By Alan J. Arville

Last week, the 2014 340B Coalition Winter Conference was held in San Diego, California (the “Winter Conference”), where representatives from the Health Resources and Services Administration (“HRSA”) of the United States Department of Health and Human Services (“HHS”), the Office of Inspector General (“OIG”) of HHS, and industry stakeholders (including Epstein Becker Green) presented on current developments with the 340B drug discount program (the “340B Program”). A brief summary of the 340B Program, including contract pharmacy arrangements, can be found at our previous blog post here. The following are a few noteworthy takeaways from the Winter Conference:

Contract Pharmacy Oversight: On February 5, 2014, the HRSA Office of Pharmacy Affairs (“OPA”), the office responsible for administering the 340B Program, issued a letter to 340B covered entities (“Covered Entities”) stressing that Covered Entities must exercise “vigilant oversight” of their contract pharmacy arrangements to ensure compliance with the 340B Program requirements to prevent diversion and duplicate discounts. The letter repeats previous HRSA guidance on contract pharmacy arrangements[1] that HRSA expects Covered Entities to conduct annual audits of contract pharmacies that are performed by an independent auditor. Most notably, the letter states that “if HRSA finds a covered entity providing no oversight of its contract pharmacy arrangements, this is a violation of program requirements and HRSA will no longer permit the participation of that contract pharmacy arrangement.” This was repeated by the OPA Director in a presentation, last Thursday, February 6, at the Winter Conference.

On the day prior to HRSA’s letter to Covered Entities, the OIG issued a report (the “OIG Report”) (discussed here) on contract pharmacy arrangements revealing that while most Covered Entities reported that they monitor their contract pharmacy arrangements internally to detect potential diversion or duplicate discounts, only 7 of 30 Covered Entities interviewed reported that they have retained independent auditors, and 4 of 30 Covered Entities reported that they neither monitor their contract pharmacy arrangements nor retain independent auditors.[2]

Due to HRSA’s letter and the OIG report, Covered Entities should be on heightened alert to ensure they are monitoring contract pharmacy arrangements for compliance. Ideally, annual audits should be performed by an independent contractor, however, the companies that offer independent auditing services in this area (and their experience, quality of service, and capabilities) are not widely known among Covered Entities. At the Winter Conference, HRSA indicated that at the very least Covered Entities must regularly perform effective self-audits of contract pharmacy arrangements to prevent diversion and duplicate discounts. To this end, Covered Entities should develop policies and protocols for performing such self-audits and explore the availability of independent auditing services.

Contract pharmacies, on the other hand, should be alarmed that HRSA’s stated penalty for the Covered Entity’s failure to carry out its own responsibility to exercise oversight over the contract pharmacy is to remove the contract pharmacy arrangement from the 340B Program. Thus, contract pharmacies should contact their Covered Entities to proactively support and coordinate Covered Entity oversight and audit activities.

Medicaid Managed Care Organizations (“MCO Medicaid”): The statute implementing the 340B Program prohibits Covered Entities from subjecting drug manufacturers to duplicate discounts on 340B-purchased drugs. Duplicate discounts occur when a drug manufacturer pays a State Medicaid agency a rebate under the Medicaid drug rebate program on a drug sold at the already-discounted 340B price. In the OIG Report, the OIG states that the risk of “duplicate discounts applies to MCO Medicaid as well as traditional fee-for-service Medicaid in States where drug manufacturers are paying rebates on drugs dispensed through MCO Medicaid.”

The OIG Report noted that while the majority of Covered Entities reported that their contract pharmacies do not dispense to either Fee For Service (“FFS”) Medicaid or MCO Medicaid beneficiaries, 2 of 30 Covered Entities reported that they did not know whether their contract pharmacies do so for MCO Medicaid beneficiaries, and 8 of 30 Covered Entities reported that their contract pharmacies dispense to Medicaid beneficiaries, 6 of which did not report a method to prevent duplicate discounts. Perhaps most problematic, the OIG Report states that administrators hired by Covered Entities to manage drug inventory tracking systems with contract pharmacies reported that the information needed to accurately identify MCO Medicaid prescriptions is not readily available.

Previous guidance issued by HRSA on contract pharmacy arrangements provides that the parties to a contract pharmacy arrangement must not use 340B-purchased drugs to dispense Medicaid prescriptions, unless the Covered Entity and contract pharmacy establish an arrangement with the applicable State Medicaid agency to prevent duplicate discounts. Certain industry stakeholders have interpreted HRSA’s guidance to apply to FFS Medicaid prescriptions but not MCO Medicaid prescriptions. Nevertheless, it was reiterated by an OIG representative at the Winter Conference that, irrespective of varying interpretations of HRSA’s previous guidelines, the statute prohibits both FFS Medicaid and MCO Medicaid duplicate discounts. HRSA has not yet issued a policy that specifically addresses the application of the duplicate discount prohibition to MCO Medicaid covered prescriptions.

Based on the OIG Report and the implementing statute to the 340B Program, Covered Entities should presume that the risk of duplicate discounts applies to MCO Medicaid in States where manufacturers are paying rebates on drugs dispensed through MCO Medicaid plans. If the Covered Entity determines that such rebates are required in the applicable State, the Covered Entity should determine how it, or its administrator (if applicable), is ensuring that duplicate discounts are prevented. In some instances, the Covered Entity may need to contact the applicable State Medicaid agency and MCO Medicaid plans to obtain information needed to accurately identify MCO Medicaid beneficiaries.

340B Mega-Rule Eagerly Anticipated: HRSA issued a public statement that it is currently developing, and expects to publish, proposed regulations by June 2014 that will address at least the following 4 areas: (1) definition of an eligible patient, (2) compliance requirements for contract pharmacy arrangements, (3) hospital eligibility criteria and (4) eligibility of hospital off-site facilities. At the Winter Conference, HRSA did not expound on the scope or content of the proposed regulations in each of the foregoing areas.

With respect to the definition of an eligible patient, the OIG Report summarized how the Covered Entities interviewed applied inconsistent methods for identifying 340B-eligible prescriptions, based on differing interpretations of the eligible patient definition. Industry stakeholders at the Winter Conference both supportive and critical of the 340B Program expressed that they welcome new regulations that will clarify the definition of an eligible patient, and other areas where the statute and existing guidelines are ambiguous.


[1] HRSA, Notice Regarding 340B Drug Pricing Program—Contract Pharmacy Services, 75 Fed. Reg. 10272 (Mar. 5, 2010).

[2] HHS OIG, Memorandum Report: Contract Pharmacy Arrangements in the 340B Program (Feb. 4, 2014),