Drug Pricing: Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement
Released: 2011-09-23T00:00:00

Letter

Background

The 340B program was created in 1992 following the enactment of the Medicaid Drug Rebate Program and gives certain safety net providers discounts on outpatient drugs comparable to those made available to state Medicaid agencies. HRSA, through its Office of Pharmacy Affairs, is responsible for administering and overseeing the 340B program, which according to federal standards, includes designing and implementing necessary policies and procedures to enforce agency objectives and assess program risk. These policies and procedures 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.

Program Participants

Eligibility for the 340B program is defined in the PHSA. Entities generally become eligible by receiving one of 10 federal grants or by being one of six hospital types. (See appendix II for a complete list of covered entity types and their eligibility requirements.) To participate in the 340B program, eligible entities must register with HRSA and be approved. Entity participation in the 340B program has grown over time to include over 16,500 covered entity sites (see fig. 1).

Federal grantees are eligible for the 340B program by virtue of receiving certain federal grants administered by different agencies within HHS. Eligible grantees include clinics that offer primary and preventive care services, such as FQHCs, family planning clinics, and clinics that target specific conditions or diseases that raise public health concerns or are expensive to treat, such as hemophilia treatment centers. Participating clinics may offer eligible services at one or multiple sites. They also include state-operated ADAPs, which serve as a “payer of last resort” to cover the cost of providing HIV-related medications to certain low-income individuals.

Hospitals eligible for the 340B program include certain DSH hospitals, children’s hospitals, freestanding cancer hospitals, rural referral centers, sole community hospitals, and critical access hospitals. While DSH hospitals have been eligible for the program since its inception, children’s hospitals became eligible in 2006, and the remaining hospital types became eligible through PPACA.

Hospital eligibility for the 340B program has more elements than that of federal grantees, because unlike federal grantees, hospitals do not qualify for the program based on receipt of a federal grant. Rather, they 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; however, critical access hospitals are exempt from this requirement. Additionally, all hospitals 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. Clinics and other sites affiliated with a hospital, but not located in the main hospital building, are eligible to participate in the 340B program if they are an integral part of the hospital, which HRSA has defined as reimbursable sites on the hospital’s most recently filed Medicare cost report.

All drug manufacturers that supply outpatient drugs are eligible to participate in the 340B program and must participate if they want 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 and submit this agreement to HRSA.

Program Structure and Operation

Covered entities typically purchase and dispense 340B drugs through pharmacies and can structure their programs in different ways. Entities can have (1) an in-house pharmacy model, in which the pharmacy is housed within the covered entity, (2) a contract pharmacy model, in which the entity contracts with an outside pharmacy to dispense drugs on their behalf, or (3) both. Historically, only covered entities that did not have an in-house pharmacy were allowed to contract with a single outside pharmacy to provide services. In March 2010, however, HRSA issued guidance allowing all covered entities—including those that have an in- house pharmacy—to contract with multiple outside pharmacies. Some covered entities use HRSA’s Pharmacy Services Support Center (PSSC) or private companies that provide technical assistance, information technology, and other services to help develop, implement, and manage their 340B pharmacy program.

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 drug manufacturer may charge covered entities; however, the provision establishing the 340B pricing formula indicates that manufacturers 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. Manufacturers are responsible for calculating the 340B price on a quarterly basis. Occasionally the formula results in a negative price for a 340B 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.

Key Program Requirements

Covered entities must follow certain program requirements as a condition of participating in the 340B program. For example, covered entities are prohibited from diverting any drug purchased at a 340B price to an individual who does not meet HRSA’s current definition of a patient. This definition was issued in 1996 and outlines three criteria which 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, from covered entities. (See table 1 for more information on HRSA’s definition of a 340B patient.) Covered entities are permitted to use drugs purchased at the 340B price for all individuals who meet the definition of a patient, whether or not they are low income, uninsured, or underinsured.

Covered entities also are prohibited from subjecting manufacturers to duplicate discounts whereby drugs prescribed to Medicaid patients are subject to both the 340B price and a rebate through the Medicaid Drug Rebate Program. To avoid duplicate discounts, covered entities can either purchase drugs for Medicaid patients outside the 340B program, in which case the state Medicaid agency may claim the rebate, or they can use drugs purchased at 340B prices, in which case the agency may not claim the rebate. Covered entities that decide to use 340B drugs for Medicaid patients must notify HRSA so that it can coordinate with state Medicaid agencies for billing purposes. Further, certain covered entities— DSH hospitals, children’s hospitals, and freestanding cancer hospitals— are prohibited from purchasing outpatient drugs through any group purchasing organization (GPO). However, they may purchase drugs through the specified HRSA contractor, the Prime Vendor Program (PVP). Rural referral centers, sole community hospitals, and critical access hospitals participating in the 340B program are allowed to purchase outpatient drugs through any GPO.

Drug manufacturers also must follow certain 340B program requirements. Specifically, they must sell outpatient drugs to covered entities at or below the statutorily determined price. In addition, 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 avenue 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 340B program.

340B Revenue Generated by Covered Entities Varied, but All Entities Reported That the Program Was Used to Support or Expand Access to Services

About half of the covered entities we interviewed reported that they generated 340B program revenue that exceeded drug-related costs—the costs of purchasing and dispensing a drug—and revenue generation depended on several factors. Regardless of the amount of 340B revenue generated or the savings realized through 340B discounts, covered entities generally reported using the 340B program to support or expand access to services.

About Half of Covered Entities Reported Generating 340B Revenue That Exceeded Drug- Related Costs, and Revenue Generated Depended on Several Factors

Thirteen of the 29 covered entities we interviewed reported that they generated revenue through the 340B program that exceeded drug-related costs. Of the 16 remaining, 10 did not generate enough 340B revenue to cover all drug-related costs, and 6 covered entities were unable or did not report enough information for us to determine the extent to which they generated 340B revenue due, in part, to their inability to track 340B- specific financial information.

In general, 340B revenue—whether exceeding drug related costs or not— was generated through reimbursement received for drugs dispensed by 340B in-house or contract pharmacies, though several factors affected the extent to which the covered entities we interviewed generated revenue through the program:  Third-party reimbursement rates: Eighteen of the 29 covered entities we interviewed generated 340B revenue by receiving reimbursement from third-party payers and tracked revenue by payer source. Of the 18, most reported that they generated more 340B revenue from patients with private insurance and Medicare compared to other payers. However, a few of these covered entities reported that their ability to generate 340B revenue from private insurers, including Medicare Part D plans, was decreasing because some insurers were reducing contracted reimbursement rates for drugs based on the entity’s status as a 340B provider. Of the 18 covered entities, most of those that used 340B drugs for Medicaid patients reported that state-determined Medicaid reimbursement rates for these drugs were generally lower, compared to private insurers and Medicare. For example, most reported that Medicaid reimbursement for a 340B drug was set at the price paid for the drug—the 340B price or any lower price—plus a dispensing fee, the latter of which generally did not cover the costs of dispensing the drug. This is typically referred to as reimbursement at actual acquisition cost, which reduces a covered entity’s ability to generate revenue because the state, rather than the entity, benefits from any savings from purchasing drugs at the 340B price. However, a few covered entities generated more 340B revenue through Medicaid than others because they had contractual agreements with their states to share 340B-related savings. Covered entities in two of the five states included in our selection had such agreements. Finally, a majority of the 18 covered entities reported that revenue generated from uninsured patients was lower than that from all other payers.  ADAP status: Factors that affected 340B revenue generation for the five ADAPs we interviewed were different than for other entity types, because unlike other covered entity types, ADAPs do not receive third-party reimbursement for drugs. Rather, ADAPs serve as a “payer of last resort” to cover the cost of providing HIV-related medications to certain low-income individuals who, for example, are uninsured and cannot afford to pay for drugs or who cannot afford their health insurance coverage for drugs. ADAPs can choose to cover costs of drugs by either paying for the drugs directly or by assisting patients with the costs associated with health insurance, including payments for premiums and co-payments or deductibles. When ADAPs purchase drugs directly, they realize 340B savings on drugs—either at the point of purchase or after the fact through manufacturer rebates— but do not generate revenue through the program. When ADAPs assist with patients’ health insurance by paying for co-payments or deductibles on a drug, they sometimes generate revenue by collecting the rebates representing the full 340B discount on a drug for which they may have only paid a portion of the price. Three of the five ADAPs we interviewed reported generating revenue this way.  Ability to leverage resources to access the lowest drug prices: Some of the 29 covered entities we interviewed reported leveraging resources, such as through their larger parent organizations or the PVP, to access drugs at prices below the 340B ceiling price, potentially increasing the difference between the price paid for the drug and the reimbursement received. In addition, some covered entities said they had access to sophisticated information technology—for example by contracting with private companies—or had more staff to help ensure that they were obtaining the lowest priced drugs.

As more people gain insurance coverage under PPACA, covered entities may serve more patients with private insurance and Medicaid, which may affect the extent to which they generate 340B revenue. One covered entity located in Massachusetts reported that after the state implemented universal health care, while they received more revenue from reimbursement for low-income patients that gained private insurance, these patients often could not afford associated co-payments or deductibles, and the entity covered these costs. In addition, according to one ADAP we interviewed, as more individuals gain private insurance, the ADAP may increasingly choose to pay for health insurance for patients rather than paying for patients’ drugs directly. This may enable it to generate revenue through the 340B program if it can claim more rebates for drugs for the newly insured patients. According to some covered entities, the impact of serving more Medicaid patients may depend on the Medicaid reimbursement rate that entities receive. For example, patients that gain Medicaid coverage may begin to seek services from covered entities, and for those entities that lose money on Medicaid patients, this may decrease their ability to generate 340B revenue. Conversely, for covered entities that have contractual agreements to share 340B-related savings with their states, the increased Medicaid population may increase their ability to generate 340B revenue.

Covered Entities Reported Using the 340B Program to Support or Expand Access to Services

Regardless of the amount of revenue generated through the program, all of the 29 covered entities we interviewed reported that the 340B program, including the up-front savings they realized on the cost of drugs, allowed them to support their missions by maintaining services and lowering medication costs for patients, which is consistent with the purpose of the program. For example, some covered entities reported that they used the 340B revenue generated by certain patients to offset losses incurred from other patients, which helped support the financial stability of the organization and allowed them to maintain services. Further, one covered entity reported that without 340B revenue or the savings on drugs through its participation in the program, it would be unable to offer all the services it provides—both pharmaceutical and clinical—and another reported that it would have to close its outpatient pharmacy without the program. In addition to maintaining services, some covered entities passed 340B savings on to patients by providing lower-cost drugs to uninsured patients. For example, many covered entities determined the amount that a patient is required to pay based on the lower cost of 340B-priced drugs.

In addition, the 13 covered entities that generated 340B revenue that exceeded drug-related costs were able to use this revenue to serve more patients and to provide services that they might not have otherwise provided, including additional service locations, patient education programs, and case management, which is also consistent with the purpose of program. One covered entity, for example, reported that it used the revenue generated through the 340B program to provide additional service delivery sites in other parts of the state, which eliminated the need for some patients to travel more than 60 miles to receive services. A few covered entities reported using 340B revenue to support patient and family education programs, such as those where pharmacists provide education on drug interactions. Additionally, one covered entity reported using 340B program revenue to fund a case management program that did not generate any revenue on its own; some services provided through this program included arranging transportation for patients to receive clinical services, coordinating necessary specialty care, and providing translation services.

Even though the uses of revenue generated through the 340B program were for similar purposes, some covered entities relied on the program more than others. For example, one FQHC reported that 340B revenue accounted for approximately 5 percent of its total budget, and was used to provide additional services within the organization. However, one hemophilia treatment center reported that 340B revenue accounted for about 97 percent of its total budget and was used to support all of its program operations.

Manufacturers’ Distribution of Drugs at 340B Prices Generally Did Not Affect Providers’ Access to Drugs Except in Two Situations

According to stakeholders we interviewed, manufacturers’ distribution of drugs at 340B prices generally did not affect providers’ access to drugs. For example, 36 of the 61 program stakeholders we interviewed did not report any effect on covered entities’ or non-340B providers’ access to drugs related to manufacturers’ distribution of drugs at 340B prices. These stakeholders represented a wide range of perspectives on the 340B program, including those representing manufacturers, covered entities, and non-340B providers.

The remaining 25 program stakeholders—also representing a wide range of perspectives on the 340B program—reported that manufacturers’ distribution of drugs at 340B prices affected providers’ access to drugs primarily in two situations. The two situations were: (1) for intravenous immune globulin (IVIG), a lifesaving immune deficiency drug, the supply of which is inherently limited; and (2) when there was a significant drop in the 340B price of a drug, which may result in increased demand for the drug by covered entities. Both situations relate to the restricted distribution of drugs, which may occur during shortages or when shortages are anticipated.

Stakeholders reported that manufacturers’ restricted distribution of IVIG at 340B prices resulted in 340B hospitals having to purchase some IVIG at higher, non-340B prices in order to meet their demand for the drug. Manufacturers restrict the distribution of IVIG on an ongoing basis, because it is susceptible to shortages. Stakeholders, including five of the seven DSH hospitals we interviewed, reported that because of the restricted distribution of IVIG at 340B prices, 340B hospitals often must purchase some IVIG at higher, non-340B prices to meet their patients’ needs. For example, DSH hospitals reported that when they were unable to access IVIG at 340B prices, additional IVIG was available for purchase at higher, non-340B prices directly from manufacturers, from specialty pharmacies, or from GPOs. Moreover, one DSH hospital reported that it had to purchase about one-third of the IVIG it needed at non-340B prices—paying about $20,000 to $25,000 more per month than what it would have paid if it could have purchased it at 340B prices.

Although manufacturers’ distribution of IVIG at 340B prices may not meet 340B hospitals’ demand, some stakeholders, such as drug manufacturers, reported that changes in the amount of IVIG allocated for sale at 340B prices could negatively affect non-340B providers’ access to these drugs. For example, one IVIG manufacturer reported that it restricted its distribution of IVIG by allocating its supply based on the amount of the drug purchased by providers in 2004—allocating 95 percent of its projected monthly sales to non-340B providers and the remaining 5 percent to covered entities at the 340B price. This manufacturer stated that its distribution was fair, and that changing distribution plans to increase the amount of IVIG drugs available at 340B prices could negatively affect non-340B providers’ access to the drugs. However, HRSA officials told us that the allocation of IVIG in this way is not sufficient or fair. Nearly a third of the nation’s hospitals currently participate in the 340B program, and one large GPO we interviewed reported that 340B hospitals tended to be the bigger hospitals in the company’s membership base. Thus, if other manufacturers similarly restrict the distribution of IVIG at 340B prices, it is unlikely that covered entities’ demands will be met at the 340B price.

Stakeholders reported that manufacturers’ distribution of drugs at 340B prices also affected providers’ access to drugs when the 340B prices dropped significantly. In certain cases, when the 340B price of a drug dropped, some covered entities stockpiled the drug, which resulted in shortages in the supply for other providers, including other covered entities. For example, two covered entities we interviewed reported challenges accessing drugs when their 340B prices dropped, because other entities purchased large amounts of these drugs. In other cases when the 340B prices dropped, manufacturers restricted the distribution of those drugs at 340B prices to ensure that all providers had equitable access. For example, one manufacturer reported that after the price of an oral contraceptive dropped to a penny as a result of HRSA’s penny pricing policy, it received an order from a covered entity that exceeded the manufacturer’s current national supply by 50 percent. In response, this manufacturer consulted with HRSA to ensure compliance with the agency’s nondiscrimination guidance and restricted the distribution of drugs at 340B prices by allocating its supply based on the projected demand in the market and providers’ past purchasing patterns.

HRSA’s Oversight of the 340B Program Is Inadequate

HRSA’s oversight of the 340B program is inadequate because it primarily relies on participants’ self-policing to ensure compliance. Changes in the settings where the program is used may heighten concerns about the inadequacy of HRSA’s oversight, and HRSA’s plans for improving oversight are uncertain.

HRSA’s Oversight Is Inadequate to Ensure Participants’ Compliance with 340B Program Requirements

HRSA’s oversight of the 340B program is inadequate because it primarily relies on covered entities’ and manufacturers’ self-policing—that is, participants ensuring their own compliance with program requirements. Upon enrollment, HRSA requires both covered entities and manufacturers to certify that they will comply with applicable 340B program requirements and any accompanying agency guidance. As part of this certification, agency officials told us that they expect participants to develop the procedures necessary to ensure compliance, maintain auditable records that demonstrate compliance, and inform HRSA if violations occur. For example, covered entities must develop adequate safeguards to prevent drugs purchased at 340B prices from being diverted to non-eligible patients, such as inventory tracking systems that separately purchase and dispense 340B drugs, and manufacturers must ensure that they properly calculate the 340B price of their drugs. In both cases, program participants must keep auditable records that can show that they have complied with program requirements and produce that documentation if requested by HRSA.

HRSA officials told us that covered entities and manufacturers can also monitor each other’s compliance with program requirements, but in practice, participants may face limitations to doing so. For example, two covered entities we interviewed reported that it is difficult to determine whether they have been charged correctly for drugs because manufacturers’ calculations of 340B prices are not transparent—namely, there is no centralized list of 340B prices. An organization representing covered entities also told us that its members had reported this difficulty. Similarly, three drug manufacturers we interviewed reported that, although they sometimes have suspected covered entities of diverting 340B drugs, it is difficult to prove diversion took place. An organization representing some manufacturers explained that, although manufacturers have the authority to audit covered entities, they have only conducted them in egregious circumstances, because agency requirements for these audits—such as a requirement to hire an independent third party to conduct the audits—are costly and administratively burdensome.

HRSA’s guidance on key program requirements often lacks 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 may be interpreted in ways that are inconsistent with its intent. For example, HRSA’s current guidance on the definition of a 340B 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 340B and thus, covered entities could interpret it either too broadly or too narrowly. Stakeholders we interviewed, including those representing covered entities and drug manufacturers, raised concerns that the guidance will be interpreted too broadly leading to cases of unintended diversion—that is, using 340B drugs for individuals who HRSA did not intend as eligible patients, but who may not be clearly prohibited in the guidance. However, one of these stakeholders representing covered entities also noted that, in order to ensure compliance, some entities may adhere to a narrow interpretation of the guidance and thus, limit the benefit of the program for their organization. The agency itself has recognized the need to further specify the definition of a 340B patient to ensure that it is interpreted correctly.

For example, HRSA officials told us that the definition currently includes individuals receiving health care services from providers affiliated with covered entities through “other arrangements,” as long as the responsibility for care provided remains with the entity. However, HRSA does not define “other arrangements,” and officials told us that what is meant by responsibility for care also needs to be clarified. As a result of the lack of specificity in the guidance, the agency has become concerned that some covered entities may be broadly interpreting the definition to include individuals such as those seen by providers who are only loosely affiliated with a covered entity and thus, for whom the entity is serving an administrative function and does not actually have the responsibility for care.

In addition, HRSA has not issued guidance specifying the criteria under which hospitals that are not publicly owned or operated can qualify for the 340B program. Rather, the agency bases eligibility for these hospitals on the application of broad statutory requirements that they are either formally delegated governmental powers by a unit of a state or local government or have a contract with a state or local government to provide services to low-income individuals who are not eligible for Medicaid or Medicare. HRSA has stated that the determination of whether hospitals meet the first requirement is evaluated by the agency on a case-by-case basis. For the second requirement, HRSA requires a state or local government official and a hospital executive to certify that a contract exists to meet the requirement, but does not require hospitals to submit their contracts for review or outline any criteria that must be included in the contracts, including the amount of care a hospital must provide to these low-income individuals. Therefore, hospitals with contracts that provide a small amount of care to low-income individuals not eligible for Medicaid or Medicare could claim 340B discounts, which may not be what the agency intended.

Moreover, HRSA’s nondiscrimination guidance is not specific in the practices that manufacturers should follow to ensure that drugs are equitably distributed to covered entities and non-340B providers when distribution is restricted. Some stakeholders we interviewed, such as covered entities, have raised concerns about the way IVIG manufacturers have interpreted and complied with the guidance in these cases, because covered entities have sometimes had to purchase IVIG at higher, non- 340B prices. Additionally, given current guidance, one stakeholder reported that manufacturers can offer a certain amount of drugs at 340B prices, and while the distribution may not be equitable, still contend that they are complying with the guidance. Although PPACA included a provision prohibiting manufacturers from discriminating against covered entities in the sale of 340B drugs, officials told us they do not have plans to provide any additional specificity to the nondiscrimination guidance.

Finally, in the case of HRSA’s penny pricing policy, agency officials told us that it is well understood by 340B stakeholders and manufacturers we interviewed were generally aware of the policy. However, the agency has never formalized guidance in writing and there have been documented cases of manufacturers charging covered entities more than a penny for drugs when the policy should have been in effect.

Beyond relying on participants’ self-policing, HRSA engages in few activities to oversee the 340B program and ensure its integrity, which agency officials said was primarily due to funding constraints. For example, HRSA officials told us that the agency verifies eligibility for the 340B program at enrollment, but does not periodically recertify eligibility for all covered entity types. As a result, there is the potential for ineligible entities to remain enrolled in the program. In addition, HRSA officials told us that they do not require a review of the procedures participants put in place to ensure compliance, and, although the agency has the authority to conduct audits of program participants to determine whether violations have occurred, it has never done so. For example, officials said that they do not verify whether covered entities have systems in place to prevent diversion. Also, while HRSA encourages manufacturers to work with the agency to develop processes for restricting the distribution of drugs that are equitable to covered entities and non-340B providers, the agency only reviews manufacturers’ plans to restrict access to drugs at 340B prices if a manufacturer contacts HRSA or concerns with a plan are brought to the agency’s attention. Similarly, although HRSA calculates 340B prices separately from manufacturers, officials told us that, at this time, the agency does not use these calculations to verify the price that manufacturers charge covered entities, unless an entity reports a specific pricing concern.

HRSA’s oversight activities are further limited because the agency lacks effective mechanisms to resolve suspected violations and enforce program requirements when situations of non-compliance occur. If covered entities and manufacturers are not able to resolve conflicts on their own, HRSA has had an informal dispute resolution process in place since 1996 through which program participants can request that HRSA review evidence of a suspected violation and the agency then decides whether to initiate the process. However, despite reports by program participants about suspected violations they were unable to resolve on their own, HRSA officials told us that they have only initiated the dispute resolution process twice since its inception. Additionally, HRSA has not issued regulations implementing monetary penalties for non-compliance established by PPACA, and HRSA has rarely utilized the sanctions that existed prior to PPACA. For example, participants found to be in violation of 340B program requirements face termination from the program. Yet according to HRSA officials, since the program’s inception, only two covered entities have been terminated from the program due to findings of program violations and no manufacturer has ever been terminated for this reason. Covered entities also are expected to pay back manufacturers for discounts received while out of compliance, and manufacturers are expected to pay back covered entities for overcharges. However, HRSA has not enforced these expectations and officials were unable to tell us the extent to which repayments have occurred.

Because of HRSA’s reliance on self-policing to oversee the 340B program as well as its nonspecific guidance, the agency cannot provide reasonable assurance that covered entities and drug manufacturers are in compliance with program requirements and is not able to adequately assess program risk. As a result, covered entities may be inappropriately claiming 340B discounts from drug manufacturers or qualifying for the program when they should not be, potentially increasing the likelihood that manufacturers will offset providing lower prices to covered entities with higher prices for others in the health care system. Additionally, manufacturers may be charging covered entities more than the 340B price for drugs, which would limit the benefit of the program for these entities.

Changes in the Settings Where the 340B Program Is Used May Heighten Concerns about HRSA’s Inadequate Oversight

Over time, the settings where the 340B program is used have shifted to more contract pharmacies and hospitals than in the past. According to HRSA officials, the number of covered entities using contract pharmacies has grown rapidly since its new multiple contract pharmacy guidance was issued in March 2010—as of July 2011, there were over 7,000 contract pharmacy arrangements in the program. Hospitals’ participation in the 340B program has also grown markedly in recent years. In 2011, the number of hospitals participating in the program was nearly three times what it was in 2005, and the number of these organizations, including their affiliated sites, was close to four times what it was in 2005 (see fig. 2). Further, although participation in the 340B program has increased among other covered entity types over time, hospitals’ participation in the 340B program has grown faster than that of federal grantees. In 2005, hospitals represented 10 percent of program participants, and as of July 2011, they represented 27 percent.

Increased use of the 340B program by contract pharmacies and hospitals may result in a greater risk of drug diversion, further heightening concerns about HRSA’s reliance on participants’ self-policing to oversee the program. Operating the 340B program in contract pharmacies creates more opportunities for drug diversion compared to in-house pharmacies. For example, contract pharmacies are more likely to serve both patients of covered entities and others in the community; in these cases more sophisticated inventory tracking systems must be in place to ensure that 340B drugs are not diverted—intentionally or unintentionally—to non- 340B patients.

Also, for a number of reasons, operating the 340B program in the hospital environment creates more opportunities for drug diversion compared to other covered entity types. First, hospitals operate 340B pharmacies in settings where both inpatient and outpatient drugs are dispensed and must ensure that inpatients do not get 340B drugs. Second, hospitals tend to have more complex contracting arrangements and organizational structures than other entity types—340B drugs can be dispensed in multiple locations, including emergency rooms, on-site clinics, and off-site clinics. In light of this and given HRSA’s nonspecific guidance on the definition of a 340B patient, broad interpretations of the guidance may be more likely in the hospital setting and diversion harder to detect. Third, hospitals dispense a comparatively larger volume of drugs than other entity types—while representing 27 percent of participating covered entities, according to HRSA, DSH hospitals alone represent about 75 percent of all 340B drug purchases.

The increasing number of hospitals participating in the 340B program has raised other concerns for some stakeholders we interviewed, such as drug manufacturers, including whether all of these hospitals are in need of a discount drug program. Nearly a third of all hospitals in the U.S. currently participate in the 340B program, and HRSA estimates that more may be eligible. The number of hospitals eligible to participate may increase due to PPACA’s Medicaid expansion, because the number of Medicaid patients served by a hospital affects its DSH adjustment percentage—one factor that determines hospital eligibility. Further, one organization we interviewed questioned whether the DSH adjustment percentage is the best measure to determine hospitals’ eligibility for the 340B program, because of research indicating that it may not be an adequate proxy for the amount of uncompensated care a hospital provides. The DSH hospitals we interviewed reported a wide range of payer mixes—with the percentage of Medicaid and uninsured patients ranging from about 15 percent of total patient volume for one hospital to about 85 percent for another. However, payer mix may not be the only factor to consider when identifying hospitals that provide care to the medically underserved and are part of the health care safety net. There is no established definition of a safety net hospital, and some researchers have argued that it should include factors other than payer mix, for example the disproportionate provision of critical services, that are either too expensive or unprofitable for other hospitals to provide, such as emergency room or trauma care.

HRSA’s Plans to Improve Oversight of the 340B Program Are Uncertain and May Not Address All Areas of Concern

While PPACA’s 340B program integrity provisions address many of the deficiencies in HRSA’s current approach to oversight, the agency has taken few steps to implement these provisions. PPACA requires HRSA to increase oversight of both covered entities and manufacturers, and outlines specific steps for HRSA to take in accomplishing this goal. (See table 2 for the 340B program integrity provisions included in PPACA.) However, according to officials, the agency does not have adequate funding to implement the integrity provisions. Officials also noted that once funding is secured, it could take several years to develop the systems and regulatory structure necessary to implement them.

Independent of the provisions in PPACA, HRSA also has recently developed guidance to further specify the definition of a 340B patient. While the Office of Management and Budget completed its review of this definition in April 2011, as of August 2011, HRSA had not yet released it for stakeholder comment. In 2007, HRSA also proposed updating this guidance, but it was never finalized.

Even if HRSA implements PPACA’s provisions and updates its definition of a patient, these steps may not be sufficient to address all areas of concern. For example, PPACA specifically requires HRSA to conduct selective audits of manufacturers, but it did not establish the same requirement for audits of covered entities. As such, the effectiveness of HRSA’s oversight of covered entities will, in part, be dependent on what additional steps the agency takes to ensure program integrity. Similarly, if in implementing PPACA’s provision prohibiting manufacturers from discriminating against covered entities in the sale of 340B drugs, HRSA does not add specificity to the existing nondiscrimination guidance, it may be inadequate to ensure that all providers are able to equitably access drugs, particularly when manufacturers restrict the distribution of drugs at 340B prices. Also, as part of its 2007 proposed guidance on the definition of a patient, HRSA requested stakeholder comment on the elements that should be required in private, nonprofit hospitals’ contracts with state or local governments as well as the different situations in which hospitals that are not publicly owned or operated should be formally granted government powers. However, HRSA officials told us that they have not issued additional guidance on these issues, and that they are not addressed in the clarifying guidance on the definition of a patient currently awaiting agency approval.

Conclusions

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, and we found that the covered entities we interviewed reported using it for these purposes. However, HRSA’s current approach to oversight does not ensure 340B program integrity, and raises concerns that may be exacerbated by changes within the program. 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. As a result, HRSA may not know when participants are engaging in practices that are not in compliance. Furthermore, we found that HRSA has not always provided covered entities and drug manufacturers with guidance that includes the necessary specificity on how to comply with program requirements. There also is evidence to suggest that participants may be interpreting guidance in ways that are inconsistent with the agency’s intent. Finally, participants have little incentive to comply with program requirements, because few have faced sanctions for non-compliance. 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. For covered entities, this may be particularly true in settings where there is heightened concern about the opportunities for the diversion of 340B drugs.

PPACA outlined a number of provisions that, if implemented, will help improve many of the 340B program integrity issues we identified. For example, PPACA requires HRSA to recertify eligibility for all covered entity types on an annual basis, which would help ensure entities that lose eligibility for the program do not remain enrolled. Additionally, PPACA requires HRSA to develop a formal dispute resolution process, including procedures for covered entities to obtain information from manufacturers, and maintain a centralized list of 340B prices—provisions that would help ensure covered entities and manufacturers are better able to identify and resolve suspected violations. PPACA also requires HRSA to institute monetary penalties for covered entities and manufacturers, which gives program participants more incentive to comply with program requirements. Finally, PPACA requires HRSA to conduct more direct oversight of manufacturers, including conducting selective audits to ensure that they are charging covered entities the correct 340B price.

However, we identified other program integrity issues that HRSA should also address. For example, the law does not require HRSA to audit covered entities or further specify the agency’s definition of a 340B patient. While HRSA has developed new proposed guidance on this definition, it is uncertain when, or if, the guidance will be finalized. Because the discounts on 340B drugs can be substantial, it is important for HRSA to ensure that covered entities only purchase them for eligible patients both by issuing more specific guidance and by conducting audits of covered entities to prevent diversion. Additionally, while PPACA included a provision prohibiting manufacturers from discriminating against covered entities in the sale of 340B drugs, HRSA does not plan to make any changes to or further specify its related nondiscrimination guidance. Absent additional oversight by the agency, including more specific guidance, access challenges covered entities have faced when manufacturers’ have restricted distribution of IVIG at 340B prices may continue and similar challenges could arise for other drugs in the future.

Also, current HRSA guidance may allow some entities to be eligible for the program that should not be. Hospitals qualify for the 340B program in part based on their DSH adjustment percentage. Even though the PHSA establishes additional eligibility requirements for hospitals that are not publicly owned or operated, these requirements are broad, and HRSA has not issued more specific guidance to implement them. We found that nearly a third of all hospitals in the U.S. are participating in the 340B program, more are currently eligible and not participating, and more may become eligible as Medicaid is expanded through PPACA. As the number of covered entities enrolled in the 340B program increases and more drugs are purchased at 340B prices, there is the potential for unintended consequences, such as cost-shifting to other parts of the health care system. As such, it is important that HRSA take additional action to ensure that eligibility for the 340B program is appropriately targeted. While HRSA officials reported that the agency does not have the resources to implement the PPACA provisions or otherwise increase oversight of the 340B program, limited resources could be prioritized to address areas of greatest risk to the program.

Recommendations for Executive Action

PPACA contained several important program integrity provisions for the 340B program, and additional steps can also ensure appropriate use of the program. Therefore, we recommend that the Secretary of HHS instruct the administrator of HRSA to take the following four actions to strengthen oversight: conduct selective audits of 340B covered entities to deter potential diversion; finalize new, more specific guidance on the definition of a 340B patient; further specify its 340B 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; and 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.

Agency Comments and Our Evaluation

In commenting on a draft of this report, HHS stated that it agreed with our recommendations. HHS also had additional comments on several content areas of the report, and we made changes as appropriate to address these comments. (HHS’ comments are reprinted in appendix III.) Finally, HHS provided technical comments, which we incorporated as appropriate.

HHS stated that HRSA would continue to work on 340B program integrity efforts and prioritize these efforts based on available funding. HHS also outlined steps that HRSA plans to take in response to each of our recommendations. While we appreciate HHS’ commitment to improving oversight of the 340B program, we are concerned that the steps are not sufficient to ensure adequate oversight.

With regard to our first recommendation that HRSA conduct selective audits of covered entities to deter potential diversion, HHS stated that HRSA will continue working with manufacturers to identify and address potential diversion and implement a plan to better educate covered entities about diversion. However, HHS did not state that HRSA will conduct its own audits of covered entities and we reiterate the importance of the agency doing so as part of its ongoing oversight responsibilities.

With regard to our second recommendation that HRSA finalize new, more specific guidance on the definition of a 340B patient, HHS stated that HRSA will review the draft of proposed guidance to update the definition and revise this guidance in light of changes in PPACA. While we agree that it may be important for HRSA to consider the impact of PPACA on the definition, given that PPACA became law more than a year ago, and the potential for broad interpretations of current guidance, we encourage HRSA to complete its review in a timely fashion.

With regard to our third recommendation, that HRSA further specify its non-discrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers’ plans to restrict distribution of drugs at 340B prices, HHS stated that HRSA will: implement a plan to specify existing policy regarding 340B non- discrimination and drug distribution; provide clearer guidance to manufacturers for working with HRSA and develop specific allocation plans where needed; and continue to work with the Department of Justice when fair, voluntary allocation plans are not developed. However, we are concerned that these steps do not require reviews of manufacturers’ plans to restrict distribution of drugs at 340B prices. Without taking this step, HRSA may not know when manufacturers are inequitably distributing drugs to covered entities and non-340B providers.

With regard to our fourth recommendation that HRSA 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, HHS stated that HRSA will implement a plan to better educate covered entities on existing criteria for hospital participation in the program and initiate a phased approach to recertifying eligibility for all participating covered entities. Here, we are concerned that these steps do not include further specification of eligibility criteria for hospitals that are not publicly owned or operated, because we determined that additional specification of statutory requirements was needed to ensure that the 340B program is appropriately targeted.

We are sending copies of this report to the Secretary of HHS and appropriate congressional committees. In addition, the report is available at no charge on the GAO web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Selection of Interviews with Program Stakeholders

Type of stakeholder

29 27 were selected to take into account certain criteria: Entity Type:  We selected five types of covered entities and specifically interviewed: 7 federally qualified health centers (FQHC), 5 disproportionate share hospital (DSH) hospitals, 5 hemophilia treatment centers, 5 family planning clinics, and 5 AIDS Drug Assistance Programs (ADAP). (See appendix II for a list of all entities eligible to participate in the program.)  We picked these types based on:  variation in operational structure,  variation in services and drugs provided,  high levels of 340B participation,  experience with the program, and  potential difficulty accessing drugs at 340B prices.

Location:  We selected entities in five states: Illinois, Massachusetts, Tennessee, Texas, and Utah. States were selected based on variation in a number of factors, including: geography, percent of uninsured individuals, and Medicaid reimbursement policies. We included Massachusetts to gain a better understanding of the potential effect of the Patient Protection and Affordable Care Act (PPACA) health insurance reforms on the 340B program.  We used information provided by trade organizations representing covered entities to help select individual covered entities to interview. 2 additional DSH hospitals were selected based on concerns raised in stakeholder interviews about how these entities were using the program. 6 Selected based on market share and those that produce drugs with reported challenges related to their distribution at 340B prices.

Includes 4 manufacturer trade organizations, 1 distributor, and 1 pharmacy benefits manager.

Type of stakeholder

Interview details Includes organizations representing providers, including covered entities and non-340B providers: 9 organizations that represent covered entities, including 6 trade organizations and 3 private companies that provide services and information technology to help covered entities establish and manage their 340B programs. 2 organizations representing non-340B providers, including 1 trade organization and 1 non-340B provider. 5 organizations that represent both covered entities and non-340B providers, including 3 trade organizations and 2 group purchasing organizations (GPO). 4 HRSA, the contractors that help administer the 340B program, and the Centers for Medicare & Medicaid Services.

Appendix II: Select Information on Entities Eligible to Participate in the 340B Program

Entity type Federal Grantees

Number of sites enrolled by entity type (July 1, 2011)

Administering agency within the Department of Health Human Services (HHS)

Urban or rural health centers that provide comprehensive community-based primary and preventive care services to medically underserved populations. and Services Administration (HRSA)

Receives funds under title V of the Indian Health Care Improvement Act (25 U.S.C. §§1651 et seq.)

Provide a variety of health programs to eligible individuals.

Receives a grant or contract under Section 1001 PHSA (42 U.S.C. § 300)

Provide comprehensive family planning services.

Provide screening and treatment for sexually transmitted diseases.

Provide treatment for tuberculosis.

Receives funds under the Native Hawaiian Health Care Act of 1988 (42 U.S.C. §§ 11701 et seq.)

Provide comprehensive health promotion and disease prevention services to Native Hawaiians.

Receives financial assistance under title XXVI of the PHSA (42 U.S.C. §§ 300ff-11 et seq.)

Serve as a “payer of last resort” to cover the cost of providing HIV-related medications to low- income individuals who are uninsured or underinsured and cannot afford to pay for drugs or who cannot afford their health insurance coverage for drugs.

Number of sites enrolled by entity type (July 1, 2011)

Administering agency within the Department of Health Human Services (HHS)

Description of covered entity type Provide primary care and support services to individuals with HIV or AIDS.

Receives a grant under section 501(a)(2) of the Social Security Act (42 U.S.C § 701(a)(2))

Provide medical care to individuals with hemophilia.

Black lung clinics Receives funds under Section 427(a) of the Black Lung Benefits Act (30 U.S.C. § 937(a))

Provide medical treatment to individuals disabled from pneumoconiosis (black lung) as a result of their employment at U.S. coal mines.

General acute care hospitals paid under the Medicare inpatient prospective payment system.

3,061 Centers for Medicare & Medicaid Services (CMS)

Primarily provide services to individuals under 18 years of age.

DSH as defined under Section 1886(d)(1)(B) of the Social Security Act (42 U.S.C. § 1395ww(d)(1)(B)) with a DSH adjustment percentage greater than 11.75 Children’s hospital as described under Section 1886 (d)(1)(B)(iii) of the Social Security Act with a DSH adjustment percentage greater than 11.75 Critical access hospital as determined under Section 1820(c)(2) of the Social Security Act (42 U.S.C. § 1395i-4(c)(2)) (no DSH requirement)

Located in rural areas, provide 24-hour emergency care services, and have no more than 25 inpatient beds.

Isolated from other hospitals by distance, weather, or travel conditions.

Number of sites enrolled by entity type (July 1, 2011)

Administering agency within the Department of Health Human Services (HHS)

Large rural hospitals that provide services for patients from a wide geographic area.

Not a unit of another hospital, has a primary purpose of treating or conducting research on cancer.

Total

Not all FQHCs receive federal grants. Providers that meet all of the requirements for the FQHC program but do not receive federal grants are referred to as FQHC look-alikes and are eligible to participate in the 340B program. This category includes: FQHC look-alikes; Consolidated Health Centers; Migrant Health Centers; Health Care for the Homeless; Healthy Schools/Healthy Communities; Health Centers for Residents of Public Housing; and Tribal Organizations created under the Indian Self Determination Act (Pub. L.. No. 93-638) and administered by the Indian Health Service. Section 1905(l)(2)(B) of the Social Security Act includes outpatient health programs or facilities operated by an urban Indian organization receiving funds under title V of the Indian Health Care Improvement Act for the provision of primary health services in the definition of FQHCs.

Appendix III: Comments from the Department of Health and Human Services

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Gerardine Brennan, Assistant Director; Jennie Apter; Kristin Ekelund; Kelli Jones; Dawn Nelson; Rachel Svoboda; and Jennifer Whitworth made key contributions to this report.