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. 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. 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). 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. 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. 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. 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. 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. 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.