Drug Discount Program: Update on Agency Efforts to Improve 340B Program Oversight
Published: 2017-07-18T00:00:00

Fast Facts:
Under the 340B Drug Pricing Program, if drug manufacturers want Medicaid to cover their drugs, they are required to sell outpatient drugs at discounted prices to covered entities—such as eligible clinics and hospitals.
Our 2011 report found weaknesses in the Health Resources & Services Administration's (HRSA) oversight of the 340B program.
This testimony describes HRSA’s progress in addressing our recommendations: it now audits entities to ensure they comply with program rules, and clarified its guidance on equitable distribution of drugs to 340B entities. Two other recommendations on clarifying eligibility guidance have not been addressed.

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to HRSA, the purpose of the 340B Program, which was created in 1992, is to enable covered entities to stretch scarce federal resources to reach more eligible patients, and provide more comprehensive services. Covered entities can provide 340B drugs to patients regardless of income or insurance status and generate revenue by receiving reimbursement from patients insurance. The program does not specify how this revenue is to be used or whether discounts are to be passed on to patients. The number of participating covered entity sites—currently about 38,000—has almost doubled in the past 5 years and the number of contract pharmacies increased from about 1,300 in 2010 to around 18,700 in 2017. In recent years, questions have been raised regarding oversight of the 340B Program, particularly given the program's growth over time.
In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B program and made recommendations for improvement. This statement describes (1) HRSA actions in response to GAO recommendations to improve its program oversight, and (2) ongoing GAO work regarding the 340B program and HRSA oversight.
For this statement, GAO obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement the 2011 GAO recommendations. More detailed information on the objectives, scope, and methodology can be found in GAO's September 2011 report.
section_title: What GAO Found
paragraphs: The 340B 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 340B drugs to certain eligible patients. Entities dispense 340B 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 340B 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 340B 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 340B 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 340B program requirements at contract pharmacies.

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. In recent years, questions have been raised regarding HRSA’s  oversight of the 340B 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 340B Program—almost double  the number reported just 5 years earlier.
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 cost 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, such as by receiving reimbursement from a  patient’s insurance that may exceed the 340B price paid for the drugs.  The 340B Program does not dictate how covered entities should use  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 340B 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 340B drugs—that is, transferring 340B drugs to  individuals who are not eligible patients of the entities. 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-340B health care providers, 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 oversight and ensure appropriate use of the program. 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. My statement today will describe HRSA  actions in response to GAO recommendations to address (1) weaknesses  in oversight of the 340B program and (2) the lack of clarity in program  guidance. The statement will also (3) describe ongoing GAO work  regarding the 340B program and HRSA oversight.
For this statement, we obtained information and documentation from  HRSA officials about any significant program updates, and steps they  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 2010 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.
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.
subsections: section_title: Program Participants
paragraphs: Eligibility for the 340B 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. 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. Entity participation in the 340B  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).
To be eligible for the 340B 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.  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.
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 Requirements
paragraphs: The 340B price for a drug—often referred to as the 340B ceiling price—is  based on a statutory formula and represents the highest price a  participating drug manufacturer may charge covered entities. Covered  entities must follow certain requirements as a condition of participating in  the 340B 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 340B price and a rebate through  the Medicaid Drug Rebate Program.  covered entities are also prohibited from diverting any drug purchased  at the 340B 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 340B  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 340B price for all  individuals who meet the 340B Program definition of a patient  regardless of whether they are low-income, uninsured, or  underinsured.
A covered entity typically purchases and dispenses 340B 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  allowed each covered entity to contract with only one outside pharmacy.  However, March 2010 guidance lifted the restriction on the number of  pharmacies with which a covered entity could contract. 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 contract 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.
Drug manufacturers also must follow certain 340B 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-340B 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.
section_title: HRSA Has Implemented GAO’s Recommendation to Improve Its Oversight of the 340B Program by Conducting Audits
paragraphs: In our September 2011 report, we found that HRSA’s oversight of the  340B Program was weak because it primarily relied on covered entities  and manufacturers to police themselves and ensure their own compliance  with program requirements. Upon enrollment into the program, HRSA  requires participants to self-certify that they will comply with applicable  340B 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 340B 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  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, and that trend has  continued in recent years. 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.
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  is outlined on its website. 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 (10  percent of the audits conducted). (See table 2 for the number of audits  conducted by HRSA from FY 2012-2017.)
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 non- compliance through corrective action plans. The results of each year’s  audits are available on HRSA’s website.
section_title: HRSA Implemented One of Three GAO Recommendations to Clarify Program Guidance
paragraphs: 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.
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 non- 340B providers when distribution was restricted. 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 340B 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.
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 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 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, 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.  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.
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 340B  program. HRSA agreed with these recommendations and had planned to  address them 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 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 340B program. After this ruling, the agency issued a proposed  omnibus guidance in August 2015 to interpret statutory requirements for  the 340B program in areas where it did not have explicit rulemaking  authority, including further specificity on the definition of a patient of a  covered entity and hospital eligibility for 340B program participation.  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. 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.
section_title: GAO Has Ongoing Work Examining HRSA Oversight of 340B Contract Pharmacies
paragraphs: Given the increase in the number of contract pharmacies in the 340B  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 340B 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 340B drugs, and how, if at all, this  varies by entity type?
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  340B program requirements at contract pharmacies?
We are in the early stages of this work, and we expect to issue a future  report on 340B contract pharmacies.
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.
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  Michelle Rosenberg, Assistant Director; Rotimi Adebonojo, Jennie Apter;  and Amanda Cherrin.
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