340B Drug Pricing Program: Recent Developments

18 April 2013 Publication
Author(s): Anil Shankar

Legal News Alert: Health Care

The 340B Drug Pricing Program (340B Program) continues to undergo a period of intense scrutiny and debate over how compliance with program rules is enforced. As previously reported in the May 30, 2012 edition of Foley’s Legal News Alert: Health Care, in 2012 the U.S. Health Resources and Services Administration (HRSA) initiated new enforcement efforts with respect to covered entities participating in the 340B Program in response to scrutiny from drug manufacturers, the Governmental Accountability Office (GAO), and members of the U.S. Congress. These enforcement efforts will be expanded upon in 2013, including increased use of 340B Program audits, increased focus on the Group Purchasing Organization (GPO) prohibition applicable to certain covered entities, and new recertification requirements. HRSA also has begun issuing guidance for covered entities addressing issues raised during the audits, and establishing timetables for covered entities to come into compliance.

340B-covered entities should confirm they comply with HRSA’s new guidance, ensure they have robust compliance policies and procedures in place, and review their programs to ensure compliance with all 340B Program requirements prior to the initiation of an audit or recertification period. In addition, covered entities should be aware that additional changes to the 340B Program may be forthcoming.

HRSA Extends Deadline to Comply With New Guidance Regarding GPO Prohibition

On February 7, 2013, HRSA issued new policy guidance regarding the 340B Program statutory prohibition on certain covered entities obtaining covered outpatient drugs through a GPO. An important component of this guidance provides that covered entity hospitals subject to the GPO prohibition (namely, disproportionate share hospitals, children's hospitals, and freestanding cancer hospitals) may not replenish supplies of 340B Program drugs through a GPO. The guidance explains that HRSA learned that some hospitals subject to the GPO prohibition have been purchasing covered outpatient drugs through a GPO and later either “replenishing” through accounting by “replacing” the GPO-purchased drug with a 340B discounted drug, or otherwise reclassifying the method of purchase after dispensing the drugs.

In order to comply with HRSA’s new guidance, many hospitals will need to change their virtual inventory systems so that their original inventories of covered outpatient drugs are purchased from a non-GPO, non-340B account (generally a wholesale acquisition cost (WAC) account), and then replenished with 340B Program drugs only after the hospital is able to verify that the drugs were provided to eligible patients. For a large number of hospitals, this is a complicated change that requires significant work with their vendors and wholesalers.

HRSA was initially going to require applicable covered entities to comply with the February 2013 guidance by April 7, 2013. However, after receiving extensive feedback from covered entities and related trade organizations indicating that the covered entities could not meet this compliance deadline due to the significant amount of work it would take to implement the required changes to their drug replenishment practices, HRSA updated its 340B Program FAQs to specify that the compliance deadline would be extended to August 7, 2013. HRSA noted in its FAQs that there would be no further extension of this deadline and that it expects covered entities to come into compliance as soon as possible prior to the new deadline. HRSA’s FAQs also point out that HRSA may audit covered entities and that during such audits, covered entities should be able to demonstrate that they made their best effort to come into compliance as soon as they were able to do so. HRSA notes that any evidence of intentional delay could result in immediate removal from the 340B Program.

HRSA’s FAQs explain that if a covered entity subject to the GPO prohibition cannot come into compliance with the new HRSA guidance by August 7, 2013, the covered entity must notify HRSA and will be terminated from the program. If a covered entity is terminated on this basis, but can come into compliance thereafter, the entity may reapply during the next quarterly registration period. If HRSA determines that a covered entity is not compliant after August 7, 2013, HRSA will immediately terminate the covered entity from the 340B Program. HRSA expects that applicable covered entities will be able to demonstrate compliance with the GPO prohibition through auditable records.

HRSA’s new FAQs also provide that HRSA will begin conducting its second annual recertification of covered entity hospitals after the August 7, 2013 deadline, and at this time, participating 340B Program hospitals must attest during recertification that they are in compliance with all 340B Program requirements, including (if applicable to the hospital) the GPO prohibition as detailed in HRSA’s February 7, 2013 policy guidance.

Another notable issue covered in HRSA’s guidance on the GPO prohibition specifies that while a hospital subject to the GPO prohibition may not purchase covered outpatient drugs through a GPO for any of its clinics/departments within the four walls of the hospital under any circumstances, the GPO prohibition does not extend to certain offsite outpatient clinics under specific conditions set forth in the guidance. Additionally, the guidance specifies that a hospital may not use a GPO to purchase covered outpatient drugs for patients even if the drugs are dispensed at a contract pharmacy.

New Audits Planned for 2013

HRSA is planning to expand its 340B Program audits during 2013, and hundreds of audits of covered entities are expected. HRSA began conducting 340B Program audits in January 2012. HRSA’s audits will focus first on covered entities randomly chosen from program types that are determined to be higher risk, due to their volume of 340B Program purchases, complexity of program administration, and/or use of contract pharmacies. Later audits will focus on entities chosen from program types that are determined to have lower risk. In addition, HRSA will also conduct targeted audits that are triggered by allegations of 340B Program violations, including those made by whistleblowers, drug manufacturers, or that are prompted by self-disclosures from the covered entity.

HRSA audits will review the covered entities’ 340B Program operations and compliance with 340B Program rules, including but not limited to the prohibition on the diversion of 340B Program drugs to non-patients, duplicate discounts related to the use of 340B Program drugs for Medicaid patients, and the prohibition for certain hospital-covered entities on the use of a GPO. Potential penalties for compliance violations include repayment to manufacturers of the 340B Program discount, payments of interest, and, for systematic and egregious violations, removal from the program.

Drug manufacturers have also begun conducting audits of covered entities, and such audits are expected to be more prevalent in the future. The 340B Program statute and implementing guidance have given drug manufacturers the ability to audit covered entities if they can demonstrate “reasonable cause” to HRSA to do so. In some cases, HRSA may choose to conduct the audit itself. A covered entity may not be subject to more than one audit at a time.

New Regulations Planned

Partly in response to concerns expressed by the GAO and concerns from members of Congress, HRSA is reportedly planning comprehensive 340B Program regulations for publication later this year. These regulations would most likely include a revised definition of “patient” for purposes of determining who may receive 340B Program drugs. Once proposed, HRSA would provide an opportunity to comment on the regulations before they are finalized.

User Fee Proposed

The proposed budget released in April 2013 by the White House included a provision that would, for the first time, impose a “user fee” on covered entities participating in the 340B Program. The user fee would be an imposition of a 0.1 percent fee on 340B Program drug purchases.. The money would be used to increase the budget of HRSA’s Office of Pharmacy Affairs (OPA) from $4 million to $10 million, thus likely further increasing HRSA’s program integrity efforts A similar proposal was previously considered and rejected by Congress.

Senator Recommends HRSA Collect Information About Covered Entity’s Use of 340B Program Savings

On March 27, 2013, Sen. Chuck Grassley (R-Ia.) sent a letter to the administrator of HRSA reporting information Sen. Grassley had received from several North Carolina hospitals regarding their 340B Program patient mix, the amount of savings the hospitals generated from the 340B Program, and how those savings are reinvested. In the letter, Sen. Grassley recommends that HRSA begin to “collect information from covered entities regarding their participation in the program.” While it is unclear whether, or how, HRSA will respond to the letter, covered entities should be prepared for the possibility of greater scrutiny of their use of savings that result from participation in the 340B Program.


As a result of the continuing scrutiny of the 340B Program and increased efforts by manufacturers, Congress, and HRSA to ensure program integrity, covered entities should make sure they have effective 340B Program compliance programs in place. Covered entities should regularly review and update their compliance policies and procedures to ensure compliance with current 340B Program guidance, and should verify that they have auditable records demonstrating such compliance.

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

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