The Health Resources and Services Administration, part of the Department of Health and Human Services, published a Final Rule on January 5, 2017 addressing how 340B covered outpatient drug “Ceiling Prices” are to be calculated under the 340B Drug Pricing Program, and how participating drug manufacturers may be subject to certain monetary penalties for violation of the 340B statute (the Final Rule). The provisions of the Final Rule are effective March 6, 2017, and HHS indicated that it will begin enforcing the requirements of the Final Rule at the beginning of the second quarter of 2017, meaning April 1, 2017.

The Final Rule implements into regulation many of the provisions as proposed in the June 17, 2015 proposed rule, which was reopened for additional comment on April 19, 2016 (collectively, the Proposed Rule). Prior Arent Fox Health Care Counsel analysis of the June 17, 2015 proposed rule is available here, and of the April 19, 2016 reopening notice here. Below, we summarize the contours of the Final Rule, and how the new regulations may impact participants in the 340B Drug Pricing Program (the 340B Program).

The Final Rule revises and replaces existing regulations governing the 340B Program found at 42 C.F.R. Part 10, §§10.1, 10.2, 10.3, and 10.10, adds a new §10.11, and eliminates §§10.20 and 10.21. It also completely replaces prior agency guidance published in 1995 describing how provisional Ceiling Prices are to be calculated for new drugs entering the market (60 Fed. Reg. 51488, Oct. 2, 1995). Specifically, HRSA addresses the following in the Final Rule: (i) how drug manufacturers are supposed to calculate the Ceiling Price for covered outpatient drugs (340B drugs); (ii) how manufacturers should estimate the provisional Ceiling Price for drugs new to the market and, if necessary, implement refunds to Covered Entities who paid more than the calculated Ceiling Price for such new covered drugs; and (iii) the ability of the HHS Office of Inspector General to subject manufacturers to civil monetary penalties (CMPs) for the knowing and intentional violation of 340B pricing rules. Often, one of the most important sections of regulatory text is the “Definitions” section, which sets forth the agency’s basic assumptions and understandings of important terms used throughout the regulation. In the Final Rule, however, it is notable that HHS declined to finalize and/or include official regulatory definitions for the terms “340B Drug” and “Wholesaler.” HHS agreed with commentators that the reference to the definition of “wholesaler” in Section 1927(k)(11) of the Social Security Act was inappropriate, since that definition focuses on wholesale distribution of drugs to retail community pharmacies and, by law, retail community pharmacies cannot be 340B Program “Covered Entities.” While the removal of the term “wholesaler” from the “definitions” section could be interpreted as a softening of HHS’s focus on the role that wholesalers play in the 340B Program, HHS was careful to point out in the preamble to the Final Rule that “a manufacturer’s failure to ensure that Covered Entities receive the 340B Ceiling Price through its distribution arrangements with wholesalers may be grounds for the assessment of civil monetary penalties.” The methodology for calculating the 340B Ceiling Price (meaning, the maximum amount that a manufacturer may charge a Covered Entity for a covered 340B drug) will be finalized per the Final Rule, largely as proposed. Ceiling Prices will be calculated by subtracting the Medicaid Drug Rebate Program Unit Rebate Amount (URA) from the Average Manufacturer Price (AMP) of the applicable covered outpatient drug from two quarters prior at the smallest unit of measure using six decimal places; however, HRSA “will publish the 340B Ceiling Price rounded to two decimal places.” The Final Rule removed the terms “package size” and “case package size” from the text of the calculation methodology, since the 340B statute does not explicitly mention those metrics. However, HHS indicated that it “does plan to further elaborate on the manner that the terms relate to the 340B Ceiling Price calculation, and its use in the markets, in future guidance.” Also, HHS does not clarify what it means by the statement that HRSA “will publish” the 340B Ceiling Price for covered outpatient drugs. We assume that HRSA will make Ceiling Prices available via some sort of secure portal accessible to participating 340B Covered Entities, rather than actually publishing the prices in a manner accessible to the public and/or competitors of participating manufacturers; however, this point is not entirely clear from a reading of the final regulations and the preamble.

Despite alternatives suggested by commenters and strong objections to the policy, and despite the fact that HRSA re-opened the proposed rule and asked for additional comments related to calculation of a 340B Ceiling Price for a covered outpatient drug when the URA for a covered outpatient drug equals AMP, the Final Rule will codify the existing, so-called “penny pricing” policy as set forth in the Proposed Rule, which allows manufacturers to avoid setting a 340B Ceiling Price for a covered outpatient drug of $0.00 per unit. Instead, when the difference between AMP and 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. The Final Rule will replace in its entirety guidance that HRSA previously issued in 1995 regarding the calculation of provisional 340B Ceiling Prices for new drugs. The Final Rule requires manufacturers to “estimate the 340B Ceiling Price for a new covered outpatient drug as of the date the drug is first available for sale.” The Ceiling Price estimation for the new drug will be based on a standard methodology until actual AMP and URA data is available to calculate the 340B Ceiling Price as set forth in the final regulations (actual AMP data is available two quarters later and an actual URA is typically available 3 quarters later given the need to calculate the Additional Discount). Estimated prices will be calculated by subtracting the applicable Medicaid minimum discount rate percentage (23.1 percent for single-source and innovator drugs, 17.1 percent for clotting factors and most pediatric drugs, and 13 percent for non-innovator drugs) from the Wholesale Acquisition Cost (WAC) of the drug. No later than the fourth quarter that the drug is on the market for sale, manufacturers will be required to calculate the actual Ceiling Price based on the actual AMP and URA. If there is any difference between the estimated and actual 340B Ceiling Prices applied to purchases of the new drug by a Covered Entity, the manufacturer must “offer to refund or credit the Covered Entities” any such difference “within 120 days of the determination by the manufacturer that an overcharge occurred.” The Final Rule essentially removes the existing “de minmis” exception that exists in HRSA’s 1995 guidance relating to a manufacturer’s obligations to refund any overpayment by a 340B Covered Entity due to a differential between the estimated and actual 340B Ceiling Price for a new drug. However, in the preamble to the Final Rule, HHS does state that drug manufacturers and Covered Entities can negotiate a process for truing up any differential, including “repayment options such as crediting or netting.” HHS goes on to state that manufacturers and Covered Entities may separately “agree that a de minimis threshold for refunds should be established.” As such, while HRSA has effectively eliminated the de minimis exception from formal agency regulation/guidance, it suggests in the preamble that manufacturers and 340B Covered Entities could contractually or otherwise agree to such an exception and “trump” the regulatory requirements.

The OIG can impose CMPs in an amount not to exceed $5,000.00 against any manufacturer who “knowingly and intentionally charges a Covered Entity more than the Ceiling Price.” The CMP can be imposed “for each instance” of the overcharge. The Proposed Rule, however, did not specifically define the “knowing and intentional” standard, and the Final Rule also declined to explicitly define the knowledge standard. Rather, HHS “has chosen to provide OIG the flexibility to determine what constitutes ‘knowingly’ and ‘intentionally’ overcharging a Covered Entity in a particular instance.” HHS also reiterates several times that “each factual case is different and will be evaluated separately.” The only concrete guidance provided in the preamble to the Final Rule is a list of examples of “circumstances where HHS would assume that a manufacturer did not ‘knowingly and intentionally’ overcharge a Covered Entity.” (Emphasis added.) Such examples reflected in the preamble include that:

  • The manufacturer made an isolated inadvertent, unintentional, or unrecognized error in calculating the 340B Ceiling Price;
  • The manufacturer sells a new covered outpatient drug during the period the manufacturer is estimating a price based on this final rule, as long as the manufacturer offers refunds of any overcharges to Covered Entities within 120 days of determining an overcharge occurred during the estimation period;
  • When a Covered Entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase; or
  • When a Covered Entity chooses to order non-340B priced drugs and the order is not due to a manufacturer’s refusal to sell or make drugs available at the 340B price.

HHS decided to finalize the definition of an “instance” of overcharging as reflected in the Proposed Rule – meaning that an “instance” is any order of a covered outpatient drug, by National Drug Code, regardless of the number of units of the drug ordered. In addition, HHS maintains its position in the Final Rule that if a 340B Covered Entity did not initially identify its order as 340B eligible, the manufacturer’s failure to offer the appropriate price (at or below the 340B Ceiling Price) would not be considered an “instance of overcharging.”

The fact that HHS is subjecting each potential pricing infraction to a unique “facts and circumstances” test by the OIG without substantial guidance in regulatory text is most likely concerning to 340B participating drug manufacturers. Manufacturers should review the language contained in the preamble to the Final Rule carefully, and consult with regulatory counsel immediately if they believe they could be subject to CMP exposure. HHS indicates several times that additional guidance related to the 340B Program is forthcoming – related to operationalization of the refund process and dispute resolution – and manufacturers could also ask HHS to provide further guidance on the CMP issue in those future releases.