hospitals in the 340B 

program has grown substantially in recent years and the number 

of unique hospital organizations participating in the program has 

nearly quadrupled from 2011 to 2016, increasing from 3,200 participating hospitals in 2011 to 12,148 as of October of 2016. 

Now, with this growth concerns have been raised about HRSA’s 

ability to adequately oversee this program, as the witnesses from 

HHS Inspector General’s office and GAO will discuss in detail 

today. HRSA’s oversight of the program has improved in recent 

years through enhanced authority and resources but program 

vulnerabilities still exist. So today we will examine a number of important programmatic issues. 

First, we want to learn how HRSA’s oversight efforts can best 

meet the challenges of 340B growth. While HRSA has made improvements to its oversight efforts in recent years, HRSA’s audit 

activities remain at or below 200 annual audits of covered entities 

since 2012, despite the rapid growth of the program. That is one 

reason we are here today. That is to answer the question: How can 

HRSA improve its audits to better detect problems or somehow 

raise the annual number of audits? 

7 

Next, we will focus on the problems already discovered and how 

HRSA can address them. HRSA’s annual audits reveal a high level 

of noncompliance with program requirements by covered entities 

including the potential for duplicate discounts and diversion of 

340B drugs to ineligible patients. 

We will also want to find out how HRSA can be more transparent. Lack of transparency hinders HRSA’s oversight capabilities, and while the purpose of the program is to stretch scarce resources as far as possible, reaching more eligible patients, and providing more comprehensive services, neither 340B nor HRSA guidance explains how 340B providers must use savings from the program. That is an issue that has come to our attention. 

Finally, we need to discuss how HRSA’s lack of regulatory authority limits the agency’s ability to adequately oversee the program. 

So the committee has been reviewing HRSA’s oversight of the 

340B program for pricing for 2 years and we plan to continue this 

work after this hearing.And as we move forward it is important not 

to overreact and create unnecessary red tape for providers who are 

truly using the program to benefit patients. And I have heard from 

hospitals in my district like those in Bend and even down on the 

south coast outside of my district just how important this program 

is to patients. While we do not want to overburden these safety net 

providers, we also need robust oversight over a program that has 

expanded this dramatically. 

Just last month, the committee sent a letter the HRSA to gain 

more insight into the audits conducted in the 340B program and 

we want to extend our appreciation to HRSA for their timely production of information responsive to our requests. Thank you for 

doing that and we look forward to hearing about the steps that 

HRSA’s taking to strengthen the program. 

I also want to thank the Office of Inspector General at the U.S. 

Department of Health and Human Services and the GAO for your 

good work as well. 

With that, I yield the balance of my time to the chairman of the 

Subcommittee on Health, Dr. Burgess. 

Mr. BURGESS. Thank you, Mr. Chairman, and thank you, Mr. 

Chairman, for holding this hearing today. 

As Chairman Walden pointed out, this program has saved billions of dollars for patients, ensuring that those in need could receive care and that the hospitals that provide that care can continue to support their communities. 

But the program has challenges and audits by HRSA have found 

high levels of noncompliance among 340B-covered entities, raising 

questions as to who is currently overseeing the program and who 

should provide that oversight, going forward. 

So I also want to thank our witnesses for being here today and 

discussing this very important program with us. This is a multifaceted problem. 

The way forward isn’t entirely clear but that is what this hearing 

is to sort out. So I am grateful we are having the hearing today 

and look forward for an opportunity to examine the 340B landscape, going forward. 

And I yield back. 

8 

[The prepared statement of Mr. Walden follows:] 

PREPARED STATEMENT OF HON. GREG WALDEN

Thank you, Mr. Chairman, for this hearing. This committee has really been 

ramping up its top-to-bottom oversight of many aspects of our health care system. 

The subcommittee’s hearing on the 340B drug pricing program and the oversight 

role of the Health Resources and Services Administration, or HRSA, is part of this 

broader overview. 

Since its creation by Congress in 1992, the 340B drug pricing program has provided life-saving medicines at reduced prices to certain safety-net health care providers. Indeed, this program has helped these providers known as ‘‘covered entities’’ 

stretch scarce federal dollars as far as possible to better serve uninsured and underinsured patients across the country. HRSA estimated that, in 2015, covered entities 

saved about $6 billion on 340B drugs through their participation in the program. 

For a variety of reasons, participation by hospitals in the 340B program has 

grown substantially in recent years. The number of unique hospital organizations 

participating in the program has nearly quadrupled from 2011 to 2016-increasing 

from 3,200 participating hospitals in 2011 to 12,148 in October 2016. 

With this program growth, concerns have surfaced about HRSA’s ability to adequately oversee the program. As the witnesses from the HHS Inspector General’s 

office and GAO will discuss in detail today, HRSA’s oversight of the program has 

improved in recent years through enhanced authority and resources, but program 

vulnerabilities still exist. Today, we will examine a number of important programmatic issues: 

•First, we want to learn how HRSA’s oversight efforts can best meet the challenge of 340B program growth. While HRSA has made improvements to its oversight efforts in recent years, HRSA’s audit activity has remained at or below 200 

annual audits of covered entities since 2012 despite the rapid growth of the program. That’s one reason we are here today—to answer the question: how can HRSA 

improve its audits to better detect problems or somehow raise the annual number 

of audits? 

• Next, we will focus on the problems already discovered and how HRSA can address them. HRSA’s annual audits reveal a high level of noncompliance with program requirements by covered entities, including the potential for duplicate discounts and diversion of 340B drugs to ineligible patients. 

• We will also want to find out how HRSA can be more transparent. Lack of transparency hinders HRSA’s oversight capabilities. While the purpose of the program is 

to ‘‘stretch scarce resources as far as possible, reaching more eligible patients and 

providing more comprehensive services,’’ neither the 340B statute nor HRSA guidance explains how 340B providers must use savings from the program. 

•Finally, we will discuss how HRSA’s lack of regulatory authority limits the agency’s ability to adequately oversee the program. 

The committee has been reviewing HRSA’s oversight of the 340B drug pricing program for over two years, and plans to continue this work after the hearing. As we 

move forward, it’s also important not to overreact and create unnecessary red tape 

for providers who are truly using the program to benefit patients. I’ve heard from 

hospitals in rural areas, like those in my district, that use 340B discounts to help 

beneficiaries in underserved parts of the country. While we do not want to overburden these safety-net providers, we also need robust oversight in the program to determine where these scarce federal dollars are going. 

Just last month, the committee sent a letter to HRSA to gain more insight into 

the audits conducted into the 340B program, and we want to extend our appreciation to HRSA for their timely production of information responsive to our requests. 

We look forward today to hearing from HRSA about the steps that they have taken 

to strengthen the program and the challenges they face in their efforts to oversee 

the program. 

I also want to thank the Office of Inspector General at the U.S. Department of 

Health and Human Services and the Government Accountability Office for being 

here to discuss their important work on this topic too. We look forward to hearing 

their recommendations on how to best promote program integrity and improve the 

program. 

Mr. MURPHY. Gentleman yields. 

I now recognize the ranking member of the full committee, Mr. 

Pallone, for an opening statement for 5 minutes. 

9 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. Thank you, Mr. Chairman. 

Twenty-five years ago, Congress passed bipartisan legislation establishing the 340B program. Since its inception, the 340B program 

has played a critical role in ensuring that low-income and vulnerable individuals have access to affordable health care. 

The 340B program provides discounts on outpatient drugs that 

have allowed safety net providers to be able to expand access to essential health care services for vulnerable patients. This program 

has been vital for safety net providers like community health centers, inner city and rural hospitals, HIV clinics, and hemophilia 

treatment centers. And the 340B program has made the difference 

between patients getting the lifesaving health care services and 

drugs they need or going without. 

The Congress created this program with the intention of helping 

covered entities expand their capacity to serve their patients. By 

purchasing drugs at a discounted rate, 340B providers are able to 

stretch scarce resources to provide more comprehensive health 

services. Resources provided through the 340B program directly 

augment patient care throughout the country. It continues to support the mission of safety net providers that serve low-income, uninsured, and under insured patients. And the 340 program is a 

critically important health care program and the Health Resources 

and Service Administration, or HRSA, should have the authority it 

needs to strengthen the integrity of the program. 

GAO and OIG have identified weaknesses in the oversight of the 

program which can have negative consequences for both the participating providers and drug manufacturers. HRSA should appropriately improve program integrity while protecting the mission of 

the 340B program and be given the necessary resources to oversee 

the program. 

Last Congress, this committee worked on a bipartisan basis to 

try to address the concerns from stakeholders on all sides of this 

issue in a balanced and measured fashion. Our goal was to 

strengthen and support the mission of 340B to provide health services to those most in need. Unfortunately, we were not successful. 

But I continue to believe and I think we can all agree here today 

that the mission of this program is sound and the continued emphasis on program integrity will make the 340B program stronger 

now and in the coming years. 

I want to be clear, however, that while I was always happy to 

have a conversation about strengthening the 340B program, it 

would be disingenuous for anyone on this committee to say that 

this hearing today is in any way a hearing on rising drug prices. 

The 340B program is not the problem or the solution to rising drug 

prices and that is why I am so concerned about the Trump administration’s recently proposed rule containing a provision that would 

slash reimbursements on Medicare Part B drugs to 340B hospitals 

under the guise that doing so would somehow address the rising 

cost of prescription drugs. 

When Health and Human Services Secretary Price announced 

the proposed rule change, he claimed that this rule will somehow 

10 

make drugs more affordable. And I want to be clear—this rule 

would have zero impact on the actual price of prescription drugs 

and would decimate the support that 340B hospitals rely on to 

serve needy patients. 

This proposal is nothing more than a deep cut to many of the 

hospitals that serve as the bedrock of our safety net, and committee Democrats have repeatedly asked that this committee begin 

to have a real conversation about drug prices and this is not it. 

And again, I urge the chairman to hold the hearing on drug pricing so we can hear from all the stakeholders involved and so we 

can begin to develop real solutions that will begin to drive down 

the cost of prescription drugs. Until then, I remain dedicated to 

finding ways to strengthen the 340B program and ensure that it 

continues to fulfil its essential mission. And I am grateful to our 

witnesses for being here today to talk about some of the challenges 

the program faces as well as its successes and the important role 

it continues to play. 

And I yield back. I yield the time remaining to the gentlewoman 

from Florida, Ms. Castor. 

Ms. CASTOR. Great. Thank you, Mr. Pallone. 

I just wanted to say that at a time when high and escalating 

drug prices are a top concern for all Americans, the 340B drug discount program is a real winner. 

It is a very modest government initiative that has huge benefits 

and helps our disproportionate share hospitals and many community health centers and other clinics all across the country provide 

affordable prescriptions to folks that need it that may not have insurance, that are really struggling to get by and then that helps 

those hospitals and those clinics stretch the dollar and keep the 

burden off the taxpayer. 

Doesn’t mean that it is immune from oversight and that is important for our hearing today but 340B is a real godsend for so 

many families and health providers across the country. 

Thank you, and I yield back. 

Mr. MURPHY. Gentlewoman yields back. 

So now I ask unanimous that the members’ written opening 

statements be introduced into the record, and without objection the 

documents will be entered into the record. 

I would now like to introduce our panel of federal witnesses for 

today’s hearing. 

First, we have Captain Krista Pedley, director of the Office of 

Pharmacy Affairs at the Health Resources and Services Administration. I just want to say you also got your pharmacy degree from 

the University of Pittsburgh. Fine school. Fine school. 

Next is Ms. Erin Bliss, who serves as assistant inspector general 

in the Office of Inspector General within the Department of Health 

and Human Service. I think more of a Notre Dame person there, 

right? 

And Ms. Debra Draper, but you have a doctorate degree so I am 

going to call you doctor today. Yes, she is the director of health 

care for the Government Accountability Office. 

Thank you all for being here today and providing testimony. We 

look forward to a productive discussion of HRSA’s oversight of 

340B drug pricing program. 

11 

You are all aware that this committee is holding an investigative 

hearing and when doing so has the practice of taking testimony 

under oath. Do any of you have any objections to testifying under 

oath? 

Seeing no objections, the chair then advises you that under the 

rules of the House and rules of the committee you are all entitled 

to be advised by counsel. 

Do any of you desire to be advised by counsel during testimony 

today? 

OK. Seeing no things on that then we will proceed with swearing 

you in. Please rise, raise your right hand. I’ll swear you in. 

[Witnesses were sworn.] 

Seeing all answered in the affirmative, you are now under oath 

and subject to the penalties set for in Title 18 Section 1001 United 

State Code. 

We ask you all to give a five-minute summary of your written 

statement. Please try and stick with the 5 minutes. I will tap the 

gavel when you are close to that. 

Captain Pedley, you are recognized first. 5 minutes. 

STATEMENTS OF CAPT. KRISTA M. PEDLEY, PHARMD, MS, DIRECTOR, OFFICE OF PHARMACY AFFAIRS, HEALTH RESOURCES AND SERVICES ADMINISTRATION, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; ERIN BLISS, ASSISTANT INSPECTOR GENERAL, OFFICE OF EVALUATION 

AND INSPECTIONS, OFFICE OF INSPECTOR GENERAL, U.S. 

DEPARTMENT OF HEALTH AND HUMAN SERVICES; DEBRA 

DRAPER, DIRECTOR, HEALTH CARE, GOVERNMENT ACCOUNTABILITY OFFICE 

STATEMENT OF CAPT. KRISTA M. PEDLEY, PHARMD, MS 

Ms. PEDLEY. Good morning, Chairman Murphy, Ranking Member DeGette, and members of the subcommittee. 

I appreciate the opportunity to appear before you today to discuss the 340B program. HRSA shares the subcommittee’s commitment to ensuring program integrity and today I will discuss steps 

we have taken to implement key provisions and strengthen oversight including some of the current challenges in managing the 

program. 

The 340B program was authorized in 1992 to stretch scarce federal resources by reducing the cost of covered outpatient drugs to 

340B-eligible entities. Approximately 12,300 entities and 26,000 associated sites participate in addition to over 600 manufacturers. We 

appreciate the work of the Office of Inspector General and the Government Accountability Office to provide recommendations on 

strengthening safeguards which inform our activities across all 

HRSA programs. Within our statutory authority HRSA has worked 

to address the majority of GAO and OIG recommendations through 

systematic efforts to improve the program. 

Two recommendations remain open from GAO’s 2011 study 

which direct HRSA to clarify hospital eligibility requirements and 

the definition of a 340B patient. The OIG’s 2005 and 2006 reports 

include open recommendations that HRSA develop a pricing system 

to improve oversight and allow entities to secure pricing data. 

12 

Since 1992, HRSA has administratively established many requirements of the program for a series of guidance documents published 

in the Federal Register, typically after public comment. 

In 2014, HRSA planned to issue a proposed omnibus regulation. 

However, that same year the U.S. District Court for the District of 

Columbia invalidated a 2013 final rule on a provision related to orphan drugs. HRSA then withdrew the proposed omnibus regulation 

from the Office of Management and Budget review. HRSA has 

prioritized rulemaking in areas in which the D.C. circuit has clearly recognized our regulatory authority. 

The agency finalized a rule in January 2017 on a calculation of 

ceiling prices and the imposition of civil monetary penalties for 

manufacturers which will become effective October 1, 2017. HRSA 

also proposed a rule in August 2016 on the dispute resolution process. All other program policy areas were addressed in an August 

2015 proposed omnibus guidance and we are working on next steps 

to address these policy issues. 

The president’s fiscal year ’18 proposed budget commits to developing a legislative proposal to improve 340B program integrity and 

ensure that the benefits derived from participation are used to benefit patients, especially the low-income and uninsured. Specific legislative authority to conduct rulemaking for all provisions in the 

340B statute would be more effective for facilitating HRSA’s oversight and management of the program. Specifically, regulatory authority would also allow HRSA to provide greater clarity and specificity of program requirements. 

HRSA works to verify that both 340B entities and manufacturers 

are in compliance. Regarding covered entity program efforts, we 

conduct initial certification, annual recertification and program audits. We have completed over 800 covered entity audits since 2012, 

which encompass nearly 11,000 offsite facilities and 18,000 contract 

pharmacy locations. HRSA also reaudits a select number of entities 

with findings that resulted in repayment to manufacturers. HRSA 

posts on our website a summary of audit findings. The findings 

have varied from minor database corrections to findings of diversion. 

Through findings and audits, HRSA develops educational tools 

and resources for all 340B stakeholders in order to improve program integrity. The statute specifies the types of entities eligible to 

participate but does not specify how a covered entity may provide 

or dispense such drugs to its patients. 

HHS has issued guidance recognizing entity use of contract pharmacies to dispense 340B drugs. The majority, or 73 percent, of entities do not contract with pharmacies. HRSA guidance outlines compliance requirements for entities that utilize these contract pharmacies, which HRSA reviews as part of our audits. If a covered entity is not providing oversight of its contract pharmacy, the pharmacy arrangement is terminated from the program. 

HRSA is also actively engaged in manufacture oversight and has 

the authority to conduct audits of manufacturers. HRSA has conducted seven audits of manufacturers in addition to developing regulations and guidance specific to manufacturer compliance. In accordance with the statute, HRSA is required to collect information 

13 

from manufacturers to verify the accuracy of 340B ceiling prices 

and then make those ceiling prices available to the covered entities. 

HRSA appreciates the work of the OIG and GAO to help 

strengthen the program. We look forward to continuing our partnership with them as well as with Congress to strengthen program 

integrity and enforce program requirements as well as increase 

transparency on how entities use the program to benefit low-income and uninsured patients. 

I appreciate the opportunity to testify today and look forward to 

your questions. 

[The prepared statement of Capt. Krista M. Pedley follows:] 

14 


26929.001

STATEMENT OF 

CAPT KRISTA M. PEDLEY, PharmD, MS 

DIRECTOR 

OFFICE OF PHARMACY AFFAIRS 

HEAL THCARE SYSTEMS BUREAU 

HEALTH RESOURCES AND SERVICES ADMINISTRATION 

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES 

BEFORE THE 

COMMITTEE ON ENERGY AND COMMERCE 

SUBCOMMITEE ON OVERSIGHT AND INVESTIGATIONS 

U.S. HOUSE OF REPRESENTATIVES 

JULY 18,2017 
15 


26929.002

Good morning Chairman Murphy, Ranking Member DeGette and Members of the 

Subcommittee. My name is CAPT Krista Pedley and I am the Director of the Office of 

Pharmacy Affairs, within the Health Resources and Services Administration (HRSA) at the U.S. 

Department of Health and Human Services (HHS). Thank you for the opportunity to appear 

before you today to discuss the 3408 Drug Pricing Program. HRSA shares the Subcommittee's 

commitment to ensuring the integrity of this program. I will discuss today the steps we have 

taken to implement key provisions and strengthen oversight of the Program, and some of the 

current challenges we face in managing the Program. 

HRSA focuses on improving access to healthcare services for people who arc geographically 

isolated or economically or medically vulnerable. HRSA strives to maximize every dollar and 

utilize continuous improvement to achieve the best outcomes for those we serve. To that end, 

program integrity is essential to all HRSA programs, including the 3408 Program. 

The 340B Drug Pricing Program 

The 3408 Program was authorized by the Veterans Health Care Act of 1992. Based on 

Congressional report language, 1 the 3408 Program is intended to substantially reduce the cost of 

covered outpatient drugs to 3408-participating eligible entities, known as "covered entities," in 

order to stretch scarce Federal resources. Some examples of covered entities include 

disproportionate share hospitals, Federally Qualified Health Centers, Ryan White HIV/AIDS 

Program grantees, and hemophilia treatment centers. Covered entities must apply to participate 

in the 3408 Program and, once eligibility is verified by HRSA, the entities may begin purchasing 

drugs at the statutorily-defined ceiling price. Approximately 12,300 covered entities and 26,000 

associated sites participate. 

Manufacturers participating in Medicaid enter into an agreement with HHS under which they 

cannot charge covered entities a price that exceeds the 3408 ceiling price. Over 600 

manufacturers participate in the Program. 

We appreciate the work done by the Department of Health and Human Services Office of 

Inspector General (OIG) and the Government Accountability Office (GAO) to highlight potential 

program integrity vulnerabilities and provide recommendations on strengthening safeguards. 

HRSA relies on these recommendations to inform our program improvement activities across all 

HRSA programs, including the 3408 Program. Since 2011, GAO and OIG reviews of the 3408 

Program have resulted in eight recommendations. Two recommendations from GAO's 2011 

study which direct HRSA to clarify hospital eligibility requirements and the definition of a 340B 

patient, remain open. The OIG's 2005 and 2006 reports recommended that HRSA develop a 

pricing system to improve the oversight of the 3408 Program and to allow entities access to 

seeure pricing data to ensure that they are charged at or below the 340B ceiling price. 

Within our statutory authority, HRSA has worked to address the majority of these 

recommendations through systematic efforts to improve the 340B Program. We continue to 

1 The House Report accompanying the original 34GB Program legislation states the following intent "[iJn giving these 'covered 

entities' access to price reductions the Committee intends to enable these entities to stretch scarce federal resources as far as 

possible. reaching more eligible patients and providing more comprehensive services." H.R. Rep. No. I 02·384(Il), at 12 (1992). 
16 


26929.003

welcome feedback from our stakeholder community, Members of Congress, GAO, and OIG to 

help strengthen our program operations and oversight. 

3408 Program Oversight 

Since 1992, HRSA has administratively established many requirements of the 3408 Program 

through a series of guidance documents published in the Federal Register, typically after notice 

and comment. In the past few years, HRSA has been undertaking systematic efforts to improve 

the 3408 Program, including proposing new regulations and issuing program guidance. 

Collectively, these rules and guidance are intended to strengthen the integrity of the 3408 

Program. 

In 2014, HRSA planned to issue a proposed omnibus regulation for the 3408 Program to 

establish additional policy to advance its oversight of covered entities and manufacturers. In 

May 2014, before HRSA was scheduled to issue the proposed omnibus regulation, the U.S. 

District Court for the District of Columbia2 invalidated a 2013 final rule on a provision in the 

3408 statute related to orphan drugs. HRSA withdrew the proposed omnibus regulation from 

Office of Management and Budget (OMB) in order to reevaluate the proposed regulation in light 

of the court's ruling. 

On August 12,2016, HHS issued a notice of proposed rulemaking3 on the 3408 ADR process. 

On January 5, 2017, HHS promulgated regulations in the Federal Register4 on the calculation of 

ceiling prices and the imposition of civil monetary penalties for manufacturers, which will 

become effective October I, 2017. 

In the absence of new regulation on certain issues, HRSA issued a proposed 3408 Omnibus 

Guidance in August 20155 We are working to determine next steps to address these policy 

issues. 

Budget Proposals 

The President's FY 2018 Budget commits to developing a legislative proposal to improve 340B 

Program integrity and ensure that the benefits derived from participation in the program are used to 

benefit patients, especially low-income and uninsured populations. HRSA has prioritized 

rulemaking in areas in which the D.C. District Court has clearly recognized our regulatory 

authority. Specific legislative authority to conduct rulemaking for all provisions in the 340B 

statute would be more effective for facilitating HRSA's oversight over, and management of, the 

3408 Program. In addition, specific regulatory authority would allow HRSA to provide greater 

clarity and specificity to Program requirements. 

2 PhRMA v. HHS, 43 F. Supp. 3d 28 (D.D.C. 2014). 3 81 FR 53381(August 12, 2016). 4 82 FR 1210(January 5, 2017). 

' 80 FR 52300, (August 28, 20 15). 

2 
17 


26929.004

340B Program Integrity 

HRSA places the highest priority on the integrity of the 340B Program and has strengthened 

oversight of this program. We work to verify that both 340B covered entities and manufacturers 

are in compliance with 340B Program requirements. We have always worked to achieve 

program integrity within our authority to provide clarity in important program areas. 

We conduct efforts such as initial certification (entity enrollment and validation), annual 

recertification, and program audits (on-site audit of340B compliance). When an entity applies 

for participation in the program, HRSA staff review and validate the applicant's eligibility based 

on statutory requirements. In addition, through the annual recertification process, covered 

entities verify that all eligibility information is up to date and attest to compliance. We have 

been conducting annual recertification for all covered entities over the last several years. Since 

2012, there have been steady improvements in recertification efforts by all covered entities in the 

340B Program. 

Fiscal year 2017 is our sixth year of covered entity audits. Random audits continue to be 

selected using a risk stratification methodology, so that entities with higher risk factors are more 

likely to be selected for audit. Targeted audits are also performed and may be triggered by 

reported violations or allegations. 

The 340B covered entity audit process begins with a selected covered entity receiving an 

engagement letter explaining what to expect and how to prepare for the audit. HRSA auditors 

follow a strict protocol when conducting an audit. After the completion of the audit, the entity 

receives a preliminary report, and is granted one opportunity for "notice and hearing," by which 

it can submit a written disagreement addressing any or all of the audit findings. If the entity 

submits a disagreement, HRSA considers additional points raised, which may result in adjusted 

findings. The entity is then issued a Final Report. If findings were included in the final report, 

the entity would be required to submit to HRSA a Corrective Action Plan (CAP), which would 

include repayment to manufacturers for findings of diversion, duplicate discount, and/or 

violation of the Group Purchasing Organization prohibition. 

To ensure the transparency of the audit process, HRSA posts a summary of final audit findings, 

including the name of the covered entity, on the Office of Pharmacy Affairs public website. As 

of June 26, 2017, we have completed 805 covered entity audits since we began auditing in 2012, 

which encompasses nearly 11 ,000 offsite outpatient/off-site facilities and nearly 18,000 contract 

pharmacy locations. In FY 2017, HRSA is on track to conduct an additional 200 covered entity 

audits. The findings of the audits have varied. Some findings were minor, requiring basic 

corrections in the 3408 database (e.g., contact or address information was incorrect). Other 

audits found diversion, either through ineligible providers or ineligible sites. For audits with 

findings of a possible duplicate discount violation, the covered entity is required to work with the 

state to clarify and resolve the issue. 

HRSA re-audits a select number of entities with findings that resulted in repayment to 

manufacturers. HRSA does not consider covered entities for re-audit until their audit is closed, 

which does not occur until after the CAP has been fully implemented. This policy is in place to 

3 
18 


26929.005

ensure the covered entity has time to fix the issue and has time to conduct repayment to 

manufacturers. Therefore, there is some time delay between the first audit and any subsequent 

re-audit. Through FY 2016, HRSA has re-audited II covered entities that were previously 

audited and had findings that resulted in repayment to manufacturers. HRSA plans to re-audit an 

additional I 0 covered entities in FY 2017. To ensure we conduct a variety of audits in a given 

fiscal year, HRSA chooses its audits considering many factors, including but not limited to, 

entities that are eligible for are-audit. 

Through findings in the audits, HRSA develops educational tools and resources for all 340B 

stakeholders in order to improve overall program integrity. 

In addition to covered entity oversight, we are actively engaged in manufacturer oversight. 

HRSA has the authority to conduct audits of manufacturers with program requirements. The 

audit process is the same as the process for covered entity audits as outlined above. As of July 1, 

2017, HRSA conducted seven audits of manufacturers (one conducted with the assistance of the 

OIG. HRSA also ensures manufacturer compliance through development of regulations, 

guidance, and policy releases specific to manufacturer compliance. Additionally, HRSA verifies 

manufacturers that participate in Medicaid have signed a pharmaceutical pricing agreement, 

reviews all allegations brought to its attention, and requires refunds and credits when a covered 

entity is overcharged. 

In accordance with the statute, HRSA is required to collect information from manufacturers to 

verify the accuracy of 340B ceiling prices, and then make ceiling prices available to covered 

entities. 

Contract Pharmacy Use in the 340B Program 

The statute specifies the types of entities eligible to participate in the 340B Program, but does not 

specify how a covered entity may provide or dispense such drugs to its patients. The diverse 

nature of eligible entity types has resulted in a variety of drug distribution systems. In 1996, 

HHS issued guidance recognizing covered entity use of contract pharmacy arrangements, which 

states had permitted, to dispense 340B drugs. The majority (73 percent) of covered entities do 

not contract with pharmacies. Of the 27 percent of covered entity organizations utilizing 

contract pharmacy arrangements, community health centers represent the largest users of 

contract pharmacy arrangements, with 73 percent of community health centers utilizing one or 

more contract pharmacies. 

HRSA issued revised guidance in 2010 to further outline compliance requirements for covered 

entities that utilize contract pharmacies to dispense 340B drugs to their patients and to permit 

covered entities to utilize more than one contract pharmacy. The guidance states that covered 

entities are responsible for compliance of the contract pharmacies, and they must ensure against 

diversion and duplicate discounts, maintain auditable records, and meet all other program 

requirements. HRSA expects entities to conduct annual audits of their contract pharmacies in 

order to conduct sufficient oversight. If a covered entity is found to not be providing adequate 

oversight, the contract pharmacy arrangement is terminated from the 340B Program. 

4 
19 


26929.006

HRSA conducts audits of covered entities and their contract pharmacy arrangements and has 

included in the criteria for risk-based audits the number of contract pharmacy arrangements a 

covered entity utilizes. HRSA verifies the existence of a contract between a covered entity and 

contract pharmacy during its audits of 340B covered entities. Entities must demonstrate that 

they have mechanisms in place to prevent diversion and duplicate discounts. During audits, 

HRSA also reviews a sample of the records of 3408 drugs dispensed at the contract pharmacy 

and reviews contract pharmacy compliance. During the annual recertification process, covered 

entities that have arrangements with contract pharmacies must attest that the arrangement is in 

compliance with all requirements set forth by the 3408 Program. If an arrangement is found to 

be out of compliance with 340B Program requirements, HRSA may terminate the contract 

pharmacy arrangement from the 3408 database so that manufacturers no longer ship 3408 drugs 

to them. 

Conclusion 

HRSA appreciates the work ofOIG and GAO to help strengthen the Program. We look forward 

to continuing our partnership with them as well as with Congress to strengthen program integrity 

and enforce program requirements, as well as increase transparency on how covered entities use 

the program to benefit low-income and uninsured patients. 

5 
20 

Mr. MURPHY. Thank you. 

Ms. Bliss, you are recognized for 5 minutes. 

STATEMENT OF ERIN BLISS 

Ms. BLISS. Good morning, Chairman Murphy, Ranking Member 

DeGette, and other distinguished members of the subcommittee. I 

am pleased to join you today to discuss ways to protect the integrity of the 340B drug discount program. 

OIG has found that HRSA has strengthened its oversight of the 

340B program over the years. However, more needs to be done. 

Some longstanding and fundamental challenges persist and they 

impede effective program oversight and operations. OIG recommends two key improvements to 340B program integrity and 

oversight: One, increase transparency to allow for payment accuracy; and two, clarify rules to ensure that the program operates as 

intended. I will explain both of these. 

With respect to transparency, OIG recommends that HRSA 

shares ceiling prices with 340B providers and states. For providers, 

this will allow them to ensure that they are not overcharged by 

drug manufacturers. Currently, 340B providers cannot verify that 

they actually receive the required discount. Congress has given 

HRSA authority to do so and HRSA is working on it. Sharing ceiling prices with states will allow them to ensure that Medicaid is 

not overpaying for 340B drugs. Making this happen may require 

new authority from Congress. States also need transparency as to 

which Medicaid claims represent 340B drugs. Even when states 

can determine how much they should be paying for these drugs, 

they still may not know which claims to reimburse at that price. 

This transparency is also essential for states to correctly claim 

Medicaid rebates from drug manufacturers. Without it, states put 

manufacturers at risk for paying more rebates than they should by 

inappropriately including 340B drugs. At the same time, states risk 

forgoing rebates to which they are entitled by inappropriately excluding non-340B drugs. OIG recommends that HRSA work with 

the Centers for Medicare and Medicaid Services to help states accurately identify 340B claims. 

The second key improvement is to clarify 340B program rules. 

For one, HRSA’s guidance addresses patient eligibility but leaves 

room for interpretation as to which of a patient’s prescription 

might be eligible in a retail pharmacy setting. In these retail settings we found that providers in fact are making different determinations about which prescriptions are eligible for the 340B price. 

Let me illustrate with an example. Let us imagine a doctor sees 

a patient at a 340B community health center. Later, that same doctor sees the same patient at her private practice. If the doctor prescribes a drug to that patient at the private practice, is that prescription eligible for the 340B price? One provider in our study said 

yes and another said no, and another said it depends. So who is 

right? We couldn’t tell, based on the current guidance, and so we 

recommend that HRSA more clearly define this. 

Furthermore, guidance does not address how to handle uninsured patients. In our review of retail pharmacies, we found that 

uninsured 340B patients sometimes received discounted prices but 

sometimes they paid full price for 340B drugs. In other words, unVerDate Nov 24 2008 12:07 Feb 23, 2018 Jkt 037690 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-46 CHRIS
21 

insured patients are not always receiving the benefit of the 340B 

discount on their prescriptions. We recommend that HRSA address 

whether providers must offer discounted prices to uninsured patients. 

In closing, lack of transparency and clarity make it harder to ensure integrity and harder to determine how well the program is 

working. If HRSA needs new authorities to make these key improvements, we encourage Congress to consider statutory changes 

as appropriate to support increased transparency and better clarity. 

OIG appreciates and shares your interest in improving program 

integrity and effectiveness for the 340B program. I will look forward to answering your questions. Thank you. 

[The prepared statement of Erin Bliss follows:] 

22 


26929.007

Testimony Before the United States House of Representatives 

Committee on Energy and Commerce: 

Subcommittee on Oversight and Investigations 

July 18, 2017 

10:15 a.m. 

Location: 2322 Rayburn House Office Building 
23 


26929.008

Testimony of: 

Erin Bliss 

Assistant Inspector General for Evaluation and Inspections 

Office of Inspector General, U.S. Department of Health and Human Services 

Good morning, Chairman Murphy, Ranking Member DeGette, and Members of the 

Subcommittee. I am Erin Bliss, Assistant Inspector General for Evaluation and Inspections for 

the Office of Inspector General (OIG), U.S. Department of Health and Human Services. I 

appreciate the opportunity to appear before you to discuss ways to protect the integrity of the 

3408 Drug Pricing Program (340B program). 

OIG oversees the Health Resources and Services Administration's (HRSA) operation of the 

340B program. OIG reviews have explored various aspects of the 340B program, identified 

potential vulnerabilities, and offered several recommendations to promote program integrity. 

Some of the weaknesses we have identified have been addressed through legislation or by HRSA 

directly. However, some long-standing, fundamental vulnerabilities persist, impeding effective 

program oversight and operations. Specifically, O!G work has identified: I) a lack of 

transparency that prevents accurate payments by 340B providers, State Medicaid programs, and 

pharmaceutical manufacturers; and 2) a lack of clarity regarding program rules that creates 

uncertainty and results in uneven program implementation and limited accountability. HRSA has 

taken some steps toward addressing these concerns, but it has not fully addressed either. My 

testimony today focuses on the two key improvements OIG recommends to support effective 

oversight and strengthen the integrity of the 3408 program. 

OIG Recommends Key Improvements to 340B Program Integrity and Oversight: 

• increase transparency to allow payment accuracy, and 

• clarify rules to ensure that the program operates as intended. 

The 3408 Program Requires Drug Manufacturers to Sell Products at Discounted Prices to 

Certain Safety-Net Health Care Providers 

In 1992, Congress established the 340B program to generate savings for certain safety-net health 

care providers by allowing them to purchase outpatient drugs at discounted prices. 1 These 

savings could then be used to "stretch scarce Federal resources as far as possible, reaching more 

eligible patients and providing more comprehensive services."2 HRSA manages the 340B 

1 Section 3408 of the Public Health Service Act, 42 U.S.C. § 256b 2 H.R. Rept. No. I 02-384 (Part 2). at 12 (1992) (Con f. Rept.). 

House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July 18, 2017 
24 


26929.009

program and estimated that the savings to 3408 providers attributable to the program in 2015 was 

$6 billion.3 

Pursuant to the Public Health Service Act, drug manufacturers sign a Pharmaceutical Pricing 

Agreement stipulating that they will charge certain eligible health care providers (3408 

providers) at or below specified maximum prices, known as ceiling prices. The manufacturers 

calculate 3408 ceiling prices each quarter by applying a statutorily defined formula to 

confidential drug pricing data. The 3408 providers benefiting from these discounted prices 

include such safety-net providers as community health centers and hospitals that serve a 

disproportionate number of low-income patients. In 20 I 0, the Affordable Care Act expanded the 

types of providers eligible to participate in the 3408 program to include children's hospitals, 

critical access hospitals, free-standing cancer hospitals, rural referral centers, and sole 

community hospitals. As of October 1, 2016, the 3408 program included 12,148 providers and 

25,348 associated sites, for a total 37,496 registered sites.4 

The 3408 program also intersects with State Medicaid programs in important ways. One way 

relates to how State Medicaid programs reimburse 3408 providers for drugs provided to 

Medicaid beneficiaries. As of February 2016, the Centers for Medicare & Medicaid Services 

(CMS) requires State Medicaid agencies to reimburse providers for 3408-purchased drugs at 

amounts that do not exceed the 3408 ceiling pricc.5 Another way relates to how States claim 

Medicaid rebates from drug manufacturers. 1n general, States are entitled to statutorily defined 

rebates from manufacturers for covered outpatient drugs. However, "duplicate discounts"-

which occur when drug manufacturers pay rebates to State Medicaid agencies on drugs that they 

sold at the already discounted 3408 price- are prohibited by law.6 

HRSA Has Strengthened Its Oversight of the 340B Program Over the Years, But Some 

Key Challenges Persist 

Across numerous OJG reviews of the 3408 program, our work has identified program integrity 

vulnerabilities, many of which have been addressed, but others continue to be concerns. 7 Our 

initial work, released in the early 2000s, found deficiencies in HRSA's oversight of the program. 

These deficiencies included inaccurate information regarding which providers were eligible for 

discounted prices and a lack of systematic monitoring to ensure that drug manufacturers were 

charging 3408 providers the correct prices. Systemic monitoring by IIRSA was critical, at the 

time, because confidentiality protections prevented HRSA from sharing the ceiling prices with 

3 82 Fed. Reg. 1210, 1227 (January 5, 2017) 4 HRSA, Fiscal Year 2018 Justification of Estimates for Appropriations Committees, p. 245. 5 81 Fed. Reg. 5170 (February l, 2016); 42 C.F.R. § 447.518(a)(2). 6 42 U.S. C.§ 256b(a)(5)(A)(i); 42 U.S.C. § l396r-8U)(l). 7 OJG has issued seven evaluations of the 340B program: (l) Deficiencies in the 3408 Drug Pricing 

Program ·s Database, OEl-05-02-00071, June 2004; (2) Deficiencies in Oversight of the 3408 Drug Pricing 

Program. OEl-05-02-00072, October 2005; (3) Review of3408 Prices, OEI-05-02-00073, July 2006; (4) 

State Medicaid Policies and Oversight Activities Related to 3408-Purchased Drugs, OEI-05-09-00321, 

June 2011; (5) Contract Pharmacy Arrangements in the 3408 Program, OEI-05-13-00431, February 2014; 

(6) Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-11-00580, August 2014; and (7) 

State L]Jorts to Exclude 3408 Drugs From Medicaid Managed Care Rebates, OEI-05-14-00430, June 2016 

2 House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July 18,2017 
25 


26929.010

340B providers. This lack of transparency left 340B providers unable to determine whether they 

were paying accurate amounts to drug manufacturers. Further, HRSA lacked the necessary 

enforcement tools for holding manufacturers accountable. 

In recent years, HRSA has taken steps to improve oversight of the 3408 program and been 

granted additional oversight authorities. For example, HRSA has issued several technical 

assistance resources to educate manufactures and 3408 providers to facilitate compliance. In 

one case, HRSA created a training webinar for 3408 providers to help them ensure compliance 

with program requirements to prevent duplicate discounts when working with Medicaid patients. 

During this same time, HRSA was authorized in legislation to share the discounted ceiling prices 

with 3408 providers. HRSA was also granted new enforcement tools that it has been using. For 

example, HRSA now conducts audits of selected manufacturers and 3408 providers. 

Some ofHRSA's efforts to strengthen 3408 program integrity through regulations were 

unsuccessful. HRSA proposed an omnibus 3408 regulation, but withdrew it prior to publication 

after a Federal court ruling established limits on HRSA 's rulemaking authority for the 3408 

program. In 2015, HRSA instead issued proposed omnibus 3408 guidance.8 However, this 

guidance was withdrawn in January 2017. HRSA did not provide a reason for withdrawing the 

guidance. 

Despite progress in addressing some program vulnerabilities, the steps HRSA has taken have not 

fully addressed the long-standing challenges identified by OIG. As such, OIG continues to 

recommend improving the 3408 program by: (I) increasing transparency, and (2) clarifying 

program rules. HRSA, CMS, and Congress each have roles in advancing these improvements. 

These broad recommendations are explored in detail below. 

OIG RECOMMENDS: Increasing Transparency to Allow Payment Accuracy 

Transparency is needed to support payment accuracy in three ways. First, 3408 providers need 

to know the 3408 ceiling prices to determine whether they are paying the accurate price. 

Second, State Medicaid programs need to know the 3408 ceiling price, as well as which 

Medicaid claims are for 3408-purchased drugs, to determine whether they are paying 3408 

providers accurately. Third, State Medicaid programs need to know which Medicaid claims are 

for 3408-purchased drugs to ensure that Medicaid programs receive all of the drug rebates to 

which they are entitled and manufacturers do not provide duplicate discounts. However, the lack 

of transparency regarding 3408 prices and claims hampers payment accuracy in all of these 

transactions. 

The lack o[transparencv in ceiling prices impedes 340B providers and Medicaid programs (rom 

ensuring that they have paid the correct amount (or 34GB-purchased drugs. 

Although Congress authorized HRSA to share confidential ceiling prices with 3408 providers in 

2010, HRSA has not yet done so. HRSA has begun to develop a secure system for sharing 

'80 Fed. Reg. 52300 (August 28, 2015) 
26 


26929.011

ceiling prices with 3408 providers. HRSA plans for the system to be a single point of reference 

to calculate, verify, and display 3408 ceiling prices. According to these plans, 3408 providers 

will be able to access the system to view 3408 ceiling prices and verify that they are paying at or 

below the posted 3408 ceiling price. Manufacturers will also be able to upload their quarterly 

pricing data and validate their prices with the HRSA-verified 3408 ceiling price. HRSA 

identifies this initiative as an ongoing priority for fiscal year 2018. 9 However, until the system is 

operational, 3408 providers cannot ensure that they are paying the right amount. 

The 2010 legislation addressed access to ceiling prices for 3408 providers, but it did not address 

access for State Medicaid agencies. Lack of access to 3408 ceiling prices can prevent State 

Medicaid agencies from effectively enforcing Medicaid payment policies for 3408-purchased 

drugs. OIG found that without access to 3408 ceiling prices, States are unable to implement 

automated, prepayment edits to enforce these policies. Instead, some States conduct laborintensive and potentially costly audits and post-payment reviews in an attempt to ensure that they 

have paid 3408 providers correctly for 3408-purchased drugs. HRSA concurred with OIG's 

recommendation to share ceiling prices with States but may need additional statutory authority to 

do so10 

The lack o(transparency in Medicaid claims for 34GB-purchased drugs hinders States' efforts to 

pay providers correctly and to claim correct Medicaid rebates from manufacturers. 

States also need transparency into which Medicaid claims represent 3408-purchased drugs to 

ensure that they make payments in accordance with their payment policies. Even if States can 

determine how much they should be paying 3408 providers for 3408-purchased drugs, they still 

may not know which claims to reimburse at that rate. 

Likewise, knowing which Medicaid claims represent 3408-purchased drugs is essential for 

States to correctly claim rebates from manufacturers. If States cannot accurately identify which 

Medicaid claims involve 3408-purchased drugs, two types of problems may result. One, States 

may inappropriately include claims for 3408-purchascd drugs in rebate invoices sent to 

manufacturers, potentially causing duplicate discount situations. Two, States may 

inappropriately exclude claims for non-3408-purchased drugs and forgo rebates to which they 

are entitled. In addition, without reliable methods for identifying claims for 3408-purchased 

drugs, States may be more likely to have rebate disputes with drug manufacturers, which would 

require additional resources to resolve and may impede or delay rebate payments. 

HRSA maintains a tool, the Medicaid Exclusion File, to assist States in identifying providers 

who have chosen to dispense 3408-purchased drugs to Medicaid patients in the fee-for-service 

program. OJG found that in 2015, States typically used HRSA 's Medicaid Exclusion File to 

identify and exclude 3408 drug claims for the purpose of collecting rebates. 11 However, we 

found that this provider-level approach may not accurately identify all individual 340B drug 

9 HRSA, Fiscal Year 2018 Justification of Estimates for Appropriations Committees, p. 245. 10 O!G, State Medicaid Policies and Oversight Activities Related to 340B-Purchased Drugs, OEI-05-09-00321, 

June 2011. 11 O!G, Stale Efforts to Exclude 340B Drugs from Medicaid Managed Care Rebates, OEI-05-14-00430, June 2016. 

4 House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July IS. 20!7 
27 


26929.012

claims, creating a risk of duplicate discounts and forgone rebates. We found that methods that 

operate at the claim level can improve accuracy in identifying 340B drug claims and thereby 

help prevent duplicate discounts and improve collection of rebates. Identifying and excluding 

340B claims paid by Medicaid managed care organizations involves additional complications, 

and claims-level transparency would help address these challenges, too. 

To increase transparency, OIG recommended that CMS require States to usc claim-level 

methods to identify 340B claims. CMS did not concur with OIG's recommendation to require 

the use of claim-level methods to identify 340B claims, stating that it agreed with the importance 

of claim-level methods but that the statute "does not contemplate" such a requirement. To the 

extent that CMS detennines it does not have sufficient statutory authority to implement such a 

requirement, additional action from Congress may be needed. 

OIG RECOMMENDS: Clarifying Rules to Ensure that the 340B Program Operates as 

Intended 

OIG has identified a number of challenges and inconsistencies arising from the widespread use 

of contract pharmacy arrangements. Contract pharmacies are external pharmacies (often retail 

pharmacies) that partner with 340B providers to dispense 340B-purchased drugs to the 

providers' patients, and their prevalence is on the rise. These pharmacies typically dispense both 

340B-purchased drugs on behalf of 340B providers, as well as non-340B drugs. The operations 

of contract phannacies are often quite complex, and this complexity has important 

consequences-variation in eligibility detenninations across different 340B providers and 

inconsistencies in whether uninsured patients benefit directly from the 340B program. As such, 

OIG recommends that HRSA clarify rules to address these ambiguities and inconsistencies. 

HRSA initiated steps to address OIG's concerns by proposing updates and clarifications that 

address the patient definition, contract phannacy arrangements, and other program integrity 

provisions in its 2015 proposed omnibus 340B guidance. However, HRSA never finalized that 

proposed guidance. As such, these issues remain unaddressed. To address these issues through 

rulemaking, HRSA may need additional statutory authority. 

HRSA 's current patient definition guidance does not account for the complexity of contract 

pharmacy arrangements. 

340B providers are prohibited by law from dispensing 340B-purchased drugs to anyone who 

is not their patient. 12 However, the law does not further define what constitutes a 

"patient." HRSA's official definition of patient eligibility comes from guidance issued 

before 340B providers were permitted to contract with networks of retail pharmacies. That 

guidance specifies that an individual is an eligible patient only if he or she has an established 

relationship with the 340B provider, he or she receives health care services from the 340B 

12 42 U.S.C. § 256b(a)(5)(B). 

5 House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July 18,2017 
28 


26929.013

provider, and those services are consistent with the service or range of services for which 

Federal funding is being granted. 13• 

14 

Dispensing a 3408-purchased drug to an ineligible patient, which is prohibited by law, is 

referred to as "diversion." Thus, appropriately determining patient eligibility for 

3408-purchased drugs is critical to preventing diversion. 

Although the law and HRSA guidance focus on 3408 eligibility at the patient level, 

operationally, contract pharmacies determine eligibility at the prescription level. Retail contract 

pharmacies often have no way to distinguish a 3408 patient from any other customer filling a 

prescription at their stores. To address this reality, many contract pharmacies dispense drugs to 

all of their customers-3408-eligible or otherwise-from their regular inventory. Only later, 

after dispensing a drug, do these contract pharmacies determine which prescriptions were given 

to 3408-eligible patients. They then order the appropriate quantity of drugs at 3408 prices to 

replenish their inventory. 

To identify which prescriptions were given to 3408-eligible patients, contract pharmacies often 

match information from the 3408 providers, such as patient and prescriber lists, to their 

dispensing data. In its 2014 report, OIG found wide variation in these eligibility determinations. 

Different determinations of 3408 eligibility appear to stem from the application of the patient 

definition by 3408 providers and their contract pharmacies to a wide variety of prescription-level 

scenarios. 15 Depending on the interpretation ofHRSA's patient definition, some 3408 provider 

eligibility determinations would be considered diversion and others would not. 

J-IRSA's current guidance on patient definition does not account for many of the 3408 eligibility 

decisions that arise in contract pharmacy arrangements. The following example illustrates how 

contract pharmacy operations have led to different determinations of 3408 eligibility in the 

absence of a clearer patient definition: 

Scenario: Nonexclusive physician 

A physician practices part time at a 340B provider, but also has a private 

practice. The physician first sees an individual at the 340B provider. 

Separately, the physician sees the same individual at his private practice and 

writes a prescription for that person. The individual fills the prescription at the 

340B provider contract pharmacy. 

13 Disproportionate share hospitals are exempt from the requirement that services be consistent with the service or 

range of services for which Federal funding is being granted. 14 61 Fed. Reg. 55156,55157-8 (October 24, 1996). 15 OIG, Contract Pharmacy Arrangements in the 3408 Program, OEI-05-13-00431, February 2014. 

6 House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July 18.2017 
29 


26929.014

Whether contract pharmacies determine the prescription in this scenario to be 340B-eligible 

depends on how they match their dispensing data to information from the 340B provider. One 

340B provider in OIG's report noted that it would automatically categorize the prescription in 

this scenario as 340B-eligible because it uses a list of all prescribers working at the 340B 

provider to identify 340B-eligible prescriptions. Because the physician in this scenario would be 

on the prescriber list, the prescription would be categorized as 340B-eligible, even though it was 

written at the physician's private practice (i.e., it originated outside the 3408 provider). 

Another 340B provider in OIG's report noted that it would not categorize the prescription in this 

scenario as 340B-eligiblc because, although the 3408 provider's contract pharmacy also uses a 

prescriber list to identify 340B-eligible prescriptions, it limits the prescriber list only to those 

prescribers who work exclusively for the 3408 provider. Because the physician in this scenario 

would not be on the prescriber list (as he does not work exclusively for the 3408 provider), the 

prescription would not be categorized as 3408-eligible. 

In its 2015 proposed omnibus guidance, HRSA proposed an update to the patient definition that 

could have addressed this scenario. The guidance proposed a six-part patient definition, to be 

applied on a prescription-by-prescription basis, that would have deemed prescriptions to be 

3408-eligible only if they resulted from a service (e.g., a physician consultation) provided by the 

covered entity. However, HRSA has not issued final guidance on the patient definition. 

Neither the 340B statute nor HRSA guidance addresses whether 340B providers must otfor the 

discounted price to uninsured patients. 

Despite the 3408 program's goal of increasing access and providing more comprehensive care, 

neither the 340B statute nor I !RSA guidance speaks to how 3408 providers must use savings 

from the program-nor do they stipulate that the discounted 340B price must be passed on to 

uninsured patients. Given this discretion, some 3408 providers have chosen to institute extra 

measures to ensure that uninsured patients benefit through lower drug costs when filling 

prescriptions at contract pharmacies. If they do not, uninsured patients can pay full price for 

drugs filled at contract pharmacies and thus not directly benefit from the 340B discount on their 

prescriptions. Guidance on how the program should apply to uninsured patients in these 

scenarios should be clarified to ensure that patients are treated consistently across 340B 

providers and that operations align with the program's intent. 

In OIG's 2014 report on 340B contract pharmacy arrangements, we found that several 340B 

providers did not offer the discounted price to their uninsured patients at contract pharmacies. 16 

These 3408 providers' contract pharmacy arrangements would have required additional 

processes to identify uninsured patients as 3408-eligible because, as previously noted, many 

contract pharmacies do not know which patients are from the 340B providers when they come to 

the pharmacy. Not knowing whether the patient is 3408-eligible may not have a financial 

impact on insured patients, because their costs are often determined by standard copayments 

stipulated in their insurance plans. OIG did not assess the specific consequences for insured 

16 OIG, Contract Pharmacy Arrangements in the 340B Program, OEI-05-13-00431, February 2014. 

7 House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July 18,2017 
30 


26929.015

patients in its report. For uninsured patients, not knowing whether they are 340B-eligible means 

that they may be charged the full price for their drugs. Contract pharmacies may later identify 

uninsured patients' prescriptions as 3408-eligible, but those patients will have paid full price. 

Conclusion and Specific OIG Recommendations 

We appreciate the Subcommittee's interest in these important issues. We also appreciate the 

progress that 1-IRSA has made to improve its oversight of the 340B program. However, we 

continue to urge HRSA, in coordination with CMS, to improve transparency of 340B pricing 

information for 340B providers and State Medicaid agencies and to improve transparency of 

claims for 3408-purchased drugs. Specifically, we recommend that: 

• I-IRS A fully implement its authority to share ceiling prices with 340B providers; 

• 1-IRSA work with CMS, and with Congress to obtain any needed authority, to share 

ceiling prices with State Medicaid agencies; and 

• CMS require Medicaid programs to use claims-level methods to identify claims for 

340B-purchased drugs and that HRSA update its related guidance. 

Clarifying 3408 program rules in a complex and evolving health care delivery system is also 

essential. Without clear rules, 1-IRSA oversight is compromised, program implementation and 

outcomes vary, and vulnerabilities in 3408 program integrity persist. OIG recommends that 

I-IRS A: 

• clarify the definition of eligible patient; and 

• address whether 340B providers must offer discounted 340B prices to uninsured patients. 

To the extent that 1-IRSA determines it docs not have sufficient statutory authority to carry out 

these recommendations, we encourage Congress to consider statutory changes to support 

increased clarity in program goals and requirements and more effective oversight. 

Thank you for the opportunity to testify on ways to improve oversight of the 340B program. 

010 will continue to work with HRSA, CMS, and Congress to protect the integrity of this 

program and help ensure that it is efficiently and effectively meeting its intended goals. 

8 House Committee on Energy and Commerce 

Subcommittee on Oversight and Investigations 

July 18.2017 
31 

Mr. MURPHY. Thank you, Ms. Bliss. 

Dr. Draper, you are recognized for 5 minutes. 

STATEMENT OF DEBRA A. DRAPER 

Ms. DRAPER. Chairman Murphy, Ranking Member DeGette, and 

members of the subcommittee, thank you for the opportunity to be 

here today to discuss the 340B program including issues concerning 

its oversight. 

The 340B program was created by statute in 1992 and is administered by HRSA. According to HRSA, the intent of the program is 

to enable participating entities, also known as covered entities, to 

stretch scarce federal resources to reach more eligible patients and 

provide more comprehensive services. Participation is voluntary 

but there are strong incentives to do so. For covered entities such 

as certain hospitals and federally-qualified health centers, substantial cost savings or revenue on outpatient drugs can be obtained 

through participation in the program. 

For drug manufacturers, participation is required to receive Medicaid reimbursement. Since the 340B program first became operational in 1993, it has experienced exponential growth in the number of covered entities. In 1993, the program had approximately 

400 covered entities and by 2017 there were more than 12,000 representing approximately 38,000 covered sites. 

The 340B program has also seen exponential growth in the number of contract pharmacies particularly since 2010. Prior to March 

2010, only one contract pharmacy was allowed for covered entities 

without an in-house pharmacy. In March 2010, HRSA lifted that 

restriction and as a result, the number of contract pharmacies increased from about 1,300 in 2010 to nearly 19,000 in 2017, encompassing more than 46,000 arrangements. 

In 2011, we reported that HRSA’s oversight of the 340B program 

was inadequate to provide reasonable assurance that participants 

were in compliance with program requirements. As a result of the 

identified weaknesses, we made four recommendations. One recommendation was for HRSA to conduct audits of covered entities 

to ensure compliance with program requirements. This recommendation was a result of our findings that HRSA primarily relied on participants to self-police and ensure their own compliance. 

In fiscal year 2012, HRSA initiated audits of covered entities and 

now conducts 200 audits per year. While we are pleased that HRSA 

is conducting these audits, 200 per year may be insufficient, given 

the continued escalation and the number of covered entities. A second recommendation was for HRSA to clarify the guidance for 

cases in which the distribution of drugs is restricted including required reviews of manufacture plans to ensure that drugs are equitably distributed to all entities regardless of 340B, program participation. This recommendation was the result of our finding that in 

cases such as when the drug is inherently limited, manufacturers 

may have restricted distribution but the manner in which they did 

so was not always clear. 

HRSA issued updated guidance in fiscal year 2012, which addressed their recommendation. The remaining two recommendations were for HRSA to issue more specific program guidance on 

the definition of a patient eligible to receive discounted drugs 

32 

through the program and the criteria that hospitals must meet to 

be eligible to participate. These recommendations were the result 

of our findings that the lack of specificity in the guidance could be 

interpreted in ways that were inconsistent with the programs intent. This was particularly troubling given that the 340B program 

has been increasingly used in settings such as hospitals where the 

risk of diverting 340B drugs to ineligible patients is greater because these settings are more likely to serve such patients. 

HRSA has attempted but not succeeded in addressing these two 

open recommendations. In 2014, it developed a comprehensive 

340B program regulation but a court ruling found that HRSA’s 

rulemaking authority for the program was limited to specified 

areas. In 2015, it issued proposed guidance but withdrew plans to 

finalize it earlier this year following the administration’s directive 

for agencies to withdraw pending regulations and guidance. 

In summary, HRSA has undertaken efforts to improve oversight 

of the 340B program. However, there are a number of critical 

issues that remain unresolved including whether the intent of the 

program, which was established nearly 25 years ago, is still relevant today, given the vastly changed healthcare landscape and 

340B program environment. Continued lack of specificity and program guidance, most notably the definition of a patient and hospital eligibility criteria. 

Until these issues are resolved there will continue to be concerns 

about the integrity of the 340B program and HRSA’s ability to provide effective oversight. 

Mr. Chairman, this concludes my opening remarks. I am happy 

to answer any questions. 

[The prepared statement of Debra A. Draper follows:] 

33 


26929.016

For Release on Delivery 

Expected at 10:15 a.m. ET Tuesday, July 18, 2017 

GA0-17-749T 

United States Government Accountability Office 

Testimony 

Before the Subcommittee on Oversight 

and Investigations, Committee on 

Energy and Commerce, House of 

Representatives 

DRUG DISCOUNT 

PROGRAM 

Update on Agency Efforts 

to Improve 3408 Program 

Oversight 

Statement of Debra A. Draper 

Director, Health Care 
34 


26929.017

DRUG DISCOUNT PROGRAM 

Update on Agency Efforts to Improve 3408 Program 

Oversight 

What GAO Found 

The 3408 Drug Pricing Program requires drug manufacturers to sell outpatient 

drugs at discounted prices to covered entities-eligible clinics, hospitals, and 

others-to have their drugs covered by Medicaid. Covered entities are only 

allowed to provide 3408 drugs to certain eligible patients. Entities dispense 3408 

drugs through in-house pharmacies or contract pharmacies, which are outside 

pharmacies entities contract with to dispense drugs on their behalf. The number 

of contract pharmacies has increased significantly in recent years. 

In its September 2011 report, GAO found that the Health Resources and 

Services Administration's (HRSA) oversight of the 3408 program was 

inadequate to ensure compliance with program rules, and GAO recommended 

actions that HRSA should take to improve program integrity, particularly given 

significant growth in the program in recent years. HRSA has taken steps to 

address two of GAO's four recommendations: 

HRSA initiated audits of covered entities. GAO found that HRSA's 

oversight of the 3408 Program was weak because it primarily relied on 

covered entities and manufacturers to ensure their own compliance with 

program requirements and HRSA engaged in few oversight activities. GAO 

recommended that HRSA conduct audits of covered entities and in fiscal 

year 2012, HRSA implemented a systematic approach to conducting annual 

audits of covered entities. HRSA now conducts 200 audits a year, which 

have identified instances of non-compliance with program requirements, 

including the dispensing of drugs to ineligible patients. 

HRSA clarified guidance for manufacturers. GAO found a lack of 

specificity in guidance for manufacturers for handling cases in which 

distribution of drugs is restricted, such as when there is a shortage in drug 

supply. GAO recommended that HRSA refine its guidance. In May 2012, 

HRSA clarified its policy for when manufacturers restricted distribution of a 

drug and provided additional detail on the type of information manufacturers 

should include in their restricted distribution plans. 

HRSA has not clarified guidance on two issues. GAO also found that 

HRSA guidance on (1) the definition of an eligible patient and (2) hospital 

eligibility criteria for program participation lacked specificity and 

recommended that HRSA clarify its guidance. HRSA agreed that clearer 

guidance was necessary and, in 2015, released proposed guidance that 

addressed both issues. However, earlier this year, the agency withdrew that 

guidance in accordance with recent directives to freeze, withdraw, or 

postpone pending federal guidance. 

Given particular concerns that the significant escalation in the number of contract 

pharmacies poses a potential risk to the integrity of the 3408 Program, GAO was 

asked to examine this issue and expects to issue a future report, in which it plans 

to address the extent to which covered entities use contract pharmacies; 

financial arrangements between covered entities and pharmacies; the provision 

of discounts on drugs dispensed by contract pharmacies to low-income, 

uninsured patients; and how covered entities and HRSA ensure compliance with 

3408 program requirements at contract pharmacies. 

-------------United States Government Accountability Office 
35 


26929.018

Chairman Murphy, Ranking Member DeGette, and Members of the 

Subcommittee: 

I am pleased to be here today as you examine the 3408 Drug Pricing 

Program (3408 Program), including issues concerning its oversight The 

program, created in 1992 and named for the statutory provision 

authorizing it in the Public Health Service Act (PHSA), requires drug 

manufacturers to sell outpatient drugs at discounted prices to eligible 

clinics, hospitals, and other entities-commonly referred to as covered 

entities-in order to have their drugs covered by Medicaid. 1 According to 

the Health Resources and Services Administration (HRSA), the agency 

within the Department of Health and Human Services (HHS) responsible 

for administering and overseeing the 3408 Program, the purpose of the 

program is to enable covered entities to stretch scarce federal resources 

to reach more eligible patients, and provide more comprehensive 

services. 2 In recent years, questions have been raised regarding HRSA's 

oversight of the 3408 Program, particularly given growth in the program 

over time. According to HRSA, as of January 2017, covered entities had 

more than 38,000 sites participating in the 3408 Program-almost double 

the number reported just 5 years earlier. 3 

Participation in the 3408 Program is voluntary for both covered entities 

and drug manufacturers, but there are strong incentives to participate: 

Covered entities can realize substantial savings through 3408 price 

discounts-an estimated 20 to 50 percent of the cost of the drugs, 

according to HRSA. In addition, covered entities can generate 3408 

revenue. For example, they can purchase drugs at 3408 prices for all 

eligible patients regardless of the patients' income or insurance status 

and generate revenue, such as by receiving reimbursement from a 

patient's insurance that may exceed the 3408 price paid for the drugs. 

The 3408 Program does not dictate how covered entities should use 

U.S. C.§ 256b. 

2

HRSA bases this view on language in a House Energy and Commerce Committee 

Report pertaining to language similar to what eventually became section 3408 of the 

PH SA. See H. Rep. No. 102-384, Pt. 2, at 12 (1992) (discussing bill to amend the Social 

Security Act). See also Veterans Health Care Act of 1992, Pub. L No. 102-585, § 602(a), 

106 Stat 4943, 4967 (adding section 3408 to the PHSA) 

3

Data represent both unique covered entities and all their eligible sites, such as satellite 

chnics_ According to HRSA, there were 12,340 unique organizations participating in the 

program as of January 1, 2017 

Page 1 GA0-17-749T Drug Discount Program 
36 


26929.019

this revenue or require that discounts on the drugs be passed on to 

patients. 

Incentives for participation by drug manufacturers also are strong 

because they must participate in the 3408 Program to receive 

Medicaid reimbursement for their drugs. According to HRSA, most 

manufacturers that produce outpatient drugs have participated in the 

program since its inception. 

HRSA also requires program participants to meet certain conditions set 

forth both in law and agency guidance. For example, covered entities are 

prohibited from diverting 3408 drugs-that is, transferring 3408 drugs to 

individuals who are not eligible patients of the enttties. 4 Similarly, to help 

ensure covered entities receive discounts to which they are entitled, 

HRSA has issued guidance (referred to as "HRSA's nondiscrimination 

guidance" throughout this statement) prohibiting drug manufacturers from 

distributing drugs in ways that would discriminate against covered entities 

compared to non-3408 health care providers, such as by imposing 

minimum purchase requirements or other restrictive conditions. 5 

In a September 2011 report, we identified inadequacies in HRSA's 

oversight of this program and recommended actions that should be taken 

to improve oversight and ensure appropriate use of the program. 6 Since 

then, we have been monitoring HRSA's progress in addressing our 

recommendations, including at a March 24, 2015, hearing before your 

Subcommittee on Health. 7 My statement today will describe HRSA 

actions in response to GAO recommendations to address (1) weaknesses 

in oversight of the 3408 program and (2) the lack of clarity in program 

guidance. The statement will also (3) describe ongoing GAO work 

regarding the 3408 program and HRSA oversight. 

For this statement, we obtained information and documentation from 

HRSA officials about any significant program updates, and steps they 

U.S. C. § 256b(a)(5)(8). 

5

Notlce Regarding Section 602 of the Veterans Health Care Act of 1992 Entity Guidelines, 

58 Fed. Reg. 68922 (Dec. 29, 1993) 

6

See GAO, Drug Pricing: Manufacturer Discounts in the 3408 Program Offer Benefits, but 

Federal Oversight Needs Improvement, GA0-11-836 (Washington, D.C .. September 23, 

2011) 

7 See GAO, Drug Discount Program: Status of GAO Recommendations to Improve 3408 

Drug Pricing Program Oversight, GA0-15-455T (Washington. D.C.: March 24. 2015). 

Page 2 GA0-17~749T Drug Discount Program 
37 


26929.020

Background 

Program Participants 

have taken to implement our 2011 recommendations. More detailed 

information on the objectives, scope, and methodology for our 2011 

report can be found in that report.' We conducted our work for the 2011 

report from September 201 0 to September 2011, and updated this work 

in February and March 2015 and again in June and July 2017. The work 

upon which this statement is based was conducted in accordance with 

generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on 

our audit objectives. 

The 3408 Program was created following the enactment of the Medicaid 

Drug Rebate Program and gives 3408 covered entities discounts on 

outpatient drugs comparable to those made available to state Medicaid 

agencies.' HRSA is responsible for administering and overseeing the 

3408 Program. 

Eligibility for the 3408 Program, which is defined in the PHSA, has 

expanded over time, most recently through the Patient Protection and 

Affordable Care Act, which extended eligibility to additional types of 

hospitals. 10 Entities generally become eligible by receiving certain federal 

grants or by being one of six hospital types. Eligible grantees include 

clinics that offer primary and preventive care services, such as Federally 

Qualified Health Centers, clinics that target specific conditions or 

diseases that raise public health concerns or are expensive to treat, and 

state-operated AIDS Drug Assistance Programs, which serve as a "payer 

of last resort" to cover the cost of providing HIV-related medications to 

certain low-income individuals. Eligible hospitals include certain children's 

hospitals, free-standing cancer hospitals, rural referral centers, sole 

8GA0-11-836. 

9

The Medicaid Drug Rebate Program was established through the Omnibus Budget 

Reconciliation Act of 1990 and requires drug manufacturers to pay rebates to states as a 

condition of having their drugs covered by Medicaid. Pub. L. No. 101-508 § 4401, 104 

Stat 1388. 1388-143 (adding 42 U.S. C.§ 1396r-8). 

10See Pub. L. No. 111-148, § 7101, 124 Stat 119,821 (2010) as amended by the Health 

Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 2302, 124 Stat 

1029, 1082 

Page 3 GA0~17~749T Drug Discount Program 
38 


26929.021

community hospitals, critical access hospitals, and general acute care 

hospitals that serve a disproportionate number of low-income patients, 

referred to as disproportionate share hospitals (DSH). 11 To become a 

covered entity and participate in the program, eligible entities must 

register with HRSA and be approved. Entity participation in the 3408 

program has grown over time to include more than 38,000 entity sites, 

including more than 21,000 hospital sites and nearly 17,000 federal 

grantee sites (see fig. 1 ). 

Figure 1: Growth in Covered Entity Sites, 2013 to 2017 

Number of covered entity sites 

45,000 

40,000 

35,000 

30,000 

25,000 

20,000 

15,000 

10,000 

5,000 

2013 2014 

Year 

[ZJ Federal grantees 

-Hospitals 

38,396 

2015 2016 2017 

Source. GAO analysis of Heanh Resources and Services AdminiStration data j GA(}-17-7<19T 

Note: Numbers are as of January 1 of each year. 

DSH hospitals receive an additional Medicare payment based on their DSH 

patient percentage, which is a statutory formula created to identify hospitals that treat a 

significantly disproportionate number of !ow~income Medicare and Medicaid patients. 

Page4 GAOw17-749T Drug Discount Program 
39 


26929.022

Program Structure, 

Operation, and Key 

Requirements 

To be eligible for the 3406 Program hospitals must meet certain 

requirements intended to ensure that they perform a government function 

to provide care to the medically underserved. First, hospitals generally 

must meet specified DSH adjustment percentages to qualify. 12 

Additionally, they must be (1) owned or operated by a state or local 

government, (2) a public or private nonprofit corporation that is formally 

delegated governmental powers by a unit of state or local government, or 

(3) a private, nonprofit hospital under contract with a state or local 

government to provide health care services to low-income individuals who 

are not eligible for Medicaid or Medicare. 13 

All drug manufacturers that supply outpatient drugs are eligible to 

participate in the 3406 Program and must participate in order to have 

their drugs covered by Medicaid. To participate, manufacturers are 

required to sign a pharmaceutical pricing agreement with HHS in which 

both parties agree to certain terms and conditions. 

The 3406 price for a drug-often referred to as the 3408 ceiling price-is 

based on a statutory formula and represents the highest price a 

participating drug manufacturer may charge covered entities. 14 Covered 

entities must follow certain requirements as a condition of participating in 

the 3406 Program. For example 

covered entities are prohibited from subjecting manufacturers to 

"duplicate discounts" in which drugs prescribed to Medicaid 

beneficiaries are subject to both the 3406 price and a rebate through 

the Medicaid Drug Rebate Program. 15 

covered entities are also prohibited from diverting any drug purchased 

at the 3406 price to an individual who does not meet HRSA's 

definition of a patient. This definition, issued in 1996, outlines three 

criteria that generally state that diversion occurs when 3406 

12Critical access hospitals are exempt from this requirement 

13According to HRSA, a hospital is said to be "formally granted governmental powers" 

when the state formally delegates to the hospital a type of power(s) usually exercised by 

the state, for the purpose of providing health care services to the medically indigent 

population of the state. 

14Manufacturers may sell a drug at a price that is lower than the ceiling price. As such, 

covered entities may negotiate prices below the ceiling price. 

15 42 USC § 256b(a)(5)(A) 

Page 5 GA0~17·749T Orug Discount Program 
40 


26929.023

discounted drugs are given to individuals who are not receiving health 

care services from covered entities or are only receiving non-covered 

services, such as inpatient hospital services." (See table 1 for more 

information on HRSA's definition of an eligible patient.) Covered 

entities are permitted to use drugs purchased at the 3408 price for all 

individuals who meet the 3408 Program definition of a patient 

regardless of whether they are low-income, uninsured, or 

underinsured. 

Table 1: Health Resources and Services Administration's {HRSA) Definition of a 

Patient Eligible for Discounted Drugs under the 3408 Program 

Criteria for patient eligibility: a 

1 The covered entity has established a relationship with the individual such that the 

covered entity maintains records of the individual's health care. 

2. The individual receives health care services from a health care professional who is 

either employed by the covered entity or provides health care under contractual or 

other arrangements (e.g. referral for consultation} such that responsibility for the 

care provided remains with the covered entity.b 

3. The individual receives a health care service or range of services from the covered 

entity which is consistent with the service or range of services for which grant 

funding or Federally Qualified Health Center !ookwaHke status has been provided.c 

Source GAO analysls of HRSA gwdanca ! GA0-17-749T 

Notes: HRSA guidance on the definition of a patient eligible for discounted drugs under the 3408 

Program was issued in 1996. See Notice Regarding Section 602 of the Veterans Health Care Act of 

1992 Patient and Entity Eligibllity, 61 Fed. Reg. 55156 (Oct. 24, 1996) 

aThese criteria do not apply to AIDS Drug Assistance Programs: rather an individual enrolled in an 

AIDS Drug Assistance Programs will be considered a patient of that program. 

bAn individual is not considered a patient if the only health care service received from the covered 

entity is the dispensing of a drug or drugs for subsequent self-administration or administration in the 

home setting. 

eDisproporUonate share hospitals are exempt from this requirement. Not aU federally qualified health 

centers rece1ve federal grants. Providers that meet au of the requirements for the health center 

program but do not receive federal grants are referred to as look-alikes and are eligible to participate 

in the 340B program 

A covered entity typically purchases and dispenses 3408 drugs through 

pharmacies-either through an in-house pharmacy, or through the use of 

a contract pharmacy arrangement, in which the covered entity contracts 

with an outside pharmacy to dispense drugs on its behalf. The adoption 

and use of contract pharmacies is governed by HRSA guidance. HRSA's 

original guidance permitting the use of contract pharmacies limited their 

use to covered entities that did not have in-house pharmacies and 

16See Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and 

Entity Eligibility. 61 Fed. Reg. 55156 (Oct 24, 1996). 

Page 6 GA0~17-749T Drug Discount Program 
41 


26929.024

allowed each covered entity to contract with only one outside pharmacy. 17 

However, March 2010 guidance lifted the restriction on the number of 

pharmacies with which a covered entity could contract. 18 Since that time, 

the number of unique contract pharmacies has increased significantly, 

from about 1,300 at the beginning of 2010 to around 18,700 in 2017 (see 

fig. 2); and, according to HRSA data, in 2017, there were more than 

46,000 contract pharmacy arrangements." HRSA guidance requires a 

written contract between the covered entity and each contract pharmacy. 

Covered entities are responsible for overseeing ccntract pharmacies to 

ensure compliance with prohibitions of drug diversion and duplicate 

discounts. HRSA guidance indicates that covered entities are "expected" 

to conduct annual independent audits of contract pharmacies, leaving the 

exact method of ensuring compliance up to the covered entity. 

17Notice Regarding Section 602 of the Veterans Health Care Act of 1992; Contract 

Pharmacy Services, 61 Fed. Reg. 43549 (Aug. 23, 1996). 

18Notice Regarding 3408 Drug Pricing Program-Contract Pharmacy Services, 75 Fed. 

Reg. 10272 (March 5, 201 0). 

19Contract pharmacies may have arrangements to dispense drugs for more than one 

entity. HRSA data indicates that there were 46,174 contract pharmacy arrangementsarrangements between a covered entity site and a pharmacy-as of January 1, 2017. 

However, the total number of contract pharmacy arrangements is !ike!y higher, as HRSA 

does not require entities to report a!! arrangements to the agency. 

Page 7 GA0~17-749T Drug Discount Program 
42 


26929.025

Figure 2: Growth in Contract Pharmacy Participation, 2010 to 2017 

Number of contract phannacies 

20,000 

18,000 

16,000 

14,000 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

2010 2011 

Year 

2012 2013 

Source Health Resources and Services Adminlstralion 1 GA0-17-749T 

2014 2015 2016 2017 

Note: Data represent the number of unique contract pharmacies participating in the program as of 

January 1 of each year. Contract pharmacies may have arrangements to dispense drugs for more 

than one entity, 

Drug manufacturers also must follow certain 3406 Program requirements. 

For example, HRSA's nondiscrimination guidance prohibits 

manufacturers from distributing drugs in ways that discriminate against 

covered entities compared to other providers. This includes ensuring that 

drugs are made available to covered entities through the same channels 

that they are made available to non-3406 providers, and not conditioning 

the sale of drugs to covered entities on restrictive conditions, which would 

have the effect of discouraging participation in the program. 

Page 8 GA0·17·749T Drug Discount Program 
43 


26929.026

HRSAHas 

Implemented GAO's 

Recommendation to 

Improve Its Oversight 

of the 3408 Program 

by Conducting Audits 

In our September 2011 report, we found that HRSA's oversight of the 

3408 Program was weak because it primarily relied on covered entities 

and manufacturers to police themselves and ensure their own compliance 

with program requirements. 20 Upon enrollment into the program, HRSA 

requires participants to self-certify that they will comply with applicable 

3408 Program requirements and any accompanying agency guidance, 

and expects participants to develop the procedures necessary to ensure 

and document compliance, informing HRSA if violations occur. HRSA 

officials told us that covered entities and manufacturers could also 

monitor each other's compliance with program requirements, but we 

found that, in practice, participants could face limitations to such an 

approach. 

Beyond relying on participants' self-policing, we also found that HRSA 

engaged in few activities to oversee the 3408 Program and ensure its 

integrity, which agency officials said was primarily due to funding 

constraints. Further, although HRSA had the authority to conduct audits 

of program participants to determine whether program violations had 

occurred, at the time of our 2011 report, the agency had never conducted 

such an audit. 

In our 2011 report, we concluded that changes in the settings where the 

3408 Program was used may have heightened the concerns about the 

inadequate oversight we identified. In the years leading up to our report, 

the settings where the 3408 Program was used had shifted to more 

contract pharmacies and hospitals than in the past, and that trend has 

continued in recent years. We concluded that increased use of the 3408 

Program by contract pharmacies and hospitals may have resulted in a 

greater risk of drug diversion to ineligible patients, in part because these 

facilities were more likely to serve patients that did not meet the definition 

of a patient of the program. 

To address these oversight weaknesses, we recommended that the 

Secretary of HHS instruct the administrator of HRSA to conduct selective 

audits of covered entities to deter potential diversion. In response to that 

recommendation, in fiscal year (FY) 2012, HRSA implemented a 

systematic approach to conducting annual audits of covered entities that 

Page 9 GA0-17-749T Drug Discount Program 
44 


26929.027

is outlined on its website. 21 Now numbering 200 per year, HRSA audits 

include entities that are randomly selected based on risk-based criteria 

(approximately 90 percent of the audits conducted each year), and 

entities that are targeted based on information from stakeholders (1 0 

percent of the audits conducted). (See table 2 for the number of audits 

conducted by HRSA from FY 2012-2017.) 

Table 2: Audits of Covered Entities by the Health Resources and Services 

Administration (HRSA), FY 2012-2017 

T otat audits 

2016 

2017 (planned) 

Total 

Source HRSA I GA0-17-7491 

As a result of the audits already conducted, HRSA has identified 

instances of non-compliance with program requirements, including 

violations related to drug diversion and the potential for duplicate 

discounts. The agency has developed a process to address noncompliance through corrective action plans. The results of each year's 

audits are available on HRSA's website. 

21See https://www.hrsa.gov/opa/programintegrity/index.html, accessed June 30, 2017. 

94 

99 

200 

200 

200 

844 

Page 10 GA0-17-749T Drug Discount Program 
45 


26929.028

HRSA Implemented 

One of Three GAO 

Recommendations to 

Clarify Program 

Guidance 

In our 2011 report, we found that HRSA's guidance on three key program 

requirements lacked the necessary level of specificity to provide clear 

direction, making it difficult for participants to self-police or monitor others' 

compliance, and raising concerns that the guidance could be interpreted 

in ways that were inconsistent with its intent. 22 

First, we found that HRSA's nondiscrimination guidance was not 

sufficiently specific in detailing practices manufacturers should follow to 

ensure that drugs were equitably distributed to covered entities and non3408 providers when distribution was restricted. 23 Some stakeholders we 

interviewed for the 2011 report, such as covered entities, raised concerns 

about the way certain manufacturers interpreted and complied with the 

guidance in these cases. We recommended that HRSA further clarify its 

nondiscrimination guidance for cases in which distribution of drugs is 

restricted and require reviews of manufacturers' plans to restrict 

distribution of drugs at 3408 prices in such cases. In response, HRSA 

issued a program notice in May 2012 that clarified HRSA's policy for 

manufacturers that intend to restrict distribution of a drug and provided 

additional detail on the type of information manufacturers should include 

in such restricted distribution plans. 24 

In addition, we found a lack of specificity in HRSA's guidance on two 

other issues-the definition of an eligible patient and hospital eligibility for 

program participation. Specifically, we found that 

HRSA's guidance on the definition of an eligible patient lacked the 

necessary specificity to clearly define the various situations under 

which an individual was considered eligible for discounted drugs 

through the 3408 Program. As a result, covered entities could 

interpret the definition either too broadly or too narrowly. At the time of 

our report, agency officials told us they recognized the need to 

provide additional clarity around the definition of an eligible patient, in 

part because of concerns that some covered entities may have 

interpreted the definition too broadly to include non-eligible 

23Restricted distribution may occur when there is a shortage in drug supply or when 

shortages are anticipated. 

24HRSA Drug Pricing Program Notice, Release No. 2011-1.1 {May 23, 2012}. 

Page 11 GA0~17w749T Drug Discount Program 
46 


26929.029

individuals, such as those seen by providers who were only loosely 

affiliated with a covered entity. 

HRSA had not issued guidance specifying the criteria under which 

hospitals that were not publicly owned or operated could qualify for 

the 3408 Program. 25 For example, we found HRSA guidance lacking 

on one of the ways hospitals could qualify for the program, namely by 

executing a contract with a state or local government to provide 

services to low-income individuals who are not eligible for Medicaid or 

Medicare. Specifically, we found that HRSA did not outline any criteria 

that must be included in such contracts, such as the amount of care a 

hospital must provide to these low-income individuals, and did not 

require the hospitals to submit their contracts for review by HRSA. 26 

As a result, hospitals with contracts that provided a small amount of 

care to low-income individuals not eligible for Medicaid or Medicare 

could claim 3408 discounts, which may not have been what the 

agency intended. 

Given the lack of specificity in these areas, we recommended that HRSA 

(1) finalize new, more specific guidance on the definition of an eligible 

patient, and (2) issue guidance to further specify the criteria that hospitals 

not publicly owned or operated must meet to be eligible for the 3408 

program. HRSA agreed with these recommendations and had planned to 

address them in a comprehensive 3408 Program regulation that it 

submitted to the Office of Management and Budget for review in April 

2014. However, HRSA withdrew this proposed regulation in November 

2014 following a May 2014 federal district court ruling that the agency had 

not been granted broad rulemaking authority to carry out all the provisions 

of the 3408 program. 27 After this ruling, the agency issued a proposed 

omnibus guidance in August 2015 to interpret statutory requirements for 

the 3408 program in areas where it did not have explicit rulemaking 

authority, including further specificity on the definition of a patient of a 

25We use the term "hospitals that are not publicly owned or operated" to refer to public 

and private nonprofit corporations as well as private, nonprofit hospitals that may be 

eligible for the 3408 Program. The term does not include private, for~profit hospitals as 

these hospitals are not eligible for the 3408 Program. 

26HRSA officials we interviewed for the September 2011 report told us that contracts were 

selectively reviewed if further clarification was necessary. 

27See Pharm Research & Mfrs. of Am. v. United States HHS, No. 13~1501, 2014 U.S. 

Dist LEXIS 70894 (D. D.C. May 23, 2014). 

Page 12 GA0-17-749T Drug Discount Program 
47 


26929.030

GAO Has Ongoing 

Work Examining 

HRSA Oversight of 

3408 Contract 

Pharmacies 

covered entity and hospital eligibility for 3408 program participation. 28 

However, in January 2017, the agency withdrew the guidance following 

the administration's January 20 memorandum directing agencies to 

withdraw or postpone regulations and guidance that had not yet taken 

effect. 29 In July 2017, HRSA indicated that it was working with HHS to 

determine next steps regarding the proposed Omnibus Guidance, which 

included the patient definition, but that it was unable to further clarify 

guidance on hospital eligibility without additional authority. 

Given the increase in the number of contract pharmacies in the 3408 

Program and concerns that contract pharmacy arrangements present an 

increased risk to the integrity of the program, we were asked to review 

contract pharmacy use under the 3408 Program. For this review, we are 

planning to address the following four questions. 

To what extent do the various types of covered entities use contract 

pharmacies and where are the pharmacies located? 

What, if any, financial arrangements do covered entities have with 

contract pharmacies and third-party administrators related to the 

administration and dispensing of 3408 drugs, and how, if at all, this 

varies by entity type?30 

To what extent do covered entities provide low-income, uninsured 

patients with discounts on drugs dispensed by contract pharmacies? 

How, if at all, do covered entities and HRSA ensure compliance with 

3408 program requirements at contract pharmacies? 

We are in the early stages of this work, and we expect to issue a future 

report on 3408 contract pharmacies. 

3406 Drug Pncing Program Omnibus Guidance, 80 Fed. Reg. 52300 (Aug. 28, 

2015) 

29See Memorandum for the Heads of Executive Departments and Agencies, Regulatory 

Freeze Pending Review, 82 Fed. Reg. 8346 (Jan. 24, 2017). 

30Third~party administrators are private companies that some covered entities contract 

with to manage systems for patient eligibility, program finances, and 3408 mventory. 

Page 13 GA0-17-749T Drug Discount Program 
48 


26929.031

GAO Contacts and 

Staff 

Acknowledgments 

(102145) 

Chairman Murphy, Ranking Member DeGette, and Members of the 

Committee, this concludes my statement. I would be pleased to respond 

to any questions you may have. 

For further information about this statement, please contact Debra A. 

Draper at (202) 512-7114 or draperd@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this testimony. Key contributors to this statement were 

Michelle Rosenberg, Assistant Director; Rotimi Adebonojo, Jennie Apter; 

and Amanda Cherrin. 

Page 14 GA0-17-749T Drug Discount Program 
49 


26929.032

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately 
50 


26929.033

GAO's Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Phone 

Connect with GAO 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

Strategic Planning and 

External Liaison 

The Government Accountability Office, the audit, evaluation, and investigative 

arm of Congress, exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability of the 

federal government for the American people. GAO examines the use of public 

funds; evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO's commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through GAO's website (http://www.gao.gov). Each weekday afternoon, GAO 

posts on its website newly released reports, testimony, and correspondence. To 

have GAO e-mail you a list of newly posted products, go to http://www.gao.gov 

and select "E-mail Updates." 

The price of each GAO publication reflects GAO's actual cost of production and 

distribution and depends on the number of pages in the publication and whether 

the publication is printed in color or black and white. Pricing and ordering 

information is posted on GAO's website, http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, MasterCard, 

Visa, check, or money order. Call for additional information. 

Connect with GAO on Facebook, Flickr, Linkedln, Twitter, and YouTube. 

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts. 

Visit GAO on the web at www.gao.gov and read The Watchblog. 

Contact: 

Website: http://www.gao.govlfraudnetlfraudnet.htm 

E-mail: fraudnet@gao.gov 

Automated answering system: (800) 424-5454 or (202) 512-7470 

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-4400, 

U.S. Government Accountability Office, 441 G Street NW, Room 7125, 

Washington, DC 20548 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

James-Christian Blockwood, Managing Director, spel@gao.gov, (202) 512-4707 

U.S. Government Accountability Office, 441 G Street NW, Room 7814, 

Washington, DC 20548 

(j Please Print on Recycled Paper. 
51 

Mr. MURPHY. Thank you, Doctor. 

I now recognize myself for 5 minutes for questions. 

Captain Pedley, let me just start off with this. There is a lack 

of clarity in how the intent of the program is, which you outlined 

in your testimony in your documents there. 

The absence of reporting requirements and specific mandates on 

how savings must be spent—can you elaborate a little bit more on 

what that impact is? 

Ms. PEDLEY. So the statute is silent regarding how covered entities have to use their savings. Therefore, HRSA doesn’t have authority to require what these entities are doing with their savings. 

Mr. MURPHY. So is that savings—does it go into the general fund 

or the hospital or clinic or a separate account so even if you were 

to audit that separate account you could see where that money 

goes? Or is there no way to do that? 

Ms. PEDLEY. I don’t have insight into how a hospital may manage those funds. 

Mr. MURPHY. OK. So you wouldn’t know. But you don’t audit 

that anyway. So—— 

Ms. PEDLEY. Correct. 

Mr. MURPHY. But these entities are generally supposed to serve 

specific vulnerable populations. But people who may go into a hospital or entity that has a 340B program there is not a means test 

by which says you can’t go to this program based upon your income. They could come in regardless of income, correct? 

Ms. PEDLEY. Correct. The statute is silent as well as to whether 

a patient is insured or uninsured. They just have to meet our patient eligibility guidance. 

Mr. MURPHY. And the patient eligibility guidance, I understand, 

is that records have to be kept there and the doctor treating them 

has to work there? 

Ms. PEDLEY. Yes. There have to be records and HRSA audits 

those records. 

Mr. MURPHY. OK. So do community health centers use a sliding 

scale to discount policy to determine a patient’s ability to pay? 

Ms. PEDLEY. I know under their separate grant requirements 

they do have different things in place. I am not familiar with those. 

Mr. MURPHY. OK. 

Ms. PEDLEY. But that is under their grant requirements, not 

under the 340B statute. 

Mr. MURPHY. My assumption is they would and that would be 

one way of passing on savings. Do hospitals use a sliding scale to 

discount policy to determine a patient’s ability to pay? 

Ms. PEDLEY. I don’t have insight into that either as they are not 

required under the 340B statute to pass on the savings. 

Mr. MURPHY. But hospitals and other covered entities can acquire the drugs at a 25 to 50 percent discount, right? 

Ms. PEDLEY. Correct. 

Mr. MURPHY. And then charge the patients full price for the 

same drug? 

Ms. PEDLEY. So the amount that they charge the patient after 

they receive that discount, again, is a decision made at the hospital. The price that they charge is outside of the 340B statute. 

52 

Mr. MURPHY. So if someone who is very, very low income, struggling, could come in and purchase it under the intent of the program. 

But at that same clinic or hospital that was brought up before 

about oncology, someone could be in there—for all we know could 

be a multi-billionaire and also they would be eligible to—the drug 

would be eligible. 

The hospital could buy at a discount and sell it to the person at 

the full price? 

Ms. PEDLEY. So the statute is silent again on how the savings 

are used and whether the patient is insured or uninsured. If the 

patient is insured, then the entity would bill the insurer at the 

higher rate and then obtain that revenue to stretch their scarce 

federal resources. 

Mr. MURPHY. And so what happens, however, is that because 

they are not required to collect this data, you don’t know what’s 

really happening. If you audit, you don’t know, for example, how 

many people may come in there, what their income level is because 

that is not a required thing for the eligible patient, correct? 

Ms. PEDLEY. That’s correct. HRSA does not audit that information as it is outside of our authority. 

Mr. MURPHY. And the money that comes through these savings, 

you have no idea where that money goes because that information 

is not collected and it is—correct? 

Ms. PEDLEY. There are no requirements in the statute so we do 

not—— 

Mr. MURPHY. Do they voluntarily say, here’s how we spent the 

money? Does anybody do that? 

Ms. PEDLEY. They do not voluntarily submit that information to 

HRSA. 

Mr. MURPHY. And since the accounts may not be separate as far 

as you know, even if they put the money in the general fund that— 

we couldn’t even trace that, how that is done? 

Ms. PEDLEY. HRSA would not have access to that information. 

Again, I reiterate for the grantees, however, they are required 

under their grant requirements to report 340B program savings as 

income and put that back into their grant. 

Mr. MURPHY. OK. But is there any data which would show the 

level of charity care they are providing? Anything that they are required to show you? 

Ms. PEDLEY. They do not share anything with HRSA. They may 

report charity care information on their cost reports that is submitted to CMS. 

Mr. MURPHY. And we don’t know if that charity care money came 

from the 340B or came from something else? 

Ms. PEDLEY. Yes, HRSA would not know that. 

Mr. MURPHY. So as I understand it so far with the vague guidelines of eligibility for patients, the intent of the program, of course, 

to help the indigent population—good. 

The idea that other people who may not fit that definition may 

still have the hospital or clinic purchasing at a discount and can 

use that money in any way, shape, or form and you have no way 

of finding out and they are not required to keep data and the books 

53 

aren’t kept in such a way that anybody could trace it if they wanted to? 

Ms. PEDLEY. Yes. The statute, again, does not in any way mention what covered entities—— 

Mr. MURPHY. OK. 

Ms. PEDLEY [continuing]. Do with that savings or that they have 

to report it to HRSA. 

Mr. MURPHY. And operate under the assumption they are all 

doing good works but we don’t know, and since 60 to 80 percent 

have some problems, we will see. 

Ms. DeGette, 5 minutes. 

Ms. DEGETTE. Thank you, Mr. Chairman. 

I thought your line of questioning was quite interesting and I 

would like to follow up on it a little bit. 

The chairman was asking appropriately, I think, what do hospitals do with the money. I don’t think we have anybody here who 

would be able to answer that question, right? 

OK. So none of the three of you can answer that question. I 

would assume there is probably somebody who can answer that 

question and maybe we should have a follow-up hearing and have 

some people from the hospitals come and talk about what they do 

with that money. 

Dr. Draper, I do know that one of the GAO findings was that— 

well, first of all, is the GAO aware of a practice with hospitals 

where they get the discounts under 340B and then they pass those 

discounts along to billionaires and things like that? Have you found 

any evidence of that? 

Ms. DRAPER. We have not looked at that specifically. 

And getting back to your earlier question—— 

Ms. DEGETTE. Yes. 

Ms. DRAPER. In our 2011 work we did interview a small number 

of covered entities to ask them what they did with the revenues 

and most said they are not required to report that. 

Ms. DEGETTE. Right. 

Ms. DRAPER. So what they told us was that they use the moneys 

to expand services to patients and to provide more comprehensive 

services. 

Ms. DEGETTE. So the limited evidence you got seemed to indicate 

they were using that for the original intended purpose? 

Ms. DRAPER. Yes. It was very limited information and—— 

Ms. DEGETTE. Number one, Mr. Chairman, I think we should try 

to get some hospitals in here to talk to us, but number two, I think 

your inference is correct. 

We probably do need to get more controls and that is why I said 

in my opening statement that we may need to have more legislative reporting and more transparency because you can’t have a program where nobody knows what’s going on. 

But let us get back for a minute to the original purpose of the 

340B program. Captain Pedley, what the 340B program was intended to do was to help providers stretch scarce resources and 

give services to people who are uninsured or lack insurance altogether. Is that right? 

Ms. PEDLEY. Yes. From report language, the intent of the program was for these covered entities to be able to purchase the 

54 

drugs at a discount in order to stretch their resources and provide 

more care to patients. 

Ms. DEGETTE. Right. So if people didn’t have this source of revenue, hospitals, assuming they are using the revenue for the originally intended purpose, they might have to cut back on services 

that they would provide to these underserved populations. Is that 

correct? 

Ms. PEDLEY. So if the program were not—— 

Ms. DEGETTE. A yes or no will work. 

Ms. PEDLEY. Yes. 

Ms. DEGETTE. Thanks. 

Now, so, Dr. Draper, I understand that in the GAO audits you 

found some weaknesses in HRSA’s ability to oversee the program 

and also you found that the agency needs to issue guidance that 

defines a 340B patient and clarify the standard for hospital eligibility. Are those in general your concerns? 

Ms. DRAPER. Well, to give you an example, the definition of a patient is very ambiguous. It is that the patient has an established 

relationship with the entity and the entity maintains the medical 

records and that the provider of services for that entity is either 

employed or under contract arrangement or some other type of arrangement. 

So we had concerns about the language about like some other 

type of arrangement—— 

Ms. DEGETTE. Right. 

Ms. DRAPER [continuing]. What specifically does that mean, and 

I think it has been interpreted very broadly. 

Ms. DEGETTE. So let me ask you, do you think the agency has 

authority under the current statutory language to tighten those 

definitions up or do you think that we need to do something with 

the statute? 

Ms. DRAPER. Well, since 1992 the agency has issued program 

guidance to try to clarify the rules of the program. So we are a little confused about why. I think there is some concern that they 

need some regulatory authority versus having guidance and—— 

Ms. DEGETTE. OK. So we might have to go and look at the statute. 

Ms. DRAPER. Perhaps. 

Ms. DEGETTE. Yes. OK. 

And Ms. Bliss, I just wanted to ask you quickly what tools or authorities do you believe HRSA needs in order to efficiently administer the 340B program? 

Ms. BLISS. Thank you. 

We believe that increasing transparency and clarity around the 

program rules is very important, and while I can’t offer a legal 

opinion on HRSA’s authority, our understanding is they may need 

additional authority from Congress to do this. 

Ms. DEGETTE. Great. Thank you. 

Thanks, Mr. Chairman. I yield back. 

Mr. MURPHY. Thanks. Can I follow up on that quickly? 

With regard to those definitions of entities, are any of you receiving letters, pressures from other organizations, hospital associations, pharma, et cetera, on recommendations for these changes? 

Ms. DRAPER. We have not. 

55 

Mr. MURPHY. You have not? Ms. Bliss. 

Ms. BLISS. No, not at all. 

Mr. MURPHY. Captain Pedley. 

Ms. PEDLEY. So when we proposed in August 2015 our omnibus 

guidance, patient definition was a part of that and we did receive 

over 1,200 comments related to the entire guidance but within 

those specifically to the patient definition. 

Mr. MURPHY. OK. Just with regard to there might be some on 

this committee who would like to see some of those. 

Ms. PEDLEY. Yes. I agree. 

Mr. MURPHY. We will sharpen our question to you. Thank you 

very much. 

Chairman Walden. 

Mr. WALDEN. Thank you, Mr. Chairman. Thanks for having this 

oversight hearing. 

And I just want to follow up on a couple of things. Do we or do 

we not know or audit how the savings are spent? That seems to 

be one of the issues. 

We all believe that everybody is a good actor and the money is 

going to the people most in need, as well as savings. 

But I also am not clear that HRSA actually—that there is a clear 

definition of how the money should be spent or that we track the 

money. 

Is that correct? 

Ms. PEDLEY. So the statute is silent as to how savings are used. 

Therefore, HRSA does not audit or have access to that information. 

Mr. WALDEN. So we really don’t have a trail of bread crumbs as 

to—you know how much it saved, right? Or do you? 

Ms. PEDLEY. The discount on the drug? 

Mr. WALDEN. Right. 

Ms. PEDLEY. So it is on average between 25 to 50 percent but it 

depends on the specific drug. 

Mr. WALDEN. Do we know if those savings get passed specifically 

back to people who need reduction in prices on the drugs? 

Ms. PEDLEY. The statute is silent in that area. So HRSA does not 

have that information. 

Mr. WALDEN. OK. So we don’t know that. 

And of those savings, could the 340B hospitals take that money 

and use it for good things but not necessarily back to the same person that is buying the drugs? 

Ms. PEDLEY. Because the statute is silent—— 

Mr. WALDEN. Silent. 

Ms. PEDLEY [continuing]. We don’t have access to that. 

Mr. WALDEN. OK. All right. 

And these are issues I think both of you have raised, right, from 

GAO and from OIG that there is just lack of clarity here? 

Ms. DRAPER. Yes. We don’t know how the savings are used. The 

entities are not required to keep that information or to track it. 

We are currently doing some work on looking at contract pharmacies and we are going to be looking at things like discounts that 

are being provided to patients. So—— 

Mr. WALDEN. OK. 

56 

Ms. DRAPER. As far as the savings, there are really no requirements and most of the entities in our 2011 work that we talked to 

were not able to provide that information. 

Mr. WALDEN. So could a 340B get the savings from the drug 

manufacturer and not pass those on to the individual that actually 

charged the individual through their pharmacies, like, the retail 

price for that drug? 

Ms. DRAPER. I think that is very possible. There is just no way 

to know—— 

Mr. WALDEN. We don’t know. 

Ms. DRAPER [continuing]. Without the transparency around that. 

Mr. WALDEN. All right. 

Yesterday, HRSA’s website listed a total of 41,132 registered 

sites. That is an increase of 3,636 registered sites since the budget 

justification was released. 

So from HRSA’s perspective, do you know how many of these 

3,636 sites are new unique covered entities and how many are 

these so-called child sites? 

Ms. PEDLEY. I would have to go back and look at the specifics 

of the data as to how many are new—the main facility or a child 

site, as you mentioned. 

Mr. WALDEN. Yes. Well, you just don’t know off the top of your 

head? 

Ms. PEDLEY. Correct. 

Mr. WALDEN. OK. All right. 

Ms. PEDLEY. But we have that information. 

Mr. WALDEN. And overall you are seeing a faster growth rate for 

the new covered entities or new child sites? Which are you seeing 

the fastest growth rate for? 

Ms. PEDLEY. I would have to go back again and compare the 

growth rate of the new entities versus child sites. 

Mr. WALDEN. OK. 

Ms. PEDLEY. We do have that. 

Mr. WALDEN. And how many manufacturers are participating in 

the 340B program? 

Ms. PEDLEY. Over 600. 

Mr. WALDEN. OK. And how has that number changed in the last 

few years? 

Ms. PEDLEY. It stays about the same. So the manufacturers that 

participate in the program are based on the manufacturers that 

participate in the Medicaid program. 

They are required to participate in 340B if they are in Medicaid. 

Again, so we monitor when manufacturers enter into the Medicaid 

program to ensure that they also sign an agreement with HRSA to 

participate in the 340B program. 

Mr. WALDEN. And I don’t know if this is a fair question to ask 

you, Captain, but it is my understanding that HRSA was given an 

additional $6 million in funding beginning in FY 2014 and I guess 

the question is how much does HRSA now receive in funding to 

oversee the program and is that enough? 

Ms. PEDLEY. So we did receive an additional $6 million in fiscal 

year ’15 for program integrity efforts and information technology as 

well. 

57 

We continue to remain at the $10.2 million in total and that is 

in our proposed budget as well for fiscal year ’18 in order to maintain our level of oversight in the program. 

Mr. WALDEN. And you have got how many staff involved? 

Ms. PEDLEY. We currently have 16 FTEs. 

Mr. WALDEN. Do they have other responsibilities other than just 

overseeing 340B? 

Ms. PEDLEY. So they specifically work on the 340B program anywhere from our information technology systems to registering entities in the program to specifically the audit function. 

Mr. WALDEN. So they are focused on 340B exclusively? 

Ms. PEDLEY. Yes. 

Mr. WALDEN. OK. All right. 

This has been most helpful. Obviously, there are some statutory 

issues here and some clarity issues on who is a patient and transparency and who gets the benefit from the program designed to 

help patients in one way or another. 

So, Mr. Chairman, thank you for holding this hearing. I appreciate the input of our talented witnesses. 

Mr. MURPHY. Thank you. 

I now recognize the gentleman from New Jersey, Mr. Pallone, for 

5 minutes. 

Mr. PALLONE. Thank you, Mr. Chairman. 

The 340B program is a critical component of the safety net that 

serves the most vulnerable among us and 340B drug discounts help 

safety net providers make the most of the limited resources they 

receive. 

As a result, they are able to reach more eligible patients and provide those patients with more comprehensive health services, and 

I believe in both protecting 340B and improving the integrity of the 

program to ensure it remains strong for the future. 

My questions are, Captain Pedley, could you describe how this 

program helps safety net hospitals and other covered providers give 

care to needy populations? In other words, the 340B, if you could 

answer that question. 

Ms. PEDLEY. So the intent of the program was for these entities 

defined in statute to be able to purchase the drugs at a discount 

so they can stretch those scarce federal resources. 

Once they are eligible for the program and listed on our database 

and we validate to ensure they are eligible for the statute they are 

then able to purchase these drugs at a discount, typically 25 to 50 

percent lower than what they would have otherwise paid. 

Mr. PALLONE. And so the discounts help ensure that all individuals including the under insured and the uninsured have access to 

care. Is that a correct statement on my part? 

Ms. PEDLEY. Yes, based on the intent of the program. 

Mr. PALLONE. All right. 

Now, Captain, can you please describe how the 340B drug discounts generate savings for providers while expanding services for 

patients? 

Ms. PEDLEY. So the savings in the program are generated on the 

up front discounts that they receive on the drug. 

58 

In addition, if the patient is insured they bill the insurer at the 

higher rate in order to create revenue to provide then the care to 

those that do not have insurance there or the ability to pay. 

Mr. PALLONE. OK, and I know some members have already expressed concerns that there is not sufficient transparency with respect to how some 340B hospitals use their money. What actions 

is HRSA taking, if any, to improve transparency in the program? 

Ms. PEDLEY. The statute is silent on the savings but in the fiscal 

year ’18 president’s budget we did propose to intend to work with 

Congress on a legislative proposal to ensure the benefit of the program does benefit the low-income uninsured populations. 

Mr. PALLONE. OK. 

I wanted to ask Dr. Draper what are the most important actions 

out of GAO’s recommendations to improve program integrity in 

340B and how should Congress prioritize? 

Ms. DRAPER. Well, I think one of the key pieces is really clarifying the intent of the program. The intent was set up 25 years ago 

and, I think there is a misperception that it does. 

It doesn’t explicitly talk about uninsured or under insured patients—to receive benefits through the program. That is implied, 

depending on the types of covered entities. So that is one issue. 

The other issue is really clarifying the definition of a patient. 

That would go a long way as well as hospital criteria—the criteria 

to participate. So those are the weaknesses that we currently see 

remaining that would really help improve the integrity of the program. 

Mr. PALLONE. OK. So from what I am hearing, the 340B program 

does play a valuable role in our efforts to provide a robust safety 

net for vulnerable patients and while more can be done to improve 

transparency those efforts should be tailored towards helping the 

program serve more needy patients. 

So I want to thank you all for being here this morning and the 

comments, I think they are very helpful. 

I yield back. 

Mr. MURPHY. Gentleman yields now. 

I now recognize Mr. Barton or 5 minutes. 

Mr. BARTON. Thank you, Mr. Chairman. 

This is a difficult hearing. We have got a program that I think 

both political parties strongly support. I have got a number of federally qualified health facilities and DSH hospitals in my district 

that use 340B and it is an integral part of the care they provide 

to the low-income population. 

But it is a program that has just grown exponentially and, quite 

frankly, I think HRSA has done a pretty amazing job, given how 

many people you have—24 people at one time. That is about this 

subcommittee. You did 200 audits. That’s 10 per month per person. 

I couldn’t do 10 audits a month if I were a CPA. And yet, nobody 

really knows what’s going on in the program because it is so big. 

I don’t even understand what we are talking about when you 

talk about the money. So I am going to ask a very elementary 

question and see if you can explain it to me. If the regular price 

for a drug from a manufacturer is $10—I am making it as easy as 

I can—and the average discount for 340B is 50 percent, that means 

that the entity that is participating in the 340B program is charged 

59 

$5. Is that right? The hospital pharmacy, their cost is $5. Now, if 

they prescribe that to an outpatient, what does Medicaid pay for 

that prescription? Do they pay $5? Do they pay $10? Do they pay 

$7.50? In other words, what, if any, is the markup? Can anybody 

answer that? 

Ms. PEDLEY. So, first, with the ceiling price, the price that an entity pays is actually set in statute. The calculation is set based 

on—— 

Mr. BARTON. I don’t need to know that. I am using my example. 

Ten dollars is what the retail price would be—the normal price if 

it wasn’t a 340B drug and you said the discount is 25 to 50 percent. 

So I made it 50. So the price is $5. What I want to know is the 

patient who gets that drug—whoever is paying for it, the patient 

or Medicaid—what do they pay? Do they pay $5? Do they pay $10? 

Do they pay $15? Do they pay something in between? 

Ms. PEDLEY. So if the patient has insurance they would pay their 

standard co-pay. If they are uninsured—— 

Mr. BARTON. If they are covered by Medicaid. 

Ms. BLISS. So CMS has a rule for state Medicaid programs that 

they would reimburse at that $5 plus a dispensing fee. 

Mr. BARTON. Plus a dispensing fee. But there is no profit? 

Ms. BLISS. Not in the Medicaid context. 

Mr. BARTON. OK. So, technically, whatever the discount is that 

is passed through? 

Ms. BLISS. Yes, to the Medicaid—— 

Mr. BARTON. But you have no way to prove that it really is 

passed through? 

Ms. BLISS. State Medicaid agencies don’t currently have access to 

those ceiling prices. 

Mr. BARTON. So nobody knows? 

Ms. BLISS. There is no check and balance. 

Mr. BARTON. It is voluntary compliance. I guarantee you people 

are abusing that. I guarantee it. But let us forget that. Let us forget that. So we really have no controls on that end. If the dispensing pharmacy—they get the discount but let us say they 

charge Medicaid the regular rate, $10. So they have got a profit of 

$5. Is that illegal under current law? Are they required to pass it 

through or can they keep it and in the best case use it to defray 

the cost of another patient? 

Ms. DRAPER. If it is not required it is how they pass or whether 

they pass on discounts. Unless it is part of their federal grants for 

a federally qualified health center their grant may require them to 

pass on discounts but not for all facilities. 

Mr. BARTON. So even though they are getting a lower rate they 

could charge the higher rate and use that within their facility for 

some other purpose? 

Ms. DRAPER. That is correct. It is not clear how that is being 

used. 

Mr. BARTON. It is not illegal. I am just trying to educate the subcommittee how screwed up this program is. 

My last question—my time has expired—if we created a whistle 

blower option so that anybody in the country could turn somebody 

in if they think there is abuse and if there is abuse they got to keep 

60 

some of the savings that was discovered would that help police the 

program? 

Ms. DRAPER. Well, I think you would have to make sure that the 

rules are clear as to what—it goes back to patient eligibility, hospital eligibility criteria. 

I think some of that ambiguity is—— 

Mr. BARTON. I am not even going down that trail. 

Ms. DRAPER. Yes, but I think this—— 

Mr. BARTON. I am assuming everybody in the program is allowed 

to be in the program. 

Ms. DRAPER. Right. But I think those rules are not clear. So people have interpreted it very differently. So until the rule is 

clear—— 

Mr. BARTON. It is a mess. 

Ms. DRAPER [continuing]. It is really difficult to do that, I think. 

Mr. BARTON. This is a great opportunity for this subcommittee. 

On a bipartisan basis, we all support the 340B program. But it has 

grown topsy-turvy. We really need to put the best minds of this 

subcommittee on a bipartisan basis and see if we can come up with 

some solutions. 

With that, I yield back. 

Mr. MURPHY. I will work on that. That is good. 

Ms. Castor, you are recognized for 5 minutes. 

Ms. CASTOR. Thank you, Mr. Chairman, and thank you to all of 

you for helping us keep the 340B program strong and true to its 

original purpose. 

The providers in my local community that are covered entities 

that participate are the ones that are providing inordinate amounts 

of charity care. Most of them never recoup the reimbursements 

that they need. For example, the St. Joseph’s Children’s Hospital 

Chronic Complex Clinic for medically fragile children—that is part 

of the BayCare Health System—behavioral health and substance 

abuse services at BayCare Behavioral Health and St. Joseph’s Care 

Clinic that stretches the federal Ryan White funding to support a 

continuum of care to maintain a high retention rate of HIV patients. 

Tampa General Hospital is our safety net hospital. They provide 

multi-million dollars in charity care though that is never recouped. 

So 340B has been a godsend to their mission in our community. 

Captain Pedley, HRSA has already audited a third of hospitals in 

the 340B program but only a small fraction of the drug manufacturers. 

Program integrity is appropriate for all stakeholders. Can you 

please indicate your intention with regard to undertaking audits 

and ensuring compliance for the drug manufacturers? 

Ms. PEDLEY. So we audit manufacturers every year. We have 

conducted seven audits thus far. We plan to conduct an additional 

five this year. As with—— 

Ms. CASTOR. What percentage is that? 

Ms. PEDLEY. So there are 600 manufacturers—whatever that 

comes out to be. 

Ms. CASTOR. What have the audits found so far? 

Ms. PEDLEY. Thus far, we do post the audits on our website and 

we have not had any findings whereby the manufacturers are not 

61 

in compliance with the statute. The manufacturers have a more 

narrow focus than the 340B-covered and that is to provide the drug 

at or below the ceiling price and that is what we audit. But that 

is only one tool we use for manufacture compliance. We also ensure 

that once they are in the Medicaid program that they appropriately 

sign an agreement with HRSA to provide the drugs at or below the 

ceiling price. 

We also issue regulation and guidance in the program related to 

manufacturer compliance. We also review all allegations that we 

receive if a covered entity is not receiving a price at or below the 

ceiling price and we investigate each of those situations. 

Ms. CASTOR. And I think a lot of folks don’t know that nearly 

one-third of the total of 340B discounts is due to a penalty that is 

enforced against drug manufacturers for raising the price of drugs 

higher than the rate of inflation or voluntarily providing a discount 

lower than the 340B price and that manufacturers could avoid the 

penalty by not increasing their drug prices at such high rates. How 

does that work? 

Ms. PEDLEY. So the 340B ceiling price, again, it is in statute and 

it is informed by components reported under the Medicaid drug rebate program and that is the average manufacturer price and the 

unit rebate amount and we receive those components from CMS to 

calculate the price. 

However, if the drug company does raise the price of their drugs 

higher than the rate of inflation there is a penalty that kicks in 

and that causes the 340B ceiling price to equal a zero. HRSA has 

policy in place and a final regulation that is effective October 1 

that when that ceiling price equals a zero that the manufacturer 

charge a penny. 

Ms. CASTOR. So that is a very important incentive and, again, 

helps keep the burden off the taxpayers that I think needs to be 

maintained as we move forward. 

Captain Pedley, all the witnesses here—and you can hear the 

comments from the committee—said HRSA needs regulatory authority to properly administer 340B and I strongly favor appropriate HRSA oversight to ensure the highest level of program integrity. But HRSA’s proposed Mega-Guidance last year would have 

dramatically limited the use of 340B well beyond congressional intent and harm many hospitals and their ability to provide charity 

care and the whole continuum of care. For example, it would have 

prohibited discharge prescriptions needed to prevent unnecessary 

readmissions, eliminated 340B in infusion centers for patients with 

no other options for cancer care, and created a complex and unworkable definition of who is a patient. 

If the Congress provides HRSA with such regulatory authority, 

how can we be assured that harmful proposals such as these 

wouldn’t go beyond the congressional intent? 

Ms. PEDLEY. So HRSA’s proposal in 2015 and the omnibus guidance we did address patient definition, and based on some of the 

things that we were seeing in our program integrity efforts such as 

audits informed our decisions around how to define certain elements in that guidance. 

We did receive over 1,200 comments that we took into consideration very seriously in drafting a final guidance that was sent to 

62 

OMB in the fall but was then withdrawn. So we do take the stakeholders’ comments very seriously. 

Ms. CASTOR. To be continued. Thank you very much. 

Mr. MURPHY. Dr. Burgess is not here so it will be Mrs. Brooks. 

Mrs. Brooks, you are recognized for 5 minutes. 

Mrs. BROOKS. Thank you, Mr. Chairman. 

Captain Pedley, I would like to talk a bit about what it means 

for diversion to occur in the 340B program and how common is it 

for you to find evidence of diversion in your audits. 

Ms. PEDLEY. So the statute states that 340B drugs can only go 

to an eligible patient but the statute does not further define what 

a patient is in the program. 

So we have historically defined in guidance what it means to be 

a patient. We have guidance currently in place from 1996. We did 

attempt in 2015 in the proposed guidance to further clarify the definition of a patient and we do audit that information when we 

audit. 

I don’t have the specific numbers on findings for diversion and 

we can make sure to get those to you. But that is one of the areas 

that we specifically look at when we audit covered entities. 

Mrs. BROOKS. Could you provide, though, some examples of diversion that you have found in audits? 

Ms. PEDLEY. So an example may be that a covered entity sees 

a patient. That patient is also seen at an outside provider at their 

private practice, and if that patient comes back to the hospital, for 

example, to see that patient. 

There may not have been sensitive enough systems in place to 

know where the drug was prescribed from because the private 

practice doctor, unless it was a referral arrangement, would not 

have been eligible for the program. So that is an example of an ineligible patient. 

Mrs. BROOKS. And so that would be a finding against that hospital or provider? 

Ms. PEDLEY. Correct. 

Mrs. BROOKS. And then what happens? What happens next when 

you do have a finding like that? 

Ms. PEDLEY. So when there is a finding of diversion, the statute 

does require that the covered entity offer repayment to the manufacturer. They are also required to submit a corrective action plan 

to HRSA which we review and approve and then monitor the covered entity to ensure that that corrective action plan is appropriately implemented. They do, again, have to offer the manufacturer repayment for any drugs that were diverted. 

Mrs. BROOKS. And how long is the duration of a corrective action 

plan, typically? 

Ms. PEDLEY. It varies on the covered entity type and how severe 

the issue was, for example, whether it was one issue of diversion 

or many issues of diversion. So it does depend on that. 

But we do follow follow up with the entity and monitor them 

throughout the process. 

Mrs. BROOKS. Do you have any recollection of what is probably 

one of the more egregious issues involving a corrective action findings in audits? 

63 

Ms. PEDLEY. So in terms of corrective action plans, we do assess. 

Many times it may be that they have to make corrections to their 

software systems that track eligible patients and they will have to 

adjust those accordingly. That is a common error that we will see. 

Mrs. BROOKS. And so what steps would you say that HRSA takes 

to minimize the amount of diversion that occurs in a 340B drug 

pricing program? 

Ms. PEDLEY. So I would say first and foremost we provide education to the covered entities regarding the definition of a patient, 

best practices in this space, and how to ensure against diversion. 

The covered entities have to annually recertify and attest to compliance with program requirements and then again through our audits we do ensure that there is no diversion. If there is diversion 

or any audit whereby there is repayment, we do consider those entities for reaudit so that we can go back and check to make sure 

the corrective action plan has been appropriately implemented and 

that not continuing. 

Mrs. BROOKS. Have you ever terminated an entity? 

Ms. PEDLEY. We have terminated one covered entity for not submitting a corrective action plan. We were able to terminate them 

through that mechanism. We have terminated contract pharmacies 

through the program where a covered entity was not providing 

oversight and there were a few cases where we terminated a child 

or offsite clinic of a hospital because they were not eligible for the 

program. But that is just through the audit process. We also terminate through our recertification process and some other quarterly 

integrity checks that we do to ensure compliance. 

Mrs. BROOKS. And Ms. Bliss, can you please let us know what 

recommendations does OIG have to help reduce diversion? What 

recommendations have you made? 

Ms. BLISS. We have recommended that the patient definition be 

clarified so that it is more clear which patients and which prescriptions in particular are eligible for the 340B discounted price. 

We have also examined how covered entities work with their contract pharmacies and raise concerns that the covered entities themselves need to conduct additional oversight and independent audits 

of their contracted pharmacies to help ensure there is not diversion. 

Mrs. BROOKS. Thank you. My time is up. I yield back. 

Mr. MURPHY. OK. Mr. Tonko, you are recognized for 5 minutes. 

Mr. TONKO. Thank you, Mr. Chair. 

As we have heard today, the 340B program is a critical component of the safety net that serves our nation’s most vulnerable patients. Congress created 340B drug discounts to enable these safety 

net providers to stretch scarce resources and provide comprehensive services to vulnerable patients. However, HHS’s recent proposed rule calls for drastic cuts in Medicare payments to 340B hospitals. I am deeply concerned that these proposed cuts would greatly limit 340B hospitals’ ability to provide vital services. 

So Captain Pedley, can you elaborate on the types of services 

that 340B hospitals provide to vulnerable patients? 

Ms. PEDLEY. So under the 340B program, they are able to purchase the drugs at a discount and, again, provide those drugs to 

64 

their patients. But beyond that, that would be outside of HRSA’s 

authority regarding the other types of services that they provide. 

Mr. TONKO. Yes. If the CMS rule is successful and results in certain safety net hospitals having less revenue, what impact might 

that have on their ability to provide services for low-income populations? 

Ms. PEDLEY. It is a CMS rule and because it is going through the 

rulemaking process I am unable to comment because it is out for 

public comment. 

Mr. TONKO. Anyone on the panel able to suggest what that impact would be? 

Ms. DRAPER. No. 

Ms. BLISS. Not in a measured way. The CMS rule is proposing 

to reduce Medicare Part B reimbursement for separately payable 

340B drugs in the hospital outpatient setting. So it would potentially reduce the savings generated by the 340B discount. There are 

other proposed changes to payments through the outpatient prospective payment system included in that rule. So I don’t have a 

way to say how that would net out. 

Mr. TONKO. Yes. 

Ms. DRAPER. We did conduct work in 2015, looking at the intersection of 340B and the Medicare Part B program and we did find 

that for DSH hospitals that their Part B spending on drugs was 

substantially higher than non-DSH hospitals—almost twice as 

much—and we found that it suggested prescribing patterns of providers perhaps prescribing more and more expensive drugs than 

340B hospitals. 

Mr. TONKO. Yes. The 340B discounts are also critical for disproportionate share hospitals which provide care to uninsured and 

under insured populations. A recent study found that 340B disproportionate share hospitals provided some $23.7 billion of uncompensated care in 2014 alone. 

So, Captain Pedley, the discounts provided through the 340B program are one reason why 340B hospitals are able to provide those 

services to patients who are under insured or uninsured. Is that 

your understanding? 

Ms. PEDLEY. So the intent of the program was for the entities to 

purchase the drugs at a discount in order to stretch their resources. 

The statute is silent regarding whether the patient is insured or 

uninsured. 

Mr. TONKO. But, obviously, it is going to help some in those categories? 

Ms. PEDLEY. That was the intent of the program. 

Mr. TONKO. Right. And GAO has previously found that for all the 

covered entities it reviewed, 340B savings, and I will quote, ‘‘allowed them to support their missions by maintaining services and 

lowering medication costs for patients,’’ which is consistent with 

the purpose of the program. 

So, Dr. Draper, can you elaborate on the ways entities use 340B 

revenue to maintain services? 

Ms. DRAPER. Yes. We talked to a small number of covered entities when we did our 2011 work and, for example, some federally 

qualified health centers talked about perhaps expanding their 

number of sites to reach more patients and to expand their servVerDate Nov 24 2008 12:07 Feb 23, 2018 Jkt 037690 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-46 CHRIS
65 

ices. So that was one example of how they use the money. But, 

again, the money is not specifically tracked so we don’t know how 

much of that was used specifically for that but that is what they 

told us. 

Mr. TONKO. Yes. Thank you. 

And, Captain Pedley, I understand the proposed rule was issued 

by CMS and not HRSA. But is it fair to say that a drastic reduction 

in payments to 340B hospitals would have a significant impact on 

covered entities in your program? 

Ms. PEDLEY. I am unable to comment due to the fact that it is 

in proposed format. 

Mr. TONKO. Right. Well, thank you. 

Mr. Chair, I am all for finding solutions to rising drug costs. But 

this proposed rule does nothing to address that. It would be a disaster for 340B hospitals and certainly for the critical services they 

provide. 

With that, I yield back. 

Mr. GRIFFITH. I thank the gentleman. 

The gentleman from New York, Mr. Collins, is now recognized for 

5 minutes. 

Mr. COLLINS. Thank you, Mr. Chairman. 

I want to thank the witnesses as well and maybe, to start with 

a summary, we all understand the importance of 340B including 

the pharmaceutical companies, what the intent was in 1992. 

I think the reality is that the landscape of the cost of drugs, especially in the oncology world, especially as we have gotten into 

some of the biologics and the treatments, which are great for any 

and all of these patients. But the costs are astronomical. And as 

a result then these discounts become very significant and much 

more so than a generic drug type of thing. 

So it has been a very changing pharmaceutical world, certainly 

the last 10 or 15 years compared to ’92. I think all of us are worried about the transparency—clearly, the lack thereof. The definition of a covered patient—because none of us want to see this program implode unto itself. And I guess the example I use, if you are 

an airline and you are flying a plane with 200 seats and the average price on the plane is $400 but you do know that you have got 

to discount 10 seats on that airplane. So you have got a revenue 

piece that gets into your pricing model that you have got 190 seats 

at $400 and 10 seats at $200, you got that model. 

But what we are starting to see, especially in the oncology world, 

is private hospitals buying up oncology practices. There is only one 

reason they are buying the oncology practices. Those are the most 

expensive pharmaceutical drugs prescribed and a 50 percent discount on a $60,000 drug is real money, and we don’t know where 

the money is going. We don’t know if the patients are getting it 

properly or whether there is a diversion. 

But as that percentage goes up, think of the airplane taking off 

now with 200 seats and half of them are at $400 and the other half 

are at a 50 percent discount. There is only one thing that is going 

to happen. The $400 price is going to $500. So here we are. We always are worried about the cost of pharmaceutical drugs but potential abuse in the 340B program—there is no free lunch in America. 

At least that is what we were taught growing up. The price of the 

66 

drugs will go up because the abuse results in the most expensive 

drugs grabbing this discount. 

So the transparency is critical and I think our committee can 

work together on that. I do know factually there are hospitals that 

have a line item in their P&L and it is called 340B discounts. 340B 

discounts is an actual line item on their profit and loss statement 

and they don’t use it for additional services. It is simply a line item 

on the P&L and that is where we need to know where the money 

is going. 

These are not the grantees. The grantees, the Ryan White AIDS 

clinics, we know exactly what they are doing and that was the intent back in 1992. And some of the grantees are very worried—because I have met with them—that if we don’t get this under control 

there could be impacts on them and nobody wants to impact any 

of the grantees. 

So I guess it comes back, Captain Pedley—as we have heard the 

others, the OIG and the GAO state, we need this clarity on patient 

definition. We need clarity on requirements for transparency and 

we need perhaps clarity out of HRSA. What do you need from us? 

Because guidance is guidance. Regulations and regulatory authority is that. 

But there seems to be almost a disconnect of what you are allowed to do, what you are not allowed to do. Do you need more regulatory authority for Congress or don’t you? You see my worries 

and I hope—I tried to give you an example of why we have got to 

get this under control. 

Ms. PEDLEY. Based on the court ruling in 2014, the court held 

that the statute only provides HRSA regulatory authority in three 

specific places and that is the ceiling price and civil monetary penalties for manufacturers and administrative dispute resolution 

process. The first two are combined. 

All other areas of the program we do not have specific regulatory 

authority. We do propose in the fiscal year ’18 president’s budget 

to provide that regulatory authority for HRSA. Regulatory authority does provide us the ability to be more clear and the requirements of the program, which is why we did include that in the 

president’s budget. 

Mr. COLLINS. So are you saying right now—for instance, I also 

serve on the Health Subcommittee of Energy and Commerce—do 

we on the Health Subcommittee have the language you would like? 

Because I would think fairly quickly we could move that language 

into a bill and I think, in a bipartisan way, move that through Congress. Have they been that specific? Has HRSA been that specific? 

Ms. PEDLEY. I would have to check with my department colleagues on whether there has been specific language. 

Mr. COLLINS. If there is, could you provide that to the committee 

and to myself? Because I think that could be a very quick starting 

point. 

Thank you, Mr. Chairman. I know my time is up. Thank you all 

for your testimony. 

Mr. GRIFFITH. Thank you. 

The gentleman from California, Mr. Ruiz, is recognized for 5 

minutes. 

67 

Mr. RUIZ. Thank you, Mr. Chairman. Thank you for this conversation. I have worked very closely with FQHCs and rural clinics. In fact, my medical career—I grew up in an FQHC, essentially, 

that was a block from my house, that took care of farm workers 

and I have seen patients that go in that couldn’t afford their medications, and the 340B program is very essential for a clinic to be 

able to provide lower cost or at least cover the uncompensated 

under insured patients’ costs and expand their services. So this is 

something that we definitely need to strengthen and to get right. 

But we are not talking about the big picture here. Why are drugs 

so expensive to begin with? That is the common sense question. 

This is another band-aid approach to figuring out how can we 

make medications more affordable. But we are really not addressing the elephant in the room, which is why are these medications 

so expensive and perhaps in addition to transparency for this program where we want information from FQHCs and people that are 

struggling to meet the needs of underserved communities we 

should also have transparency on the big pharmaceutical companies on their costs and their pricing and where are their moneys 

going to so that we can figure out how we can help protect patients 

and other entities who have the focus on providing care for our 

neediest patients throughout America and our middle class families 

who are under insured and who are still struggling to make ends 

meet. 

So we need to protect this crucial program which allows thousands of entities across the country to provide lifesaving prescriptions and care for the most vulnerable in our communities. And we 

know that these providers operate on very narrow margins and this 

program allows them to stretch their money to serve more patients. 

For example, the Desert AIDS Project in my district has a Hepatitis C program through which patients have access to the medication to treat their disease that otherwise can be cost prohibitive. 

And I have seen day in and day out how not having access to the 

proper medication is devastating to the overall health of patients. 

Ms. Bliss, you talk about transparency. If you were to have a 

wish list of what you want to know in transparency within these 

programs, what would that wish list be like and what is the number-one information that you would most advocate for in terms of 

transparency? 

Ms. BLISS. Thank you. 

In the current program as it stands, we are advocating for increased transparency in the ceiling prices and identifying which 

claims are subject to the 340B discount and that is because there 

are existing program rules around those features of the program. 

So coming from an oversight entity, our link is to those criteria. 

Where we advocate that there be new information, new guidance 

is where there are missing rules. 

So at this point, we are focused on the program as it stands. But 

we would, in an environment with additional rules, then we would 

certainly recommend transparency go hand in hand with new requirements so that we would be able to tell whether the program 

is working as intended. 

Mr. RUIZ. For example, what kind of transparency would you 

place on hospitals and clinics? 

68 

Ms. BLISS. Well, at this point, there are no reporting requirements, as Captain Pedley has described, about how those savings 

get spent. But there are also no requirements about how they 

should be spent. So if hospitals were to start reporting those today, 

we wouldn’t have a measure to judge the success or the outcomes 

or whether they would meet program intent. So reporting requirements tied to actual program criteria and goals are what would be 

most effective. 

Mr. RUIZ. What would be most helpful for you, Captain Pedley, 

in being able to enforce these in terms of transparency? 

Ms. PEDLEY. So the statute is silent on the savings piece. But we 

did propose in the budget to work with Congress on ensuring that 

the program does benefit patients, especially those that are low-income uninsured. We are also working in terms of transparency, as 

mentioned, on the 340B ceiling prices. We are working on a system 

to provide those ceiling prices to the covered entities so that they 

can see the prices that they are to be charged. 

Mr. RUIZ. Well, I certainly appreciate and would advocate fiercely in order to see those cost savings translated into real patient 

out-of-pocket savings. I do also know as well that some of those 

savings are used for other programs that are in dire need in those 

underserved communities. And so, I think that a combination of 

both are very wise for these entities who work under very strained 

under resourced conditions to provide an enormous amount of help 

for patients who actually need it. 

So thank you very much for your efforts. 

Mr. GRIFFITH. Gentleman yields back. 

The gentleman from Michigan, Mr. Walberg, is recognized for 5 

minutes. 

Mr. WALBERG. I want to start by thanking the chairman for holding this hearing. 

The 340B program assists some of the most needy patients in our 

communities, including those who receive their care at community 

health centers, hemophilia treatment centers, and HIV clinics. As 

the number of entities participating in the 340B program has quadrupled since 2011, we have learned of greater oversight challenges 

and we are hearing of those today. I am hopeful and expectant that 

this hearing will help us clearly identify those challenges as we 

seek to preserve and strengthen this 340B program. So it continues 

to truly meet needs. 

Captain Pedley, I see that HRSA first began auditing covered entities in 2012, as recommended by a 2011 GAO report. As has been 

noted, HRSA has fewer than 30 staff devoted to oversight of the 

340B program. So it is understandable that HRSA has conducted 

relatively few audits over the years when compared with the size 

of the program—51 audits in fiscal year 2012, building up to 200 

audits in fiscal year 2016. 

What concerns me is the high rate of noncompliance that HRSA 

uncovered in a very small sample size of the program. Based on the 

available data, HRSA found noncompliance in 63 percent of 2012 

audits. In 2013, that number rose to 79 percent of audits showing 

noncompliance in 2014. Eighty-two percent of audits in 2015—that 

number dropped slightly to 78 percent. And finally, in 2016, of the 

69 

audits that have been completed so far, 66 percent show noncompliance. Those numbers are just staggering. 

Can you explain to me how HRSA selects the entities it audits 

and why those numbers are so high? 

Ms. PEDLEY. So HRSA determines the audits on two different 

models. The first is a risk-based approach whereby we factor in certain risk factors and then randomly select based on those risk factors. We then separately specifically target audit some of the entities either based on specific allegations we have received about the 

entities already being in noncompliance or information that we 

have that we are unable to resolve an issue with an entity. Then 

we may go in and target audit an entity already known with an 

issue. So the entities that we choose are already at higher risk. 

Mr. WALBERG. Am I correct that the audits only cover small 

number of the drugs that an entity might purchase through participation in the 340B program rather than a full audit of all drug 

purchases by that entity? 

Ms. PEDLEY. So we use the standard auditing process whereby 

we do sample based on a statistical methodology, a certain percentage of the drugs to ensure that they meet program requirements 

specific to diversion and duplicate discounts. However, we do review all other aspects of the program outside of the sample in addition to looking at their policies and procedures, interviewing staff, 

and looking at all other documents necessary to ensure that compliance beyond just the sample of drugs. 

Mr. WALBERG. So even the small number of audits connected by 

HRSA only cover a fraction of that entity’s participation in the program? 

Ms. PEDLEY. So the sampling is specific to the diversion and duplicate discounts that we sample and that is a standard process 

used in auditing. But we look at the entire program to ensure compliance, policies and procedures, interviews, looking at their software systems and how they track drugs. 

Mr. WALBERG. OK. Thank you. 

Ms. Bliss, has the OIG considered whether the 340B program encourages the use of brand drugs and discourages the use of generic 

drugs? 

Ms. BLISS. We have not studied that particular issue. 

Mr. WALBERG. Is there any incentive to study that? An incentive 

to prescribe more drugs and more expensive drugs because the entity has received those drugs that reduce price? 

Ms. BLISS. In theory, there is certainly financial incentives to 

maximize the spread and your payments and your reimbursements. 

Mr. WALBERG. Ms. Bliss, has the OIG reviewed whether the 

340B program has created an incentive for hospitals to acquire 

practices? 

Ms. BLISS. We have not specifically examined hospital incentives. 

I believe my colleague from HRSA had some work touching upon 

that issue. 

Ms. DRAPER. Yes. 

Mr. WALBERG. Ms. Draper. 

Ms. BLISS. Oh, I am sorry. 

Ms. DRAPER. That is OK. Actually, in 2015 we did look at Medicare Part B, the intersection of that with the 340B program and 

70 

we did find the average number of oncology patients increased for 

all hospital groups but the most for the 340B DSH hospitals. 

And we also found that the Part B drug spending was substantially higher at 340B DSH hospitals which suggests that the financial incentives may influence prescribing patterns to prescribe more 

and more expensive drugs. 

Mr. WALBERG. OK. Thank you. 

I yield back. 

Mr. GRIFFITH. I thank the gentleman. 

The gentlewoman from Illinois, Ms. Schakowsky. 

Ms. SCHAKOWSKY. Thank you. 

Well, I am happy to see that everyone on the committee has expressed their support—just about everybody—for the 340B program because it certainly is a vital source for health care providers 

that really underpins our safety net programs. And I am all in 

favor of doing everything we can to make sure that we provide the 

proper oversight. But I wanted to make a couple of comments. One 

may seem irrelevant but I would hope that members of this committee would have as great enthusiasm for audits of the Defense 

Department and where big money is really spent. 

And I would also like to comment my support for and associate 

myself with the remarks of Dr. Ruiz, who was talking about hep 

C patients being able, under this program, to be able to afford 

drugs that could offer a cure, but that we also want to look at why 

the pharmaceutical companies are charging tens of thousands of 

dollars for this drug and charging so much for other drugs and I 

think that this committee needs to look at more than—this is really 

not, I don’t think a discussion about the price of drugs as much it 

is a particular small program. 

I am concerned with the CMS-proposed rule and I know, Captain 

Pedley, that you said it is under advisement and so you can’t talk 

about it. But can you describe it so that I understand it better 

what this proposed rule would do? Because what it sounds to me 

is at the end of the day that the entities like hospitals and FQHCs 

would receive less money. Can you describe it? 

Ms. PEDLEY. I don’t know the details of that rule. That is under 

the purview of CMS and we could help connect you with them. But 

I would be unable to go into any detail. 

Ms. SCHAKOWSKY. OK. And you were also asked the question describe the types of comprehensive services 340B covers. You were 

just strictly talking about the discount drugs. Is there anything 

else that you can add about that? 

Ms. PEDLEY. HRSA does not track or have information on how 

the entities use the savings to provide or care to more patients. 

Ms. SCHAKOWSKY. OK. The 340B program has a demonstrable effect in helping disproportionate share hospitals and rural hospitals 

save their patients and that is a key part of the program that they 

are able and actually required to spend that money into engaging 

in meaningful and beneficial work to support the most vulnerable. 

So let me ask you then what you think are the key—Captain 

Pedley, the key areas that we ought to be looking at to support 

your work in making sure that your audits are as effective as they 

can be and that this program is as effective as it can be. 

71 

Ms. PEDLEY. As proposed in the fiscal year ’18 president’s budget, 

HRSA only, again, has regulatory authority in the three specific 

areas and we have proposed guidance in all other areas. The regulatory authority across the program is critical for us to be able to 

provide clarity in our program requirements and assist HRSA in 

our oversight efforts to be able to then enforce those requirements. 

So regulatory authority is key. 

Ms. SCHAKOWSKY. So this program has just been described as a 

real mess by some others on the other side of the aisle. Dr. Draper, 

would you agree that that is accurate, based on what GAO has 

looked at? 

Ms. DRAPER. Well, we have identified weaknesses in oversight 

and we believe that the oversight needs to be improved and there 

are things that can be undertaken to make that happen. 

Ms. SCHAKOWSKY. What is the most important thing that we 

ought to do? 

Ms. DRAPER. Well, we talked a little bit about—I want to reemphasize about hospital eligibility. I think it is really important to 

think about HRSA’s role with oversight related to participating 

hospitals. In 2011, about a third of U.S. hospitals were participating in the 340B program and by 2015 they are 40 percent. 

HRSA may have more updated numbers. 

But I think the issue, because other grantees have specific requirements based on their grants that they have to follow in treating under insured or uninsured patients, you have a range of hospitals participating in this program and they operate in settings 

that provide both inpatient and outpatient services. 

So the risk for diversion is really—there is more risk. Because 

this is an outpatient program, drugs are not to be used for an inpatient setting. Hospitals also tend to have more complex contracting 

arrangements in organizational settings, which is really different 

than the federal grantees, and then they provide a larger volume 

of drugs in multiple settings. So I think the risk is probably higher 

for a hospital and that is why I think that the hospital eligibility 

criteria is really critical as well as the definition of a patient. 

Ms. SCHAKOWSKY. In my home state of Illinois there are over a 

hundred hospitals participating in the 340B program, and by and 

large, I think, and I am not disagreeing that we want to look at 

this carefully, but that helps those institutions better serve their 

patients. The 340B program helped a 9-year-old patient with a 

brain tumor who receives care at the University of Illinois in Chicago and they were able to afford a drug that she needed for her 

chemotherapy regimen that is not covered by her insurance. 

So, we all have anecdotal information, I think. But I just worry 

that we don’t want to throw out the baby with the bath water. 

Ms. Bliss, what would you say is the most important thing? 

Ms. BLISS. Clear program rules are fundamental to ensuring program integrity, accountability, and even assessing to what degree 

the program is working. 

Ms. SCHAKOWSKY. OK. I yield. 

Mr. GRIFFITH. I appreciate that. Thank you very much for yielding back and I now recognize the gentlelady from California, Mrs. 

Walters. 

72 

Mrs. WALTERS. Thank you, Mr. Chairman, and I would like to 

thank the panelists for being here today. 

Captain Pedley, I understand that the number of entity child 

sites has more than doubled in the past 6 years, rising from roughly 16,500 in 2011, according to GAO, to 41,132 as of yesterday, according to HRSA. Two weeks ago on July 5th, HRSA listed the 

number of registered child sites at 40,745. Yesterday, July 17th, 

that number had increased by almost 400 sites. That is a drastic 

increase in child sites. And I would like to get a sense of what is 

driving that increase in sites and how that affects program integrity. How much can this rise in child sites be attributed to consolidation—that is, the trend of larger entities often DSH hospitals 

find smaller clinics and physician practices that as a result fall 

under their 340B umbrella? 

Ms. PEDLEY. The statute is very specific as to which entities are 

eligible for the program and HRSA’s role through that process is 

to ensure that when an entity applies that they do meet the statutory requirements. So everyone that we do list in the program does 

meet the statutory requirements and is eligible. 

Mrs. WALTERS. OK. When a covered entity acquires another 

practice as a child site, it is my understanding that the drugs dispensed to that child site’s patients often becomes eligible for 340B 

discounts. Does that child site take on any new statutory or regulatory obligations such as providing the kind of care that originally 

qualified the parent site for 340B status? 

Ms. PEDLEY. So specifically for a hospital, and it may be different 

for a grantee, but for a hospital if they do acquire an outpatient 

facility they do first have to be reimbursable on that hospital’s 

Medicare cost report before they are eligible for the 340B program 

because that is our test to ensure that they are an integral part. 

Once they are in that cost report then they also have to enroll, be 

listed on our database. They can then purchase drugs at that clinic 

as well and they have to meet all other 340B requirements just as 

the main facility does. 

Mrs. WALTERS. OK. And to what extent is consolidation guided 

by perverse incentives? For example, a recent report has shown 

that there has been a 172 percent increase in the consolidation of 

community oncology practices into hospitals since 2008. 

Ms. PEDLEY. HRSA’s role is to ensure that everyone that does 

register does meet statutory requirements. I am unable to speculate on business decisions a hospital may make to acquire those facilities. Our role is to ensure that they are eligible for the program. 

Mrs. WALTERS. OK. And as you know, oncology drugs can be 

quite expensive, and I know we talked a little bit about this before. 

If the covered entity is purchasing oncology drugs at the 340B discount but not charging the patients at a discounted rate for those 

drugs, this can be profitable for the covered entity. 

Does this function to serve vulnerable patient populations and, 

if not, does it run counter to the intent of the program and how 

does this consolidation affect patient care? 

Ms. PEDLEY. The statute is only specific around the different 

compliance elements related to the 340B program—for example, 

the patient definition and duplicate discounts. It does not provide 

HRSA the authority around how the entity uses those savings. 

73 

Mrs. WALTERS. OK. And how does this consolidation affect patient care? 

Ms. PEDLEY. I am unable to comment on those business decisions 

made by the hospital. 

Mrs. WALTERS. OK. I yield back the balance of my time. Thank 

you. 

Mr. MURPHY. Ms. Clarke, you are recognized for 5 minutes. 

Ms. CLARKE. I thank you, Mr. Chairman, and I thank our panelists for enlightening us today with this discussion. 

I have been an ardent supporter of the 340B program. In fact, 

I have six nonprofit safety net 340B hospitals as well as multiple 

federally qualified community health centers and clinics in my district. Having the access to affordable medications provided through 

this program has saved countless lives in my district as well as improved the quality of life for many of my constituents. It is due in 

large part to this program that one of the hospital systems in my 

district was able to increase uncompensated care by 34.68 percent. 

With the current debate raging around the repeal of the ACA 

and my Republican colleagues’ attempt to systemically dismantle 

the Medicaid program by their health care reform bills, the 340B 

program is needed now more than ever. However, I can’t overlook 

numerous government reports citing the vulnerabilities in this program. Drug manufacturers have also expressed their concerns 

about the reports of such vulnerabilities. 

To be clear, I support the intent of the program, but I do believe 

that more transparency and accountability is required. Therefore, 

additional oversight and reasonable checks and balances are needed to strengthen the program. 

So my question is to you, Captain Pedley. The first question is 

can you provide me with the dates by which some of the oversight 

tools stemming from the GAO and OIG recommendations will be 

fully implemented? Specifically, what is the estimated completion 

date for the ceiling price website which can help ensure that covered entities are paying the appropriate drug price? And can you 

tell me the date by which a centralized mechanism similar to the 

340B Medicaid exclusive file will be up and running for Medicaid 

managed care organizations? 

Ms. PEDLEY. The 2011 study from GAO did recommend information for us but specific to the ceiling price system that you mentioned we received funding in fiscal year ’14. We honored that and 

we had a contract put in place that September in order to start development of that system. It is complex. There are over 40,000 

drugs as part of that system. 

We also have to ensure that it is developed in a way to ensure 

the confidential and proprietary nature of those prices and to ensure that the information in that system is not redisclosed. We are 

getting close to the release of that system and plan for it to be released in the coming months so the covered entities are able to 

view the ceiling prices. 

Ms. CLARKE. So that would be this year? 

Ms. PEDLEY. In the coming months. 

Ms. CLARKE. 2017. Coming months. Months are always coming. 

[Laughter.] 

74 

Ms. PEDLEY. We do hope that it is soon and we have an education plan in place to ensure that those that are going to be able 

to use the system have adequate time to learn it so they can understand more about that system and the information it will contain. 

Ms. CLARKE. The 340B Medicaid exclusive file—is that part of 

the system that you are speaking of? 

Ms. PEDLEY. No. That is a separate document—the Medicaid exclusion file. There is currently one in place for Medicaid fee for 

service and the purpose of that file is to ensure that states and 

manufacturers have the information necessary to prevent a duplicate discount in the program, meaning to prevent a 340B drug discount and a Medicaid rebate on the same drug and the file is used 

for that purpose. We are separately going through the process of 

developing policy around duplicate discounts and Medicaid managed care. 

Amendments were added to the statute in 2010 that did include 

now Medicaid managed care under the duplicate discount provision. We proposed in our 2015 omnibus guidance policy related to 

that matter and we received comments. 

We are also in discussion with CMS related to that as there will 

also have to be policy in place by CMS in the states in order to 

make that process work. 

Ms. CLARKE. Well, that process is of interest to me since I have 

a significant portion of the recipients in my district are now in 

Medicaid managed care plans. 

Are there no completion dates that are up and running and when 

can those dates be really confirmed for us? 

Ms. PEDLEY. So we first have to address the policy matters as to 

how to handle duplicate discounts related to Medicaid managed 

care and we are working with the administration currently on next 

steps related to that policy. 

And then from there we would develop some type of file or information that would be used to prevent those duplicate discounts. 

Ms. CLARKE. Well, let me close by congratulating you because I 

know that HRSA has been working on this item for a while and 

I am happy to see them finally done. 

I yield back, Mr. Chairman. 

Mr. MURPHY. Thank you, Ms. Clarke. 

I recognize the gentleman from Pennsylvania, Mr. Costello, for 5 

minutes. 

Mr. COSTELLO. Following up on Ms. Clarke’s line of inquiry, Captain Pedley, do you agree that given that two-thirds of the more 

than 70 million Medicaid enrollees are in managed care that whatever policy changes you are proposing there would probably go further in terms of addressing the issue of duplicate discounts than 

anything else? 

Ms. PEDLEY. So under Medicaid managed care we do have to first 

develop that policy for how duplicate discounts are to be prevented 

under Medicaid managed care and that involves many parties 

through the process. Our authority specifically over how an entity 

prevents those duplicate discounts. CMS would have to separately 

address this issue with the states and the Medicaid managed care 

organizations. 

75 

Mr. COSTELLO. Do you agree that the policy change can occur 

within the regulatory realm and that no legislative action will be 

required? 

Ms. PEDLEY. HRSA does not have regulatory authority related to 

duplicate discounts. 

Mr. COSTELLO. CMS? 

Ms. PEDLEY. I do not know the answer. 

Mr. COSTELLO. So at this point, you do not know, and I don’t 

mean this to be an unfair question—you don’t know whether this 

will require legislative action in order to address the policy change 

required in order to drill down and prevent duplicate discounts in 

the managed care realm? 

Ms. PEDLEY. We have the authority to present guidance as we 

have presented in our proposed guidance. In order to regulate on 

this issue, we would need a legislative change. 

Mr. COSTELLO. OK. Do you have an opinion on what policy is required or legislative change is required in order to address that? 

Ms. PEDLEY. So in the fiscal year ’18 proposed budget we did propose for broad regulatory in the program in order for HRSA to better clarify our policy and to ensure that those policies are enforceable. 

Mr. COSTELLO. Shifting gears, this is in the testimony of Ms. 

Bliss, HRSA worked with CMS and with Congress to obtain any 

needed authority to share ceiling prices with state Medicaid agencies. Do you have sufficient statutory authority to carry out that 

recommendation of providing ceiling prices to state Medicaid agencies? 

Ms. PEDLEY. The statute is very specific to allow HRSA to provide the ceiling prices to covered entities. Therefore, we would need 

a legislative change to provide that information to the states. 

We are currently in discussion with CMS regarding some possible administrative options. But we would need up front a legislative—— 

Mr. COSTELLO. OK. So let us talk about that for a second. Let 

us assume that state Medicaid agencies have the ability to learn 

of the ceiling prices. Can you share for this subcommittee how that 

would positively impact the program integrity? 

Ms. PEDLEY. So in terms of providing the ceiling prices to states, 

it would not address any issues around duplicate discounts under 

the 340B statute. The ceiling prices would be in place to help inform the prices being paid for those drugs so that the states could 

reimburse the covered entity according to CMS rules. 

Mr. COSTELLO. Can you share with me if you were to use claims 

level methods to identify claims for 340B purchased drugs and 

HRSA’s guidance were updated related to same, what would that 

do in terms of program integrity? Would it improve it? 

Ms. PEDLEY. So claims level data as suggested by the OIG in 

their study would make transparent the specific 340B drugs that 

are being purchased in order to prevent duplicate discounts. 

Mr. COSTELLO. Do you believe that there is an insufficient technology platform right now in order to provide the type of transparency and accountability in order to make sure that this program 

operates the way that it should? 

76 

Ms. PEDLEY. So related to the recommendation made by the OIG 

for HRSA to provide more clarity regarding Medicaid managed care 

and how to prevent duplicate discounts we have been working very 

closely with CMS and we have convened many of the stakeholders 

in this space regarding how a solution may play out to prevent duplicate discounts—— 

Mr. COSTELLO. Right. 

Ms. PEDLEY [continuing]. And an IT solution is very important 

to that process. 

Mr. COSTELLO. There are the clarity issues. The clarity issues, 

because there is ambiguity, people can interpret things differently 

and thus you have different results given the same set of facts. 

The question I have is for the enforcement side of this, you are 

doing, I think, less than 1 percent of all of these 340B facilities get 

audited, right, because of a manpower issue. 

If you have the right IT in place, a lot of that sort of speaks for 

itself, does it not? And so the question is really geared more towards the IT side of this and if you have the right IT platforms 

in—well, here is a question. 

I know my time has expired. If you had the right IT platform, 

do you feel that you could perform more audits in the same amount 

of time or in the same—could you provide more audits in a given 

year if you had a better IT platform? 

Ms. PEDLEY. We have not explored IT related to whether we 

could conduct more audits or not. But that is something that we 

could look into. 

Mr. COSTELLO. Well, the IT would be on the side of the reporting, 

right? 

My time is up. I yield back. 

Mr. MURPHY. Mr. Carter, you are recognized for 5 minutes. 

Mr. CARTER. Thank you, Mr. Chairman. I thank all of you for 

being here. This is an extremely interesting subject on a very important subject as well. 

I am going to start with you, Dr. Pedley, and by the way, Mr. 

Chairman, she is a doctor. She had a PharmD degree as well as 

being a captain. I know that Dr. Draper mentioned earlier when 

she was asked a question about what could we do to improve the 

program she mentioned about the hospital eligibility. But one thing 

that I am concerned about is the patient eligibility. If I have heard 

to, Dr. Pedley, say once I’ve heard you say it 50 times during this 

hearing the statute is silent. The statute is silent. 

What do we need to do to clarify patient eligibility? Do we need 

to do it legislatively or can you do it? 

Ms. PEDLEY. So the statute is silent on what entities do with 

their savings. It is—it does, however, mention that it has to go to 

a patient and HRSA does have authority related to creating guidance on who is an eligible patient. 

And we have done that. We have a guidance currently on what 

defines a patient from 1996 and we proposed in 2015 additional 

guidelines related to the definition of a patient. 

However, we do not have regulatory authority to regulate on 

what—— 

Mr. CARTER. That comes from Congress? So we need to do that? 

Ms. PEDLEY. We would need a legislative change. 

77 

Mr. CARTER. OK. Count on it. 

I want to go to you, Dr. Draper, because something is very important to me and that is—and I know that Representative Collins 

mentioned this and it is just something that I want to get clarified 

here because I think that there is a lot more that goes on here than 

we recognize—a lot more ramifications, if you will, and that is the 

GAO has released a number of reports including the report in June 

of 2015 that said the financial incentive to maximize Medicare revenues through the prescribing of more or more expensive drugs at 

340B hospitals also raises concerns. You acknowledge that. You acknowledge that you have seen a tendency for more 340B drugs to 

be used in those hospitals that are eligible for this. 

Not only does excess spending on Part B drugs increase the burden on both taxpayers and beneficiaries who finance the program 

through their premiums, it also has a direct financial effect on 

beneficiaries who are responsible for 20 percent of the Medicare 

payment for their Part B drugs. This is something that is very important. Throughout this hearing, I have heard, well, this isn’t 

really talking about prescription drug costs. Well, it is really talking about prescription drug costs because I can assure you this is 

helping to increase prescription drug costs. 

One of the things that you were asked by Representative Collins 

is about the incentive for hospitals to buy up physician practices 

in order to gain that authority or in order to gain that ability to 

have them participate in 340B programs. Is that something that 

you see happening? 

Ms. DRAPER. On our 2015 work we did find that the average 

number of—I know there has been a lot of discussion about oncology practices in particular, but the number of oncology patients increased for all hospital groups but the most for 340B hospitals. 

Mr. CARTER. Absolutely, and the less competition we have within 

the healthcare system the higher the prices are. So it is just a 

merry-go-round here. 

I am not naive enough to believe that this is the worst administered program that we have in the federal government but I think 

it is an example of how a program that was set out with the best 

of intentions can mushroom into a program that is just out of control. 

Listen, it is not just the pharmaceutical manufacturers who 

aren’t making as much money as they will. If I have insurance and 

I am being charged through the 340B program, the hospital is 

making money off of me. They are making money off my insurance. 

They are causing me to have higher premiums in the end. It has 

just as much an impact on me as it has on anyone. Even though 

I have insurance, it is causing insurance to go up. It’s causing prescription drug prices to go up. Hospitals are right when they say, 

we are in compliance. They are in compliance because what is compliance? 

Nobody can really define what compliance is. They can point to 

just about any program that they have and many of them have fine 

programs that they are administering. But until we make sure that 

we are setting the record straight on what they are supposed to be 

doing with this, no one is going to be out of compliance. Not only 

that, but the repercussions when we do find someone who is out 

78 

of compliance there aren’t even there—there aren’t even any penalties there. You have said that over and over again. 

There is one word that we can sum up prescription drug pricing, 

that we can sum up this program with, and that is transparency. 

We need transparency within prescription drug pricing. We need it 

here. We need it in the individual markets—transparency. Whatever happened to the ability to just buy directly from the pharmaceutical manufacturer? 

Right now there has got to be all kind of discounts, and I apologize for getting on my soapbox here but I am telling you it is out 

of control. Until we have transparency, we are never going to get 

this under control. 

This program is a good program but it lacks clarity and it lacks 

oversight, and we have got to do something about it. 

Mr. Chairman, I yield back. 

Mr. MURPHY. Gentleman from Virginia for 5 minutes. 

Mr. GRIFFITH. Thank you very much, Mr. Chairman. Thank you 

all for being here today to testify. 

Let me start with Ms. Draper. By the way, it is always nice to 

have you here and always love it when I see the Medical College 

of Virginia listed in your bio. 

Ms. DRAPER. Great school. 

Mr. GRIFFITH. Great school. Yes, ma’am. 

This metric for qualifying DSH hospitals is an inpatient measurement yet 340B is for outpatient drugs. So does it make sense 

for us to use an inpatient metric for an outpatient program? 

Ms. DRAPER. Well, we do believe that that is one of the weaknesses of the DSH measure. The other is that it really—the formula is based on covered patients and that would be those covered 

by Medicare and Medicaid. So, there are weaknesses inherent in 

that measure. 

Mr. GRIFFITH. That’s just another one of the many stones you all 

have turned over and said, whoops, we can’t see anything there. 

Ms. DRAPER. Yes. 

Mr. GRIFFITH. Yes. And what is the DSH threshold? Do you 

know? 

Ms. DRAPER. Well, it ranges for different hospital types. For some 

hospitals, it is 8 percent—the DSH adjustment—and for others like 

the general DSH hospitals it is 11.75 percent. So that is another 

issue—whether or not that is an appropriate level or not and, 

again, that has been pretty consistent over time with the program. 

So, whether that needs to be reassessed that would also be a 

question. 

Mr. GRIFFITH. Yes, ma’am. Thank you so much. 

Captain Pedley, earlier Ms. Draper referenced that prior to the 

shift or the change there were 1,300—and if I get the numbers 

wrong you all correct me—1,300 contract pharmacies with the various entities or hospitals and now there are 19,000, if I wrote it 

down correctly when you said that earlier. 

I got all kinds of complicated questions on that that I have been 

given. But why the great expansion in the number of contract 

pharmacies? Is it just because we lifted the cap of one or how did 

that happen? 

79 

Ms. PEDLEY. The 340B statute is silent on how these covered entities dispense and get these drugs to their patients. We had understood that through state law entities were contracting with pharmacies. So in recognition of that, we did develop guidance in 2010 

that stated if they were going to have these contract pharmacies 

they needed to ensure they were also complying with the statutory 

requirements of diversion and duplicate discounts and we audit 

that information on those contract pharmacies when we go in to 

audit a covered entity. 

Mr. GRIFFITH. All right. I am going to get to that in a second. 

But I have also heard that the contract pharmacies are not only 

allowed to charge a dispensing fee but some of them ask for part 

of the savings on the drug. Is that correct or is that incorrect? 

Ms. PEDLEY. I don’t have the information on that. That’s a business matter between the parties and their contract. 

Mr. GRIFFITH. But it is not prohibited? 

Ms. PEDLEY. It is not prohibited. 

Mr. GRIFFITH. OK. Now, let us get back to the audits. You have 

asked the hospitals to do the audits of the contracting pharmacies. 

When you go in and you check on those, obviously, you don’t have 

enough people to check on 19,000 individual contracts with the various providers to the various entities. So have you uncovered problems and if you do, do you suspend somebody? Do you suspend the 

pharmacy or do you suspend the entity if they are not doing the 

proper oversight of the contracting pharmacies? 

Ms. PEDLEY. So we have audited now over 800 covered entities 

but it doesn’t stop there. We also do conduct the audits within 

those of their contract pharmacies. So we have audited over 18,000 

contract pharmacy arrangements related to those audits. We do ensure that the covered entity is providing oversight. We sample 

340B drugs dispensed from those pharmacies to ensure that they 

have not been diverted or have a duplicate discount, and if we do 

find the entity is not providing oversight of those contract pharmacies we will remove the pharmacies from the program. 

Mr. GRIFFITH. All right. Now, that raises an interesting issue. If 

you have done the audits, and you touched on 18,000 contract 

pharmacies, those audits didn’t reveal to you if some of them were 

getting a split of the savings with the entity? 

Ms. PEDLEY. That is a matter outside of our authority so we don’t 

review it when we audit them. 

Mr. GRIFFITH. OK. Would you like to have that authority? I 

mean, as long as we are going in to look at this, and it looks like 

it is a bipartisan way, should we give you that authority as well? 

Ms. PEDLEY. We would be happy to work with Congress on a specific proposal. 

Mr. GRIFFITH. I appreciate that very much. Yes, ma’am. 

All right. I might be the last one up. I have got about 40 seconds 

left. Anybody have something that they really want to—— 

Mr. CARTER. I do. I do. 

Mr. GRIFFITH. I yield to the gentleman from Georgia. Oh, OK. I 

yield to the gentleman from Georgia, though. 

Mr. CARTER. Dr. Pedley, I just want to make sure and understand. Most of the problems that you see, are they with the contracting pharmacies? Is it not true that most of the hospitals disVerDate Nov 24 2008 12:07 Feb 23, 2018 Jkt 037690 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 I:\MY DOCS\HEARINGS 115\HEARINGS\115-46 CHRIS
80 

pense these medications that are covered under 340B through their 

own providers, especially with oncology? I mean, they dispense 

them out of the office. 

Ms. PEDLEY. It is a combination of their in-house pharmacy and 

whether they contract with pharmacies. I think, as you mentioned, 

it also depends on the types of drugs. But it is a combination of 

both. 

Mr. CARTER. Thank you. I yield back. 

Mr. MURPHY. I yield back to myself. OK. 

That being done, we are finished with the regular committee 

members. We have Mr. Welch, who, I assume, by unanimous consent, is allowed to participate today. 

So I recognize the gentleman from Vermont, Mr. Welch, for 5 

minutes. 

Mr. WELCH. Thank you, Mr. Chairman, I appreciate it, and I 

thank the panel. 

A couple of things. One, Mr. Chairman, with respect to transparency, I am all on board. We need that across the board. Number 

two, with respect to whatever auditing has to be done in order to 

get our hands around this program, I am all for that and I think 

you are doing a good job. 

But I want to bring this back to what this means to rural 

Vermont and I think rural America. We are talking about the audit 

as though these nonprofit hospitals, like North Country Hospital in 

Newport, Vermont, is playing some kind of game and that just ain’t 

the case. Folks there in a hospital are working hard, not making 

a lot of money, and are the vital community institution in Newport, 

Vermont. 

And I know, Mr. Chairman, you have got that and, Mr. Carter, 

I know you have that as well. They are focused on trying to get 

costs down. That is their focus, and that cost going down means 

that they can serve other people in this rural and pretty poor community. 

The pharma companies, frankly, are focused on shareholder profit. That is their job. But there is a tug of war here, and whatever 

it is we do—transparency, better audits—I do not want to compromise the ability of those rural community hospitals to do the job 

and get the services out to folks, and that has got to be the bottom 

line. For me, that is the bottom line. Rural America is getting hammered and it is not just Vermont. 

The other issue, Mr. Griffith, you and I worked on to some extent—the 340B issue where these orphan drugs get mislabeled and 

the pharmaceutical companies take advantage of the fact that 

there is an orphan designation for a small component of what the 

use of that drug is and then they get the higher price on everything—and I would hope that would be part of it. 

But just let me tell you about the North County Hospital. If we 

lost the 340B designation, that would be $2.7 million a year. That 

is what would happen to them. When Porter Hospital in 

Middlebury, Vermont—the nearest other hospital is about 40 miles 

away—when the orphan drug rule change was made that cost them 

$500,000. That is big money in a rural community hospital. 

81 

So that is the focus here—I think ultimately at the end of the 

day whatever we do in transparency and on the audit and oversight, the bottom line for me is those community hospitals. 

Commander Pedley, I do want to ask you about some of the challenges that you face in regulating in this area and share your best 

understanding of what you believe Congress intended when it enacted the provision on 340B. 

Ms. PEDLEY. In terms of regulatory authority, due to the district 

court ruling in 2014, the courts did hold that we only have explicit 

authority in three areas: that is related to the ceiling price, civil 

monetary penalties for manufacturers, and the administrative dispute resolution process. 

But we do not have that authority for all other areas of the program. We have developed guidance in those areas but we did propose in the budget to provide comprehensive regulatory authority 

for HRSA to oversee around. 

Mr. WELCH. All right. Now, on the current application of the exclusion that has an effect on access to products in the 340B, is that 

something you have the ability to track? 

Ms. PEDLEY. I am sorry. Did you say orphan drugs? 

Mr. WELCH. Yes. 

Ms. PEDLEY. So related to orphan drugs, there was an amendment in the statute in 2010 that the newly eligible hospitals, mainly, rural hospitals, are unable to purchase orphan drugs under the 

program at the 340B discount. 

There was a lawsuit involving HRSA’s interpretation related to 

that matter. Currently, under the program the policy is that the 

manufacturer does not have to provide the 340B discount to those 

newly eligible hospitals for drug—— 

Mr. WELCH. All right. Thank you. 

Ms. Draper, it is very nice to see you. Thank you. 

On the orphan drug issue, and the specific question of how many 

drugs have been recently pulled out of the program, is that something the GAO has reviewed? 

Ms. DRAPER. We have not reviewed that. 

Mr. WELCH. That information would be helpful and important, 

given the anecdotal evidence about real access. Is that something 

you would agree with? 

Ms. DRAPER. I think anything that would help improve the transparency and integrity of the program would be good. 

Mr. WELCH. OK. Thank you. 

I thank the panel. Mr. Chairman, thank you for allowing me to 

participate. 

Mr. MURPHY. Thank you very much. 

That concludes this committee hearing. I would like to thank all 

the witnesses and members who have participated in today’s hearing. 

I would remind members that they have 10 business days to submit questions for the record, and I ask that the witnesses all agree 

to respond promptly to those questions. 

Hearing nothing else, the committee is adjourned. 

[Whereupon, at 12:31 p.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

82 


26929.034

TO: 

U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON ENERGY AND COMMERCE 

Members, Subcommittee on Oversight and Investigations 

July 14,2017 

FROM: Committee Majority Staff 

RE: Hearing entitled "Examining J-IRSA's Oversight of the 3408 Drug Pricing 

Program." 

The Subcommittee on Oversight and Investigations will hold a hearing on Tuesday, 

July 18, 20 17, at 1 0: 15 a.m. in 2322 Rayburn House Office Building. The hearing is entitled 

"Examining J-IRSA's Oversight of the 3408 Drug Pricing Program." An agency within the 

U.S. Department of Health and Human Services (HHS), the Health Resources and Services 

Administration (J-IRSA), oversees the program. The purpose of the hearing is to review 

HRSA's oversight of the 3408 Drug Pricing Program, as well as how the program is impacting 

patients, providers, manufacturers, and other stakeholders. Further, the hearing will examine 

potential areas for improvement within the program to ensure program integrity. 

I. WITNESSES 

• Krista M. Pedley, PharmD, MS, CDR, US PHS, Director, Office of Pharmacy Affairs, 

Health Resources and Services Administration, U.S. Department of Health and Human 

Services; 

• Debbie Draper, Director, Health Care, Government Accountability Office; and, 

• Erin Bliss, Assistant Inspector General, Office of Evaluation and Inspections, Office of 

Inspector General, U.S. Department of Health and Human Services. 

II. BACKGROUND 

a. Overview of the 340B Program 

The 3408 drug discount program was created by Congress in 1992. The 3408 program 

mandates that drug manufacturers provide outpatient drugs to eligible health care organizations 

(also known as "covered entities") at reduced prices in order to remain eligible for 

reimbursements through entitlement programs such as Medicaid and Medicare. Covered entities 

include hospitals owned or operated by state or local governments that serve a higher percentage 

of Medicaid beneficiaries, as well as federal grantees such as federally qualified health centers 

(FQHC), FQHC look-alikes, family planning clinics, state-operated AIDS drug assistance 

programs, Ryan White CARE Act grantees, family planning and sexually transmitted disease 
83 


26929.035

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 2 

clinics, and others, as identified in the Public Health Services Act (PHSA). The Health 

Resources and Services Administration, under HHS, is tasked with accepting applications and 

overseeing covered entities. 

Citing a Committee report from the time the authorizing legislation passed, HRSA states 

that the purpose of the 3408 program is to "stretch scarce federal resources as far as possible, 

reaching more eligible patients and providing more comprehensive services." 1 

Participation in the 3408 program is voluntary for covered entities and drug 

manufacturers, but there arc strong incentives to participate. Covered entities are eligible to 

receive discounts on outpatient prescription drugs from participating manufacturers. Covered 

entities report saving between 25 and 50 percent of the average wholesale price for covered 

outpatient drugs. 2 HRSA estimates that covered entities saved $3.8 billion on outpatient drugs 

through the program in fiscal year (FY) 2013,3 and $4.5 billion in FY 2014.4 As of October 

2016, 12,148 covered entities were participating in the program5 and roughly 1,200 

pharmaceutical manufacturers participate in the program.6 

Covered entities do not receive discounts on inpatient drugs under the 3408 program, 

but can realize substantial savings through 3408 price discounts and generate 3408 revenue by 

selling 3408 drugs at a higher price than the discounted price at which the covered entity 

obtained the drug. Moreover, while covered entities are prohibited from diverting any drug 

purchased at a 3408 price to an individual who does not meet HRSA 's current definition of a 

patient,7 these entities are permitted to use drugs purchased at the 3408 price for all individuals 

who meet the definition of a patient, whether or not they are low income, uninsured, or 

underinsured. 

The 3408 price for a drug paid by covered entities-sometimes referred to as the 3408 

ceiling price-is based on a statutory formula and represents the highest price a drug 

1 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, 340B Drug Pricing 

Program, available at https://www.hrsa.gov/opa!. 2 340B Prime Vendor Program, 340B Price/Covered Outpatient Drugs, available at 

https:llwww.340bpvp.com/resource-centerlfaqs/340b-pricing--covered-outpatient-drugs/. 

3 Examining the 340B Drug Discount Program: Hearing Before the H Comm. on Energy & Commerce, !14th 

Cong. (March 24, 2015) (statement of Diana Espinosa, Deputy Administrator, Health Resources and Services 

Administration). 

4 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees-~~ Fiscal Year 2017, available at 

https:/ lwww .hrsa.govlaboutlbudgetlbudgetjustification20 I 7 .pdf. 5 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees~- Fiscal Year 2018, available at 

https:/ lwww .hrsa.gov/aboutlbudgetlbudgetj usti fication20 18 .pdf. 6 There are 1204 manufacturers are listed by HRSA, 706 of which arc deemed "active." See Health Resources and 

Services Administration, U.S. Dep't of Health and Human Services, Office of Pharmacy Affairs 340B Database, 

available at https://opanet.hrsa.gov/OPA/Manufacturers.aspx. 

7 For current definition of a patient, see HRSA's website. Health Resources and Services Administration, U.S. 

Dep't of Health and Human Services, Eligibility & Registration, available at 

http://www.hrsa.gov/opaleligibilityandregistrationlindex.html. 
84 


26929.036

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 3 

manufacturer may charge covered entities.8 Manufacturers are pennitted to audit covered entity 

records if they suspect product diversion or multiple discounts are taking place. Occasionally, 

the formula results in a negative price for a 3408 drug. In these cases, HRSA has instructed 

manufacturers to set the price for that drug at a penny for that quarter-referred to as HRSA's 

penny pricing policy. 

In March 2010, HRSA issued guidance allowing all covered entities- including those 

that have an in-house pharmacy-to contract with multiple outside pharmacies, referred to as 

contract pharmacies. Prior to 2010, covered entities were allowed to contract with only one 

pharmacy- either an in-house pharmacy, or an individual contract pharmacy. 9 The growth and 

oversight of contract pharmacies since 20 I 0 has been identified as an issue of concern by the 

Office of Inspector General of the U.S. Department of Health and Human Services (HHS OJG), 

and the U.S. Government Accountability Office (GAO) is planning an upcoming report 

examining that issue. 

Many 3408 program covered entity parent organizations have multiple associated "child 

sites." Child sites can include satellite clinics or facilities, hospital departments, outpatient 

treatment units, and other facilities. Child sites are eligible to participate in the 3408 program if 

they are an integral part of the hospital, which IIRSA has defined as reimbursable sites on a 

hospital's most recently filed Medicare cost report. As of July 5, 2017,40,745 covered entity 

sites were participating in the 3408 Program, including 17,965 disproportionate share hospital 

(DSH) sites. 10 

Hospitals' participation in the 3408 program has grown markedly in recent years- faster 

than that of federal grantees, increasing almost three-fold in the number of participants from 

2005 to 2011. 11 According to a 2011 report by the GAO, a third of all hospitals participated in 

the program, and DSH hospitals alone represented about 75 percent of all 3408 drug 

purchases. 12 Currently, approximately 40 percent of all U.S. hospitals participate in the 3408 

program. According to HRSA's database on covered entities, as of July 5, 2017, DSH hospitals 

accounted for 44 percent of covered entities sitcsP 

8 Manufacturers may sell a drug at a price that is lower than the ceiling price, so covered entities may negotiate 

prices below the ceiling price. The discount is determined by dividing the average total Medicaid rebate percentage 

of 15.1% for single source and innovator multiple source drugs, and 11% for non-innovator multiple source drugs by 

the average manufacturer price (AMP) for each dose and strength. The Medicaid statute defines AMP as the 

average price paid to manufacturers by wholesalers for drugs distributed to the retail pharmacy class of trade. 

Manufacturers are required to report AMP and their best price to the Secretary, but subject to verification, 

manufacturers calculate the maximum price ("ceiling price") they may charge 340B entities. 9 75 Fed. Reg. 10272, 10274-10278 (March 5, 2010). 10 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, 3408 Drug Pricing 

Program Covered Entities, available at 

https://datawarehouse.hrsa.gov/topics/HealthcareSystems/CE340BDataExplorer.aspx. 

11 U.S. Gov't Accountability Office, Drug Pricing: Manufacturer Discounts in the 3408 Program Offer Benefits, 

but Federal Oversight Needs Improvement, GA0-11-836 (Sept. 2011). 12 ld 

" Health Resources and Services Administration, U.S. Dep't of Health and lluman Services, 3408 Drug Pricing 

Program Covered Entities, available at 

https://datawarchouse.hrsa.gov/topics/HealthcareSystems/CE340BDataExplorer.aspx. 
85 


26929.037

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 4 

b. Changes PP ACA Made to the 340B Program 

Enacted in 2010, the Patient Protection and Affordable Care Act (PPACA) made a 

number of notable changes to the 340B program, some of which have yet to be fully 

implemented. 

• Expanded Participation in 340B Program: 14 PPACA added the following to the list of 

covered entities entitled to discounted drug prices under the 340B program: ( l) certain 

children's and free-standing cancer hospitals excluded from the Medicare prospective 

payment system; (2) critical access hospitals; and (3) certain rural referral centers and 

sole community hospitals. These 340B-eligible facilities also must meet other specified 

340B participation requirements. 

• Changes to 340B Program Integrity: PPACA required the Secretary ofHHS to develop 

systems to improve manufacturer and covered entity compliance and program integrity 

activities, as well as administrative procedures to resolve disputes. The compliance and 

program integrity systems were to include a number of specifications to increase 

transparency and strengthen monitoring, oversight, and investigation of the prices that 

manufacturers charge covered entities, as well as additional improvements to ensure 

covered entities do not divert drugs or obtain multiple discounts. The Secretary was 

required to establish a new administrative dispute resolution process to mediate and 

resolve covered entity overpayment claims and manufacturer claims against covered 

entities for drug diversion or multiple discounts. Civil money penalty (CMP) sanctions 

up to $5,000 per instance for manufacturer overcharges were authorized. The Secretary 

was required to establish standards and issue regulations for assessing CMPs on drug 

manufacturers for overcharge violations and was required to issue regulations to 

implement a dispute resolution process by which covered entities can report instances 

where they suspect they have been overcharged. 

• Required Manufacturers Communicate Prices to HHS: PPACA required that pricing 

agreements stipulate that drug makers will report to the Secretary the quarterly ceiling 

prices for each covered drug and to offer these drugs to covered entities at or below these 

prices. 

c. GAO and HHS OIG Findings 

• 2011 GAO Findings: In 2011, GAO issued a report, "Manufacturer Discounts in the 

340B Program Offer Benefits, but Federal Oversight Needs Improvement." 15 GAO 

found that the 340B program allows certain providers within the U.S. health care safety 

net to stretch federal resources to reach more eligible patients and provide more 

comprehensive services. However, GAO cautioned that HRSA's then-current approach 

to oversight did not ensure 340B program integrity, and raised concerns that this 

14 Section 7101, as amended by HCERA Sec. 2302, amended PHSA Sec. 340B. 15 U.S. Gov't Accountability Office, Drug Pricing: Manufacturer Discounts in the 340H Program Offer Benefits, 

but Federal Oversight Needs Improvement, GA0-11-836 (Sept. 2011 ). 
86 


26929.038

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 5 

vulnerability may be exacerbated by changes within the program. Among GAO's key 

findings: 

o According to HRSA, the agency largely relies on participants' self-policing to 

ensure compliance with program requirements, and has never conducted an audit 

of covered entities or drug manufacturers. 

o HRSA has not always provided covered entities and drug manufacturers with 

guidance that includes the necessary specificity on how to comply with program 

requirements, so participants may be interpreting guidance in ways that are 

inconsistent with the agency's intent. 

o Participants have little incentive to comply with program requirements, because 

few have faced sanctions for non-compliance. 

o With the program's expansion, program integrity issues may take on even greater 

significance unless effective mechanisms to monitor and address program 

violations, as well as more specific guidance, are put in place. 

o PPACA outlined a number of provisions that, iffully implemented, would help 

improve many of the 3408 program integrity issues identified. 

o GAO identified other program integrity issues that HRSA should also address: 

(l) HRSA is not required to audit covered entities or further specify the agency's 

definition of a 3408 patient; (2) HRSA does not plan to make any changes to or 

further specify its related nondiscrimination guidance; (3) HRSA guidance may 

allow some ineligible entities to be eligible for the program. 

o Finally, GAO noted that while HRSA would benefit from more resources, 

limited resources could be prioritized to address areas of greatest risk to the 

program. 

HRSA has addressed some of the concerns raised by GAO. For example, HRSA began 

conducting audits of covered entities and issued more specific nondiscrimination guidance for 

cases in which distribution of drugs is restricted. 

• 2014 HHS OIG Findings: Covered entities participating in the 340B Program may 

contract with pharmacies to dispense drugs purchased through the program on their 

behalf. 16 Such pharmacies are referred to as "contract pharmacies." In a 2014 report 

examining "Contract Pharmacy Arrangements in the 3408 program," HHS OIG noted 

that in 20 l 0, the percentage of all covered entities that use contract phatmacies had risen 

16 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Contract Pharmacy 

Services, available at http://www.hrsa.gov/opa/implementation/contract/index.html. 
87 


26929.039

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 6 

from I 0 percent to 22 percent. 17 Moreover, the number of unique pharmacies serving as 

340B contract pharmacies has grown by 770 percent, and the total number of contract 

pharmacy arrangements has grown by 1,245 percent. Some ofHHS OIG's key findings 

were: 

o HHS OJG found that contract pharmacy arrangements create complications in 

preventing diversion, and that covered entities are addressing these complications 

in different ways. 

o In some cases, HHS OJG explained that different methods lead to differing 

determinations of 340B eligibility across covered entities. That is, two covered 

entities may categorize similar types of prescriptions differently. As a result, 

HHS OIG concluded "there is inconsistency within the 340B Program as to 

which prescriptions filled at contract pharmacies are treated as 340B-eligible." 

o Several covered entities did not offer the discounted 340B price to uninsured 

patients at their contract pharmacies. 

o Most covered entities examined did not conduct all of the oversight activities 

recommended by HRSA. Few covered entities reported retaining independent 

auditors for their contract pharmacy arrangements as recommended in HRSA 

guidance. 

o Contract pharmacy administrators reported difficulties in identifying 

beneficiaries covered by managed care organization Medicaid, and some covered 

entities that do dispense 340B-purchased drugs to Medicaid beneficiaries through 

their contract pharmacies did not report a method to avoid duplicate discounts. 

In June 2011, HHS OIG published a review of states' reimbursement policies and 

oversight related to 340B-purchased drugs. At the time, HHS OIG found that states lacked 

pricing information needed for oversight and that nearly half of states did not have written 340B 

policies. 18 

• 2015 GAO Findings: In 2015, GAO issued a report, "Action Needed to Reduce Financial 

Incentives to Prescribe 340B Drugs at Participating Hospitals." 19 The report identified 

the characteristics of 340B DSH hospitals as compared to non-340B hospitals, and found 

that hospitals participating in the 340B program have a financial incentive to prescribe 

17 Office oflnspector General, U.S. Dep't of Health and Human Services, .Vfemorandum Report: Contract 

Pharmacy Arrangements in the 3408 Program, OEI-05-13-00431 (Feb. 4, 2014), available at 

http://oig.hhs.gov/oeilreportsloei-05-13-00431.pdf. 

18 Office oflnspector General, U.S. Dep't of Health and Human Services, State Medicaid Policies and Oversight 

Activities Related to 3408-Purchased Drugs, OEI-05-09-00321 (June 2011), available at 

http:/ /oig. hhs. govloei/reports/ oei-05-09-003 21 . pdf. 19 U.S. Gov't Accountability Office, Medicare Part 8 Drugs: Action Needed to Reduce Financial Incentives to 

Prescribe 3408 Drugs at Participating Hospitals, GA0-15-442 (June 2015), available at 

https:llwww.gao.gov/products/GA0-15-442. 
88 


26929.040

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 7 

more drugs, and more expensive drugs to Medicare beneficiaries. Among GAO's key 

findings: 

o 3408 DSH hospitals tended to be larger in terms of facility revenues, and were 

more likely to be major teaching hospitals compared to non-3408 hospitals. 

o 3408 DSH hospitals generally provided more charity care, and generally had 

DS!-1 median adjustment percentages between two and three times larger than 

non-3408 DSH hospitals, depending on teaching status. 

o While most 3408 DSII hospitals provided more charity care than non-3408 

hospitals, GAO found that 12 percent of3408 DSH hospitals studied were 

among those that provided the lowest amount of charity care. 

o 3408 DS!-1 hospitals had higher Medicare margins, had substantially higher 

Medicare Part 8 spending per beneficiary (by 240 percent and 232 percent 

compared to non-3408 DSH and non-3408 institutions), and these differences 

were not attributable to differences in the health of the populations they served. 

o The Centers for Medicare and Medicaid Services (CMS) uses a statutorily 

defined formula to pay hospitals for drugs, regardless of the cost to the hospital 

in purchasing those drugs. 

o The 3408 statute does not prohibit 340B entities from prescribing 3408 

discounted drugs to Medicare Part B beneficiaries, so HRSA and CMS have 

limited ability to hinder the 3408 DSH hospitals' incentive to prescribe more, 

and more expensive drugs to Medicare beneficiaries. 

III. CURRENT ISSUES 

a. Program Growth Exceeds HRSA's Oversight Capabilities 

For most of its existence, the 3408 Program has not been subject to rigorous oversight. 

HRSA had 24 full-time employees (FTEs) for the 3408 program in FY 2016, which it reduced 

to 22 FTEs for FY 2017 and 2018.20 After GAO issued a 2011 report critical of the program's 

oversight, HRSA received additional funding of $6 million in FY 2014 to increase its oversight 

efforts.21 However, the PPACA dramatically increased the size and scope of this program by 

expanding eligibility to more categories of hospitals, so the periodic audits conducted by the 

20 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees~ Fiscal Year 2018, available at 

https:/ /www .hrsa.gov/about/budgetlbudgetj ustification20 18. pdf. 21 In FY 2016 and FY 2017 HRSA budget was $10.543 billion and $!0.401 billion respectively. For FY 2018, 

HRSA has requested $9.9 billion. Health Resources and Services Administration, U.S. Dep't of Health and Human 

Services, .Justifications of Estimates for Appropriations Committees-Fiscal Year 2018, available at 

https://www.hrsa.gov/about/budget/budgetjustification20 18.pdf. 
89 


26929.041

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 8 

GAO and HHS OIG, and HRSA's own limited oversight may not be sufficient to conduct 

adequate oversight of this program. 

The number of participating unique covered entities has grown from 3,200 in 2011,22 to 

II, 180 in February 2015, to 12,148 covered entities in October 2016.23 The number of hospitals 

in particular has grown significantly, from 591 in 2005, to 1,673 in 2011, to 2,871 as of July 

2017. The number of child sites has also grown dramatically. In 2011, GAO reported that the 

number of child sites had nearly doubled over the previous decade, reaching just over 16,500 

registered sites.24 According to HRSA, that number had reached 37,496 in October 2016,25 and 

40,745 registered sites by July 2017. 26 

In addition to an increase in child sites, the number of contract pharmacies has grown 

greatly since HRSA issued its 2010 guidance on contract pharmacies. In 20 II, GAO reported 

that while HRSA did not track individual contract pharmacies in use, there were more than 

7,000 contract pharmacy arrangements through the program. 27 In its 2018 Budget Justification, 

HRSA reported that twenty-seven percent of covered entity sites have contract pharmacy 

arrangements, resulting in approximately 18,078 unique pharmacy locations.28 The GAO has 

ongoing work that will examine the growth of contract pharmacy arrangements. 

Finally, the amount that covered entities save on 3408 drugs has also increased. In FY 

2013, HRSA estimated that covered entities saved $3.8 billion on drug expenditures.29 In FY 

2014, that estimate rose to $4.5 billion in savings.30 

Despite the rapid growth of the program, HRSA's auditing has remained at or below 200 

annual audits of covered entities since 2012, when HRSA's practice of auditing covered entities 

began. The next section covers the results of those audits. 

22 U.S. Gov't Accountability Office, Drug Pricing: J'danufacturer Discounts in the 3408 Program ()jfer Benefits, 

but Federal Oversight Needs Improvement, GA0-11-836 (Sept. 2011), http://gao.gov/assets/330/323702.pdf. 23 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees--Fiscal Year 2018, available at 

https://www .hrsa.gov laboutlbudgetlbudgetjustification20 18. pdf. 24 U.S. Gov't Accountability Office, Drug Pricing: Alanufacturer Discounts in the 3408 Program Offer Benefits, 

but Federal Oversight Needs Improvement, GA0-11-836 (Sept. 2011 ), http://gao.gov/assets/330/323702.pdf. 

"Health Resources and Services Administration, U.S. Dep 't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees~ Fiscal Year 2018, available at 

https://www.hrsa.gov/about/budget!budgeljustification20 !8.pdf. 26 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, 3408 Drug Pricing 

Program Covered Entities, available at 

https:/idatawarehouse.hrsa.gov/topics/HealthcareSystems/CE340BDataExp1orer.aspx. 

27 U.S. Gov't Accountability Office, Drug Pricing: Manufacturer Discounts in the 3408 Program Offer Benefits, 

but Federal Oversight Needs Improvement, GA0-11-836 (Sept. 2011), http://gao.govlassets/3301323702.pdf. 28 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees--Fiscal Year 2018, available at 

https:l/www.hrsa.gov/about/budgetlbudgctjustification20 18.pdf. 29 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Justifications of 

Estimates for Appropriations Committees-Fiscal Year 2016, available at 

https://www. hrsa.gov/ about/budgetlbudgetj usti fication20 16. pdf. 

Jo Id 
90 


26929.042

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 9 

b. HRSA's Oversight Reveals High Levels of Non-compliance 

HRSA's annual audits uncover a high level of non-compliance by covered entities. The 

HRSA audits from FY 2012 to FY 2016 demonstrate that non-complying entities violate 

program requirements in at least one of three ways: duplicate discounts, diversion to ineligible 

patients and facilities, and incorrect database reporting. 31 

Figure 1: Program Requirement Violations: 

FY2012 FY2013 FY2014 FY2015 FY 2016 

Duplicate Discounts 18 24 23 47 42 

Drug Diversion 16 51 54 94 78 

Incorrect Database 15 46 51 100 57 

No Adverse Findings 19 20 18 43 59 

''f~~~\lans •· ~$·1~.\'fJ\'c •<• >lftl'll' .. t;.: .c\ith'dc .. > '~UJ.I:'i'''' •;·;:"!'rJ.:.lZ>'\::.;::: I *Note: numbei:S do not sum because several entities had more than one type of violation. 

c. Duplicate Discounts 

Covered entities are prohibited from receiving duplicate discounts.32 A duplicate discount 

occurs when a covered entity receives a 3408 discount on drugs provided to Medicaid patients 

and the state Medicaid agency also receives a rebate for the drug dispensed to the Medicaid 

beneficiary through the Medicaid Drug Rebate Program. When an entity enrolls in the 3408 

Program, it must determine whether it will "carve-in" or "carve-out" for Medicaid prescriptions. 

Entities that "carve-in" agree to buy Medicaid drugs through the 3408 program without seeking 

a Medicaid rebate, while entities that "carve-out" agree to buy Medicaid drugs through the 

Medicaid Drug Rebate Program or otherwise. Duplicate discounts occur because there is overlap 

in eligibility for the Medicaid rebate and 3408 programs. While Medicaid rebates benefit state 

Medicaid programs and 3408 programs benefit 3408-covered entities, both of these programs 

target the same safety-net population. 33 The significant overlap in prescription eligibility makes 

discount errors likely, and HRSA's audits found duplicate discounts to be quite common. 

Further, 3408 discounts are often determined retrospectively, which can also increase the rate of 

discount errors. At least 23 percent of 3408-covered entities audited had duplicate discount 

errors each year, as shown above in Figure I. 

In 2013, HRSA created the 3408 Medicaid Exclusion File (MEF) as a strategy to prevent 

duplicate discounts for drugs subject to both Medicaid rebates and 3408 prices for Fee-For31 Duplicate discounts, diversion, and incorrect reporting will be discussed later in this section. 32 Public Health Service Act, 42 U.S.C. 256b(a)(5)(A)(i). 33 Jason Hardaway, 340B Program Puts Manufacturers At Risk qf Duplicate Drug Discounts, 41 PHARMACY AND 

THERAPEUTICS l. 38 (2016). 
91 


26929.043

Majority Memorandum for July 18,2017, Subcommittee on Oversight and Investigations Hearing 

Page 10 

Service claims. 34 The MEF is a list of Medicaid provider number or national provider numbers 

(NPI) of each entity that has agreed to purchase all drugs billed to Medicaid through the 340B 

program. The MEF is intended to prevent duplicate discounts by notifying states and 

manufacturers which drugs are not eligible for Medicaid rebates. This measure counts on the 

integrity and continued participation of covered entities to disclose accurate and current 

information. 

HRSA lacks a centralized mechanism similar to the MEF to prevent duplicate discounts 

for Medicaid Managed Care Organizations (MCOs).35 This is a significant problem because an 

increasing number of Medicaid programs rely on Managed Care. In 2014,76 percent of 

Medicaid enrollees were in some type of managed care. 36 The HHS OIG released a report in 

June 2016, finding that duplicate discounts are a severe issue for Medicaid MCOs. The data that 

most states collect for MCO drugs is not granular enough to detect all individual drug claims. 

Many states still used the MEF for MCO drugs, despite HRSA's guidance to develop alternate 

strategies, since the MEF only works for Fee-For-Service drugs. Duplicate discounts for MCOs 

participating in the Medicaid Drug Rebate Program is a relatively new problem. Prior to the 

PPACA, only Medicaid Fee-For-Service (FFS) claims were eligible for rebates. Unfortunately, 

the PP ACA did not anticipate the issues involved with reconciling duplicate discounts for 

MCOs, which notoriously under-report Medicaid data to the states. 

d. Diversion 

HRSA prohibits the resale or transfer of 340B drugs to ineligible patients, known as 

diversion. Only individuals who are patients of 340B-covered entities are eligible for drug 

pricing discounts. 37 To be considered a patient of a covered entity, the individual must maintain 

his or her records with the covered entity, and receive health care services from providers 

employed by the covered entity. 38 

In FY 2012, FY 2015, and FY 2016, close to half ofHRSA's audited entities diverted 

benefits to ineligible patients- 31 percent of covered entities in FY 2012, 47 percent of covered 

entities in FY 2015, and 44 percent of covered entities in FY 2016 were found to have diverted 

drugs. Diversion violations reached a 54 percent high in FY 2014 and FY 2015, when over 50 

audited entities offered drug pricing benefits to ineligible patients. 

34 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, 3408 Drug Pricing 

Program Notice: Clarification on use of the Medicaid E'clusion File, Release No. 2014-1,3 (Dec. 2014). 35 3408 Drug Pricing Program Omnibus Guidance, 80 Fed. Reg. 52300,52309 (Aug. 2015); See Office oflnspector 

General, U.S. Dcp't of Health and Human Services, State Efforts to T'.Xclude 340B Drugs from Medicaid Managed 

Care Rebates, OEI-05-14-00430 (June 2016). 36 Medicaid fvfanaged Care Enrollment and Program Characteristics, 2014, Centers for Medicare and Medicaid 

Services, available at https://www.medicaid.gov/medicaid-chip-program-informationlby-topics/data-andsystems/medicaid-managed-care/ downloads/20 14 -medicaid-managed -care-enrollment -report. pdf. 37 There is one exception: individuals registered in state-operated or funded AIDS Drug Assistance Program who 

are automatically eligible for 340B benefits. See 340B Prime Vender Program, Patient Definition, available at 

https://www.340bpvp.com/resource-center/faqs/patient-definition/. 

38 See Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and Entity Eligibility, 61 Fed. 

Reg. 207 (Oct. 24, 1996). 
92 


26929.044

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 11 

The lack of a clear definition of "patient" sheds light on the high number of covered 

entities who committed diversion violations. HRSA's definition of"patient" has been criticized 

widely for its vagueness. The HHS OIG has stated that "[there is] a lack of clarity on how 

HRSA 's patient definition should be applied in contract pharmacy arrangements." 39 The GAO 

has also offered criticism, explaining that "HRSA's current guidance on the definition of a 3408 

patient is sometimes not specific enough to define the situations under which an individual is 

considered a patient of a covered entity for the purposes of 3408. "40 

To identify which 3408-eligible patients received prescriptions, contract pharmacies41 

often match information from the 3408 providers, such as patient and prescriber lists, to their 

dispensing data. In its 2014 report, HHS OIG found wide variation in these eligibility 

determinations. Depending on the interpretation ofHRSA's patient definition, some 3408 

provider eligibility determinations would be considered diversion and others would not.42 

c. Incorrect Reporting 

The administration of the 3408 program depends on accurate database information. 

HRSA audits reveal that many covered entities arc not fulfilling their obligations of maintaining 

current database information. With the exception ofFY 2012, at least half of the audited entities 

kept incorrect records all other years, as shown above in Figure 1. The audits show that many 

times, records include clinic locations or outpatient facilities that are no longer in service. 

Another common error is that entities include unauthorized facilities in their database. 

HHS OIG investigators have warned that incorrect reporting is one way to hide 

intentional abuses of government programs. Entities seeking reimbursement from Medicaid and 

Medicare sometimes practice poor bookkeeping to prevent auditors from noticing trends and 

practices that may alert the auditor to wrongdoing. As a result, it is imperative for program 

integrity that the covered entities be required to keep detailed records. 

f. Unclear Program Requirements and Lack of Transparency Hamper HRSA's 

Oversight Capabilities 

In addition to significant growth, unclear program requirements and lack of transparency 

surrounding the program hamper HRSA's ability to conduct sufficient oversight. According to 

a committee report from the time the authorizing legislation was passed, the purpose of the 

3408 program is to "stretch scarce federal resources as far as possible, reaching more eligible 

patients and providing more comprehensive services."43 However, neither the 3408 statute nor 

39 Office of Inspector General, U.S. Dep't of Health and Human Services, Memorandum report: Contract 

Pharmacy Arrangements in the 3408 Program, OEI-05-13-00431 (Feb. 2014). 40 Government Accountability Office, Manufacturer Discounts in the 3408 Program Offer Benefits, but Federal 

Oversight Needs Improvement, GAO 11-836 (Sep. 2011). 41 Covered entities may contract with pharmacies to dispense drugs purchased through the program on their behalf 

Such pharmacies are referred to as contract pharmacies. 42 Office of Inspector General, U.S. Dcp't of Health and Human Services, Memorandum report: Contract 

Pharmacy Arrangements in the 3408 Program, OEI-05-13-00431 (Feb. 2014). 43 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, 3408 Drug Pricing 

Program, available at https:llwww.hrsa.gov/opal. 
93 


26929.045

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 12 

HRSA guidance explain how 3408 providers must use savings from the program. Notably, 

there is no requirement that the discounted 3408 price be passed on to uninsured patients who 

seek treatment at 3408 entities. As a result, the 3408 entity will acquire the drug at a 

discounted price, but the uninsured patient may pay the full list price for the drug. While some 

3408 entities pass savings on to uninsured patients, many use savings from the 3408 program to 

pay for the operations of the covered entity, such as marketing. 

In 20 II, GAO issued a report on the savings generated by covered entities through the 

program.44 While covered entities reported that 3408 savings were used to expand access and 

services, GAO told Committee staff that all but one entity audited was unable to tell GAO the 

exact number of funds generated from the 3408 program and how 3408 funds were used. HRSA 

does not require covered entities to report the amount of funds generated from the 3408 

program, or how the entity spends those funds. 

Further, there is little transparency surrounding the ceiling prices set by manufacturers in 

accordance with a statutory formula. Consistent with an HHS OIG recommendation, the ACA 

mandated that HRSA share ceiling prices with covered entities through a secure website. HRSA 

has since testified that it was unable to do so due to a lack of resources, but would undertake that 

project in 2015. However, covered entities still do not have access to that data. Without that 

data, covered entities are unable to ensure they are paying an appropriate price for 3408 drugs. 

While HRSA has authority to establish a mechanism to share ceiling prices with 3408 providers, 

HRSA does not have the authority to share ceiling prices with the states in order to enable state 

Medicaid agencies to ensure that they too are paying appropriate prices. 

g. HRSA's Authority is Limited 

HRSA has limited authority to regulate and enforce requirements for the 3408 program. 

The three areas in which HRSA has explicit regulatory authority are calculation of 3408 drug 

ceiling prices, imposition of manufacturer CMPs, and implementation of a dispute resolution 

process. As described above, lack of clarity on program requirements creates confusion as to 

what constitutes compliance, and further, HRSA lacks the authority to issue regulations 

clarifying those requirements. 

In 2014, HRSA was preparing an omnibus regulation, which the agency said would have 

addressed a wide range of policy issues related to the program, including the definition of an 

eligible patient, compliance requirements for contract pharmacy arrangements, hospital 

eligibility criteria, and eligibility of off-site facilities. However, before the omnibus 3408 

regulation was released, HRSA found itself in litigation over a separate orphan drug 

regulation.45 In May 2014, a ruling by the United States District Court for the District of 

44 Government Accountability Office, Manufacturer Discounts in the 3408 Program Offer Benefits, but Federal 

Oversight Needs Improvement, GAO 11-836 (Sep. 2011). 45 The orphan drug rule HRSA issued allowed 340B covered entities affected by the orphan drug exclusion (critical 

access hospitals, freestanding cancer hospitals, sole community hospitals and rural referral centers) to purchase 

orphan drugs at 340B prices when orphan drugs are used for any indication other than treating the rare disease or 

condition for which the drug received an orphan designation. 
94 


26929.046

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 13 

Columbia vacated HRSA's orphan drug regulation in the 3408 program on the grounds that 

HRSA lacks the statutory authority to engage in that form of rulemaking. 46 

In June 2014, HHS/HRSA announced it continued to stand by its interpretation described 

in its published final rule, and in July, HRSA issued an interpretive guidance pertaining to the 

statutory requirement for inclusion of drugs with orphan drug designations in the 3408 drug 

pricing program.47 These agency actions were met with further litigation. In November 2014, 

with the ongoing litigation on the orphan drug regulation, HRSA withdrew its omnibus 340B 

regulation. The District Court's ruling vacating the regulation was affirmed in October 2015, 

and hampers HRSA's ability to issue regulations and to enforce provisions of the 340B program. 

After HRSA withdrew its omnibus regulation, it subsequently released its proposed 

340B Drug Pricing Program Omnibus Guidance, commonly referred to as the "Mega-Guidance" 

in August 2015.48 However, HRSA withdrew the Mega-Guidance on January 30,2017, shortly 

after the Trump Administration issued a regulatory freeze requiring agencies to retract any 

regulations currently under review. 

In light of these issues, the Committee hopes to explore the challenges HRSA faces in 

conducting oversight of the 340B program, and the impact of the program on patients, providers, 

manufacturers, and other stakeholders. 

IV. ISSUES 

The following issues may be examined at the hearing: 

• How has HRSA's oversight changed to reflect the growth of the 340B program in recent 

years? 

• How effective is HRSA's oversight in detecting and resolving non-compliance with 

340B program regulations? 

• Does HRSA currently have the regulatory authority it needs to successfully oversee the 

3408 program? 

• How has the 3408 program affected patient care? 

46 Pharmaceutical Research and Manufacturers of America v. United States Department ofHea/th and Human 

Services, Civil Action No. 2013-1501 (D.C. 2014). 47 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, Program 

Requirements, available at http://www.hrsa.gov/opa/programrequirements/intcrpretiverule/. 48 Health Resources and Services Administration, U.S. Dep't of Health and Human Services, 340B Drug Pricing 

Program Omnibus Guidance, available at https://www.federalregister.gov/documents/2015/08/28/2015-

21246/340b-drug-pricing-program-omnibus-guidance. 
95 


26929.047

Majority Memorandum for July 18, 2017, Subcommittee on Oversight and Investigations Hearing 

Page 14 

V. STAFF CONTACTS 

If you have any questions regarding this hearing, please contact Brighton Haslett or 

Brittany Havens of the Committee staff at (202) 225-2927. 
96 


26929.048

GREG WALDEN, OREGON 

CHAIRMAN 

ONE HUNDRED FIFTEENTH CONGRESS 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

C!Congre£i£i of tbe llniteb ~tate!i 

~oust of l\epresentatibes 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN HousE OFFICE BuiLDING 

WASHINGTON, DC 20515-6115 Majority !202\225-2927 

Minority{202)225-3641 

August4, 2017 

Captain Krista M. Pedley 

Director, Office of Pharmacy Affairs 

Health Resources and Services Administration 

U.S. Department of Health and Human Services 

5600 Fishers Lane 

Rockville, MD 20857 

Dear Captain Pedley: 

Thank you for appearing before the Subcommittee on Oversight and Investigations on 

Wednesday, July 18, 2017, to testify at the hearing entitled "Examining HRSA's Oversight of the 3408 

Drug Pricing Program," 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be a~ follows:(!) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on Friday, August 18,2017. Your responses should be mailed to 

Ali Fulling, Legislative Clerk, Commiuee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word fonuat to /\li.Fullingfclhnai!.house.zov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

Sincerely, 

~~- Tim :,:u;~h\J (J Chairman 

Subcommittee on Oversight and Investigations 

cc: The Honorable Diana DeGette, Ranking Member, Subcommittee on Oversight and Investigations 

Attachment 
97 


26929.049

House Energy and Commerce Committee 

Subcommittee on Oversight and Investigations 

Hearing entitled, "Examining HRSA's Oversight of the 340B Drug Pricing Program" 

Questions for the Record 

September 26,2017 

The Honorable Tim Murphy 

1. HRSA testified at our .July hearing that one of the biggest issues it faces in 

administering and overseeing the 340B program is the vague definition of patient. In 

fact, GAO recommended in 2011 that HRSA clarify the definition of a 340B patient, 

and that recommendation currently remains open. Captain Pedley described HRSA's 

attempts to tighten the definition of patient, one of the more recent attempts being the 

August 2015 omnibus guidance, in which HRSA addressed the ambiguity and tried to 

clarify that definition. HRSA received more than 1,200 comments related to the 

guidance, some of which were related to the definition of "patient." I am interested in 

the comments related to the definition of "patient" and how HRSA has taken those 

comments into consideration. 

a. What were the biggest takeaways from the comments related to the ambiguous 

definition of "patient" and how will those comments affect HRSA's approach to 

clarifying that definition? 

HRSA issued a proposed 340B Omnibus Guidance in August 2015, which addressed key policy 

issues raised by various stakeholders to assist covered entities and manufacturers in their ability 

to satisfy 340B Program requirements and expectations, including the definition of a patient. 

The proposed guidance was open for review and public comment in the Federal Register. 1 

Regarding the specific comments HRSA received on the definition of a patient, manufacturers 

generally supported the revised patient definition. Manufacturer groups also recommended that 

HRSA limit the term "patient" to the indigent, or those individuals lacking commercial or 

governmental insurance, or to those who otherwise have no outpatient drug coverage. 

Covered entity commenters had concerns about HRSA's authority to define the term patient, that 

the proposed definition was more restrictive than the 1996 patient definition guidance, and that 

many of those served by covered entities would no longer qualify as patients. The covered 

entities also expressed that a "one-size-fits-all" approach to the patient definition did not 

recognize the unique statutorily mandated structure and goals of certain categories of covered 

entities. All comments on the 2015 proposed Omnibus Guidance can be found on 

regulations.gov at 

https://www.regulations.gov/docketBrowser?rpp=50&so=DESC&sb=postedDate&po=O&dct=P 

S&D=HRSA-20 15-0002. 

b. Were there any notable trends that HRSA saw in the comments related to the 

definition of "patient" and program compliance, such as the issue of drug diversion, 

that will affect HRSA's work going forward? 

1 80 FR 52300 (August 28, 2015) 
98 


26929.050

The comments in the proposed 2015 Omnibus Guidance related to the definition of patient 

varied; there were no clear trends. HHS is working to determine next steps to address the policy 

issues included in the proposed Omnibus Guidance, which will inform our efforts to improve 

program compliance, including with regard to preventing drug diversion. 

2. HRSA also testified at our July hearing that it tracked information regarding the 

growth rate for new child sites compared to new covered entities. On July 17, URSA's 

website listed a total of 41,132 registered entities. As of August 4, URSA's website lists 

42,217 total registered entities-an increase of 1,085 registered entities since the 

hearing. 

a. How many of the 1,085 new registered entities are unique covered entities and how 

many are child-sites? 

Currently, HRSA only designates hospital outpatient facilities and health center (and health 

center look-alikes) service delivery sites as child sites. All other registrations are considered 

parent sites. During the April2017 registration period (with a start date of July 1), there were 37 

new parent sites and I, 144 new associated/child sites registered under the Program. As of July I, 

2017, 12,470 covered entities and 28,276 associated/child sites participate in the 3408 Program 

for a total of 40,746 registered sites. HRSA tracks this information on a quarterly basis and 

utilizes information from the previous quarter for our analysis. 

b. Overall, is HRSA seeing a faster growth rate for new covered entities or new childsites? 

Since 20 I 0, HRSA has continued to see an increase in both the number of parent and child sites 

for hospital outpatient facilities and health center sub-grantees, which are deemed child sites in 

the 3408 database. This is due to a variety of factors, including the five new eligible hospital 

types that were added to the 3408 statute in 20 I 0, which increased the total number of hospitals 

eligible to participate in the program. In addition, for purposes of transparency, HRSA also 

instituted a new reporting policy in 2012 that required all hospital outpatient services and clinics 

that use the 3408 Program to be listed on the HRSA database. That effort led to a large increase 

in the number of hospital sites that appeared on the 3408 database. Many of those sites had been 

participating for years, but had not previously been required to register individually. The chart 

below provides additional information about the growth of 3408 parent versus child site 

participants for hospitals and health centers. 

340B Parent vs. Child Site Participants for Hospitals and 

Health Centers 

Date Total Number of I Number of Parent I Number of Child 

Participating Sites Sites for Hospitals, Sites for Hospitals, 

Health Centers, Health Centers, 
99 


26929.051

and Health Center and Health Center 

Look- Alikes Look- Alikes 

July 2010 14,725 2,063 5,064 

July 2011 16,572 2,744 6,135 

July 2012 18,561 2,947 7,990 

July 2013 22,641 3,190 11,791 * 

July 2014 26,870 3,318 15,408 

July 2015 32,071 3,431 20,233 

July 2016 36,914 3,609 24,843 

July 2017 40,746 3,726 28,276 

Source: Internal Analysis ofHRSA 3408 Database 

*In 2012, HRSA instituted a new reporting policy that required all hospital 

outpatient services and clinics that use the 3408 Program to be listed on the 

HRSA database. 

The Honorable Michael C. Burgess 

1. HRSA has taken specific steps to addressing duplicate discounts by creating the 

Medicaid Exclusion File (MEF), which providers can use to prevent duplicate discounts 

in Medicaid fee-for-service. Has HRSA undertaken any efforts to creating a similar 

MEF for Medicaid Managed Care? 

In December 2014, HRSA clarified that the current mechanism in place to prevent duplicate 

discounts, the Medicaid Exclusion File (MEF), was specific to Medicaid fee-for-service. HRSA 

recognizes the need to address covered entities' role in preventing duplicate discounts under 

Medicaid managed care. HRSA addressed this issue in its 2015 proposed Omnibus Guidance 

and is working to determine future policy in this area. In the meantime, HRSA is aware that 

some covered entities are working with managed care organizations (MCOs) and state partners 

to develop models for the prevention of duplicate discounts. HRSA encourages 3408 covered 

entities to work with their states to develop strategies to prevent duplicate discounts on drugs 

reimbursed through MCOs. In addition, HRSA is working closely with the Centers for Medicare 

& Medicaid Services and other stakeholders to develop possible policy and technical solutions 

for how covered entities and states can prevent duplicate discounts for 3408 drugs dispensed to 

MCO patients. 

2. Upon delaying HRSA's most recent 340B rule, "340B Drug Pricing Program Ceiling 

Price and Manufacturer Civil Monetary Penalties and Regulations", the agency 

acknowledged that a delay of the rule was warranted because: 

"objections regarding the timing and challenges of compliance with the [Final Rule] ... as 

well as other objections to the [Final Rule], may not have been adequately considered" such 

that HRSA should "engage in longer rulemaking" to "adequately consider" stakeholder 

comments, "consider questions of fact, law, and policy," "consider the regulatory burdens 

that may be posed," and "ensnre that ... the implementation of this rule ... is coordinated 

with and takes into consideration overaii340B J>rogram implementation." 
100 


26929.052

a. However, HRSA has not undertaken any apparent efforts to re-examine these 

substantive considerations. What is HRSA's plan to ensure that these 

considerations are reexamined? 

To provide affected parties with sufficient time to make needed changes to facilitate compliance, 

on May 19, 2017, HRSA issued a final rule, which delayed the effective date until October I, 

2017. 2 HRSA recently proposed a further delay of the final rule's effective date to July 1, 2018, 

to allow a more deliberate process of considering alternative and supplemental regulatory 

provisions and to allow for sufficient time for additional rulemaking. 3 

The Honorable Frank Pallone, Jr. 

1. The 340B program is a critical component of the safety net. 340B drug discounts allow 

covered entities-such as community health centers, safety net hospitals, state and local 

health departments, family planning clinics, and AIDS drug assistance programs-to 

maximize scarce resources and provide comprehensive health services to vulnerable 

patients. 

a. Can you describe the types of comprehensive services that 340B covered entities 

provide? 

There are many types of 340B covered entities that provide different services, though the 340B 

statute itself does not address the types of services that eligible entities provide. For example, 

HRSA's Health Center Program grantees provide comprehensive primary healthcare services. 

Health centers also often integrate access to pharmacy, mental health, substance abuse, and oral 

health services in areas where economic, geographic, or cultural barriers limit access to 

affordable healthcare services. As another example, HRSA's AIDS Drug Assistance Program 

(ADAP) grants provide medications to low-income people living with HIV who have limited or 

no health insurance coverage. ADAP funds may also be used to purchase health insurance for 

eligible clients and for services that enhance access to, adherence to, and monitoring of drug 

treatments. 

2. Hospitals, clinics, and other 340B covered entities rely on this program to provide 

essential healthcare services to needy populations. For the 340B program to function as 

intended, however, we must guarantee an appropriate amount of transparency and 

adequate oversight of both manufacturers and program participants. One such need 

for transparency relates to the 340B ceiling price that manufacturers charge covered 

entities. The Affordable Care Act (ACA) required HHS to share ceiling prices with 

covered entities, which would allow entities to ensure they are receiving the appropriate 

price for 340B drugs. HRSA has proposed a web-based system that would allow 

covered entities to view the 340B ceiling prices. 

a. What is the status of this system, and when will it be available for covered entities to 

access 340B ceiling prices? 

2 82 FR 22893 (May 21, 2017) 3 82 FR 39553 (Aug. 21, 2017) 
101 


26929.053

Section 340B(d)(l)(B) of the Public Health Service Act requires HRSA to collect information 

from manufacturers to verify the accuracy of 340B ceiling prices, and then make ceiling prices 

available to covered entities. With prices for over 40,000 national drug codes, building such a 

system is extremely complex. Due to the proprietary nature of the pricing data, it is important to 

ensure that appropriate security safeguards are instituted. 

In the process of developing the pricing system, HRSA sought to modernize the registration 

system database to enhance its functionality and security for both manufacturers and covered 

entities since the pricing system will interface with the data that is collected through registration. 

The new system, known as the 340B Office of Pharmacy Affairs Information System (340B 

OP AIS) will function as one system, and it will have two separate components-a new covered 

entity registration system and the new secure pricing system. 

The new system will be released in a phased approach, beginning with the registration system in 

mid-September 2017. The pricing component of the new 340B OPAlS will be released at a later 

date. 

3. The Government Accountability Office's (GAO) 2011 report (GA0-11-836) notes that 

the ACA established several important program integrity provisions for the 340B 

Program, and recommended that HRSA take additional steps to improve oversight of 

the program. In particular, GAO recommended that HRSA conduct selective audits of 

340B covered entities for program compliance. 

a. How many audits has HRSA conducted to date, and how have these audits been 

effective in improving program integrity? 

Since FY 2012, HRSA has completed 844 audits (as of July 28, 2017), which included review of 

II ,281 outpatient facilities and 18,851 contract pharmacies. This includes 200 audits that HRSA 

conducted in FY 2017. HRSA has also taken steps to use audit results to create tools and 

resources to assist 340B participants in program compliance. 
102 


26929.054

GREG WALDEN, OREGON 

CHAIRMAN 

Ms. Erin Bliss 

ONE HUNDRED FIFTEENTH CONGRESS 

FRANK PALLONE, JR., NEW JERSEY 

RANKING MEMBER 

QJ:ongre9'9' of tbe W:niteb $tate9' 

j!.)ou!.le ot 1\epre!.lentatil.:le!.l 

COMMITTEE ON ENERGY AND COMMERCE 

2125 RAYBURN House OFFICE BuiLDING 

WASHINGTON, DC 20515--6115 (202) 225-2927 

(202)225-3641 

August 4, 2017 

Assistant Inspector General 

Office of Evaluation and Inspections, Office of Inspector General 

U.S. Department of Health and Human Services 

330 Independence Avenue, S.W. 

Washington, DC 2020 I 

Dear Ms. Bliss: 

Thank you for appearing before the Subcommittee on Oversight and Investigations on 

Wednesday, July 18, 2017, to testify at the bearing entitled "Examining HRSA's Oversight ofthe 3408 

Drug Pricing Program." 

Pursuant to the Rules of the Committee on Energy and Commerce, the hearing record remains 

open for ten business days to permit Members to submit additional questions for the record, which are 

attached. The format of your responses to these questions should be as follows: (1) the name of the 

Member whose question you are addressing, (2) the complete text of the question you are addressing in 

bold, and (3) your answer to that question in plain text. 

To facilitate the printing of the hearing record, please respond to these questions with a 

transmittal letter by the close of business on Friday, August 18, 2017. Your responses should be mailed to 

Ali Fulling, Legislative Clerk, Committee on Energy and Commerce, 2125 Rayburn House Office 

Building, Washington, DC 20515 and e-mailed in Word format to Ali.Fulling{(ilmail.house.gov. 

Thank you again for your time and effort preparing and delivering testimony before the 

Subcommittee. 

~·~ Tim Murphy 

Chairman 

Subcommittee on Oversight and Investigations 

cc: The Honorable Diana DeGette, Ranking Member, Subcommittee on Oversight and Investigations 

Attachment 
103 


26929.055

DEPARTMENT OF HEALTH AND HUMAN SERVICES 

OFFICE OF INSPECTOR GENERAL 

WASHINGTO~, OC 20201 

The Honorable Tim Murphy 

Chairman 

AUG 17 2017 

Subcommittee on Oversight and Investigations 

Committee on Energy and Commerce 

United States House of Representatives 

Washington, DC 20515 

Dear Chairman Murphy: 

I am writing in response to questions for the record from Congressman Michael C. Burgess 

following my testimony before the Subcommittee on Oversight and Investigations on July 18, 

2017, at the hearing entitled "Examining HRSA's Oversight of the 340B Drug Pricing Program." 

If you have any questions, please contact me, or your staff may contact Jason Wittemen, 

Director of Congressional Affairs, at (202) 708-9755 or Jason.Wittemen@oig.hhs.gov. 

Sincerely, 

' E~{6h-15Q--

Erin Bliss 

Assistant Inspector General 

for Evaluation and Inspections 

Enclosure 

cc: 

The Honorable Diana DeGette 

Ranking Member, Subcommittee on Oversight and Investigations 
104 

Æ 


26929.056

Enclosure: Question for the Record 

The Honorable Michael C. Burgess 

1. The Office of Inspector General found in its report "State Efforts to Exclude 340B Drugs 

from Medicaid Managed Care Rebates" that states can support efforts to prevent duplicate 

discounts from Medicaid Managed Care in the program through examining claims and 

exercising their own respective oversight of the program. The uptake, however, in this 

oversight has varied across the country. What incentives, if any, exist that would encourage 

states to exercise oversight of the program? 

Office of Inspector General Response: 

States have a couple of existing incentives to ensure that they can accurately identif'y 340B 

claims - an essential step in effectively preventing duplicate discounts for drugs paid by both 

fee-for-service Medicaid and Medicaid managed care organizations (MCOs). As we note in our 

June 2016 report, if States' methods for identifYing 340B claims are inaccurate, they risk 

forgoing rebates to which they are entitled -resulting in States essentially overpaying for drugs. 1 

In addition, the findings of our August 2014 report reveal that Medicaid drug rebate disputes 

between States and manufacturers often relate to concerns about 340B-purchased drugs and 

potential duplicate discounts.2 Accordingly, States have an incentive to accurately identif'y and 

exclude 340B claims in order to avoid such disputes, which can lead to inefficient use of State 

resources and jeopardize rebate payments from manufacturers. 

1 OIG, State Efforts to Exclude 3408 Drugs from Medicaid Managed Care Rebates, OEI-05-14-00430, June 2016. 2 O!G, Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-11-00580, August 2014.