On Wednesday, February 5, 2014, the Office of Inspector General (OIG) of the U.S. Department of Health & Human Services (HHS) released a report discussing contract pharmacy arrangements in the 340B drug pricing program. The report and a related podcast interview with the lead OIG auditor are available on the OIG website. The OIG is scheduled to speak about this topic at the 10th Annual 340B Coalition Winter Conference on Friday, February 7, and it was anticipated that the OIG would release its report in advance of that presentation. In response to the report, a group of GOP Senate and House lawmakers issued statements urging stronger oversight of the 340B program.  

The OIG report marks the first time the OIG has issued a report focused on covered entity compliance with 340B program requirements, and provides a compelling case for greater oversight of and standards for contract pharmacy arrangements:

  • Patient Definition: The report finds that covered entities do not interpret the patient definition uniformly, leading one covered entity to treat a particular prescription as 340B-eligible and a different covered entity to treat the same prescription as not 340B-eligible. The report discusses four specific examples where the surveyed covered entities would treat a particular prescription differently under the 340B program.  

Notably, the report does not comment on the merits of the existing patient definition itself, but rather addresses only how the surveyed covered entities applied that definition. Program stakeholders have long recognized the need for a more detailed and clear definition of “patient,” and the OIG report now provides concrete examples of how the current definition fails to ensure consistent, program-wide implementation. 

  • Duplicate Discounts: The report finds that covered entities take different approaches to preventing duplicate discounts, and that certain surveyed covered entities (six of the 30 reviewed) “did not report a method” for preventing such discounts. Even for those covered entities that had taken steps to prevent duplicate discounts, utilization by Medicaid managed care organizations (MCOs), in particular, appears to present significant complexities. Manufacturers have long suspected that duplicate discounts do occur, and the OIG report now provides examples of how that can and almost certainly does happen with at least certain contract pharmacy arrangements. 
  • Oversight: The contract pharmacy guidelines released by the Health Resources and Services Administration (HRSA) recommend that covered entities engage in different types of oversight and monitoring of their contract pharmacy arrangements. The report found that some but not all of the covered entities did engage in such efforts, although the nature and frequency of those efforts differed across entities. Only seven of the 30 entities used an independent auditor to monitor the contract pharmacy arrangement, as recommended by HRSA guidance. The report also found that certain covered entities (four of the 30 reviewed) did nothing to monitor these arrangements.
  • The Uninsured: The report notes that eight of the 30 covered entities reviewed did not offer discounted 340B prices to uninsured patients in any of their contract pharmacy arrangements. This finding appears to be a counterweight to covered entity arguments that contract pharmacy arrangements necessarily increase access to discounted drugs for those most in need.

The report is based on a review of 30 covered entities — 15 community health centers and 15 disproportionate share hospitals — as well as eight third-party administrators that adjudicate claims for prescriptions filled through contract pharmacies. The report focused on these arrangements’ compliance with the patient definition and duplicate discount provisions of the 340B statute. It did not address other issues of note regarding these arrangements, such as whether and how the revenue generated by these arrangements is shared between covered entities, contract pharmacies, and third-party administrators, or how these arrangements are structured to ensure compliance with the federal anti-kickback statute. The report only briefly addresses the recent and rapid growth in these arrangements, indicating that since 2010

  • the percentage of all covered entities that use contract pharmacies has risen from 10 to 22 percent;
  • the number of unique pharmacies serving as 340B-contract pharmacies has grown by 770 percent; and 
  • the total number of contract pharmacy arrangements has grown by 1,245 percent.

The report does not include any recommendations but does promise that the OIG will continue to review contract pharmacy arrangements and states that the OIG may include recommendations in an upcoming report if appropriate. HRSA is in the process of drafting a proposed rule for the 340B program, which is expected to be released later this year. In the podcast, the OIG explains that it is sharing its report to inform HRSA’s rulemaking effort. Notably, the OIG appears willing to accept comments or questions about the report and directs that any such comments/questions be submitted within 60 days. This avenue may provide an opportunity for stakeholders to follow up with the OIG regarding the findings or other issues of concern regarding contract pharmacy arrangements.

In response to the report, HRSA issued a memorandum to all covered entities, dated February 5th, reminding them of their compliance obligations in relation to contract pharmacy arrangements.  The memorandum also includes a list of available supporting resources.