House Subcommittee Circulates Proposed Legislation Providing Insight on the Future of the 340B Drug Pricing Program - McDermott Will & Emery

House Subcommittee Circulates Proposed Legislation Providing Insight on the Future of the 340B Drug Pricing Program


In Depth

The 340B Federal Drug Pricing Program (the 340B Program) requires pharmaceutical manufacturers to offer drugs at discounted prices to eligible hospitals, clinics and other entities for use in the outpatient setting. The 340B Program was created by the Veterans Health Care Act of 1992 (codified at Section 340B of the Public Health Services Act) and is administered by the Department of Health and Human Services (HHS), Health Resources and Services Administration (HRSA), Office of Pharmacy Affairs (OPA). In recent years, attention to, and scrutiny of, the 340B Program has increased significantly, due in part to an expansion in the number of participating entities as a result of the Patient Protection and Affordable Care Act of 2010.

To participate in the 340B Program, entities must maintain full compliance with 340B Program requirements. Compliance with 340B Program requirements can be challenging, because guidance from OPA on a variety of significant topics has been unclear and subject to a range of interpretations, even in relation to fundamental questions of who may purchase and receive 340B drugs.

In 2014, OPA intended to release a 340B “Mega-Reg”, a formal notice-and-comment rule intended to cover a broad swath of important compliance topics, including entity and patient eligibility. Prior to the issuance of the Mega-Reg, however, a United States federal district court, responding to litigation brought by the pharmaceutical manufacturers challenging the government’s rulemaking authority in a related matter, issued a decision that called into question OPA’s authority to issue regulations on such topics. (For further discussion of the case, see: Federal Court Vacates 340B Rule Regarding Orphan Drugs). OPA has since withdrawn the Mega-Reg and indicated that it will instead seek to issue omnibus guidance in 2015. As of May 2015, this guidance is under review at the Office of Management and Budget.

In light of increasing participation in the 340B Program and continued concerns regarding the lack of oversight and clarity regarding compliance with 340B Program requirements, the House Energy and Commerce Health Subcommittee (the Subcommittee) held a hearing pertaining to the 340B Program on March 24, 2015. While the hearing focused upon increased oversight and transparency in the 340B Program, the Subcommittee appeared open to revisiting the 340B statute to provide increased clarity and federal oversight of the 340B Program.

The recently released draft legislation would have made both cosmetic and material changes to the 340B Program, including, but not limited to

  • Renaming the 340B Program
  • Formally stating the purpose of the 340B Program
  • Refining the definition of a “patient” eligible to receive 340B drugs
  • Enhancing participating entities’ data reporting requirements
  • Assessing a user fee on 340B purchases
  • Providing HHS with the authority to promulgate regulations governing many aspects of the 340B Program.

A section-by-section summary of the sections of the proposed legislation, with a focus on those provisions most relevant to health care providers participating in the 340B Program, follows below.

Summary of the Proposed Legislation







Formally establishes the name for the 340B Program as the Outpatient Drug Discount Program.

Although known commonly as the 340B Program, the program does not have a formal, statutorily established name. This provision would formally name the program the Outpatient Drug Discount Program.



Sets forth the purpose of the 340B Program as to enable covered entities to utilize scarce resources to increase patient access to, and receipt of, health care services.

Explicitly states that the description of the intent of the 340B Program shall not be construed to limit dispensing of 340B drugs to individuals who are uninsured, underinsured, underserved or medically vulnerable.

The purpose of the 340B Program has been subject to much debate and disagreement between those who believe that it is intended to permit covered entities to expand access to health care services and those who believe it is intended to directly benefit eligible patients. There has also been debate as to whether 340B drugs are appropriately dispensed to all patients, or only to those who do not have third party pharmacy benefits.

This provision would clearly establish the intended purpose of the 340B Program and recipients of 340B drugs.


Providing Ceiling Prices to State Medicaid Agencies

Requires the Secretary of HHS to provide state Medicaid agencies with access to 340B ceiling price data. Explicitly states that the provision requiring access to ceiling prices shall not be construed to limit the covered entities’ choice of which drug discounts or rebates to apply to drug purchases.

This provision appears to provide state Medicaid agencies with the data necessary to enforce certain state Medicaid program requirements related to acquisition cost billing of 340B drugs.

It does not, however, impose federal restrictions on billing or charges for 340B drugs billed to state Medicaid agencies.


Definition of Patient

Codifies a definition of “patient” that is based on the current published definition of patient, with the addition of the requirements that the individual must have an in-person clinical/medical visit at the covered entity and that the individual receives a health care service that “results in” the ordering or prescribing of a covered outpatient drug.

The proposed definition appears to address certain concerns regarding classifying as 340B-eligible patients certain individuals who have not received health care services from the covered entity, e.g., self-insured plan enrollees or employees. The proposed definition also appears to address concerns regarding the relationship between the care received at the covered entity and the prescription being filled with a 340B drug.


Maintenance of Auditable Records

Requires a covered entity to maintain auditable dispensing records for not less than five years.

The requirement that covered entities maintain auditable records for at least five years formalizes a longer record retention period than the previously generally applied three year time period. The five year record retention period also potentially extends the look-back period for non-compliance.

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Limitation on Amount Charged to Uninsured Low-Income Patients

Charges the Secretary of HHS to establish a methodology by which covered entities may collect fees for covered outpatient drugs dispensed to uninsured, low income patients.

The Secretary of HHS would be able to set limits on how much a covered entity may charge for a 340B drug dispensed to an uninsured, low-income patient. This provision appears to be a response to concerns expressed in recent investigative reports that highlighted the fact that few covered entities provide discounts on 340B drugs dispensed to low income, uninsured patients through contract pharmacy arrangements, and concerns by patient advocacy and drug manufacturer groups that the benefits of 340B discounts are not being given directly to low income, uninsured patients.

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Interaction with Correctional Facilities

Excludes correctional facilities, prisons, jails reformatories, detention centers, and similar facilities from eligibility as a covered entity. Prohibits covered entities from sharing or transferring revenue from the purchase or dispensing of a 340B drug to a correctional or similar facility.

This provision appears to address historical concerns regarding arrangements between covered entities and correctional facilities to dispense 340B drugs to individuals residing in correctional facilities.

Concerns regarding the dispensing of 340B drugs at correctional facilities are not as widespread as they once were, and this provision appears to be intended to ensure that any such existing arrangements are discontinued.


Treatment of Contract Pharmacy Services

Governs contract pharmacy arrangements, requiring such agreements to be in writing and to be registered with the Secretary of HHS. The covered entity will also be required to ensure that the contract pharmacy arrangement and operations are compliant with 340B program requirements.

A covered entity, in registering its contract pharmacy arrangement with HRSA, would need to report to HRSA the distance between the covered entity and the contract pharmacy.

Covered entities would need to conduct periodic audits of contract pharmacies and provide for independent annual audits.


Manufacturer Requirements

Requires manufacturers to maintain auditable records for not less than five years.

The requirement that manufacturers maintain auditable records for at least five years facilitates audits and oversight by HRSA.


Manufacturer Reporting of Sales Data

Requires manufacturers to submit data on 340B drug sales to the Secretary of HHS on an annual basis.

The sales data received from manufacturers will provide HRSA with additional information to use as a tool in its audit and oversight responsibilities.


Independent Audit Required

Requires that covered entities with 340B purchasing volumes in the top 10 per cent of all covered entities conduct an independent audit of 340B Program compliance and submit the results of the audit to HHS.

There are currently no requirements for covered entities to conduct routine independent or internal audits of 340B Program compliance, although such reviews are strongly encouraged and increasingly becoming a common practice. The proposed language would result in certain entities being required to undertake such reviews and would appear to place less emphasis on entities in the bottom 90 per cent undertaking such reviews.

The provision would also require that covered entities subject to the audit requirement submit the results to HHS, which could result in compliance enforcement actions being taken by HHS in response to adverse findings by the independent auditor.


Additional Penalties for Violations

Expands existing interest penalties on covered entities for knowing and intentional drug diversion to instances of duplicate discounts. Revises the 340B Program removal penalty for “systemic and egregious” drug diversion to apply to “systemic, knowing and intentional drug diversion”, and expands the penalty to duplicate discounts.

Establishes a removal penalty for systemic and routine violation of covered entity reporting requirements and a civil monetary penalty for intentional violation of covered entity reporting requirements.

Establishes a removal penalty for failure by a covered entity to take corrective action with respect to 340B Program violations in a “timely manner.”

HHS has not historically applied the current covered entity penalty provisions and it is unclear if, and how, it would apply the proposed expanded provisions.


Audits by Secretary

Sets forth criteria to be used by the Secretary of HHS in determining which covered entities to audit.

HHS prioritizes undertaking audits of those covered entities that have purchased a high volume of 340B drugs or have had compliance issues in the past.


Reporting Requirements

Establishes reporting requirements by covered entities of information related to the covered entity’s patient population, 340B drug purchases and dispensing, payments received for 340B drugs, use of 340B revenue, prevention of duplicate discounts, provision of uncompensated care and 340B vendor arrangements. Critical Access Hospitals would be exempt from these reporting requirements.

Information to be collected and reported under the proposed legislation is likely to be burdensome to collect and report. Several of the categories of information to be requested are not directly related to 340B Program eligibility or compliance requirements. It appears that much of the information to be collected could be used as the basis for future changes to the 340B Program, including establishing requirements for the use of 340B Program revenue, threshold uncompensated care volumes for participation, or reallocation of 340B Program savings between the covered entity and government payors.


User Fees

Establishes a fee that the Secretary of HHS will charge to covered entities for participation in the 340B Program. The amount of the fee will be determined using sales data, and will not exceed .1 per cent of each purchase of a 340B drug made by the covered entity during the previous year.

The fees will be used to cover the administrative and oversight costs to HRSA.

HRSA has not previously charged covered entities for participation in the 340B Program.


Direct-Hire Authority

For two years following the enactment of the legislation, the Secretary of HHS may directly hire up to 10 additional permanent employees to carry out management and oversight activities for the 340B Program.

Allowing HHS to hire additional employees may expand HHS’s audit and oversight capabilities, and could lead to an increased number, and/or an increased frequency, of audits.


Technical and Conforming Amendments

Makes certain technical and typographical changes to the existing statute.


Reports to Congress

Requires the Secretary of HHS to submit a report to the Subcommittee on hospital covered entities. This report must include an analysis and description of options for replacing the DSH percentage as the qualifying factor for 340B eligibility.

Further requires the Comptroller General to submit a report to the Subcommittee on the use of contract pharmacies.

This provision illustrates the Subcommittee’s ongoing concern with the participation by hospital covered entities in the 340B Program.



Mandates that the Secretary of HHS issue proposed rulemakings within 180 days following the enactment of the legislation on certain 340B topics, including covered entity eligibility, definition of patient, contract pharmacy requirements and reporting requirements.

Requires the Secretary of HHS to promulgate regulations within two years on the following 340B topics: duplicate discounts; limits on amounts charged to low-income, uninsured patients; exclusion of correctional facilities; prohibition on revenue sharing with correctional facilities; penalties for certain violations; and user fees.

HRSA’s current authority to issue formal notice-and-comment rules pertaining to the 340B Program was called into question by a 2014 federal district court case. HRSA’s explicit statutory authority to promulgate rules for the 340B Program is narrow. This provision would therefore expand HRSA’s rulemaking authority over a wide array of integral 340B topics that are expected to be covered in omnibus guidance to be issued by HRSA later this year.

This change would not, however, give HRSA the authority to define certain statutory provisions pertaining to “orphan drugs,” which has been the subject of litigation between the pharmaceutical industry and the government.