Overview and Executive Summary

On Wednesday, June 17, 2015, the Department of Health Resources and Services Administration (“HRSA”) released an important 340B Drug Discount Program (“340B Program”) proposed rule (“Proposed Rule”) that, if finalized, would result in the first formal regulations governing the 340B Program. Prior 340B Program regulations related to orphan drugs were finalized on July 23, 2013. However, these regulations were subsequently invalidated by a United States District Court decision, withdrawn by the Health Resources and Services Administration Office of Pharmacy Affairs (“HRSA OPA”) and reissued as interpretive guidance.

The Proposed Rule implements two major regulations related to the 340B Program. The first regulation governs the imposition of civil monetary penalties (“CMPs”) against manufacturers that charge 340B Program participating entities (each a covered entity) more than the 340B “ceiling price.” The second regulation clarifies the 340B drug ceiling price calculation process, including: i) implementation of the longstanding HRSA OPA “penny pricing” policy for drugs that would otherwise be priced at or below zero dollars; and ii) calculation of pricing for new drugs.

The most eagerly anticipated of these regulations deals with CMPs. This regulation provides that any manufacturer that charges a covered entity more than the 340B ceiling price may be subject to a $5,000 penalty for each instance of “knowing and intentional” overcharging. Notably, the Proposed Rule does not address whether or not access to 340B-priced drugs must be made available in the first place, what evidence must or might be presented in order to establish that overcharging has occurred or other key questions.

The Proposed Rule also addresses re-implementation of certain key 340B Program term definitions, including “covered outpatient drug.” Unfortunately, neither the Proposed Rule discussion nor the proposed regulatory definition provide any new insight into this term.

HRSA asks that interested parties including both manufacturers and covered entities submit written comments on the Proposed Rule on or before August 17, 2015. Entities that could be impacted by the implementation of this rule or that have questions about unique circumstances should consider submitting comments before the deadline.

Detailed Analysis and Discussion

Manufacturer Civil Monetary Penalties. The Proposed Rule provides that “any manufacturer … that knowingly and intentionally charges a covered entity more than the ceiling price … may be subject to a civil monetary penalty not to exceed $5,000 for each instance of overcharging a covered entity.” HRSA goes on to define an “instance of overcharging” as “any order for a certain covered outpatient drug … which results in the covered entity paying more than the ceiling price.” Notably, each order for a National Drug Code (“NDC”) will therefore constitute a single instance of overcharging, regardless of how many units of each NDC are in that order. For example, if a covered entity orders one bottle of a covered outpatient drug four times in a month, that would be considered four instances of overcharging. An instance of overcharging may also occur when subsequent ceiling recalculations result in a low ceiling price and the manufacturer refuses to credit or refund the overpayment in a timely manner. What is not clear is how multiple NDCs in a single order would be treated.

Interestingly, HRSA indicates that it believes the imposition of CMPs will be rare; this is due to the fact that the overcharge must be “knowing and intentional” and to the fact that HRSA understands manufacturers and 340B Covered Entities typically resolve any related disputes amicably.

Distribution System Considerations (Specialty, etc.).  The Proposed Rule notes that “all requirements for offering the 340B ceiling price to covered entities apply regardless of the distribution system.” HRSA goes on to state that “[s]pecialty distribution, regardless of the justification, must ensure that 340B covered entities purchase covered outpatient drugs at or below the ceiling price.” Though relatively straightforward on its face, this language does not directly address how limited distribution systems might reasonably be implemented in a manner that complies with this expectation.

Additionally, since manufacturers commonly use wholesalers to distribute drugs, this Proposed Rule clarifies that manufacturers have an obligation to ensure that their wholesalers are providing covered outpatient drugs to covered entities at or below ceiling price. Again, the Proposed Rule does not discuss allocation of either limited distribution or shortage drugs.

Penny Pricing and New Drug Prices.  The Proposed Rule would codify the longstanding HRSA OPA position that manufacturers not be required to charge below $0.01 per unit of measure for any 340B-priced drug, irrespective of the ceiling price calculation.

The Proposed Rule would also clarify longstanding policy toward New Drug Price Estimates. Specifically, manufacturers would estimate the 340B ceiling price for the first three calendar quarters the drug is available for sale. At the beginning of the fourth quarter the drug is available for sale, the manufacturer would then be required to calculate the actual 340B ceiling price for the first three quarters the drug was available for sale and refund or credit covered entities that purchased the covered outpatient drug above the calculated 340B ceiling price no later than the end of the fourth quarter after the drug is available for sale.

Practical Takeaway

Though the Proposed Rule did not contain any major surprises, both Covered Entities and manufacturers will want to consider outstanding questions, concerns and overall implications for their 340B Program operations in light of the Proposed Rule provisions. Among other issues, interested parties will want to consider whether to submit comments regarding: i) limited distribution permissibility; ii) implications of the CMP authority in the orphan drug context; and iii) manufacturer recoupment for undercharges on 340B covered drugs.

Again, all comments on the Proposed Rule must be submitted electronically or postmarked no later than August 17, 2015.