HRSA Issues Proposed Omnibus 340B Guidance

HRSA Issues Proposed Omnibus 340B Guidance September 2015 1

HRSA Issues Proposed Omnibus 340B Guidance John Gould, Jeffrey L. Handwerker, Rosemary Maxwell, Matthew T. Fornataro, Kristin M. Hicks, Rahul Khara, Vicky Gormanly and Elizabeth Owens September 2015 On Friday, August 28, 2015, the Health Resources and Services Administration (HRSA) published longanticipated proposed omnibus guidance concerning the 340B program in the Federal Register. 1 The proposed guidance covers many of the issues that have confronted the 340B program for many years, including the patient definition, so-called child sites or satellite facilities, contract pharmacy arrangements, restricted distribution networks, a refund process to address Medicaid pricing restatements, and many others. Although the proposed omnibus guidance is not notice-and-comment rulemaking, HRSA seeks stakeholder comments by October 27, 2015. This proposed guidance is in addition to the proposed rule that HRSA issued in June 2015 addressing the 340B ceiling price methodology and proposing a definition of instance of overcharging for purposes of the civil monetary penalty provisions. 2 The following summarizes the key elements of HRSA s proposed omnibus guidance. I. Eligibility of Covered Entities and Child Sites to Participate in the 340B Program A. Grantee Covered Entities The proposed guidance starts with a discussion of the criteria for covered entity eligibility. In this regard, it says little about eligibility of grantee parent institutions, but its discussion of grantee child sites is new. Traditionally only hospital covered entities have had so-called child sites that could participate in 340B. However, the proposed guidance states that a non-hospital covered entity may include associated health care delivery sites located at a different address, which will be listed on the 340B database if the nonhospital covered entity ( parent site ) registers the associated sites and provides information demonstrating that each site is performing services under the main qualifying grant, contract, designation, or project. 3 For example, an off-site location of a sexually transmitted disease clinic would be a child site 1 80 Fed. Reg. 52300 (Aug. 28, 2015). 2 80 Fed. Reg. 34583 (June 17, 2015). 3 80 Fed. Reg. at 52301 (emphasis added). 2

if the parent clinic demonstrates that the off-site location receives Federal funds, and is performing services within the scope of their grant. 4 HRSA also proposes to list sites that are sub-recipients of Federal grants, but seeking their own 340B identification numbers separate from a parent entity, if those entities provide information demonstrating their receipt of eligible Federal funds, or in-kind contributions purchased with eligible Federal funds, as well as the grant number under which they receive those funds. 5 It is not clear from this description whether this type of child is an off-site location of a parent organization covered entity or a different organization that receives a sub-grant from a covered entity grantee. We note that HRSA included a similar discussion regarding sub-grantees in the 2007 proposed (never-finalized) patient clarification, which indicated that sub-grantees were separate organizations that could register to participate in 340B. 6 B. Hospital Covered Entities 1. Parent Hospitals To be 340B-eligible, any hospital (whether a disproportionate share hospital (DSH), a children s hospital, a cancer hospital, a sole community hospital, a rural referral center, or a critical access hospital) must meet one of three standards involving a relationship with a unit of government. The hospital must be: (1) publicly owned or operated; (2) a private nonprofit hospital (or a public hospital) that has been formally granted governmental powers by a unit of state or local government; or (3) a private nonprofit hospital with a contract with a unit of state or local government to provide healthcare services to lowincome individuals who are not [eligible for Medicare or Medicaid]. 7 In addition, any hospital other than a critical access hospital must have a disproportionate share adjustment percentage at or above a specified level (11.75% for DSH hospitals, children s hospitals, and cancer hospitals, and 8% for sole community hospitals and rural referral centers) or must be a so-called Pickle hospital described in Social Security Act 1886(d)(5)(F). 8 Finally, DSH hospitals, children s hospitals, and cancer hospitals must not obtain covered outpatient drugs through a group purchasing organization (GPO) or other group purchasing arrangement. 9 We discuss the first two issues below and the GPO issue in Sections C and D. 4 at 52301. 5 at 52301. 6 72 Fed. Reg. 1543, 1546 (Jan. 12, 2007). 7 42 U.S.C. 256b(a)(4)(L)(i), (M)-(O). 8 42 U.S.C. 256b(a)(4)(L)(ii), (M), (O). 9 42 U.S.C. 256b(a)(4)(L)(iii), (M). 3

Requirements for Relationship With Government. HRSA will consider hospitals publicly owned or operated if they are wholly owned by a State or local government (and recognized as such in Internal Revenue Service filings or other documentation from Federal entities) or if a State or local government is the sole operating authority of a hospital. Likewise, HRSA will consider a private nonprofit (or public) hospital to be formally granted governmental powers by a unit of State or local government if the hospital has been granted a power usually exercised by State or local governments through State or local law or regulation, creation of a public corporation, or development of a hospital authority or district to provide healthcare to a community on behalf of the government. 10 Governmental powers do not include powers generally granted to private parties meeting licensure requirements (e.g., a license to practice medicine or provide health care services commercially ). To qualify under this category, a hospital must submit to HRSA: (1) the name of the government entity granting it a governmental power; (2) a description of the governmental power and a brief explanation as to why it is considered governmental; and (3) a copy of any official documents issued by the State or local government that reflect the formal grant of governmental power. This carries forward the 2013 HRSA guidance on eligibility criteria for private hospitals. 11 HRSA considers a hospital to fall within the third category -- a private nonprofit hospital that has a contract with a State or local government to provide health care services to low-income individuals ineligible for Medicare and Medicaid -- if a hospital submits a certification (signed by its 340B Program authorizing official ) and an appropriate government official (including an individual authorized to represent and bind the governmental entity ) reflecting that the hospital has a contract with the State or local government to provide health care services to low-income individuals who are not entitled to [Medicare or Medicaid]. 12 HRSA explains that this contract should create enforceable expectations for the hospital for the provision of health care services, including the provision of direct medical care, 13 but does not propose to require that the contract be submitted to HRSA, or that it call for the hospital to provide more than a minor amount of health care services to low-income individuals ineligible for Medicare and Medicaid. Medicare Disproportionate Share Adjustment Percentage Requirements. All hospitals other than critical 10 80 Fed. Reg. at 52301. 11 Clarification of Eligibility for Hospitals that are not Publicly Owned or Operated, Release No. 2013-2 (March 7, 2013). 12 80 Fed Reg. at 52301. 13 at 52301. 4

access hospitals must have a Medicare disproportionate share hospital adjustment percentage above a certain level (or be a Pickle hospital ) to be 340B-eligible. Generally, HRSA will require that the hospital s latest filed Medicare cost report demonstrate that its disproportionate share adjustment percentage meets the relevant threshold. However, children s hospitals that do not file Medicare cost reports may provide a statement from a qualified independent auditor certifying that the hospital would meet the DSH adjustment percentage standard and stating the basis for that conclusion. 14 2. Hospital Child Sites Under the proposed guidance, off-site outpatient facilities of a covered entity hospital may participate in 340B as child sites if the hospital covered entity provides its most recently filed Medicare cost report demonstrating that: (1) each of the facilities or clinics is listed on a line of the cost report that is reimbursable under Medicare; and (2) the services provided at each of the facilities or clinics have associated outpatient Medicare costs and charges. 15 The italicized language is new, but whether it means that HRSA is proposing to impose a new substantive eligibility requirement on hospital child sites is unclear. This language certainly indicates that child sites must provide (at least some) outpatient services, but child sites have always been thought to be outpatient facilities. For a children s hospital, an outpatient facility qualifies as a child site when the hospital demonstrates that the outpatient facility: (1) is an integral part of the hospital, and (2) would be correctly included on a reimbursable line with associated Medicare costs and charges on a Medicare cost report, if [a cost report were] filed. 16 The standard is not new and reflects the fact that some (or all) children s hospitals do not file Medicare cost reports. HRSA requests comments on alternatives for demonstrating hospital child site status, but suggests that the alternatives it has previously considered were unsatisfactory. HRSA acknowledges that it explored use of [Medicare] provider-based standards (42 CFR 413.65), but many hospitals choose not to seek provider-based designation for their... facilities even though these facilities may qualify for the designation and comments on a previous proposal to rely on an attestation that a would-be child met the provider-based standards highlighted difficult[ies] in verifying whether outpatient facilities and clinics 14 at 52302. This would meet standard is consistent with the statutory provision on children s hospital eligibility. 15 at 52302 (emphasis added). 16 at 52302. 5

meet provider-based standards. 17 HRSA also considered using the form hospitals use to apply for Medicare enrollment (CMS 855A) but found it insufficient as an accurate indicator of the facility s reimbursement under Medicare for purposes of 340B Program administration. 18 C. GPO Prohibition The proposed guidance reiterates the statutory provision prohibiting DSH hospitals, children s hospitals, and freestanding cancer hospitals from purchasing covered outpatient drugs through GPOs. 19 The proposed guidance notes, moreover, that [a] GPO may only be used by one of the affected covered entities to purchase drugs dispensed to inpatients or to purchase drugs which do not meet the definition of covered outpatient drug. 20 HRSA states that the 340B Prime Vendor Program, currently operated by Apexus, is not considered a GPO subject to this prohibition. 21 By way of clarification, the proposed guidance cites three purchasing scenarios that HRSA believes would not violate the statutory GPO prohibition: 1. Off-site outpatient facilities that are not participating in the 340B program, and that are not listed on HRSA s 340B database, would be able to access outpatient drugs through a GPO as long as that facility has a purchasing account separate from that of any 340B enrolled site. To meet this exception, the facility would be required to ensure that GPO purchased drugs are never provided to outpatients of the hospital or other child sites enrolled in the 340B Program. 2. The GPO prohibition would not apply where drugs are provided through a GPO to an inpatient whose status is subsequently changed to outpatient by a third party, such as an insurer or a Medicare Recovery Audit Contractor, or a hospital review, provided there is sufficient documentation of the patient s change of status. The proposed guidance does 17 at 52302. The Medicare provider-based regulation sets forth standards for determining whether a facility is provider-based in relation to a main hospital; chiefly these are standards requiring certain forms of clinical, administrative, and financial integration between the facility and the main hospital, as well as requiring that the facility is understood by patients as part of the main hospital. 18 at 52302. 19 52304. 20 21 6

not specify a timeframe for subsequent patient reclassifications, and it also does not specifically address the sufficiency of documentation required or the variety of situations under which a reclassification may occur. 3. The GPO prohibition also would not apply where hospitals cannot access a drug at the 340B price or at wholesale acquisition cost (WAC) to prevent disruptions in patient care. A hospital may avail itself of this exception only where it documents the facts surrounding the purchase and provides HHS with the name of the drug in question, the manufacturer, and a brief description of the attempts to purchase the drug at the 340B price and the WAC price prior to purchasing the drug through a GPO. The proposed guidance does not detail the types of patient care disruptions contemplated by this exception or the circumstances under which covered entities may be unable to purchase product at the 340B price or at WAC. HRSA emphasizes that these exceptions may not be used to circumvent the GPO prohibition, although it does not explicitly solicit comment on the criteria that should apply to determine whether the exceptions outlined in the proposed guidance would apply. 22 D. Drug Replenishment Models and the GPO Prohibition The proposed guidance acknowledges that a large number of hospitals use replenishment models to operationalize the 340B Program. 23 On the issue of replenishment models, HRSA points to its February 2013 Policy Release, No. 2013-1, in which it first explained that: [t]he GPO prohibition is violated upon use of a GPO to obtain covered outpatient drugs and cannot be fixed or cured by subsequently changing the characterization through accounting or other methods. 24 The proposed guidance reiterates this position, warning that a hospital that orders drugs based on actual prior usage cannot tally 340Bineligible outpatient use for drug orders on a GPO account. Further, HRSA explains that the GPO 22 at 52305. 23 24 HRSA Policy Release, No. 2013-1, at 2-3. 7

prohibition is violated where a replenishment or split billing software is used in a manner contrary to the statute. 25 1. Use of Previously-Purchased GPO Drugs The proposed guidance states that covered entities subject to the GPO prohibition must stop purchasing covered outpatient drugs through a GPO before the date of the covered entity s public listing in the HRSA database. The proposed guidance would, however, permit those covered entities to use previouslypurchased GPO drugs for eligible 340B outpatients until expended. 26 2. Violations of the Statutory GPO Prohibition The proposed guidance encourages manufacturers and covered entities to work together to remedy GPO prohibition violations. It also would extend the notice and hearing process described within the proposed guidance to covered entities that are found to have violated the GPO prohibition. 27 According to HRSA, [a]s part of the notice and hearing process, the covered entity could demonstrate that the GPO violation was an isolated error as opposed to a systematic violation. 28 Where the covered entity can demonstrate that the violation was an isolated incident, it would be permitted to remain within the 340B Program. 29 If, however, the incident was determined not to be isolated, the covered entity would be required to make repayment to the manufacturer and HRSA could remove the covered entity from the 340B Program as of the date of the violation. 30 The proposed guidance does not include detail on the range of incidents that either would permit a covered entity to remain in the program or that would require termination. With regard to parent and child sites, the proposed guidance provides that, where a parent site is found to have violated the GPO prohibition, HRSA may terminate not only the parent site, but also all child sites and contract pharmacy arrangements as well. 31 On the other hand, where a child site alone is found to have violated the GPO prohibition, remedies may be limited to the child site if the parent site can demonstrate that the violation was limited to the child site. 32 HRSA also clarifies that GPO participation 25 80 Fed. Reg. 52305. 26 27 28 29 30 31 32 8

cannot be limited to a child site if the parent site also purchases drugs on the same account as the child site. 33 II. Drugs Eligible for Purchase Under the 340B Program The proposed guidance acknowledges that the definition of covered outpatient drug in the 340B statute is limited by Social Security Act, Section 1927(k)(3), which provides that a drug, biological, or insulin does not qualify as a covered outpatient drug where it is provided as part of, or as incident to and in the same setting as, certain specified services, and for which payment may be made under this title as part of payment for the following and not as direct reimbursement for the drug. 34 The proposed guidance then repeats HRSA s previous (1994) guidance, which interpreted the limiting definition of covered outpatient drug to circumstances where: (1) a drug is provided as part of, or as incident to and in the same setting as those listed in the statute, and (2) direct reimbursement is not made for the drug under Title XIX of the Social Security Act (i.e., Medicaid). 35 The proposed guidance goes further, however, to assert that the limiting definition only applies when the drug is bundled for payment under Medicaid as part of a service in the settings described in the limiting definition... [A] drug provided as part of a hospital outpatient service which is billed to any other third party or directly billed to Medicaid would still qualify as a covered outpatient drug. 36 HRSA s proposal could have wide-ranging repercussions -- e.g., it could expand the scope of the GPO prohibition, which applies to purchases of covered outpatient drugs. III. Individuals Eligible To Receive 340B Drugs (the Patient Definition ) The proposed guidance offers a new definition of a patient for purposes of the 340B program. This is a key component of the program, as the obligation to provide a 340B price applies only to sales of eligible products to patients of an eligible 340B entity. HRSA characterizes the proposed guidance as a 33 34 at 52305 (citing Social Security Act, Section 1927(k)(3)). 35 at 52306. 36 (emphasis added). 9

clarification of its interpretation of section 340B(a)(5)(B) of the PHSA, rather than a departure from its 1996 guidance that initially defined an eligible patient. 37 According to HRSA, its clarification is intended to address the diverse set of 340B covered entities, and was informed by 340B Program audits, through which HHS has learned more about how the definition of patient is applied in different health care settings. 38 The proposed guidance provides that an individual will be considered a patient of a covered entity, on a prescription-by-prescription or order-by-order basis if all of the following six conditions are met: 1. The individual receives a health care service at a facility or clinic site which is registered for the 340B Program and listed on the public 340B database. 39 The proposed guidance states that, in addition to receiving drug, an individual must also receive health care services from a covered entity that is medically responsible for the care provided to that individual. 40 Under the proposed guidance, an individual treated at an entity not listed in the 340B database or at a non-340b site of a covered entity would not be eligible to receive 340B drugs, even if such treatment was follow-up to previous treatment at a 340B covered entity. 2. The individual receives a health care service provided by a covered entity provider who is either employed by the covered entity or who is an independent contractor for the covered entity, such that the covered entity may bill for services on behalf of the provider. 41 The prior patient definition allowed providers with contractual or other arrangements with a 340B entity to treat patients of the entity. The proposed guidance does away with the other arrangements prong of the definition and now specifically requires an employment or contractual relationship between the provider and the entity. The guidance notes as examples that faculty practice and residency arrangements are sufficient to establish a 340B patient, but that simply having privileges or credentials at a covered entity is not sufficient. 42 HRSA emphasizes that a prescription from a provider at an non-covered entity to which a patient is referred by a covered entity is not eligible for a 340B discount, but prescriptions written directly by the providers of the covered entity are 340B eligible. 37 at 52306 (citing 61 Fed. Reg. 55157 8 (Oct. 24, 1996)). 38 at 52306. 39 at 52306. 40 at 52306. 41 at 52306. 42 at 52306. 10

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). 43 According to the proposed guidance, an individual will be considered a patient of a covered entity if the health care service received results in a drug order or prescription. 44 HRSA notes that telemedicine, telepharmacy, and other service arrangements involving the issuance of prescriptions is permitted so long the practice is authorized under State or Federal law and otherwise complies with the 340B program. However, an individual would not be considered a patient of a covered entity whose only relationship to the individual is the dispensing or infusion of a drug. 45 HRSA explains that dispensing or infusion of a drug, without a covered entity provider-to-patient encounter, is not enough to qualify that individual as a patient of that covered entity. The infusion reference is not in the existing (1996) patient definition. 4. The individual s health care is consistent with scope of the Federal grant, project, designation, or contract. 46 In the case of a covered entity with eligibilty based on a Federal grant, designation, or contract, the guidance provides that an individual is a patient of the covered entity only if the individual receives healthcare consistent with the range of services provided by the Federal grant, designation, or contract to the covered entity. This requirement extends to child sites, and if child sites have a more limited grant than the parent, then individuals will be considered patients of that child site only if they receive healthcare consistent with the limited range of services covered by the child s grant. 5. The individual s drug is ordered or prescribed pursuant to a health care service that is classified as outpatient. 47 The guidance proposes that an individual will be considered a patient of a 340B entity if his or her healthcare is billed as outpatient to the patient s insurance or a third party payor, rather than as inpatient. 48 HRSA directs that covered entities should maintain auditable records documenting changes in patient status. 6. The individual s patient records are accessible to the covered entity and demonstrate that the covered entity is responsible for care. 49 Finally, HRSA proposes that an individual will be a patient if he or she has an established relationship such that the covered entity maintains auditable 43 at 52307. 44 at 52307. 45 at 52307. 46 at 52307. 47 at 52307. 48 at 52307. 49 at 52307. 11

health care records that demonstrate the covered entity has a provider-to-patient relationship for services that result in a prescription and the covered entity provides care that results in every 340B drug prescribed to the individual. 50 The proposed guidance also asserts that unique circumstance... arise during a public health emergency declared by the Secretary and proposes to adopt certain flexibilities for demonstrating that an individual is a patient of a covered entity in these situations (e.g., limited medical documentation or a site not listed in the 340B database). 51 In these emergency situations, which presumably will be rare and will require a declaration by the Secretary of Health and Human Services, HRSA suggests that individuals may be considered patients of a covered entity despite not meeting the six-part test described above. The proposed guidance does not specify criteria under which these emergency patient designations would apply. IV. Covered Entity Requirements A. Prohibition of Duplicate Discounts The 340B statute prohibits covered entities from billing Medicaid for a 340B drug if the drug is subject to the payment of a rebate to the State under [the Medicaid rebate statute]. 52 Manufacturers that sign Medicaid rebate agreements have owed Federal Medicaid rebates on Medicaid Fee-For-Service (FFS) utilization of covered outpatient drugs since the beginning of the Medicaid rebate program. The Affordable Care Act made Medicaid rebates also payable on Medicaid managed care organization (MCO) utilization, but provides that no federal Medicaid rebate is payable on a drug reimbursed by a Medicaid MCO if the drug is subject to discounts under section 340B.... 53 Under the 340B statute, [t]he Secretary [of Health and Human Services] shall establish a mechanism to ensure that covered entities comply with [the prohibition on duplicate discounts]. 54 To do so, HRSA created the 340B Exclusion File, which the 340B web site notes lists covered entities that will use 340B 50 at 52307. 51 at 52307-8. 52 42 U.S.C. 256b(a)(5)(A)(i). 53 42 U.S.C. 1396r-8(j)(1). 54 42 U.S.C. 256b(a)(5)(A). 12

drugs for their Medicaid patients (carve-in). 55 Consistent with HRSA s December 2014 Program Release regarding the Medicaid Exclusion File, 56 however, the proposed guidance characterizes the Exclusion file as providing information on whether a covered entity purchased 340B drugs for its Medicaid [Fee-For- Service (FFS)] patients. 57 HRSA proposes significantly expanding the information available through the exclusion file (or other formats): [A] covered entity will be listed on the public 340B database if it notifies HHS at the time of registration whether it will purchase and dispense 340B drugs to its Medicaid FFS patients (carve-in) and bill the State, or whether it will purchase drugs for these patients through other mechanisms (carve-out). A covered entity electing carve-in will then have their Medicaid billing number, National Provider Identifier (NPI), or both listed on HHS 340B Medicaid Exclusion File.... The covered entity may make a different determination regarding carve-in or carve-out status for MCO patients than it does for FFS patients. An entity can make different decisions by covered entity site and by MCO, but must provide to HRSA identifying information of the covered entity site, the associated MCO, and the decision to carve-in or carve-out. This information may be made available on a 340B Medicaid Exclusion file. HRSA seeks comments on the utility of this billing information for other stakeholders, as well as the format through which it is made public. 58 HRSA also solicits comments on whether to allow covered entities to take a more nuanced approach to purchasing, for example, only using 340B drugs for Medicaid FFS and MCO patients when appropriate for service delivery... and seeks information about current state arrangements that could be adapted for use as Federal standards for these supplements or alternatives. 59 The 340B statute also requires the Secretary to provide for improvements in compliance by covered entities... [including] [t]he establishment of a single, universal, and standardized identification system by which each covered entity site can be identified by manufacturers, distributors, covered entities, and the 55 HRSA, Medicaid Exclusion/Duplicate Discount Prohibition, available at http://www.hrsa.gov/opa/programrequirements/medicaidexclusion/index.html (emphasis added). 56 Clarification on Use of the Medicaid Exclusion File, Release No. 2014-1 (Dec. 12, 2014). 57 80 Fed. Reg. at 52308 (emphasis added). 58 at 52309 (emphasis added). 59 13

Secretary for purposes of facilitating the ordering, purchasing, and delivery of covered outpatient drugs under this section, including the processing of chargebacks for such drugs. 60 HRSA does not propose to create such an identification system, but instead encourage[s] covered entities, States, and Medicaid MCOs to work together to establish a process to identify 340B claims. 61 HRSA briefly mentions several mechanisms used to identify Medicaid MCO patients and 340B claims, but notes that [s]uch billing instructions are beyond the scope of the 340B program. 62 B. Covered Entity Repayment As discussed above, the 340B statute prohibits diversion (e.g. reselling to a non-340b patient) and duplicate discounts (340B discount plus Medicaid rebate). Covered entities that are found to have violated either of these requirements shall be liable to the manufacturer of the covered outpatient drug that is the subject of the violation in an amount equal to the reduction in the price of the drug.... 63 HRSA s brief discussion of covered entity repayment of improper 340B discounts mentions only the prohibition on diversion, but the statutory provision on 340B covered entity repayment applies to both duplicate discounts and diversion. With respect to covered entity repayment, the proposed guidance provides that covered entities are expected to work with manufacturers regarding repayment within 90 days of identifying the violation and that a covered entity must notify HHS and each affected manufacturer of diversion and is expected to document notification attempts in auditable records. 64 The proposed guidance also provides that a manufacturer retains discretion as to whether to request repayment based on its own business considerations, provided that, when exercising its discretion, the manufacturer complies with applicable law, including the Federal anti-kickback statute (42 U.S.C. 1320a- 7b(B)). For example, a manufacturer may prefer not to accept payments below a de minimis amount or to process repayments owed through a credit/rebill mechanism. Manufacturers should bear in mind the potential impact of such decisions on CMS price reporting requirements. 65 HRSA does not explain how 60 42 U.S.C. 256b(d)(2)(B)(iv). 61 80 Fed. Reg. at 52309. 62 63 42 U.S.C. 256b(a)(5)(D). 64 80 Fed. Reg. at 52309. 65 14

the refusal to accept a refund from a covered entity could affect CMS price reporting requirements, in light of the statutory exclusion from Best Price of any prices charged to covered entities. 66 V. Contract Pharmacy Arrangements The proposed guidance reiterates that the 340B statute does not specify how a covered entity may provide or dispense drugs to 340B patients, and HRSA s position is that [t]he 340B statute does not prohibit the use of contract pharmacies. 67 The proposed guidance also briefly addresses HRSA s 1996 and 2010 contract pharmacy guidance documents before concluding that a covered entity may contract with one or more licensed pharmacies to dispense 340B drugs to the covered entity s patients, instead of or in addition to an in-house pharmacy. 68 Moreover, building on the concept of child covered entities, the proposed guidance explains that, [i]f permitted under applicable State and local law, a covered entity may contract with one or more pharmacies on behalf of its child sites, or a child site may contract directly with a pharmacy. 69 The guidance suggests that covered entities also are permitted to contract with one contract pharmacy site or with a pharmacy corporation to include multiple pharmacy locations, and covered entities must be aware of the Federal anti-kickback statute and how such provisions could apply to arrangements with contract pharmacies. 70 The guidance does not identify any statutory basis for permitting contract pharmacy arrangements, other than to observe that [t]he 340B statute does not prohibit the use of contract pharmacies. 71 The proposed guidance then describes the process for contract pharmacy registration, including that HRSA only lists contract pharmacy locations on a covered entity s 340B database record once a written contract exists between the covered entity and the contract pharmacy and the covered entity registers those arrangements. 72 Further, HRSA explains that registration of contract pharmacy arrangements only will be accepted from covered entities and that [g]roups or networks of covered entities may not register or contract for pharmacy services on behalf of their individual covered entity members. 73 Without 66 42 U.S.C. 1396r-8(c)(1)(C)(i)(I) (excluding from Medicaid Best Price any prices charged... to a [340B] covered entity... ). 67 80 Fed. Reg. 52310. 68 69 70 71 72 73 15

providing specifics, the proposed guidance suggests that required documentation for registration would include a series of compliance requirements and that covered entities must make an attestation regarding their contract pharmacy arrangements. 74 Manufacturers would ship only to the authorized shipping address listed on the 340B database. Finally, as it had done in other areas of the proposed guidance, HRSA makes special provision for public health emergencies: A covered entity can request additional contract pharmacy locations under a public health emergency declared by the Secretary. 75 In multiple sections, HRSA notes that it has observed that not all covered entities have sufficient mechanisms in place to ensure their contract pharmacies compliance with all 340B Program requirements. 76 The proposed guidance warns that covered entities that do not regularly review and audit contract pharmacy operations are at an increased risk for compliance issues. 77 To that end, the proposed guidance emphasizes a prior HRSA recommendation that covered entities have independent annual audits of their contract pharmacies performed -- noting that use of an independent auditor will ensure the pharmacy is following all 340B Program requirements. 78 The proposed guidance recommends that the covered entity should compare its 340B prescribing records with the contract pharmacy s 340B dispensing records at least quarterly to ensure that neither diversion nor duplicate discounts have occurred. 79 VI. Manufacturer Responsibilities A. The Must Offer Requirement The Affordable Care Act amended the 340B statute to provide that each [Pharmaceutical Pricing Agreement (PPA)]... shall require that the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other 74 75 76 80 Fed. Reg. 52311. 77 78 79 16

purchaser at any price. 80 HRSA has not yet amended the PPA to include this must offer requirement. The proposed guidance, however, declares that [u]nder the PPA, a manufacturer must offer all covered outpatient drugs... to covered entities participating in the 340B Program at no more than the statutory 340B ceiling price. 81 HRSA also asserts that [t]he PPA incorporates 340B Program statutory obligations and records a manufacturer s agreement to abide by them. By executing the PPA when it enrolls in the 340B Program, a manufacturer agrees to all 340B Program statutory requirements, including statutory and regulatory changes that occur after execution of the PPA. 82 HRSA s statement is reminiscent of the now-vacated orphan drug rule, 83 in which HRSA argued that the must offer provision does not need to be specifically written into the PPA prior to taking effect, because the Supreme Court s decision in Astra USA, Inc. v. Santa Clara County, 131 S. Ct. 1342 (2011), confirmed that PPAs are not transactional, bargained-for contracts, but simply serve as the means by which drug manufacturers opt into the statutory framework of the 340B Program. 84 As in the orphan drug rule, HRSA does not directly address the plain language of the 340B statute, which provides that [e]ach such agreement -- i.e., each PPA -- shall include the must offer requirement. 85 Nor does HRSA explain how its position aligns with the language of the PPA, which specifies that the Agreement will not be altered except by an amendment in writing signed by both parties. 86 B. Limited Distribution Networks In its 2011 program notice regarding the 340B non-discrimination policy, HRSA requested manufacturers notify HRSA in writing prior to implementing allocation procedures in situations where the available supply of a covered drug is not adequate to meet market demand. 87 In the proposed guidance, HRSA would 80 42 U.S.C. 256b(a)(1). 81 80 Fed. Reg. at 52311 (emphasis added). By contrast, the PPA requires manufacturers to charge covered entities a price for each unit of the drug that does not exceed the 340B ceiling price. PPA II(a) (emphasis added). 82 80 Fed. Reg. at 52311. 83 78 Fed. Reg. 44016 (July 23, 2013). The f\federal District Court for the District of Columbia vacated the orphan drug rule on the grounds that HRSA does not have authority to issue regulations regarding the orphan drug exclusion. PhRMA v HHS, --- F. Supp. 2d ----, 2014 WL 2171089 (D.D.C. May 23, 2014). 84 78 Fed. Reg. at 44023. 85 42 U.S.C. 256b(a)(1). 86 PPA VII(h). 87 340B Drug Pricing Program notice, Release No. 2011-1.1., Clarification of Non-Discrimination Policy (May 23, 2012). 17

expand upon this approach and also request written notification from manufacturers prior to their implementing other types of limited distribution arrangement. HRSA asserts that this proposal is pursuant to the must-offer requirement of the 340B statute which, per the above, HRSA reads as automatically incorporated into the PPA. 88 Specifically, HRSA recognizes that [c]ertain covered outpatient drugs may be required to be dispensed by specialty pharmacies (e.g., drugs approved with a [REMS] ). As a result, certain manufacturers may use a restricted network of certified specialty pharmacies, which do not fall under the terms of a contract pharmacy agreement or wholesaler contract for the distribution of drugs to a covered entity. 89 HRSA explains that manufacturers may develop a limited distribution plan in such cases, but the plan will be reviewed by HHS to ensure that the manufacturer is treating 340B covered entities the same as all non- 340B providers. 90 HRSA requests information supporting the non-discriminatory nature of the limited distribution plan, including [a]n explanation of the product s limited supply or special distribution requirements and the rationale for restricted distribution among all purchasers and an assurance that manufacturers will impose these restrictions equally on both 340B covered entities and non-340b purchasers. 91 If HRSA has concerns about the plan, it proposes to work with the manufacturer to incorporate mutually agreed upon revisions to the plan prior to posting the plan on the 340B Web site. 92 C. Procedures for Issuance of Refunds and Credits The 340B statute, as amended by the Affordable Care Act, requires HRSA to set forth procedures for manufacturers to issue refunds to covered entities, both in instances of routine pricing restatements and in exceptional circumstances, e.g., erroneous or intentional overcharges. 93 HRSA proposes that the manufacturer must refund or credit that [overcharged] covered entity an amount equal to the price difference between the sale price and the correct 340B price for that drug, multiplied by the units purchased. 94 According to HRSA, the refund or credit should occur within 90 days of the determination that the overcharge occurred, and must be calculated by NDC, with no offsets permitted, and no 88 80 Fed. Reg. at 52312. 89 at 52312. 90 at 52312. 91 at 52312. 92 at 52312. 93 See 42 U.S.C. 256b(d)(1)(B)(ii). 94 80 Fed. Reg. at 52312. 18

exception for de minimis amounts. If within 90 days a covered entity fails to cash a manufacturer s check for an undisputed repayment amount, the covered entity will be deemed to have waived its right to repayment. In addition, manufacturers would submit to HRSA price recalculation information, an explanation of why the overcharge occurred, how the refund will be calculated, and to whom refunds or credits will be issued. 95 Notably, these somewhat vague procedures deviate from HRSA s 1995 guidelines regarding new drug pricing, which announced that a manufacturer s obligation to make any retroactive payments to covered entities was contingent on the covered entity submitting a specific request for the retroactive refunds. 96 According to those guidelines, [i]f an entity wishes a pricing adjustment, the dollar amount in question, one would expect, must be significant enough to balance the administrative burden involved in documenting and developing the request. 97 Under the proposed guidance, any restatement that would result in a ceiling price lower than originally calculated automatically would trigger a requirement for the manufacturer to issue credits or cut checks to each applicable covered entity (potentially thousands), regardless of the amount, and regardless of whether the entity requests the refund. Such an undertaking - - especially within a 90-day timeframe -- could present material administrative challenges for manufacturers. In addition to the administrative burden, HRSA s proposed preclusion against netting purchases would mean that if a restatement results in a 340B ceiling price higher than originally calculated, the manufacturer would be unable to recover the undercharge via offest. This could result in manufacturers being forced to offer sub-ceiling prices (which are optional under the 340B statute). D. Manufacturer Recertification HRSA also proposes to create a manufacturer recertification process, under which HRSA would list manufacturers as participating in the 340B program if they annually review and update their 340B database information. 98 HRSA also states that manufacturers should provide [HRSA] with any changes 95 at 52312. 96 60 Fed. Reg. at 51488 (Oct. 2, 1995). 97 at 51488. 98 80 Fed. Reg. at 52312. 19

to 340B database information as changes occur and that HRSA may also request additional documentation to verify the information provided. 99 HRSA states that this process is designed to prevent pricing violations and improve the accuracy of the public 340B database. 100 E. Recordkeeping The proposed guidance also adds a new recordkeeping expectation for manufacturers. HRSA states that it expects manufacturers to maintain auditable records demonstrating 340B Program compliance for no less than five years and provide such records when requested. 101 The PPA, by contrast, merely requires manufacturers to retain records of the AMP, baseline AMP, and Best Price for each covered outpatient drug for not less than three years from the date of their creation. 102 VII. Rebate Option for AIDS Drug Assistance Programs In 1998, HRSA issued guidance in the Federal Register allowing AIDS Drug Assistance Programs (ADAPs) to access the 340B ceiling price through a rebate (the rebate option ). 103 Therefore, unlike other types of covered entities, which must access the 340B ceiling price through an-invoice discount at the time of purchase (the purchase option ), ADAPs can access the 340B ceiling price through the rebate option, the purchase option, or a combination of both. Currently, some ADAPs claim the full 340B ceiling price rebate from manufacturers on units of drug when the ADAP subsidizes the patient s co-payment or co-insurance for the drug, even though the ADAP did not actually purchase the drug. Under the proposed guidance, an ADAP would be eligible for a rebate under only two circumstances: (1) when the ADAP purchases drugs at a price above the ceiling price, or (2) when the ADAP purchases the patient s health insurance, through payment of the health insurance premium, and pays the copayment, coinsurance, or deductible that covers the drug purchases at issue. 104 With respect to the second option, HRSA announces that it has determined that the payment by the ADAP of a copayment, coinsurance, or deductible, in the absence of also paying for the health 99 at 52312. 100 at 52313. 101 at 52311. 102 PPA II(d). 103 63 Fed. Reg. 35239 (June 29, 1998). 104 80 Fed. Reg. at 52313 (emphasis added). 20

insurance premium, is too attenuated within the context of the 340B Program to constitute a purchase. 105 HRSA proposes to delay the effective date of this portion of its guidance for 12 months after the publication date of the final guidance, to allow for the development of systems and any other necessary changes in order to make qualified payments on behalf of an ADAP client for those states utilizing the rebate option. 106 Under the proposed guidance, the amount of the rebate would be the Medicaid unit rebate amount (URA), regardless of the amount expended by the ADAP to pay the patients health insurance premium and copayment, coinsurance, or deductible. HRSA acknowledges that it considered a percentage rebate whereby an ADAP would be entitled to a percentage of the rebate on a dispensed drug contingent on the percentage of the total cost of the drug borne by the ADAP but concluded that this mechanism would be so operationally burdensome as to be inoperable. 107 HRSA also proposes that ADAPs would be expected to submit claims-level data to a manufacturer to receive a rebate. 108 Data elements may include: the ADAP name and state; the medication name, NDC, and package size; the date of dispensing; the ADAP payment for the medication (to include the amount paid to the dispensing pharmacy as a payment, copayment, or deductible); an assurance that the claim is not for a drug subject to a Medicaid rebate; and, when applicable, an assurance that the ADAP paid the patient s health insurance premium. HRSA specifically seeks comment regarding these claims-level data elements. Lastly, the proposed guidance cautions that no covered entity may obtain 340B pricing (either through a rebate or through a direct purchase) on a drug purchased by another covered entity at or below the 340B ceiling price. 109 However, HRSA does not identify any particular mechanism that ADAPs should use to determine whether a unit of drug was purchased by another covered entity at or below the ceiling price. 105 at 52313. 106 at 52313. 107 at 52313. 108 at 52313. 109 at 52313. 21

VIII. Program Integrity Audit Provisions The 340B statute authorizes HRSA to audit covered entities to monitor their compliance with the prohibition of duplicate discounts and diversion. 110 Citing 42 U.S.C. 256b(a)(5)(D), the proposed guidance announces auditing standards and includes a proposal for a notice and hearing process to allow covered entities to challenge adverse audit findings and/or other instances of noncompliance. 111 Under this process, HHS would notify a covered entity of a proposed adverse finding, and the entity would have 30 days to respond. If the covered entity fails to do so, the failure would be construed as agreement with the allegations, at which point HRSA will proceed with appropriate action. 112 If a final determination of noncompliance is made, the covered entity could be removed from the 340B Program, or alternatively permitted to remain in the Program if it submits and complies with a corrective action plan. 113 Entities found to be in violation of the 340B statute are responsible for repayment to affected manufacturers for 340B purchases made after the date the entity first violated the statutory requirement. 114 The 340B statute also permits manufacturers to audit a covered entity to evaluate its compliance with the prohibition of duplicate discounts and diversion. 115 HRSA initially issued guidance on such auditing procedures in 1996. Consistent with that guidance, 116 a manufacturer who wishes to audit a covered entity may do so if it can establish reasonable cause for the audit. 117 The proposed guidance offers new details on the reasonable cause standard. In particular, HRSA states that, to satisfy reasonable cause, a manufacturer would have to document[s] to HHS s satisfaction that a reasonable person could conclude, based on reliable evidence, that a covered entity, its child sites, or contract pharmacies may have violated either [the duplicate discount or diversion] section of the 340B statute. 118 The proposed guidance provides examples of the specific types of evidence that could constitute reasonable cause and observes that a covered entity s refusal to respond to relevant manufacturer questions could be construed as 110 42 U.S.C. 256b(a)(5)(C). 111 80 Fed. Reg. at 52314. 112 at 52315. 113 Under 42 U.S.C. 256b(d)(2)(B)(v)(II), a diversion or duplicate discount violation must be systematic and egregious and knowing and intentional to remove a covered entity from the 340B program. 114 at 52315. 115 42 U.S.C. 256b(a)(5)(C). 116 61 Fed. Reg. at 65406 (Dec. 12, 1996). 117 80 Fed. Reg. at 52315. 118 at 52315. 22

reasonable cause. 119 Consistent with the 1996 guidance, a manufacturer wishing to audit a covered entity must submit a detailed audit work plan that HRSA must review and potentially approve. 120 Finally, the proposed guidance provides for HHS audits of a manufacturer or wholesaler that manufacturers, processes, or distributes covered outpatient drugs in the 340B Program. 121 Similar to HHS audits of covered entities, HRSA proposes a notice and hearing process, and the potential for a manufacturer to implement a correction action plan. If you have any questions about any of the topics discussed in this advisory, please contact your Arnold & Porter attorney or any of the following attorneys: Jeffrey L. Handwerker Kristin M. Hicks +1 202.942.6103 +1 202.942.5846 Jeffrey.Handwerker@aporter.com Kristin.Hicks@aporter.com John Gould Rahul Khara +1 202.942.6281 +1 202.942.5942 John.Gould@aporter.com Rahul.Khara@aporter.com Rosemary Maxwell Vicky Gormanly +1 202.942.6040 +1 212.715.1348 Rosemary.Maxwell@aporter.com Vicky.Gormanly@aporter.com Matthew T. Fornataro Elizabeth Owens +1 202.942.6593 +1 202.942.5942 Matthew.Fornataro@aporter.com Elizabeth.Owens@aporter.com 2015 Arnold & Porter LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation. 119 See 80 Fed. Reg. at 52315. HRSA s 1996 guidance states that complaints from patients/other manufacturers about activities of a covered entity may be a basis for establishing reasonable cause. 61 Fed. Reg. at 65406. The proposed guidance does not include this example, but also does not limit the potential bases that would establish reasonable cause to the examples listed. Additionally the proposed guidance mirrors many aspects of the 1996 guidance, but does not explicitly specify certain items, e.g., timelines. 120 80 Fed. Reg. at 52315. 121 at 52315. 23