Drug Discount Program: Status of GAO Recommendations to Improve 340B Drug Pricing Program Oversight
Published: 2015-03-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to eligible hospitals, clinics, and other entities—commonly referred to as covered entities—in order to have their drugs covered by Medicaid. HRSA, an agency within the Department of Health and Human Services, is responsible for administering and overseeing the 340B Program. In recent years, questions have been raised regarding HRSA's oversight of the program, particularly given growth in the program since its inception in 1992. According to HRSA officials, as of 2015, more than 11,000 covered entities were participating in the 340B Program—an increase of approximately 30 percent since 2008.
In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B Program and made recommendations to improve program oversight and ensure appropriate use of the program. This testimony describes (1) inadequacies in 340B Program oversight that GAO previously identified, and (2) progress HRSA has made implementing GAO's recommendations to improve program oversight.
This testimony is based largely on GAO's September 2011 report. For this testimony, GAO also obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement GAO's 2011 recommendations.
section_title: What GAO Found
paragraphs: In its September 2011 report, GAO found that the Health Resources and Services Administration's (HRSA) oversight of the 340B Program was inadequate to provide reasonable assurance that program participants—covered entities and drug manufacturers—were in compliance with program requirements. Specifically, GAO found the program
lacked guidance on key requirements with the level of specificity necessary to provide clear direction, making self-policing difficult, and raising concerns that the guidance could be interpreted in ways that were inconsistent with its intent. In particular, GAO found HRSA's guidance lacked needed specificity on the definition of a patient eligible for drugs discounted under the program, criteria hospitals not publicly owned or operated needed to meet to qualify for the program, and nondiscrimination guidance manufacturers needed to follow to ensure drugs were distributed equitably to both covered entities and non-340B providers.
had increasingly been used in settings, such as hospitals, where the risk of diverting 340B drugs to ineligible patients was greater, because these settings were more likely to serve such patients.
To address these oversight inadequacies and to ensure appropriate use of the program, GAO recommended HRSA (1) conduct selective audits of covered entities to deter potential diversion; (2) further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers' plans to restrict distribution of drugs at 340B prices; (3) finalize new, more specific guidance on the definition of a patient eligible to receive discounted drugs; and (4) issue guidance to further specify the criteria that hospitals not publicly owned or operated must meet to be eligible for the 340B Program.
In fiscal year 2012, HRSA implemented two of GAO's four 2011 recommendations. Specifically, the agency implemented a systematic approach to conducting audits of covered entities and issued updated nondiscrimination guidance. With regard to the other two recommendations, HRSA planned to address the definition of a patient and hospital eligibility criteria in a comprehensive 340B Program regulation it submitted to the Office of Management and Budget in April 2014. However, HRSA withdrew this proposal following a May 2014 federal district court ruling addressing HRSA's statutory authority to issue a separate 340B regulation, which found that HRSA's rulemaking authority for the 340B Program is limited to specified areas. HRSA reported that after assessing this ruling, it plans to issue proposed guidelines later this year to address 340B Program areas where it does not have explicit rulemaking authority, including the definition of a patient and hospital eligibility.

section_title: Letter
paragraphs: I am pleased to be here today as you examine the 340B Drug Pricing  Program (340B 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. 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 340B 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.oversight of the 340B Program, particularly given growth in the program  over time. According to HRSA officials, as of 2015 more than 11,000  covered entities were participating in the 340B Program—an increase of  approximately 30 percent since 2008. According to the most recent  estimate available from HRSA, covered entities’ spending on 340B drug  purchases was estimated to be approximately $7.5 billion in 2013.
In recent years, questions have been raised regarding HRSA’s  Participation in the 340B Program is voluntary for both covered entities  and drug manufacturers, but there are strong incentives to participate.  Covered entities can realize substantial savings through 340B price  discounts—an estimated 20 to 50 percent of the costs of the drugs,  according to HRSA. In addition, covered entities can generate 340B  revenue. For example, they can purchase drugs at 340B prices for all  eligible patients regardless of the patients’ income or insurance status  and generate revenue that may exceed the 340B price paid for the drugs,  such as through a patient’s insurance reimbursement. Because they must  participate in the 340B Program to receive Medicaid reimbursement for  their drugs, incentives for participation by drug manufacturers also are  strong. According to HRSA, most manufacturers that produce outpatient  drugs have participated in the program since its inception.
HRSA requires program participants to meet certain conditions set forth  both in law and agency guidance. For example, under the PHSA, covered  entities are prohibited from diverting 340B drugs—that is transferring  340B drugs to individuals who are not eligible patients of the entities.  Similarly, to help ensure covered entities receive the discounts they are  entitled to, HRSA has issued guidance prohibiting drug manufacturers  from distributing drugs in ways that would discriminate against covered  entities compared to non-340B health care providers (referred to as  HRSA’s nondiscrimination guidance throughout this statement), such as  by imposing minimum purchase requirements or other restrictive  conditions.
In a September 2011 report, we identified inadequacies in HRSA’s  oversight of this program and recommended actions that should be taken  to improve program oversight and ensure appropriate use of the  program. My statement today will describe (1) inadequacies in 340B  Program oversight that GAO previously identified and (2) progress HRSA  has made implementing our recommendations to improve program  oversight. This statement is based largely on GAO’s 2011 report. More  detailed information on the related objectives, scope, and methodology  can be found in that report. For this statement, we also obtained  information and documentation from HRSA officials about any significant  program updates, and steps they have taken to implement our 2011  recommendations.
We conducted our 2011 work from September 2010 to September 2011,  and updated this work in February and March 2015. 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.
subsections: section_title: Background
paragraphs: The 340B Program was created following the enactment of the Medicaid  Drug Rebate Program and gives 340B covered entities discounts on  outpatient drugs comparable to those made available to state Medicaid  agencies. HRSA is responsible for administering and overseeing the  340B Program, which, according to federal internal control standards,  includes designing and implementing necessary policies and procedures  to enforce agency objectives and assess program risk. These policies  and procedures should include internal controls that provide reasonable  assurance that an agency has effective and efficient operations, and that  program participants are in compliance with applicable laws and  regulations.
subsections: section_title: Program Participants
paragraphs: Eligibility for the 340B Program is defined in the PHSA. 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 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). To become a covered entity  and participate in the program, eligible entities must register with HRSA  and be approved.
Hospital eligibility for the 340B Program has more requirements  compared to the requirements for federal grantees. Specifically, 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. 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.
Additionally, they must be (1) owned or operated by a state or  All drug manufacturers that supply outpatient drugs are eligible to  participate in the 340B 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.
section_title: Program Structure, Operation, and Key Program Requirements
paragraphs: Critical access hospitals are exempt from this requirement. were allowed to contract with a single outside pharmacy to dispense  drugs on their behalf. In 2010, however, HRSA issued guidance allowing  all covered entities to contract with multiple outside pharmacies.
See Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and  Entity Eligibility, 61 Fed. Reg. 55156 (Oct. 24, 1996).
section_title: GAO Previously Found Inadequacies in HRSA’s Oversight of the 340B Program and Made Recommendations for Improvement
paragraphs: In our September 2011 report, we found that HRSA’s oversight of the  340B Program was inadequate because it relied primarily on self-policing  by program participants and because HRSA’s guidance on key program  requirements lacked the necessary level of specificity to provide clear   We also found that changes in the settings  direction for participants.where the 340B Program was used resulted in heightened concerns  about HRSA’s inadequate oversight. We made four recommendations to  address these oversight inadequacies and to ensure appropriate use of  the program.
subsections: section_title: Reliance on Self-Policing
paragraphs: In its oversight of the 340B Program, we found in 2011 that HRSA  primarily relied on covered entities and manufacturers to police  themselves and ensure their own compliance with program requirements.  Upon enrollment into the program, HRSA required participants to self- certify that they would comply with applicable 340B Program  requirements and any accompanying agency guidance. HRSA also  expected participants to develop the procedures necessary to ensure  compliance, maintain auditable records that demonstrated compliance,  and inform HRSA if violations occurred. For example, covered entities  had to develop adequate safeguards to prevent drugs purchased at 340B  prices from being diverted to non-eligible patients, such as by using  inventory tracking systems that separately processed the purchase and  logged the dispensation of 340B drugs. Similarly, manufacturers had to  ensure that they properly calculated the 340B price of their drugs. 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 doing so.
Beyond relying on participants’ self-policing, we found that HRSA  engaged in few activities to oversee the 340B Program and ensure its  integrity, which agency officials said was primarily due to funding  constraints. For example, officials told us that they did not require a  review of the procedures participants put in place to ensure program  compliance. Further, although HRSA had the authority to conduct audits  of program participants to determine whether program violations had  occurred, at the time of our report, the agency had never conducted an  audit.
section_title: Lack of Specificity in Program Guidance
paragraphs: We found that HRSA’s guidance on 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. 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 340B 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 that 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  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 340B Program. For example, one way hospitals can qualify for  the program is 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. 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. 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 340B discounts, which may not  have been what the agency intended.
HRSA’s nondiscrimination guidance was not specific in the practices  that manufacturers should follow to ensure that drugs were equitably  distributed to covered entities and non-340B providers when  distribution was restricted. Some stakeholders we interviewed for  the report, such as covered entities, raised concerns about the way  certain manufacturers interpreted and complied with the guidance in  these cases.
section_title: Changes in Program Settings
paragraphs: In 2011, we also concluded that changes in the settings where the 340B  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 340B Program was used had shifted to more  contract pharmacies and hospitals than in the past. We concluded that  increased use of the 340B 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. According to HRSA  officials, the number of covered entities using contract pharmacies had  grown rapidly after it issued its guidance allowing all covered entities to  use multiple contract pharmacies; as of July 2011 there were more than  7,000 contract pharmacy arrangements in the program. In addition, based  on our own analysis, we found that hospitals’ participation in the 340B  Program had grown from 591 in 2005 to 1,673 in 2011. Further,  although participation in the 340B Program also had increased among  other covered entity types, we found that hospitals’ participation had  grown faster than that of federal grantees. For example, in 2005,  hospitals represented 10 percent of program participants, and as of July  2011, they represented 27 percent.
section_title: Recommendations to Improve Program Oversight
paragraphs: To address these oversight inadequacies and to ensure appropriate use  of the program, we recommended that the Secretary of HHS instruct the  administrator of HRSA to take the following four actions: (1) conduct  selective audits of covered entities to deter potential diversion; (2) further  specify its nondiscrimination guidance for cases in which distribution of  drugs is restricted and require reviews of manufacturers’ plans to restrict  distribution of drugs at 340B prices; (3) finalize new, more specific  guidance on the definition of an eligible patient; and, (4) issue guidance to  further specify the criteria that hospitals that are not publicly owned or  operated must meet to be eligible for the 340B Program.
section_title: HRSA Has Implemented Two of GAO’s Four Recommendations and Reported Plans for Addressing the Other Two
paragraphs: In fiscal year (FY) 2012, HRSA implemented two of the four  recommendations from our 2011 report. Specifically, in response to our  recommendation that HRSA conduct selective audits of 340B covered  entities to deter potential diversion (that is, diversion of 340B drugs to  non-eligible patients), the agency implemented a systematic approach to  conducting audits of covered entities that is outlined on its website. The  FY 2012 audits included 45 covered entities that were randomly selected  and 6 selections targeted based on information from stakeholders, for a  total of 51 audits that encompassed more than 410 outpatient facilities  and 860 contract pharmacy locations.conducted annual audits of covered entities with plans to continue these  annual audits going forward. As a result of the audits already conducted,  HRSA has identified instances of non-compliance with program  requirements, including violations related to drug diversion. The agency  has developed a process to address non-compliance through corrective  action plans. The results of each year’s audits are available on HRSA’s  website.
Since 2012, HRSA has  In response to our recommendation that HRSA further specify its  nondiscrimination guidance for cases in which distribution of drugs is  restricted and require reviews of manufacturers’ plans to restrict  distribution of 340B discounted drugs, HRSA issued updated  nondiscrimination guidance in May of 2012. This guidance outlined  HRSA’s policy for manufacturers who intend to restrict distribution of a  drug and provided additional detail on the type of information  manufacturers should include in their restricted distribution plans.  Additionally, HRSA officials told us that they may require manufacturers  to submit their restricted distribution plans for review if, after  implementation, they receive complaints from covered entities that they  are not able to access the drug at the 340B price.
HRSA had planned to address our remaining two recommendations in a  comprehensive 340B program regulation. Specifically, we had  recommended that HRSA (1) finalize new, more specific guidance on the  definition of a patient and (2) issue guidance to further specify the criteria  that hospitals that are not publicly owned or operated must meet to be  eligible for the 340B Program. HRSA had planned to address both of  these issues in a comprehensive 340B Program regulation that it  submitted to the Office of Management and Budget for review in April  2014. However, HRSA withdrew this proposed comprehensive regulation  in November 2014 following a May 2014 federal district court ruling that  addressed whether HRSA had statutory authority to issue a regulation   After the  concerning the ineligibility of certain drugs for 340B pricing.district court ruled that HRSA lacked statutory rulemaking authority under  the 340B statute except in three specified areas, HRSA officials reported  that they had to assess the impact of the ruling on the proposed  comprehensive regulation. The outcome of this assessment is that HRSA  plans to issue guidelines to address 340B program areas where it does  not have explicit rulemaking authority. HRSA officials said they expect to  publish proposed guidelines later this year and that they will address  areas such as the definition of a patient and hospital eligibility under the  340B program.
Chairman Pitts, Ranking Member Green, and Members of the Committee,  this concludes my statement. I would be pleased to respond to any  questions you may have.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: 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 Gerardine Brennan, Assistant Director; Jennie Apter;  Kelli Jones; Rachel Svoboda; and Jennifer Whitworth.
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