OIG Reports on Contract Pharmacy Arrangements in the 340B Program

On February 4, 2014, the U.S. Department of Health and Human Services, Office of the Inspector General (OIG) issued a memorandum report regarding contract pharmacy arrangements in the 340B Program. In its report, OIG found differences in the mechanisms employed by certain hospitals and community health centers participating in the 340B Program in the oversight of contract pharmacy agreements and inconsistencies in the categorization of eligible prescriptions, the identification of Medicaid beneficiaries and the provision of drugs to uninsured patients at discounted 340B prices under contract pharmacy arrangements.

On February 4, 2014, the U.S. Department of Health and Human Services, Office of the Inspector General (OIG) released a memorandum report (the report) on contract pharmacy arrangements in the 340B Drug Pricing Program (340B Program) and their relationship with certain hospitals and community health centers that participate in the 340B Program (covered entities). The report is one of three 340B studies reflected in the Fiscal Year 2014 OIG Work Plan. While the purpose of the report was not to be a critique of the 340B Program, it did bring to light some interesting facts.

In its report, the OIG identified a number of issues relating to inconsistencies in the way that covered entities: (i) determine patient eligibility for 340B discounted drugs; (ii) prevent Medicaid prescriptions from generating both a 340B discount and manufacturer rebate (known as a duplicate discount); (iii) offer 340B discounts to uninsured patients; and (iv) monitor contract pharmacy compliance with 340B Program requirements. The OIG found that these issues may have an impact on the relationship between covered entities and their contract pharmacies. The report did not make any recommendations, and a podcast accompanying the report indicates that OIG intends the report to be used by the federal agency that administers the 340B Program, the Health Resources and Services Administration (HRSA), as it develops proposed regulations regarding 340B Program requirements. These proposed regulations are expected to be issued later this year.

The 340B Program allows covered entities to purchase outpatient drugs at discounted prices (340B Drugs). As of May 2013, the report states that 10,510 covered entities participated in the 340B Program, including 1,103 community health centers and 1,039 disproportionate share hospitals. According to the HRSA, approximately 20 percent of covered entities enter into contracts with community pharmacies to dispense 340B Drugs to eligible patients. Covered entities are required to ensure that 340B Drugs dispensed on their behalf by contracted pharmacies are dispensed only to individuals that meet the 340B Program definition of an eligible patient and that 340B Drugs dispensed to Medicaid beneficiaries do not generate a duplicate discount. HRSA has also released program guidance reflecting an expectation that covered entities will engage independent auditors to review contract pharmacy arrangements for 340B Program compliance on an annual basis.

To evaluate covered entities’ oversight of contract pharmacy arrangements, OIG reviewed the contract pharmacy arrangements of 30 covered entities, 15 community health centers and 15 disproportionate share hospitals. The covered entities that were reviewed represent just under 0.3 percent of all covered entities participating in the 340B Program, including 1.36 percent of all participating community health centers and 1.44 percent of all disproportionate share hospitals. The OIG found:

• In their contract pharmacy arrangements, the covered entities that were reviewed have interpreted the definition of “eligible patient” differently and, as a result, have developed different mechanisms to be used by contract pharmacies for determining a prescription’s 340B eligibility. The varying mechanisms produce inconsistent categorization by contract pharmacies of prescriptions as 340B eligible or 340B ineligible;
• Most covered entities that were reviewed prevent Medicaid duplicate discounts by identifying and excluding Medicaid prescriptions (fee-for-service, managed care, or both) from their contract pharmacy arrangements. Third-party contract administrators, used by most reviewed covered entities to ensure that their contract pharmacy arrangements are compliant with 340B Program requirements, admitted to having difficulties identifying Medicaid managed care beneficiaries. For example, some third-party contract administrators classified all prescriptions with identifiers (such as Bank Identification Numbers or Processor Control Numbers) used by insurers that operate both Medicaid managed care plans and private insurance plans as 340B ineligible, even though some of those prescriptions may have been for privately insured patients and would not produce duplicate discounts. In the end, this would result in the covered entity forfeiting potential savings on 340B Drugs;
• According to the report, some covered entities that were reviewed reported that their contract pharmacies dispense 340B prescriptions to Medicaid beneficiaries and did not have in place any mechanism to prevent duplicate discounts;
• While not required for participation in the 340B Program, 22 of the 30 covered entities that were reviewed reported that their contract pharmacies provide 340B Drugs at the discounted 340B price to uninsured patients. Eight covered entities did not offer the discounted 340B price to uninsured patients through their contract pharmacies;
• Most covered entities that were reviewed engage in internal monitoring of their contract pharmacy arrangements, but few retain independent auditors, as recommended by HRSA guidance. Of those covered entities that engaged in monitoring and that identified potential instances of non-compliance with 340B Program requirements, none had reported the identified issues to HRSA.

Presumably in response to the report, on February 5, 2014, the division of HRSA that administers the 340B Program, the Office of Pharmacy Affairs (OPA), issued a program update on the subject of contract pharmacy oversight (the program update). In the program update, OPA stresses the importance of vigilance in oversight of contract pharmacy arrangements and reiterates that failure by a covered entity to provide such oversight of a contract pharmacy arrangement is in violation of program requirements that may result in the prohibition of continued participation of the contract pharmacy arrangement in the 340B Program. Further, OPA identifies five requirements for 340B Program compliance, arising from contract pharmacy arrangements. OPA requires covered entities to:

• Conduct independent annual audits or implement an adequate mechanism for oversight of contract pharmacy arrangements;
• Maintain auditable records, compliant agreements with contract pharmacies and written policies and procedures related to contract pharmacy oversight;
• Ensure that 340B drugs are delivered only to eligible patients;
• “Carve out” Medicaid or develop an alternative arrangement with the state Medicaid agency to prevent duplicate discounts; and
• Maintain accurate information, including contract pharmacy information, in the HRSA 340B database.

Covered entities participating in the 340B Program should expect HRSA to use the findings of the report as they develop 340B Program-proposed regulations. While HRSA has already indicated that it intends to address clarification of the definition of eligible patient, reduction of duplicate discounts and contract pharmacy arrangements in the proposed regulations, the report provides HRSA with valuable information regarding current challenges faced by covered entities in interpretation of and compliance with current program requirements.

In light of the report, the program update and continued scrutiny of the 340B Program, entities participating in the 340B Program with contract pharmacies should actively monitor such arrangements and engage in annual audits by an independent auditor, in addition to developing internal review plans that provide comparable opportunities for identifying and addressing any instances of non-compliance with 340B Program requirements. While not a formal 340B Program requirement, covered entities should also be aware of increased scrutiny regarding use of 340B Program revenue and, where possible, maintain documentation of use of 340B Program savings. Finally, those covered entities that are not passing the 340B savings on to uninsured patients in contract pharmacy settings should take notice of the perception that this may create for these institutions.

Joseph Parise, associate in McDermott’s New York office, also contributed to this On the Subject.