On June 17, 2015, the Health Resources and Services Administration (HRSA) published a proposed rule regarding the calculation of 340B ceiling prices and imposition of civil monetary penalties on manufacturers under the 340B Drug Pricing Program.1 The proposed rule is designed to implement two statutory provisions added to the 340B law by the Affordable Care Act. Under the first provision, the HHS Secretary must "[d]evelop and publish through an appropriate policy or regulatory issuance, precisely defined standards and methodology for the calculation of ceiling prices."2 The second provision authorizes the Secretary to impose civil monetary penalties, "according to standards established in regulations to be issued by the Secretary [within 180 days of ACA's enactment]," on manufacturers that "knowingly and intentionally charge a covered entity a price...that exceeds the [340B ceiling price]"; these civil money penalties may not exceed $5,000 "for each instance of overcharging."3

Key provisions in the proposed rule are summarized briefly below. Comments on the proposed rule are due August 17, 2015.

I. Calculation of the 340B Ceiling Price

A. Basic Calculation

The proposed rule would define the 340B ceiling price for a covered outpatient drug as "the Average Manufacturer Price (AMP) for the smallest unit of measure minus the Unit Rebate Amount (URA)."4 This per-unit calculation methodology is consistent with the 340B law5 and is found in previous HRSA guidance.6 The proposed regulatory text further states that "[t]o ensure the final price is operational in the marketplace," HRSA will multiply the ceiling price by "the drug's package size and the case package size."7 Prior HRSA guidance has only referenced the drug package size; the proposed rule does not define or discuss either "package size" or "case package size." These terms are important as they determine how per unit 340B ceiling prices are converted into NDC-11 level ceiling prices.

B. Restatements of Medicaid Rebate Metrics and Their Effect on the 340B Ceiling Price

HRSA's proposed regulatory text, quoted above, refers to the ceiling price as "the Average Manufacturer Price (AMP) for the smallest unit of measure minus the Unit Rebate Amount (URA),"8 without specifying whether "the" AMP and "the" URA would include a restated AMP reported to CMS (or a revised URA resulting from a restatement in AMP or another Medicaid rebate metric). However, the portion of the proposed rule on CMPs for "overcharges" suggests that, despite the failure to address restated values in the proposed regulatory text (or preamble discussion) on the ceiling price, HRSA does contemplate 340B price restatements when a manufacturer revises AMPs or URAs that were used to set 340B ceiling prices for a past quarter. Specifically, HRSA proposes that an "overcharge" may occur either when a 340B entity makes a purchase or "when subsequent ceiling price recalculations resulting from pricing data submitted to CMS occur and the manufacturer refuses to refund or issue a credit to a covered entity.9 We discuss this issue further below under CMPs.

C. The Two-Quarter Lag

The proposed rule does not mention the two-quarter lag associated with ceiling price calculations -- i.e., the fact that data from sales in quarter one is reflected in AMPs and URAs that are reported in quarter two, which is in time to set 340B ceiling prices for quarter three. At one point the preamble states that "340B ceiling prices must be calculated based on the immediately preceding quarter pricing data." 10HRSA could be referring to the data reported in the "immediately preceding quarter" (which could harmonize its statement with the two-quarter lag), but it does not specify what was intended.

D.  Penny Pricing

In 2011, HRSA released guidance concerning its "penny pricing" policy, which HRSA recommends that manufacturers apply when a calculated 340B ceiling price is zero or negative.11 Like the 2011 guidance, the proposed rule would set a ceiling price of $0.01 per unit when the calculated ceiling price is zero or negative. The preamble to the proposed rule suggests that "[m]anufacturers may not use the prior quarter's pricing, wholesale acquisition cost (WAC), or any other non-340B contract price in place of the penny pricing."12

E. Ceiling Prices for New Drugs

In 1995, HRSA published guidelines describing how to calculate the 340B ceiling price for new drugs.13Similar to the 1995 guidance, the proposed rule recommends that manufacturers "must estimate the ceiling price for a new covered outpatient drug as of the date the drug is first available for sale," and must estimate the ceiling price "for each of the first three quarters the drug is available."14 Under the proposed rule, a manufacturer would begin "calculating" (rather than estimating) the 340B ceiling price beginning with the fourth quarter the drug is available for sale. The proposed regulation would further require manufacturers to "calculate the actual ceiling prices for the first three quarters" by no later than the end of the fourth quarter after the drug is available for sale and to "refund or credit any covered entity which purchased the covered outpatient drug at a price greater than the calculated ceiling price."15

HRSA does not clarify how an "actual" 340B price should be calculated for the first three quarters but proposes that, beginning with the fourth quarter the covered outpatient drug is available for sale, manufacturers "will have the necessary pricing data to calculate the ceiling price based on [the statute]."16 As noted above, however, calculation of a particular quarter's 340B ceiling price requires AMP and URA values based on sales from two quarters earlier (because AMPs and Best Prices -- the quarterly metrics needed to calculate URA -- from quarter one are not reported to CMS until 30 days into quarter two and thus are used to set 340B ceiling prices for quarter three). HRSA does not explain how "actual" 340B ceiling prices can be calculated for the first two quarters a drug is marketed when sales data needed to perform the ordinary ceiling price calculation do not exist. (The proposed rule never discusses the two-quarter lag issue, as noted previously.)

Although HRSA has not clarified how the calculation of "actual" 340B ceiling prices would occur,17 it proposes that refunds and credits to covered entities that purchased the drug at a price greater than the actual ceiling price in quarters one through three must be provided to the covered entities by the end of the fourth quarter the drug is available for sale. Manufacturers should consider whether such refunds and credits to covered entities could be completed during the window of time HRSA proposes.  

II. Civil Monetary Penalties

The 340B statute, as amended by the ACA, provides that HRSA must create a process for assessing civil monetary penalties (CMPs) on a manufacturer that "knowingly and intentionally charges a covered entity a price for purchase of a drug that exceeds the [340B ceiling] price," which "shall not exceed $5,000 for each instance of overcharging a covered entity."18 Although HRSA proposes some regulatory language that tracks the 340B statute closely,19 other HRSA CMP proposals would create significant uncertainty and legal issues were they finalized.

A. Intent Requirement

As noted above, the 340B statute limits CMPs to knowing and intentional overcharges. HRSA's proposed rule does not offer a definition of what this intent requirement entails. HRSA does, however, provide an example: "A manufacturer's failure to provide the 340B ceiling price is not considered an instance of overcharging when a covered entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase. Covered entity orders of non-340B priced drugs will not subsequently be considered an instance of overcharging unless the manufacturer's refusal to sell or make drugs available at the 340B price resulted in the covered entity purchasing at the non-340B price."20

B. Instance of Overcharging

HRSA proposes that "each order for an NDC will constitute a single instance, regardless of the number of units of each NDC ordered. This includes any order placed directly with a manufacturer or through a wholesaler, authorized distributor, or agent."21 HRSA notes also that "if a covered entity orders a single bottle of a covered outpatient drug four times in a month, it would be considered four instances of overcharging."22  

C. Ceiling Price Recalculations

The proposed rule also asserts that an instance of overcharging may occur when "ceiling price recalculations due to pricing data submitted to CMS result in a covered entity paying more than the ceiling price due to failure or refusal to refund or credit a covered entity."23 As noted, HRSA appears to assume that manufacturer recalculations of Medicaid pricing data may trigger an obligation to recalculate 340B ceiling prices. HRSA also does not address how much time would need to elapse after a recalculation for there to be a "failure" to issue a refund or credit, or whether a manufacturer would need to deny a covered entity refund request in order to trigger a CMP.

D. Offsets

HRSA also proposes that an "instance of overcharging...may not be offset by other discounts provided on any other NDC or discounts provided on the same NDC on other transactions, orders, or purchases."24HRSA's proposal to apply CMPs to offsets -- and its apparent assumption that manufacturers must routinely recalculate 340B prices and issue refunds -- together risk forcing manufacturers to offer sub-ceiling prices (which are optional under the 340B statute). That is, if the correct 340B ceiling price is a price determined by restatements of Medicaid rebate metrics, then the initial 340B prices could be too high or too low, but the manufacturer apparently would not be permitted under HRSA's proposal to net out the overcharges and undercharges that would result.

E. CMP Procedural Issues

The 340B statute provides that 340B Program CMPs "shall be assessed according to standards established in regulations,"25 but does not specify the procedural standards that will apply. In its 2010 advanced notice of proposed rulemaking on the 340B CMP provisions, HRSA solicited feedback on CMP procedures. For example, HRSA asked for feedback "on the administrative processes that would best administer [CMPs]tailored to meet the unique context of the 340B Program."26 Rather than tailor administrative processes for 340B, however, the proposed rule offers only the following regarding CMP procedures: (1) 340B CMPs "will be imposed pursuant to the procedures at 42 CFR part 1003"27; and (2) "Pursuant to a delegation of authority, the HHS Office of Inspector General (OIG) will have the authority to bring 340B CMP actions utilizing the standards applied to other civil monetary penalties under 42 C.F.R. parts 1003 and 1005."28HRSA does not identify a specific delegation, or address how the lengthy and diverse CMP regulations cited in HRSA's proposal should apply in the context of the 340B Program. Nor does HRSA address how its "delegation" or the role that HRSA proposes for OIG in the CMP process will interact with the 340B administrative dispute resolution process. (HRSA notes in the proposed rule preamble that the "administrative dispute resolution process remains under development and...HHS intends to address dispute resolution in future rulemaking."29

III. Other Important Issues

A.  Specialty Distribution Arrangements

Under HRSA guidance, covered entities may contract with third party pharmacy providers.30 The proposed rule does not mention contract pharmacy arrangements. HRSA does not address whether its reference in the proposed regulatory definition of "instance of overcharging" to "any order placed directly with a manufacturer or through a wholesaler, authorized distributor, or agent..."31 is intended to permit overcharge CMPs in connection with contract pharmacy arrangements.

Regarding specialty distribution -- and drug distribution models more generally -- HRSA contends in the proposed rule preamble:

All requirements for offering the 340B ceiling price to covered entities apply regardless of the distribution system. Specialty distribution, regardless of justification, must ensure 340B covered entities purchase covered outpatient drugs at or below the ceiling price....A manufacturer's failure to ensure that covered entities receive the appropriate 340B discount through its distribution arrangements may be grounds for the assessment of [CMPs] under this regulation.32

With these statements, HRSA creates significant uncertainty. For example, what does HRSA mean by "specialty distribution"? Does HRSA mean to suggest a departure from prior guidance,33 which permits manufacturers to limit the distribution of their drugs in shortage situations or as required by other applicable laws? Does HRSA mean to suggest that manufacturers are required to offer 340B pricing to all covered entities, and if so, under what authority? And does HRSA intend contract pharmacies to play a role in "ensur[ing] that covered entities receive the appropriate 340B discount"? Depending on the answers to these questions, HRSA could well be exceeding its statutory authority in making this assertion.

B. Definitions

HRSA proposes regulatory definitions for several 340B terms, including "340B drug," "ceiling price," "covered entity," and "covered outpatient drug." For example, HRSA would define "340B drug" as a "covered outpatient drug, as defined in section 1927(k) of the Social Security Act, purchased by a covered entity at or below the ceiling price required pursuant to a pharmaceutical pricing agreement with the Secretary."34 It is unclear what purpose this definition would serve, because the term "340B drug" does not otherwise appear in HRSA's proposed regulatory text. HRSA does not mention whether it intends its definition of "340B drug" to have any effect on the exclusion from Medicaid Best Price of "any prices charged...to a [340B] covered entity...."35  

C. Confidentiality and Publication

Under the 340B statute, HRSA shall provide "access through the Internet website of the Department of Health and Human Services to the applicable [340B] ceiling prices…in a manner (such as through the use of password protection) that limits such access to covered entities and adequately assures security and protection of privileged pricing data from unauthorized re-disclosure."36 HRSA's proposed rule states that HRSA will "publish the 340B ceiling price"37 but does not address confidentiality or the mechanism for this publication.