By Constance Wilkinson, Alan Arville, and David Gibbons

The U.S. Department of Health and Human Services ("HHS") Office of Inspector General ("OIG") released a Report [1] on February 5th based on in-depth interviews with a sample of thirty 340B Covered Entities – half were disproportionate share hospitals ("DSH") and half were community health centers ("CH") – and eight contract pharmacy administrators to gain a better understanding of how contract pharmacy arrangements operate under the 340B Drug Discount Program, codified as Section 340B of the Public Health Service Act ("340B Program").

By way of background, the 340B Program, created in 1992 and administered by the Health Resources and Services Administration ("HRSA"), requires drug manufacturers to give discounts to entities covered under the law – known as "Covered Entities" – in order to have their drugs covered by Medicaid. The manufacturer must agree to sell each of its outpatient prescription drugs to Covered Entities enrolled in the 340B Program "at or below a ceiling price" that is derived from the same Average Manufacturer Price and Unit Rebate Amount calculated under the Medicaid Drug Rebate Program.[2] Covered Entities are subject to certain compliance requirements, including preventing duplicate discounts (i.e., preventing Medicaid rebate claims for prescriptions that were filled with drug purchased at the 340B price by reporting how they bill Medicaid on the Medicaid Exclusion File) and preventing diversion of 340B drugs (i.e., ensuring that only eligible patients receive 340B drug in accordance with the 340B program definition of a patient). According to HRSA's subregulatory guidance, a Covered Entity may enter into agreements with one or more specified pharmacies to dispense drugs purchased at 340B discounts to the Covered Entity's eligible patients.[3]

The Report provides a useful overview of the contract pharmacy arrangement "replenishment" model in use today and notes that the use of contract pharmacies by Covered Entities as well as the number of contract pharmacy arrangements has increased dramatically over the past several years. The Report focuses on the statutory prohibitions of diversion and duplicate discounts and also on access to discounted prices for 340B eligible uninsured patients. Notably, the Report does not discuss the applicability of the Federal Anti-Kickback Statute to 340B contract pharmacy arrangements. While limited in its scope, the Report raises some significant issues that HRSA will need to consider as it develops comprehensive regulations anticipated to be released later this year.

First, the OIG found that Covered Entities are taking inconsistent approaches to interpreting HRSA's definition of an "eligible patient" under the 340B Program.[4] The OIG found that Covered Entities differ with respect to how they classify prescriptions as 340B-eligible, with regard to when the determination is performed (before or after the prescription is written), the time limits applied to when a prescription can be 340B-eligible relative to a physician visit, and the data used to determine eligibility. For example, eligible patients must receive health care services from providers that are either employed by or under a contractual or other arrangement with the Covered Entity such that the Covered Entity is responsible for the health care services delivered to eligible patients. In practice however, these providers sometimes provide services in their private offices, which creates some ambiguity as to whether such services, including prescribing of drugs otherwise covered by the 340B Program, meet the eligibility requirements. When the OIG examined how contract pharmacies operate in scenarios such as this, they found that Covered Entities categorized 340B eligibility differently and used different means to make such categorizations, resulting in inconsistencies among Covered Entities in similar circumstances regarding the utilization of 340B drug.

Second, Covered Entities encounter difficulties in identifying 340B eligible prescriptions for patients enrolled in Medicaid managed care plans. To comply with the statutory prohibition against duplicate discounts (noted above), Covered Entities choose whether or not they will dispense 340B drugs to Medicaid beneficiaries; if they do dispense 340B drugs to Medicaid beneficiaries, Covered Entities must provide HRSA with their pharmacy Medicaid Provider number, which is then entered in the HRSA Medicaid Exclusion File. The HRSA Medicaid Exclusion File is provided to state Medicaid agencies and manufacturers to ensure that a Medicaid rebate is not sought from a manufacturer for drugs already sold at the 340B discount. The difficulty in complying with this provision for Medicaid managed care patients arises from a lack of information available from state Medicaid agencies and managed care plans using the same routing numbers for their Medicaid managed care patients as for privately insured patients.

Third, the Report noted that eight of the thirty Covered Entities included in the study do not offer the 340B discounted drug price to their uninsured patients who are dispensed prescriptions through a contract pharmacy. Most of the 340B contract pharmacy administrators serving these entities revealed that the determination of eligibility is made after the drug is dispensed. Therefore, the contract pharmacy charges the uninsured patient the full cost of the prescription at the time it is dispensed. Among the eighteen Covered Entities interviewed that do offer 340B discounts to uninsured patients, it is common for the Covered Entity to address the underlying issue by providing their 340B eligible uninsured patients with a 340B discount card that, when presented to the pharmacy, notifies the pharmacy to charge the discounted rate.

The Report does not provide any recommendations in response to the inconsistencies in contract pharmacy arrangement operations identified by the OIG, but notes that comments or questions concerning the Report can be submitted by April 5. The OIG states that recommendations could be forthcoming in a future report as the agency continues to review contract pharmacy arrangements.

An accompanying podcast is available at available at



[1] HHS OIG, Memorandum Report: Contract Pharmacy Arrangements in the 340B Program (Feb. 5, 2014),

[2] Section 340B(a)(1) of the Public Health Service Act. 42 U.S.C. § 256b(a)(1) (2011),

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

[4] HRSA, Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and Entity Eligibility, 61 Fed. Reg., 55156, 55157-55158 (Oct. 24, 1996).

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