PHS 340B Program Proposed Amendments

The Senate Finance committee bill (S. 1679) and the House bill contain provisions which would significantly expand the PHS 340B discount program. Under that program, manufacturers may not charge “covered entities” for covered outpatient drugs more than a maximum discounted price that is equal to the difference between a drug’s Medicaid AMP and the average total Medicaid rebate.

A. Expansion of “Covered Entities” Eligible to Participate

Both the Senate and House bills authorize additional classes of health care providers to become “covered entities” eligible for 340B discounts. The Senate bill would authorize Medicare prospective payment system exempt children’s and cancer hospitals that would meet disproportionate share hospital eligibility criteria, critical access hospitals, and rural referral centers with disproportionate share adjustments greater than or equal to 8 percent, to qualify as covered entities. The House bill includes these new categories, as well as also authorizing participation by title V maternal and child health grantees, community mental health service grantees, substance abuse treatment grantees, Medicare-dependent small rural hospitals, and Medicare sole community hospitals. Under the House bill, the new hospital covered entities would be subject to the existing restrictions on the use of group purchasing organizations (“GPOs”) for outpatient purchasing that currently apply to disproportionate share hospitals.

B. Expansion of 340B Discounts to Inpatient Purchases

The Senate bill would also include a significant expansion to the 340B program in that it would require manufacturers to extend 340B discounts to hospital covered entities (including the new entities described above) for purposes of their inpatient use. The bill would also retain the current limitation on hospitals’ use of GPOs for outpatient purchases, but would also include exceptions authorizing hospitals to use GPOs for inpatient purchases, as well as for outpatient uses pursuant to exceptions established by PHS with respect to drug shortages, manufacturer noncompliance, to facilitate the purchase of lower cost generics, and to minimize administrative burdens associated with dual inventory maintenance. However, this new authorization for inpatient 340B purchasing is not without cost to hospitals. While hospitals are permitted to use 340B purchases for any patients, they would be required to provide a credit to state Medicaid programs with respect to inpatient drugs administered to Medicaid patients within 90 days of filing their annual Medicare cost reports.

C. Program Integrity

Finally, but significantly, both the House and Senate bills contemplate a potentially significant expansion with respect to the administrative oversight of the 340B program. These provisions, however, are subject to appropriations.

First, the bills authorize the Secretary to develop a system to verify the accuracy of ceiling prices calculated and charged by manufacturers to covered entities. Second, bill would require the Secretary to establish procedures for manufacturers to issue refunds to covered entities in the case of overcharges (including in the Senate bill both routine and non-routine overcharge situations). Third, the bills authorize the Secretary to develop an internet website through which covered entities may obtain the PHS prices. Fourth, the bills contemplate a system to report additional rebates that may lower PHS prices and to provide credits to covered entities in those instances. Fifth, the bills would authorize the Secretary to audit both manufacturers and wholesalers with respect to program compliance. Sixth, the bill would authorize civil money penalties (“CMPs”) against manufacturers that knowingly and intentionally overcharge covered entities.

The bills also contemplate improvements with respect to covered entity compliance and identification, including a system to verify current entity eligibility, the development of a unique identifier, and the imposition of sanctions where a covered entity diverts products for non-covered uses or otherwise fails to comply with program requirements.

Finally, the bills contemplate the establishment of administrative dispute resolution (“ADR”) procedures to address claims of both manufacturer and covered entity noncompliance. The Senate bill specifically contemplates that these procedures would authorize discovery from manufacturers and third parties, and would permit the hearing entity to consolidate claims from multiple claimants and to allow associations to assert claims rather than the covered entities themselves. The Senate bill would also condition a manufacturer ADR claim against a covered entity upon the manufacturer having conducted an audit of the covered entity.