Legal Alert. Long-Awaited 340B Program Guidance Now Available for Comments: What Stakeholders Need to Know. Authors

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1 September 10, Legal Alert Authors Stephanie Trunk Partner stephanie.trunk@arentfox.com Erin E. Atkins Associate erin.atkins@arentfox.com Long-Awaited 340B Program Guidance Now Available for Comments: What Stakeholders Need to Know The Health Resources and Services Administration (HRSA), as administrator of the 340B Drug Pricing Program (the 340B Program, Program, or 340B ) on behalf of the Department of Health and Human Services (HHS), published its proposed 340B Drug Pricing Program Omnibus Guidance (the Proposed Guidance or Guidance ) on August 28, 2015, providing 340B Program stakeholders formal guidance on various components of the 340B Program. Comments on the Proposed Guidance are due on or before October 27, While many aspects of the Proposed Guidance do not fundamentally alter the manner in which the 340B Program currently operates, it does add clarity to several parts of the Program. We have summarized many of the key concepts below. We urge pharmaceutical manufacturers, contract pharmacies, 340B Covered Entities, and other stakeholders to carefully review the Proposed Guidance and submit comments to HRSA, from both a policy and operational perspective, where warranted. 340B Program Eligibility and Termination The Proposed Guidance clarifies certain requirements related to eligibility, registration and termination, recertification, and the use of group purchasing organizations for both non-hospital and hospital covered entities enrolled in the 340B Program ( Covered Entities ). With respect to eligibility for non-hospital 340B Covered Entities, the Proposed Guidance makes clear that both a parent site and related child site may participate in the 340B Program, so long as the child site is performing services under the main qualifying grant, contract, designation, or project; the parent site registers the child site; and all applicable Program requirements are satisfied. The loss of eligibility or termination or closure of a child site typically does not impact the eligibility of the parent site, but ineligibility, termination, or closure of the parent will immediately remove the child site s eligibility. For hospitals that qualify as 340B Covered Entities, off-site patient facilities or clinics affiliated with an eligible hospital Covered Entity may participate in the Program, so long as they are listed on the most recently filed cost report of the parent hospital, and can demonstrate that the services provided at the off-site facility have associated outpatient Medicare costs and charges. HRSA specifically seeks comments on the means of demonstrating 340B Program eligibility of an off-site outpatient facility or clinic, including suggestions as to the actual content of enrollment forms submitted to HRSA. Qualifying off-site clinics will be listed as child sites of the parent hospital. In the Proposed Guidance, HRSA did not propose assigning separate 340B identification numbers to the parent and child sites; rather, the child sites will be listed under each

2 2 qualifying 340B Covered Entity parent, which is the current practice, and identified by a modifying letter following the 340B identification number. If a Covered Entity loses its eligibility or terminates any contract pharmacy arrangement, the Covered Entity must immediately notify HHS. However, if a Covered Entity is removed from the 340B Program, the Proposed Guidance suggests that it can re-enroll during the next regular enrollment period, which occurs quarterly. In addition, it appears that the terminated Covered Entity may reenroll in the 340B Program even if it has not completed full repayment of any improper discount to manufacturers stemming from the termination: the Proposed Guidance states that the Covered Entity must be in the process of offering repayment to affected manufacturers, if any. The speed at which entities may reenroll in the 340B Program and the lack of a full repayment requirement prior to reenrollment may negatively impact Covered Entities focus on 340B Program compliance, which seems at odds with recent calls from Congress, HHS, and others to improve Program compliance. HRSA seeks comment on what types of information Covered Entities should be required to submit to HHS in the event that the Covered Entity wishes to re-enroll in the 340B program following a determination of noncompliance. Lastly with regard to termination, HRSA indicated in the Proposed Guidance that while it can terminate a Covered Entity from the 340B Program if the Covered Entity fails to provide required records to HRSA, it plans to do so only if the failure is systematic. Annual Certification Requirement for Covered Entities and Participating Pharmaceutical Manufacturers The Proposed Guidance requires Covered Entities and participating pharmaceutical manufacturers alike to certify on an annual basis compliance with all 340B Program requirements. Covered Entities must annually recertify that the Covered Entity, its child sites, and its contract pharmacy arrangements meet all 340B Program eligibility and compliance requirements, putting the onus on Covered Entities to carefully monitor not only its own operations, but those of affiliated sites and contractors. As part of the annual recertification process, Covered Entities and manufacturers are required to review the completeness and accuracy of records about such entities in the HRSA 340B database information. The Proposed Guidance provides little detail about the proposed recertification process, which seemingly could form the basis for a False Claims Act claim in the event such certification was false. Group Purchasing Organization Prohibition for Certain Covered Entities Certain qualifying hospital 340B Covered Entities disproportionate share hospitals, children s hospitals, and free-standing cancer hospitals are prohibited from obtaining covered outpatient drugs from a group purchasing organization (GPO) for outpatient use unless a specific exception applies: (i) an off-site outpatient clinic of a hospital Covered Entity may use a GPO in the event it is not a 340B child site or otherwise participating in the 340B Program; (ii) a hospital 340B Covered Entity may use a GPO to purchase drugs for an inpatient whose status later changes to that of an outpatient by an insurer, including Medicare, so long as sufficient documentation supports the change in status, and (iii) in the event of a

3 3 drug shortage, if the hospital can only access a given covered drug through a GPO and sufficiently documents its attempts to secure the drug from sources other than a GPO. Although violation of the GPO prohibition can result in the Covered Entity losing 340B Program eligibility, HRSA is reserving the right not to remove a hospital 340B Covered Entity that is non-compliant with the GPO prohibition from the 340B Program, opting instead only to require implementation of a corrective action plan, if the Covered Entity can demonstrate the violation is an isolated error. Covered Entities alleged to have violated the GPO prohibition will be afforded an opportunity for notice and hearing to address its compliance. HRSA provides no detail as to the notice and hearing process. Drugs Eligible for Purchase under 340B The Proposed Guidance reiterates that drugs meeting the conditions of the socalled limiting definition found in 1927(k)(3) of the Social Security Act will not be considered covered outpatient drugs eligible for purchase by Covered Entities at or below the 340B Ceiling Price under the Program. The limiting definition specifically excludes drugs paid for in a bundle (such as on a per diem, diagnosisrelated group, or ambulatory payment code basis), regardless of the payor. The Proposed Guidance narrows the scope of this limiting definition such that it only applies when the drug is bundled for payment under Medicaid as part of a service in the settings described in the limiting definition. Drugs which are not reimbursed as part of a bundled payment scheme and which are directly billed to Medicaid could still qualify as a covered outpatient drug under the Program, including if the drug is billed and paid for by another third party payor under a bundled reimbursement methodology. Revised Definition of 340B Patient One significant development in the Proposed Guidance is HRSA s attempt to further clarify and seemingly narrow the definition of a patient to which a Covered Entity can dispense 340B drugs. Current guidance uses a three-part test to determine whether a person is a patient of a Covered Entity. The Proposed Guidance will expand this into a six-part test. The determination as to patient-status is to be evaluated on a prescription-by-prescription basis, meaning that just because an individual may have received 340B drugs from a Covered Entity in the past does not automatically qualify him or her for the discounted drugs in the future. The new six-part test will require compliance with all of the following conditions: (1) The individual receives a health care service at a Covered Entity site which is registered for the 340B Program and listed on the HRSA 340B database; (2) The individual receives a health care service from a health care provider employed by the Covered Entity or who is an independent contractor of the Covered Entity such that the Covered Entity may bill for services on behalf of the provider (i.e. an individual receiving care from a physician merely having privileges at a hospital that is a 340B Covered Entity will not qualify as a patient ); (3) An individual receives a drug that is ordered or prescribed by the Covered Entity provider as a result of the service described in (2). An individual will not be considered a patient of the Covered Entity if the only health care received by the

4 4 individual from the Covered Entity is the infusion of a drug or the dispensing of a drug. As such, a patient having chemotherapy in the outpatient facility of a hospital that was ordered by an independent physician that merely has privileges at the hospital would not meet the proposed definition of patient; (4) The individual receives a health care service that is consistent with the Covered Entity s scope of grant, project, or contract; (5) The individual is classified as an outpatient when the drug is ordered or prescribed. The patient s classification status is determined by how the services for the patient are billed to the insurer (e.g., Medicare, Medicaid, private insurance). An individual who is self-pay, uninsured, or whose cost of care is covered by the Covered Entity will be considered a patient if the Covered Entity has clearly defined policies and procedures that it follows to classify such individuals consistently; and (6) The individual has a relationship with the Covered Entity such that the Covered Entity maintains access to auditable health care records which demonstrate that the Covered Entity has a provider-to-patient relationship, that the responsibility for care is with the Covered Entity, and that each element of the patient definition in this section is met for each 340B drug. The new proposed definition of patient raises several interesting considerations, including, but not limited to, the impact that telemedicine or telepharmacy practices may have on condition (3), and changes in patient status (from inpatient to outpatient, or vice versa) with respect to condition (5). The Proposed Guidance acknowledges that Covered Entities can use a replenishment model to properly account for 340B drug inventory separate from inpatient and outpatient inventories. HRSA emphasizes that each 340B drug order placed under a replenishment model should be supported by documentation demonstrating prior receipt of that drug by a 340B eligible patient. HRSA stresses that Covered Entities are responsible for requesting 340B pricing at the time of original purchase. The Guidance does warn Covered Entities, however, that if a Covered Entity improperly accumulates or tallies 340B drug inventory, even if it is prior to placing an order, the Covered Entity has effectively sold or transferred drugs to a person who is not a patient, in violation of the law. In addition, the recharacterization of drug purchases as 340B eligible after purchase known as banking is only permitted if the Covered Entity notifies manufacturers of such practice and ensures a transparent, auditable record supports each drug purchase under the 340B Program. In the section of the Guidance proposing a new patient definition, HRSA also emphasizes the following: HRSA s expectation that records and documentation be retained to support compliance with the new patient definition for every 340B drug prescription dispensed or accumulated through a replenishment model. Renewed emphasis that employees of a Covered Entity may not receive 340B drugs unless they meet the definition of a patient. Emphasis of the Covered Entity s responsibility to repay manufacturers for

5 5 drugs purchased under the 340B Program that were improperly dispensed or diverted. Of particular note is the disparate treatment between de minimis amounts potentially owed by a Covered Entity to a manufacturer, and similarly small amounts which may be owed by the manufacturer to the Covered Entity in the event of an overcharge. Specifically, Covered Entities may not be required to pay back de minimis underpayments to manufacturers if the manufacturers concur, but manufacturers are required to pay Covered Entities all overcharges, even if immaterial. Preventing Duplicate Discounts The Public Health Services Act prohibits duplicate discounts on covered outpatient drugs used by Medicaid patients who are also patients of 340B Covered Entities. Specifically, a manufacturer is not required to pay a rebate on a covered outpatient drug utilized by a Medicaid patient to a state under the Medicaid Drug Rebate Program and provide a Covered Entity the drug for such Medicaid patient at or below the 340B Ceiling Price under the 340B Program. Pharmaceutical manufacturers, states, and other 340B Program stakeholders have long sought additional guidance as to how to prevent such duplicate discounts, particularly related to 340B patients who are covered under Medicaid managed care plans. The Proposed Guidance will formally require each 340B Covered Entity to inform HRSA at the time of its 340B registration whether it will purchase and dispense 340B drugs to its Medicaid [fee for service] patients (carve-in) and bill the State, or whether it will purchase drugs for these patients through other mechanisms (carveout). This will facilitate the carve in entities being listed in the HRSA 340B Medicaid Exclusion File. This has been HRSA s longstanding technique aimed at assisting manufacturers in preventing duplicate discounts related to fee-for-service Medicaid patients. HRSA has proposed a similar approach in the Proposed Guidance for patients covered by Medicaid managed care (MCO) organizations. Under the Proposed Guidance, a Covered Entity would have to provide HRSA identifying information of the Covered Entity site, the associated MCO, and the decision to carve-in or carve-out for patients covered by such Medicaid MCO. HRSA will include the Medicaid MCO carve in designations on its 340B Medicaid Exclusions file. Interestingly, HRSA has proposed that a Covered Entity may make a different election carve-in or carve-out for a state Medicaid fee-for-service program versus Medicaid managed care in the state. In addition, a Covered Entity may make a different election carve-in or carve-out on a Medicaid MCO-to- Medicaid MCO basis, meaning that a Covered Entity may carve-in for one Medicaid MCO and carve-out for another Medicaid MCO in the same state. In addition, pursuant to the Proposed Guidance, if a Covered Entity wishes to dispense 340B drugs via a contract pharmacy arrangement to Medicaid patients (uses a carve-in approach), it must provide HRSA with a written agreement with its contract pharmacy and State Medicaid agency or MCO that describes a system to prevent duplicate discounts. HRSA specifically seeks comment on the following topics related to duplicate discounts: Whether specific information regarding carve-in or carve-out Medicaid MCO patients would be useful to pharmaceutical manufacturers and other

6 6 stakeholders, as well as the format in which such information will be made available. What alternative approaches may exist, or are currently in use at the state level, to prevent duplication of discounts with respect to Medicaid fee-forservice and managed care patients. Record Retention The Proposed Guidance would require Covered Entities and participating pharmaceutical manufacturers to retain relevant 340B records and documentation for only five years, rather than ten years as is required by the Centers for Medicare & Medicaid Services (CMS) for the Medicaid Drug Rebate Program and other federal health care programs. Contract Pharmacy Arrangements While 340B Covered Entities that utilize contract pharmacies are required to register such contract pharmacies with HRSA, HRSA does not and will not issue 340B identification numbers to contract pharmacies. HRSA s hesitancy to issue 340B identification numbers or other unique identifiers to contract pharmacies forces pharmaceutical manufacturers to validate whether a contracting pharmacy is an authorized legal agent of a given 340B Covered Entity by address alone against the HRSA database. It may be helpful for contract pharmacies to be assigned a unique identifier for ease of Program administration. The Proposed Guidance does not limit the number of contract pharmacies with which a Covered Entity can contract. However, the Proposed Guidance would increase the auditing and monitoring expectations of Covered Entities with respect to their contract pharmacies. The Guidance emphasizes that the Covered Entity retains complete responsibility for adherence of 340B Program rules by its contract pharmacies, and proposes that Covered Entities contract with independent auditors to conduct annual audits of their contract pharmacies. In addition, the Covered Entity should compare its 340B prescribing records with the contract pharmacy s 340B prescribing records at least quarterly to ensure that neither diversion nor duplicate discounts have occurred. Also of note is the right of HRSA to remove a contract pharmacy from participation in the 340B program if HRSA determines the contract pharmacy is not compliant with 340B requirements, though the Guidance does not contain any details regarding how such a determination would be made and what, if any, ability the contract pharmacy would have to address or correct allegations of noncompliance. Manufacturer Responsibilities With respect to the responsibilities of drug manufacturers that participate in the 340B Program, the Proposed Guidance addresses three main issues of importance: (i) use of limited distribution networks, (ii) issuance of refunds and credits, and (iii) annual certification. As to covered outpatient drugs that will have a limited distribution, under the Proposed Guidance, manufacturers are required to notify HRSA of any planned limited distribution of a given covered outpatient drug prior to its implementation. Such discussion has always been a best practice for pharmaceutical manufacturers participating in the 340B Program and HRSA would

7 7 merely formalize such practice in the Proposed Guidance. Detailed information regarding the limited distribution network must be provided, including a mechanism that allocates sales to both Covered Entities and non-340b purchasers with no previous purchase history of the limited distribution drug. HRSA may publish such plans on its website, as is its current practice. The Proposed Guidance also provides clarity regarding HRSA s expectation that manufacturers issue refunds or credits in the event that a Covered Entity is charged more than the 340B Ceiling Price for a covered outpatient drug, though this clarification may not be particularly well received by manufacturers. A refund or credit is expected to be issued within 90 days of the determination by the manufacturer or HHS that an overcharge occurred, and the manufacturer must provide a reason why the overcharge resulted. In addition, the refund may only be calculated by National Drug Code (NDC), and cannot be calculated in any other manner such as purchase aggregation, recognition of de minimis amounts, or netting purchases. The Guidance does allow the Covered Entity to whom the refund is due to elect a credit to their account with a manufacturer in lieu of a cash refund. Interestingly, the Guidance does not define what qualifies as an overcharge determination. HRSA s position as to manufacturer refund of overcharges is in sharp contrast to its approach with Covered Entity underpayments as noted earlier, Covered Entities may not be required to pay back de minimis underpayments to manufacturers if the manufacturers concur, but manufacturers are required to pay Covered Entities all overcharges, even if immaterial. Finally, as noted above, the Proposed Guidance requires Covered Entities and participating pharmaceutical manufacturers alike to certify on an annual basis compliance with all 340B Program requirements. The Proposed Guidance provides little detail about the proposed recertification process, which seemingly could form the basis for a False Claims Act claim in the event such certification was false. Program Integrity The program integrity provisions of the Proposed Guidance address the ability, scope, procedures, and ramifications of audits conducted by and upon the different stakeholders in the 340B Program. With respect to compliance audits of Covered Entities by HRSA, the agency has reserved the right to conduct on-site reviews, paper or desk audits, or both. If a Covered Entity fails to provide requested documentation or does not respond to requests within the timeframe established by HRSA, the Covered Entity could be penalized or terminated from the Program. If an audit does result in an adverse finding against the Covered Entity, HRSA will initiate a notice and hearing process by which the Covered Entity may respond to the adverse audit findings. The Proposed Guidance provides little detail about such notice and hearing process, though it states a Covered Entity response to audit findings must be in writing. The Proposed Guidance also contemplates that HRSA will review and potentially accept a corrective action plan (CAP) submitted by the Covered Entity to address findings of noncompliance, but the Guidance is not clear as to whether submission of a CAP is a requirement or merely an option available to the Covered Entity. HRSA may make the final audit results available to the public, which is its current practice. While the 340B statute affords participating manufacturers the right to audit the records of the entity that directly pertain to the entity s compliance with the

8 8 prohibitions against drug diversion and duplicate discounts, the Proposed Guidance seeks to insert several procedural steps that the manufacturer must follow before it can exercise this right. First, the manufacturer must have reasonable cause to believe that the entity (which could be a Covered Entity, a child site, or a contract pharmacy) is not complying with 340B requirements. Then, the manufacturer must notify the entity of its belief and attempt for 30 days to resolve the issue informally. If an informal, good faith attempt cannot resolve the matter, then the manufacturer must submit its grounds for reasonable cause with supporting documentation and evidence of its attempt to resolve the matter with the Covered Entity and its audit work plan to HRSA. Only after HRSA has reviewed and approved the work plan may the audit begin. As with the HRSA audit, the entity does have the opportunity to respond in writing to the audit findings. The manufacturer must submit copies of the final audit report and Covered Entity responses to HRSA. The Proposed Guidance does not define reasonable cause or explain what might constitute reasonable cause. Finally, the participating manufacturer itself and its wholesalers may be audited by HRSA to determine compliance with the 340B Program rules. The procedure of this audit closely track those audits of Covered Entities by HRSA, with the distinction that the manufacturer will be deemed to agree with any audit finding the manufacturer does not specifically address or if the manufacturer fails to respond to the HHS notification of audit findings within the specified deadline. The notice and hearing provisions and the use of a CAP are also referenced in this portion of the Proposed Guidance. As with the Covered Entity audits, the final audit results may be made available to the public. Opportunity to Comment As we noted in the beginning of this article, HRSA will be accepting comments on the Proposed Guidance until October 27, Given the breadth of the proposed changes and its potential effects, pharmaceutical manufacturers, contract pharmacies, 340B Covered Entities and other stakeholders should carefully review the Proposed Guidance and, where warranted, submit comments to HRSA. Arent Fox LLP has substantial experience drafting comments to proposed rules and guidance for pharmaceutical manufacturers and other interested parties throughout the health care industry. If you would like to discuss the Proposed Guidance or the 340B Drug Pricing Program, please contact Stephanie Trunk, Erin Atkins, or Larri Short in our Washington, D.C. office, Thomas Jeffry in our Los Angeles office, or the Arent Fox professional who regularly handles your matters.