The 340B federal drug discount program was created by the Veterans Health Care Act of 1992, which added Section 340B to the Public Health Service Act. Section 340B requires drug manufacturers to provide significantly discounted drugs to eligible health care providers. If your company operates in the health care space, you have probably run into this program. You may work with pharmaceutical manufacturers who are required to provide the discounts. Perhaps you advise a covered entity, such as a critical access hospital or a federally qualified health center, which benefits from the discount. Perhaps you work with retail pharmacies eager to become "contract pharmacies" in the program.

The 340B program presently accounts for only about 2 percent of over $300 billion in annual drug purchases in the U.S., but that level is expected to increase. There is a growing debate over whether the program is serving its legislative intent of stretching federal resources to reduce drug costs and expand health services to appropriate patients. The program has certainly grown significantly since its inception. Whether this is due to inappropriate use or is merely the intended result of the Medicare Modernization Act and other legislation which has expanded the program is among the points of contention.

This specification of the types of entities entitled to purchase outpatient drugs at 340B prices (“covered entities”) is statutory, thus it is unlikely that any interpretive guidance will redefine covered entity status. Among the entities included are federally qualified health centers (FQHCs) and FQHC look-alikes, certain children’s hospitals, critical access hospitals, free-standing cancer hospitals and sole community hospitals, Ryan White HIV/AIDS program grantees, Title XIX family planning clinics and sexually transmitted disease clinics. Almost a third of U.S. hospitals can now access the program. The statute can only be amended by Congressional action, thus the present group of covered entities is unlikely to expand or contract in the near term.

The Government Accountability Office has found program oversight to be inadequate. The program is administered by the U.S. Department of Health and Human Services, Health Resources and Services Administration (HRSA), Office of Pharmacy Affairs (OPA). In response to criticism, HRSA has upped its investment in program integrity to make sure that manufacturers and covered entities remain compliant and that the benefits of the 340B program for the intended beneficiaries are maximized.

A new third branch of OPA is devoted to program performance and integrity and focuses on audit activity and education. HRSA is also adding some teeth to the compliance effort by adding questions about compliance to the HRSA grant application process. Additional auditors are being hired with the goal of doubling the number of audits carried out in FY15.

The key obligations of covered entities are to prevent diversion of drugs acquired at 340B discounts to ineligible patients and locations and to avoid situations where manufacturers inadvertently provide duplicate discounts. A compliance risk area for covered entities is in their relationships with contract pharmacies.

To improve program oversight, and provide more guidance to the various actors in the 340B program, HRSA was expected to promulgate comprehensive regulations, referred to in the industry as the "mega rule", in 2014. However, shortly before that rule was published, a May 2014 decision from the D.C. District Court in Pharmaceutical Research and Manufacturers of American v. Department of Health and Human Services raised serious question about whether HRSA has any substantial rulemaking authority with respect to the 340B program.

HRSA withdrew the rule at issue in that case and has announced its intention to guide the 340B program by issuing interpretive guidance. The interpretive guidance will be issued in notice and comment form giving 340B stakeholders the opportunity to have some input. Interpretive guidance is not given the same deference by a court as a “legislative” rule, but will be accorded some weight if a court finds that the agency’s interpretation of the relevant statute is persuasive.

Current issues arising in the 340B Program, such as the extent to which patients of covered entities are eligible for 340B drugs, and the eligibility of hospitals’ off-site facilities to access the program, will be addressed in this way. HRSA will also address the use of multiple contract pharmacies as it is concerned about the compliance aspects of covered entities' relationships with contract pharmacies. HRSA does not believe it has the statutory authority to dictate how 340B savings are to be used, so it is not expected that there will be interpretative guidance on that much discussed topic.

HRSA has also announced that it will be proposing legislative rules pursuant to the authority granted to it in the Affordable Care Act in three areas relating to the 340B program, namely: civil monetary penalties for drug makers, 340B ceiling prices and administrative dispute resolution.

A recent study published in the influential journal Health Affairs by Rena Conti and Peter Bach found support for the criticism that the 340B program is being converted from one that serves vulnerable patient populations to one that enriches hospitals and their affiliated clinics. No comprehensive national assessment of this issue has been done and little data is available. The debate will continue as manufacturers, safety net providers, other stake holders and politicians continue to advocate for their points of view on this program.

Originally published in Inside Counsel, January 21, 2015