340B: ARE WE MONITORING COMPLIANCE EFFECTIVELY AND EFFICIENTLY

CPAs & ADVISORS experience clarity // 340B: ARE WE MONITORING COMPLIANCE EFFECTIVELY AND EFFICIENTLY September 17, 2014 Michael Earls, CPA, Senior Manager September 17, 2014 OVERVIEW OF TODAY S PRESENTATION Todays presentation has three (3) primary learning objectives: 1. Discuss recent developments of the 340B drug program 2. Apply recommended audit procedures to ensure ongoing compliance 3. Apply recommendations for opportunities to maximize savings, some of which may have additional reimbursement opportunities not related to 340B 2// experience clarity 1

OVERVIEW OF TODAY S PRESENTATION Please ask questions! Will hold 5 10 minutes for Q&A and available afterword, but feel free to ask throughout the presentation 3// experience clarity 340B PROGRAM: QUICK OVERVIEW Primary stakeholders of 340B Drug Program: 1. Drug Manufacturers 2. Covered Entities 3. Office of Pharmaceutical Affairs 4. Patients Patient Protection and Affordable Care Act (PPACA) expanded definition of covered entity Program intent: stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services H.R. Rep. No. 102 384(II), as 12 (1992) 4// experience clarity 2

340B PROGRAM: QUICK OVERVIEW Established by 602 of Veterans Health Care Act of 1992 Codified as 340B of Public Health Service Act (PHSA) Section 340B instructs Department of Health and Human Services (HHS) to enter into agreements with drug manufacturers of covered outpatient drugs (required if participating in Medicaid/Medicare Part B) Administered by Office of Pharmacy Affairs (OPA) within the Health Resources Services Administration (HRSA) Prime Vendor Program (PVP) currently Apexus 5// experience clarity 340B PROGRAM: QUICK OVERVIEW From 1992 2011 Program growth due to several new laws expanding the ability to participate Medicare Prescription Drug, Improvement and Modernization Act of 2003 Deficit Reduction Act of 2005 PPACA 6// experience clarity 3

340B PROGRAM: QUICK OVERVIEW From 1992 2011 As of 2011, number of hospitals participating reached 1,673, or 1/3 of all U.S. hospitals 16,500+ covered entity sites, nearly double the number reported in 2001 (approximately 8,600) In 2011, the GAO issued report on 340B Drug Program, concluding concerns around HRSA s oversight of program 7// experience clarity 340B PROGRAM: QUICK OVERVIEW Provides discounts on outpatient drugs purchased by safety net providers and 11 types of federal grantees for eligible patients Spending on 340B drugs estimated at $6 billion annually in 2011 Average savings of 25 50% for eligible covered entities on outpatient drugs Manufacturers expressed concerns around savings; and are they being used in ways consistent with purpose of program 8// experience clarity 4

340B PROGRAM: QUICK OVERVIEW Provides discounts on outpatient drugs purchased by safety net providers and certain types of federal grantees for eligible patients (FQHC, etc.) Savings can be used to: Provide discounts on drugs to patients Expand services by provider to patients Provide services to more patients 9// experience clarity Several recent communications from HRSA/OPA and others: Orphan drug rule changes 2013 (see next slide) (N/A to most in the room today) Recertification changes (annual requirement) 2013 Program audit results 2014 340B Drug Pricing Program: Important Benefit, Significant Responsibility 2014 Contract pharmacy oversight 2014 Hospital registration overview 2014 (N/A to most in the room today) 10 // experience clarity 5

HHS Fiscal 2014 Budget and OIG Work Plan Charity Care concerns (2014 Alliance for Integrity Reform of 340B) Continued negative media attention Federal Court vacates orphan drug rule 2014 and subsequent responses from HRSA (N/A to most in the room today) 11 // experience clarity 2013 Recertification Process Changes Some changes to recertification process authorizing officials should be aware of Changes emphasize importance of understanding qualification requirements Some very specific attestations that caused many covered entities to challenge internally their understanding of program 12 // experience clarity 6

2013 Recertification Process Authorizing official must attest to following eight statements As an Authorized Official, I acknowledge the 340B covered entity s responsibility to abide by & further certify on behalf of the covered entity that: 1. all information listed on the 340B Program database for the covered entity is complete, accurate, and correct; continued on next slide 13 // experience clarity 2. the covered entity meets all 340B Program eligibility requirements, including section 340B(a)(4)(L)(iii) if applicable the Group Purchasing Organization prohibition which ensures that the covered entity does not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement; 3. the covered entity is complying 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; continued on next slide 14 // experience clarity 7

4. the covered entity maintains auditable records demonstrating compliance with requirements described in paragraph (3) above; 5. the covered entity has systems/mechanisms in place to ensure ongoing compliance with requirements described in (3) above; 6. if the covered entity uses contract pharmacy services, that the contract pharmacy arrangement is being performed in accordance with OPA requirements and guidelines, including, but not limited to, that the covered entity obtains sufficient information from the contractor to ensure compliance with applicable policy and legal requirements and the entity has utilized an appropriate methodology to ensure compliance (e.g., through an independent audit or other mechanism); continued on next slide 15 // experience clarity 7. the covered entity acknowledges its responsibility to contact OPA as soon as reasonably possible if there is any material change in 340B eligibility and/or material breach by the covered entity of any of the foregoing; and 8. the covered entity acknowledges that if there is a breach of the requirements described in paragraph (3) that the covered entity may be liable to the manufacturer of the covered outpatient drug that is the subject of the violation, and depending upon the circumstances, may be subject to the payment of interest and/or removal from the list of eligible 340B entities. 16 // experience clarity 8

These attestations are very important! Critical to understand where 340B is being utilized, and compare independently to database What are your systems/mechanisms for ensuring ongoing compliance? Material breach FAQ ID 1665 (Apexus) refers to non compliance with any 340B program requirements 17 // experience clarity Compliance trends March 2010 PPACA requires GAO study on use & oversight of 340B program September 2011 GAO issues report Covered entities are effectively using the program Oversight is lacking Need for clearer guidance evident (specifically regarding definition of patient) Still pending HRSA is currently drafting omnibus 340B rule June 2014? 18 // experience clarity 9

Brief history (continued) October 2011 HRSA OPA issues response to Senator Grassley s concerns, similar to GAO report Indicates selected audits will begin in 2012 March 2012 Policy release describing audits Expansion of covered entities & appeal of contract pharmacy option have created additional attention to program 19 // experience clarity Compliance trends Common findings from HRSA reviews include Incorrect database information Diversion and duplicate discounts *Compliance with these requirements remains hospital s obligation even in contract pharmacy arrangement Expectation of Corrective Action Plan for Findings When diversion & duplicate discount findings occur, timelines & resolution processes are required 20 // experience clarity 10

Compliance trends What potential findings/concerns are we seeing: Lack of formal policies and procedures Incorrect database information Evaluation of differing contract pharmacy dispensation fee arrangements Internal processes to review the program Understanding of how to MD election was made and potential effect on Managed Care plans Others 21 // experience clarity 340B Drug Pricing Program: Important Benefit, Significant Responsibility 1/2014 Continued emphasis from HRSA and belief 340B Drug Program is critical in stretching scarce federal resources Notes studies support covered entities using savings to expand volume of care to vulnerable patient populations HRSA stated the 340B program provides eligible entities with an important benefit that comes with significant responsibility 22 // experience clarity 11

Contract Pharmacy Oversight 2/2014 HRSA re emphasizes commitment to strengthening 340B program integrity Indicates it has renewed focus around contract pharmacy arrangements Covered entities remain ultimately responsible for compliance; compliance challenges are unique Stronger language around independent audits expected Indicated no oversight, violation of program requirements 23 // experience clarity HHS Fiscal 2014 Budget and OIG Work Plan $6 million of additional funding for program oversight Endorsed by SNHPA and PhRMA Work plan includes two program initiatives: Contract pharmacy arrangements and extent to which covered entities and HRSA oversee compliance Determine what steps HRSA has taken to address OIG s previous recommendation to provide 340B covered entities with access to 340B ceiling prices 24 // experience clarity 12

Negative Media Attention There is an element of reputational risk in addition to compliance risk! Many articles written by media and other groups scrutinizing the 340B drug program: Senator Grassley letters to HRSA, NC Hospitals, Walgreens Many other examples However, many publications as well defending the 340B drug program (SNHPA, HRSA, others) 25 // experience clarity 340B PROGRAM: WHAT IS HRSA AUDIT PROCESS Audit process as described on HRSA.gov: Only one audit of a covered entity permitted at any one time. When HRSA has received request from manufacturer to conduct an audit, HRSA will determine whether audit should be performed by Government or manufacturer Audits will be performed in minimum time necessary with minimum intrusion on covered entity s operations 26 // experience clarity 13

340B PROGRAM: WHAT IS HRSA AUDIT PROCESS HRSA Audit process (continued): HRSA s 340B Program audits review covered entity compliance with respect to eligibility status, including compliance with the Group Purchasing Organization (GPO) prohibition as applicable (see 42 USC 256b(a)(4)(L)(iii)), duplicate discounts, and diversion as defined by42 USC 256b(a)(5)(A) and (B) HRSA regional auditors conduct audit field work for the HRSA Office of Pharmacy Affairs (OPA) 27 // experience clarity 340B PROGRAM: WHAT IS HRSA AUDIT PROCESS HRSA Audit process (continued): HRSA regional auditors obtain and review select program data and internal controls. Audit procedures include, at a minimum: review of relevant policies and procedures and how they are operationalized; verification of eligibility, including GPO and outpatient clinic eligibility; verification of internal controls to prevent diversion and duplicate discounts, including appropriateness of inpatient/outpatient designations and Medicaid exclusion file designations; review of contract pharmacy compliance; and test 340B drug transaction records on a sample basis 28 // experience clarity 14

340B PROGRAM: WHAT IS HRSA AUDIT PROCESS HRSA Audit process (continued): HRSA regional auditors forward preliminary findings to OPA for review. OPA reviews the preliminary findings, drafts a Final Report and issues the report to covered entity, with a request for a corrective action plan (if applicable). 29 // experience clarity 340B PROGRAM: KEY AUDIT DEFINITIONS Diversion 340B drugs to individuals not meeting outpatient criteria Drugs relate to services for inpatients/nrcc areas of hospital Prohibits resale or transfer of drugs purchased at 340B to person not a patient of covered entity Focus on defining patient & covered entity Most recent definition of patient 1996 Who is covered entity? Medicare cost report test & where services are provided Where finance & pharmacy operations meet 30 // experience clarity 15

340B PROGRAM: KEY AUDIT DEFINITIONS Duplicate discounts recent program notice 340B laws prohibit application of both 340B price discount (front end) & payment of pharmacy rebate to state Medicaid (back end) on same drug claim General options for covered entities Carve out Medicaid from 340B drug purchases (GPO exclusion needs considered) Carve in Medicaid Requires verifying Medicaid exclusion file is accurate What about Medicaid managed care or other state programs with Title XIX funding? 31 // experience clarity 340B PROGRAM: KEY AUDIT DEFINITIONS Medicaid duplicate discount Some states slow to establish & communicate Medicaid billing requirements & potential modifiers Transition to Medicaid managed care has created confusion Contract pharmacies should not Carve in unless arrangement with state Medicaid exists Recommendation Engage in ongoing dialogue with Medicaid pharmacy directors of states where you file claims a win win solution may be available Responsibility for avoiding duplicate discounts is on covered entity 32 // experience clarity 16

340B PROGRAM: COMPLIANCE CONCERNS Consequences of noncompliance Repayment of discount Suspension from 340B program Possible CMPs for knowing & intentional violations Does this give rise to false claim liability (ripe for qui tam actions?) Changing landscape of enforcement & audit 33 // experience clarity 340B PROGRAM: GENERAL AUDIT CONSIDERATIONS Audits can be performed internally by a covered entity or by an outside third party What if our third party administrator is performing self audit functions? What should be included in an audit? How often should an audit be performed? 34 // experience clarity 17

340B PROGRAM: GENERAL AUDIT CONSIDERATIONS Common findings from HRSA audits: being prepared is critical Performance of internal review procedures throughout the year is critical (there are free sample audit guides available, including from APEXUS) Is an internal review enough? Covered entities should consider independent mock reviews performed by independent third party New compliance challenges, including expectation of annual independent audits, especially surrounding contract pharmacy relationships 35 // experience clarity 340B PROGRAM: AUDIT PREPARATION Preparing for an audit examples internal procedures: Gather all policies & procedures related to 340B Obtain data policies for any vendor software Obtain copies of all 340B contracts with pharmacies and/or other 340B service providers Obtain all Medicaid ID numbers, provider numbers & NPIs for all entity sites billing Medicaid (including Medicaid managed care) for 340B drugs & point of contact with State Medicaid agency (could represent multiple states & MD contracts) 36 // experience clarity 18

340B PROGRAM: AUDIT PREPARATION Preparing for an audit examples internal procedures Obtain population of all 340B dispensations for specified period of time (typically six months) & select samples based on high cost drugs & Medicaid transactions Additional procedures should be developed around contract pharmacy relationships Who internally should perform this self monitoring? Is internal review enough based on expectation of independent audits? 37 // experience clarity 340B PROGRAM: AUDIT PREPARATION Other compliance considerations What type of entity did you apply as? Capture correct NDC for OP drug used Manual vs. use of third party vendor to track activity Third party vendor self audits Are we really monitoring compliance? Compliance committee do you have one? 38 // experience clarity 19

340B PROGRAM: AUDIT PERFORMANCE As a covered entity, you will need to decide which is most effective and efficient approach Typical sample size of 50 per 6 month period, can fluctuate based on how often being reviewed (internally vs. externally) Where should focus be? Main site, child sites, contract pharmacy, Medicaid, higher cost drugs? Expectation of an independent audit how often performed and what is process? Existence of 340B compliance committee (IA)? 39 // experience clarity 340B PROGRAM: OPPORTUNITIES Consideration of contract pharmacy relationships Don t jump all in be mindful of compliance challenges Financial performance of contract pharmacy relationships (not just about compliance) Appropriate monitoring of changing NDC s and mapping in accumulator 40 // experience clarity 20

340B PROGRAM: CONCLUSION Questions? 41 // experience clarity 340B PROGRAM: CONCLUSION THANK YOU FOR ATTENDING. LEARN MORE AT BKD.COM FOR MORE INFORMATION Michael R. Earls, CPA Senior Manager mearls@bkd.com 260.460.4068 : 42 // experience clarity 21