A recently-released proposed rule would impose civil monetary penalties on drug manufacturers that intentionally overcharge healthcare providers for medications purchased under the 340B Discount Drug Program. The proposed rule, if it is adopted, could open the door to significant financial penalties for manufacturers, even if it is the manufacturer’s wholesaler or other business partner that overcharges the healthcare provider. The proposed rule would also (1) codify regulations concerning calculation of drug prices that can be charged under the program, and (2) revise certain definitions of terms as they are used in the 340B program.

Administered by the Health Resources and Services Administration (HRSA), the 340B program requires drug manufacturers to provide discounts on outpatient prescription drugs to qualifying safety-net healthcare organizations serving low income, vulnerable populations known as “covered entities.” Under the 340B program, drug manufacturers cannot charge covered entities more than the ceiling price established for these drugs.

The 340B program has come under scrutiny by some lawmakers, including Sen. Chuck Grassley (R-IA) who has asserted that some hospitals “appear to be making sizeable profits from the program at the expense of Medicare, Medicaid and private health insurance.” A report issued this week by the Government Accountability Office found that in 2008 and 2012, spending per Medicare Part B beneficiaries was substantially higher at hospitals participating in the 340B program as compared to non-340B hospitals. According to the report, “there is a financial incentive at hospitals participating in the 340B program to prescribe more drugs or more expensive drugs to Medicare beneficiaries.”

Under the proposed rule, a drug manufacturer could be charged up to $5,000 for “knowingly and intentionally” overcharging a covered entity for each “instance of overcharging,” plus a refund of the overpayment. The proposed rule does not define in detail what it means to either “knowingly” or “intentionally” overcharge, but provides an example. In a situation where (1) the manufacturer knows the buyer is a covered entity, and (2) the covered entity is knowingly charged a price exceeding the ceiling price, “a finder of fact would be able to infer intentionality of the violation even in cases where no single individual has knowledge of all of these elements.”

The proposed rule provides greater detail on what constitutes an “instance of overcharging.” According to the proposed rule, it is “any order” for a particular covered drug that “results in a covered entity paying more than the ceiling price.” Each order will constitute a single instance, regardless of the number of units in the order.

The time the initial purchase is made is not the only instance when an “instance of overcharging” can occur. Under the proposed rule, it can also occur when ceiling prices are later recalculated as a result of the submission of pricing data used to calculate prices, and the manufacturer refuses to refund the covered entity or provide a credit. However, an instance of overcharging will not occur if the covered entity did not initially identify the purchase as being eligible for 340B program pricing.

A manufacturer must ensure a covered entity is not charged more than the ceiling price even if the manufacturer does not directly provide the drug. The proposed rule provides that the regulation and “associated penalties appl[y] solely to manufacturers, even though other parties, such as wholesalers, have a role in ultimately ensuring the covered entity receives a 340B drug at or below the ceiling prices.” Said another way, a violation that occurs as a result of a wholesaler overcharging for a drug would ultimately be the manufacturer’s responsibility. This is especially important for entities participating in the 340B program that work with subcontractors. The proposed rule advises that manufacturers take into consideration a wholesaler’s role in the distribution arrangement and work out issues “regarding the assurance that the covered entity receives the appropriate price.”

Calculating ceiling price

The proposed rule would also codify HRSA’s methodology for calculating ceiling price. The formula detailed in the proposed rule provides for subtracting the unit rebate amount (URA) from the average manufacturer price (AMP), and calculating to six decimal places. For new drugs that necessarily do not have sales data history, the proposed rule requires manufacturers to estimate the ceiling price for the first three quarters a new covered drug is available for sale, and to recalculate for the fourth quarter using the AMP minus URA formula; this represents a codification of guidelines issued in 1995 addressing this issue. After the recalculation, the manufacturer must refund or credit any covered entities that bought the drug for more than the recalculated ceiling price no later than the end of the fourth quarter.

The proposed rule also codifies “penny pricing.” In instances when AMP minus URA equals zero, the manufacturer would set the ceiling price to 1 cent. According to HRSA, “it is not reasonable for a manufacturer to set a 340B ceiling price to $0.00 per unit of measure.”

Other provisions

The proposed rule would also revise and add definitions for various terms. Many of these revisions are not substantive, but certain are noteworthy. If adopted, the definition of “covered entity” would add the requirement that the entity be registered and listed on HRSA’s 340B database in addition to being qualified under the statute. The proposed rule would also define “340B drug” more narrowly to be a covered outpatient drug that is “purchased by a covered entity at or below the ceiling price.”

Opportunity for comment

The public is invited to submit comments on all aspects of the proposed rule. Comments are due on or before August 17, 2015.