Increased Scrutiny of 340B Drug Pricing Program Compliance and Enforcement

30 May 2012 Publication
Author(s): Anil Shankar Judith A. Waltz

Legal News Alert: Health Care

In recent months, increased scrutiny from U.S. Congress, the Government Accountability Office (GAO), and pharmaceutical manufacturers has led the Health Resources and Services Administration (HRSA) to increase its enforcement efforts with respect to covered entities participating in the 340B Drug Pricing Program (340B program). As a result, participating 340B-covered entities (including disproportionate share hospitals, federally qualified health centers and look-alikes, and others as discussed below) should be aware of the recent changes to the enforcement environment, including recertification requirements, and should review their policies and procedures to ensure ongoing compliance with 340B program requirements.

Participation in the 340B Program
The 340B program requires drug manufacturers to provide outpatient drugs to participating covered entities at costs that do not exceed a statutory limit. HRSA estimates that the program reduces the costs of outpatient drugs for covered entities between 20 percent and 50 percent. Eligible covered entities include FQHCs and FQHC look-alikes, disproportionate share hospitals (DSH), critical access hospitals, children’s hospitals, free-standing cancer hospitals, rural referral centers, sole community hospitals, and other HRSA grantees. To participate in the 340B program, an eligible covered entity must register with HRSA and be listed in HRSA’s covered entity database. Drug manufacturers provide 340B drugs to covered entities listed in the database at discounted prices. Participating covered entities are responsible for ensuring that they meet 340B program requirements, including a prohibition on distributing 340B drugs to individuals who do not qualify as patients of the covered entity, and a requirement to ensure that duplicate discounts are not claimed from drug manufacturers under both the 340B program and the Medicaid drug rebate program.

GAO Report. A GAO report published in September 2011 called for increased federal oversight of the 340B program. The report concluded that HRSA’s oversight of the 340B program was inadequate to ensure compliance with program requirements and recommended that HRSA take steps to strengthen its compliance enforcement and not rely solely on self-policing by covered entities.

Health Care Reform. The GAO report followed the passage of increased program integrity provisions in the Patient Protection and Affordable Care Act (PPACA). PPACA requires HRSA to increase oversight of covered entities and authorizes HRSA to impose more severe sanctions than have been imposed historically on covered entities that violate 340B program rules. If a covered entity is determined to have knowingly and intentionally diverted 340B drugs to individuals who are not patients of the covered entity, HRSA can require the covered entity to pay interest to manufacturers on the discounts they received on the drugs. If the diversion of 340B drugs is determined to be systematic and egregious, as well as knowing and intentional, HRSA may terminate the covered entity’s participation in the 340B program for a period of time. Additionally, PPACA specifies that violations may be referred to federal authorities such as the Office of Inspector General (OIG) and Food and Drug Administration (FDA).

HRSA Audits. In February 2012, HRSA sent a letter to 340B program participants discussing its plans to strengthen its efforts to achieve 340B program compliance. The letter announced that HRSA would conduct audits of 340B-covered entities to monitor for program violations. HRSA issued another letter soon after in March 2012, clarifying that the audits of covered entities would be both targeted and random. The random audits will first include covered entities determined to pose a higher program risk due to volume of purchases, increased complexity of program administration, and use of contract pharmacies. Targeted audits will be triggered by allegations of violations of 340B requirements, including but not limited to those by whistleblowers, manufacturers, and self-reporting by covered entities. HRSA specifies in the audit guidance that the audits will include a review of covered entities’ policies and procedures and a review of auditable records and system compliance to prevent diversion and duplicate discounts. The audit results may be used to refer 340B matters to the OIG or Department of Justice (DOJ).

Recertification Requirement. Operating pursuant to expanded authority added as a result of PPACA, HRSA has been conducting a recertification process under which covered entities are required to recertify their compliance with program requirements to continue participating in the 340B program on an annual basis. Recertification of participating Ryan White grantees, STD programs, tuberculosis programs, and family planning programs were completed in 2011 and early 2012. In April 2012, HRSA initiated the recertification process for hospital-covered entities. As part of this process, HRSA required the authorized official of each participating hospital to review information in HRSA’s 340B-covered entity database to ensure that the listing for the hospital was correct, including the listings for all contract pharmacies, outpatient hospital sites that utilize 340B drugs, and any child sites that receive 340B drugs through the parent’s 340B-covered entity status. In connection with the recertification process, HRSA has made a number of changes to the covered entity database to provide increased information about each covered entity, and has requested that covered entities submit change requests as necessary to ensure the information is accurate.

As part of the recertification for a hospital-covered entity, the authorizing official is required to attest to the following:

  1. All information listed in the 340B program database for that covered entity is complete, accurate, and correct
  2. The hospital has continuously met all 340B program eligibility requirements since being listed as eligible in the 340B database
  3. The hospital complies with all requirements and restrictions of Section 340B of the Public Health Service Act and any accompanying regulations or guidelines including, but not limited to, the prohibition against duplicate discounts/rebates under Medicaid, and the prohibition against transferring drugs purchased under 340B to anyone other than a patient of the entity
  4. The hospital maintains auditable records demonstrating compliance with 340B program requirements
  5. The hospital has systems/mechanisms in place to reasonably ensure ongoing compliance with 340B program requirements
  6. If the hospital uses contract pharmacy services, that the contract pharmacy arrangement is performed in accordance with the HRSA Office of Pharmacy Affairs (OPA) requirements and guidelines including, but not limited to, that the hospital obtains sufficient information from the contractor to ensure compliance with applicable policy and legal requirements, and the hospital has utilized an appropriate methodology to ensure compliance (e.g., through an independent audit or other mechanism)
  7. The hospital acknowledges its responsibility to contact OPA as soon as reasonably possible if there is any material breach by the hospital of any of the foregoing
  8. If the hospital does not notify OPA in a timely fashion, the hospital acknowledges that it may be required to remit payment back to manufacturers, which would represent the difference between the 340B discounted price and the drug’s non-340B purchase price


Covered entities that do not complete the recertification may have their participation in the 340B program terminated. HRSA has stated that it will require other categories of covered entities to recertify in the future.

Congressional Inquiries. In March 2012, members of Congress sent letters to stakeholders, including the Pharmaceutical Research and Manufacturers of America (PhRMA), the Biotechnology Industry Organization (BIO), Apexus Inc. (the 340B program’s prime vendor), and the Safety Net Hospitals for Pharmaceutical Access (an association of hospitals that participate in the 340B program) describing concerns about 340B program integrity. The congressional representatives requested that these organizations provide them with numerous documents related to the 340B guidance the organizations have shared with their members on issues such as 340B program requirements and compliance activities. In May 2012, Congress requested information from a university hospital regarding the manner in which it conducts its 340B program. U.S. Senator Grassley’s letter to the hospital seeks details on how the hospital changed the admission status and treatment of patients to obtain 340B program discounts for patients who may not have otherwise been eligible.

As a result of the changes made by federal health care reform, as well as the continued oversight of the current Congress, HRSA has rolled out a number of changes that significantly alter the compliance and enforcement environment for 340B-covered entities. It is critical that covered entities review their 340B programs to ensure compliance with program requirements such as the prohibition on diversion to non-patients and duplicate discounts. Covered entities should ensure that they have effective 340B program compliance policies in place and that pharmacy staff are trained on the 340B program rules and restrictions. Covered entities also should ensure that they have systems controls in place to ensure compliance and have auditable records available for review by HRSA or a manufacturer auditing their compliance with 340B program requirements. In addition, covered entities should carefully review the information in HRSA’s 340B-covered entity database to ensure that the information is accurate and up to date.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this Alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Elizabeth S. Elson
Los Angeles, California

Anil Shankar
Los Angeles, California

Brandon O. Young
Milwaukee, Wisconsin

Judith A. Waltz
San Francisco, California

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