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The Coming Storm Over The 340B Rx Drug Discount Program



May 6th, 2014

Beneath the glare of the wind-down of the ACA open enrollment period and wind-up of the 2015 Medicare regulation cycle, another Administration document is sitting at a few top officials’ desks for final review. It’s targeted for release in June but could come any day.

That proposed regulation relates to a program you may not be familiar with, that is if you don’t work with a pharmaceutical manufacturer or safety net provider. It’s called 340B (for the section in which it resides in the Public Health Service Act) and it requires manufacturers to provide steep discounts to such providers for qualifying patients. But the nature of those discounts and — especially — that pivotal identification of qualifying patients is very likely to change soon.

So here we provide a brief overview of the program as it stands now, some of the key developments in recent years, and the top issues likely to be addressed in this forthcoming rule.

Background. Congress created 340B in 1992 to “stretch scarce Federal resources” by easing costs for providers who deliver care to government program enrollees. To incentivize – and effectively require – manufacturer participation, Congress made contracts with 340B entities a pre-requisite for offering drugs in the broader Medicaid market. Drawing from the methodology used to calculate mandatory Medicare pharmaceutical rebates, 340B providers glean between 20 and 50 percent discounts on covered drugs.

Initially, to qualify, hospitals had to be non-profit and serve a disproportionately high number of Medicare beneficiaries. Some non-hospital entities that focus on delivering care to higher-need and lower-income populations, such as federally qualified health centers (FQHCs) and Ryan White Act grantees (HIV clinics), are also allowed to participate. The ACA significantly expanded the list of eligible providers to include children’s hospitals, freestanding cancer clinics, critical access hospitals, and more.

Importantly, 340B discounts only apply to individuals who reasonably qualify as a patient of a participating provider. Identifying those patients can sometimes be tricky and the regulations on the books are pretty vague. They say that a patient must have an “established relationship” with the provider such that the covered entity “maintains records of the individual’s healthcare.” There’s a categorical exclusion for individuals who only cross paths with the provider to get their drugs, but otherwise there is considerable gray area here.

Recent Developments. Participation in the 340B program has been growing rapidly, with the number of participating facilities doubling in the decade between 2001 and 2011 (which accounts for the ACA expansion). One third of all hospitals now participate.

The Government Accountability Office and the Office of the Inspector General at the Department of Health and Human Services have recently called for heightened oversight of the program, which has by and large been self-regulated since its inception. Providers are required to maintain records and pharmaceutical manufacturers may drop in to check the books, but these encounters occur rarely and the Health Resources and Services Administration (HRSA) at HHS, within which the program is housed, has taken a hands-off approach.

One of the top congressional watchdogs, Senator Charles Grassley, has also sent letters to program participants questioning the use of 340B discounts to cross-subsidize other service lines. He and others have called attention to the difficulty that can arise in ensuring that 340B-discounted drugs don’t wind up in the hands of non-qualifying patients, especially when providers contract with independent pharmacies to dispense drugs.

In a potential harbinger of what’s to come, HRSA recently executed 51 audits covering 410 participating providers and the Obama Administration’s Fiscal Year 2015 Budget Request asks for a 70 percent increase in funding for HRSA’s management of the program.

The Forthcoming Rule. Of the issues to be addressed in the proposed regulation that is pending final review, the definition of who qualifies as a covered entity’s “patient” (and thus is eligible for 340B-discounted drugs) is probably the most significant.

It’s well worth noting that HRSA tried this before. In 2007, it issued a proposed rule that would have tightened the definition of patient, primarily by clarifying which kinds of encounters constitute a substantial enough relationship to justify attributing an individual to a provider. For example, providers wouldn’t have had to just keep records, they’d have to maintain ownership and possession of them and update them as appropriate.

That draft guidance also carved out certain encounters as not constituting a close enough relationship between patient and provider to qualify for 340B discounts, such as certain case management services.

After considerable debate, and some backlash against the agency for wading into this largely unregulated territory, HRSA quietly retracted the rule a few years later. But now the agency is back for Round 2.

Beyond the definition of eligible patient, expect HRSA to propose changes (and invite public comment) in areas such as contract pharmacy arrangements, hospital eligibility criteria, and the extension of discounts to off-site facilities of covered entities.

At a recent hearing, outgoing HHS Secretary Kathleen Sebelius noted that the 340B program had “expanded beyond its bounds” but also acknowledged it’s a “vitally important program.” HRSA’s proposed regulation will probably try to codify this delicate balance: staying true to Congress’s intent to extend Federal dollars by leveraging these discounts, but also drawing brighter boundaries around which transactions are “in” and which ones are “out.”

So, despite this midseason lull in government health care regulations, don’t be surprised if you hear a few shouts and murmurs from some corners of the health system in the next few weeks. This is a good sleeper pick for some summer fireworks.

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1 Response to “The Coming Storm Over The 340B Rx Drug Discount Program”

  1. Ian Spatz Says:

    The author cites a legislative intent for the 340B program that has been adopted by those favoring the program’s expansion. Those concerned with the program’s scope and reach have at least an equally convincing view that the program was primarily motivated by the unintended consequences of the Medicaid Drug Rebate program, which had allegedly harmed certain hospitals that, prior to the rebate program, had enjoyed deep drug price discounts. This dispute over intent is important as HHS and Congress examine whether the program’s good intentions have been corrupted by a desire to expand its use.

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