On June 17, 2015, the Health Resources and Services Administration (HRSA) published a long awaited proposed rule setting forth revisions to the current regulations governing the 340B Drug Discount Program (340B Program) as set forth in 42 C.F.R. part 10 (Proposed Rule). Comments to the Proposed Rule are due August 17, 2015. The Proposed Rule addresses: (i) how drug manufacturers are supposed to calculate the “Ceiling Price” for covered outpatient drugs (340B drugs), (ii) how manufacturers should estimate the Ceiling Price for drugs new to the market and, if necessary, implement retroactive refunds or credits to covered entities who paid more than the Ceiling Price for such new covered drugs, (iii) the ability of the Health and Human Services Office of Inspector General (OIG) to subject manufacturers to civil monetary penalties (CMPs) for the knowing and intentional violation of 340B pricing rules, and (iv) revisions necessary to the current 340B regulations in light of the United States District Court decision inPhRMA v. HHS, No. 13-01501 (D.D.C. May 23, 2014), which invalidated 340B regulations regarding orphan drugs.  Notably, this Proposed Rule is not the “mega rule” that so many in the industry have hoped to see from HRSA, nor does this Proposed Rule address the administrative dispute resolution process related to the 340B program. HRSA has indicated that it plans to propose published guidance later this year as well as an additional proposed rule to address a proposed dispute resolution process for both pharmaceutical manufacturers and 340B Covered Entities participating in the 340B Program.

Rounding and “Penny Pricing”

The Proposed Rule sets forth that the maximum amount that a manufacturer may charge a Covered Entity for a covered 340B drug—the 340B Ceiling Price---is calculated by subtracting the Unit Rebate Amount (URA) from the Average Manufacturer Price (AMP) of such covered outpatient drug at the smallest unit of measure and calculated to the sixth decimal point. The number derived from this calculation will be multiplied by the drug’s package size and case package size and the resulting Ceiling Price (rounded to two decimal places) will be published by HRSA. Notably, the Proposed Rule does not provide any details regarding how such pricing information is to be reported by manufacturers to HRSA nor how or where such calculated 340B Ceiling Prices will be published by HRSA.

The Proposed Rule also seeks to codify the existing, so-called “penny pricing” policy, which allows manufacturers to avoid setting a 340B Ceiling Price for a covered outpatient drug of $0.00 per unit. Instead, when the AMP less the URA for a covered outpatient drug at the lowest unit of measure results in an amount less than $0.01, manufacturers will be allowed to set a 340B Ceiling Price of $0.01 per unit.

340B Ceiling Prices for New Drugs

The Proposed Rule also seeks to codify into regulation the guidance that HRSA previously issued in 1995 regarding new drug pricing, although with some slight differences.   The Proposed Rule would allow manufacturers to “provide HRSA an estimated Ceiling Price for each of the first three quarters” that a new drug is available for sale in the U.S. market. However, commencing with the fourth quarter of sales, the manufacturer must calculate the actual 340B Ceiling Price based on the AMP and URA for the first quarter of product sales. The Proposed Rule also mandates that manufacturers of new covered drugs “refund or credit any Covered Entity which purchased the covered outpatient drug at a price greater than the calculated Ceiling Price. The refunds or credits for the first three quarters must be provided to covered entities by the end of the fourth quarter.”  Under the Proposed Rule, any resulting price differential between the estimate and actual 340B Ceiling Price for a new covered outpatient drug must be refunded or credited by a pharmaceutical manufacturer to a purchasing 340B Covered Entity, regardless of amount. However, in the 1995 guidance, HRSA seemed to suggest that a pharmaceutical manufacturer was only required to issue a refund or credit between the estimated and actual 340B Ceiling Price when a 340B Covered Entity requested such a refund or credit, and then only when the refund or credit was “significant enough to balance the administrative burden involved in documenting and developing the request.”  The Proposed Rule contains no such recognition or suggestion of a materiality threshold for refunds or credits; rather, pursuant to the Proposed Rule, a pharmaceutical manufacturer would always be required to refund or credit purchasing 340B Covered Entities the difference between an estimated and actual 340B Ceiling Price for a new covered outpatient drug regardless of the amount of the differential. In order to comply with the Proposed Rule, pharmaceutical manufacturers will be required to devise a process for facilitating such refunds or credits potentially leveraging current distribution arrangements through wholesalers and the like, or potentially through the 340B prime vendor.

A Warning About Limited Distribution

Many stakeholders were optimistic that HRSA would provide guidance as to how participating pharmaceutical manufacturers could ensure that they offered the 340B price to 340B Covered Entities when a covered outpatient drug has a non-traditional, limited distribution arrangement. Such limited distribution arrangements are becoming more commonplace for so-called "specialty drugs" such as certain biologics, injectables, and drugs with special handling and shipping requirements. Often times under such limited distribution arrangements, a covered outpatient drug is only available from a few specialty pharmacies. In the Proposed Rule, HRSA did note that “[a]ll requirements for offering the 340B ceiling price to covered entities apply regardless of distribution system. Specialty distribution, regardless of justification, must ensure 340B covered entities purchase covered outpatient drugs at or below the ceiling price.”  A “best practice” for pharmaceutical manufacturers offering a covered outpatient drug through a limited distribution system is for such manufacturer to propose a methodology for ensuring that 340B Covered Entities can obtain the drug through such limited distribution arrangement. Recently, HRSA’s Office of Pharmacy Affairs has published a few manufacturer notices addressing such limited distribution arrangements on its website. The Proposed Rule did not address this “best practice,” it did not provide guidance regarding how to notify 340B Covered Entities about covered outpatient drugs available only through limited distribution arrangements, and it did not otherwise comment on what constitutes a pharmaceutical manufacturer “offering” the 340B price to a 340B Covered Entity for a limited distribution drug. This is an area ripe for comment by all 340B stakeholders.

Imposition of Civil Monetary Penaltie

Although in its commentary to the Proposed Rule HRSA admits that it “anticipates that this would occur very rarely if at all,” the OIG can impose CMPs against any manufacturer who “knowingly and intentionally charges a Covered Entity more than the Ceiling Price” in an amount of $5,000.00 “for each instance” of the overcharge. HRSA proposes that an “instance” is any single order of a covered outpatient drug, regardless of the number of units of the drug ordered. However, if a 340B Covered Entity did not initially identify their order as 340B eligible, the manufacturer’s failure to offer the appropriate price (at or below the regulatory determined 340B Ceiling Price) would not be considered an “instance of overcharging.”  HRSA also took the time, in both its commentary and in the proposed regulatory text itself, to remind manufacturers that they are ultimately responsible for ensuring that the wholesalers and distributors of their covered outpatient drugs apply the appropriate price to orders by 340B Covered Entities.

Removal of Orphan Drug Provisions

HRSA did not provide any commentary on the PhRMA v. HHS decision, but the final revised regulations would delete in their entirety the current 42 C.F.R. § 10.21, "Exclusion of orphan drugs for certain covered entities."

HRSA is actively seeking commentary from 340B stakeholders on these topics, and we are ready to assist our clients with thoughtful and effective ways of communicating their questions, comments and concerns to the agency.