The Health Resources and Services Administration (HRSA) yesterday released its “340B Drug Pricing Program Omnibus Guidance,” also known as the “Mega-Guidance,” in proposed form. It was published in the Federal Register today, August 28, 2015. Comments will be due within 60 days of publication, or no later than Tuesday, October 27, 2015. We expect HRSA will issue the Guidance in final form after it receives and considers stakeholder input, but HRSA has not yet given any indication of what that timing may be. True to its name, the Proposed "Mega-Guidance" addresses a number of wide-ranging topics, some of which we discuss below.

Background: HRSA previously announced that it would issue a so-called “mega-rule” to address various aspects of the 340B program in the form of a binding regulation. HRSA withdrew the mega-rule from review by the Office of Management and Budget after the U.S. District Court for the District of Columbia vacated HRSA’s final rule on the treatment of orphan drugs. The Court vacated that rule on the grounds that the Department of Health and Human Services (HHS), the parent agency to HRSA, does not have a general grant of authority to issue regulations to implement the Public Health Service Act, of which section 340B is a part. Shortly after that court decision, HRSA announced it would issue the mega-rule not in the form of a binding regulation, but rather as guidance, and HRSA has now done so.

What Is Guidance? Is It Binding? HRSA is proposing the Omnibus guidance not as a regulation, but rather explicitly as “guidance.” The forthcoming court decision in the pending legal challenge to HRSA’s orphan drug “interpretive rule” may address whether and how such guidance is binding on 340B program participants. In that case, the Pharmaceutical Research and Manufacturers of America (PhRMA) is challenging the ability of HHS to require manufacturers to comply with an “interpretive” rule. Notably, the proposed Omnibus Guidance is not styled even as an “interpretive” rule, but rather simply as “guidance.” The proposed Omnibus Guidance clearly represents how HRSA believes the 340B program should operate (subject to stakeholder input), but it remains to be seen whether and to what extent HRSA will be able to require compliance with its views.

Patient Definition: Covered entities (CEs) may dispense drugs purchased at the 340B price only to the CE’s own “patients,” but that critical term is not defined by the 340B statute. The Proposed Guidance would “clarify” and appear to narrow the patient definition previously issued in HRSA guidance in 2007. Importantly, the Proposed Guidance states that the revised patient definition would be applied “on a prescription-by-prescription or order-by-order basis,” meaning that a patient cannot qualify for 340B drugs for all of the patient’s needs based on being treated by a CE for only one medical issue. Taken together, a given prescription or order for a 340B drug would have to be generated by an encounter that satisfies all of the following criteria:

  1. Location = CE: The individual receives a “healthcare service” at a CE site that is registered for the 340B program;
  2. Prescriber = CE: The individual receives a healthcare service from a healthcare provider who is employed by the CE or who is an independent contractor of the CE, “such that the [CE] may bill for services” on behalf of the healthcare provider;
  3. 1+2 = 3: The individual receives a drug that is ordered or prescribed by the CE provider as a result of the service described in (2), but only if the service is not limited to “the infusion of a drug or the dispensing of a drug;”
  4. Scope Restriction, As Applicable: The individual receives a healthcare service that is consistent with the CE’s scope of grant, project, or contract, as applicable (typically for grantee CEs only);
  5. Outpatient:  The individual is classified as an outpatient when the drug is ordered or prescribed, determined by how the services for the patient are billed to the insurer. For self-insured or uninsured individuals or where the CE covers the cost of care, the individual will be considered a patient if the CE has clearly defined policies and procedures that it follows to classify such individuals consistently; and
  6. Records: The individual has a relationship with the CE such that the CE maintains “access to auditable health care records” which demonstrate that the CE has a “provider-to-patient relationship, that the responsibility for care is with the [CE], and that each element” of this patient definition is met.

As in prior guidance, the patient definition is different for CEs that are AIDS Drug Assistance Programs (ADAPs). For ADAPs, a patient is an “individual enrolled in a Ryan White HIV/AIDS Program AIDS Drug Assistance Program funded by Title XXVI” of the Public Health Service Act. HRSA also proposes to permit alternative patient eligibility criteria in the case of a public health emergency. The preamble discussion of the revised patient definition includes a number of informative examples and other helpful commentary.

Contract Pharmacies: The Proposed Guidance also addresses contract pharmacy arrangements. The preamble is noticeably oblique in its discussion of the HRSA’s authority to create the contract pharmacy option. HRSA explains that the statute “does not prohibit” contract pharmacy arrangements and that such arrangements are “permitted under State law,” but the Proposed Guidance does not otherwise describe the basis for HRSA’s authority to create that option for CEs in the first instance. In general, the Proposed Guidance emphasizes a CE’s compliance obligations with respect to such arrangements and would require that CEs conduct a quarterly review and annual independent audit of contract pharmacy arrangements. The Proposed Guidance would not impose any restrictions on the number of CE contract pharmacy locations or arrangements. 

Prohibition of Duplicate Discounts: The Proposed Guidance acknowledges that the duplicate discount prohibition applies to covered outpatient drugs dispensed by a Medicaid managed care organization (MCO), and proposes to expand the use of HRSA’s existing Medicaid exclusion file to also identify whether a CE is dispensing 340B drugs to Medicaid MCO patients. CEs already must elect between the “carve-in” or “carve-out” options (terms that the Proposed Guidance now defines, as discussed below) for fee for service (FFS) utilization, and that election applies to all participating sites of the CE. The Proposed Guidance would require CEs to make this election for MCO utilization as well, but with significantly greater flexibility, permitting a CE to “make a different determination regarding carve-in or carve-out status for MCO patients than it does for FFS patients,” but also  to “make different decisions by [CE] site and by MCO.” The CE must provide to HRSA “identifying information of the [CE] site, the associated MCO, and the decision to carve-in or carve-out,” and that information “may be made available on a 340B Medicaid Exclusion file.” It is unclear how HRSA expects such complexity to enable CE compliance, when the more simple binary election currently required for FFS utilization still is generating CE audit error rates in the range of at least 20 percent, as shown by HRSA’s 2015 audit results.

In the contract pharmacy context, the Proposed Guidance establishes a presumption for both FFS and MCO utilization that any listed contract pharmacy will not dispense 340B drugs to Medicaid patients, and that the contract pharmacy can “carve in” only if the CE “will provide a written agreement for HHS approval … that describes a system to prevent duplicate discounts.” The Proposed Guidance does not include any mention of the public disclosure of those contract pharmacy “carve-in” agreements, in contrast to its proposal to publish manufacturer limited distribution plans, for example.

When Is an Outpatient Drug Not a Covered Outpatient Drug? The 340B statute provides that only “covered outpatient drugs” (CODs), as defined in the Medicaid statute, are subject to the 340B discount. The statutory definition includes a “limiting definition” that excludes from the COD definition outpatient drugs used in certain settings when they are paid for as part of the associated service, under a bundled rate for example. HRSA issued final guidance in 1994 that interpreted this limiting definition to exclude any drug used in the specified outpatient settings and paid for as part of a bundled or per diem rate, regardless of the payer involved. The Proposed Guidance departs from that decade-old guidance and would apply the limiting definition only when the outpatient drug is paid under a bundled rate by Medicaid, and not any other payers.   

“Must Offer” and Limited Distribution Plans: The Affordable Care Act amended the 340B statute to provide that the Pharmaceutical Pricing Agreement (PPA) “shall require that the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price.” HRSA has not yet revised the PPA to reflect this requirement, but the Proposed Guidance reiterates HRSA’s view that the “must offer” provision nevertheless is binding, and relies on that position to support its purported imposition of standards regarding limited distribution plans. Specifically, the Proposed Guidance would require manufacturers to submit limited distribution plans to HRSA for approval and publication, and encourages CEs to contact HRSA and other appropriate federal agencies (e.g., the Department of Justice and the HHS Office of Inspector General) if issues regarding such plans cannot be resolved. HRSA does not specifically define when a distribution arrangement would qualify as “limited” and trigger the disclosure requirement, but the Proposed Guidance suggests that any specialty pharmacy, restricted, or limited supply distribution arrangement would do so.  

CE Eligibility Requirements: The Proposed Guidance includes a number of details regarding CE eligibility. For example, the Proposed Guidance would evaluate the disproportionate share adjustment percentage based on a hospital’s most recently filed Medicare cost report, but does not address what occurs if later revisions to the cost report determine the CE hospital (or child site) was not eligible in the first instance. HRSA also discusses how it will determine whether a disproportionate share hospital (DSH) qualifies for participation based on “formally governmental powers,” and how a private hospital can qualify for participation based on a “contract with a State or local government.” For purposes of determining the eligibility of a CE hospital child site, the Proposed Guidance would retain the current standard that the facility or clinic be listed on a reimbursable line of the hospital’s Medicare cost report, but also would specify that the services provided at the facility or clinic have associated Medicare outpatient costs and charges. Notably, HRSA explicitly requests alternative proposals to replace this standard. The Proposed Guidance repeatedly emphasizes a CE’s responsibility to notify HRSA promptly of any change in eligibility for itself or a child site and to immediately cease making 340B purchases once it becomes ineligible. HRSA also makes clear that a CE’s inclusion in a larger organization, such as an accountable care organization (ACO), does not qualify that larger organization for the 340B program or otherwise qualify all individuals receiving care from the larger organization as “patients” of the CE.

Manufacturer Refunds to CEs: The 340B statute requires HRSA to establish a mechanism for manufacturers to issue refunds and credits to CEs if a manufacturer charges more than the ceiling price. The Proposed Guidance indicates that a refund would be required not just in the case of error or intentional overcharges, but also “in routine instances of retroactive adjustment to relevant pricing data.” Manufacturers would be prohibited from offsetting overcharges against undercharges, and there would be no exception for refunds that are de minimis. The Proposed Guidance also provides that a refund or credit would need to occur within 90 days of the manufacturer or HRSA determining that an overcharge occurred, that the manufacturer would be obligated to inform HRSA of the recalculated ceiling price and the reason for the overcharge, and that the CE would waive its right to repayment if it fails to take action to accept or execute the refund (such as cashing the check) within 90 days of receipt.

GPO Prohibition: Three types of CEs — DSH hospitals, children’s hospitals, and free-standing cancer hospitals — may participate in the 304B program only if they do not use a group purchasing organization (GPO) to purchase covered outpatient drugs. The Proposed Guidance incorporates this GPO prohibition but also would create three exceptions:

  • An off-site outpatient clinic located at a separate physical address from the parent CE that does not participate in the 340B program and that purchases drugs through a separate account from the parent covered entity may use a GPO to purchase CODs;
  • Product purchased through a GPO is used for a patient originally designated as an inpatient, but a subsequent review designates that patient as an outpatient for payment purposes; and
  • A CE can purchase a covered outpatient drug only through a GPO, and the CE has documented its attempts to purchase the drug at the 340B price or wholesale acquisition cost (WAC) and has reported the circumstances to HRSA.

The Proposed Guidance also makes clear that the 340B Prime Vendor (currently Apexus) is not considered a GPO for purposes of this prohibition.

ADAP Rebate Option: ADAPs are the only type of CE that can access the 340B price through a rebate rather than through a discounted price at the time of purchase. ADAPs historically have used this rebate option to seek rebates even when they do not cover the full purchase price for a COD but instead act as a type of secondary payer, covering only a patient’s out-of-pocket expense for a COD. The Proposed Guidance includes HRSA’s first written guidance regarding ADAP access to 340B rebates in this latter scenario. The Proposed Guidance would continue to allow ADAPs to participate in the 340B program through a rebate model and/or by “directly” purchasing drugs at the 340B ceiling price (like other CEs), or through a combination or “hybrid” approach of the two. A rebate would be due from the manufacturer only when the ADAP (1) directly purchases a covered outpatient drug at a price greater than the ceiling price, or (2) pays for health insurance premiums that cover the covered outpatient drug and the payment of copay, coinsurance, or deductible amounts for the covered outpatient drug, regardless of how those ADAP expenditures compare to the ceiling price. The amount of the rebate would be defined as the unit rebate amount (URA) for the drug as determined for purposes of the Medicaid Drug Rebate program, and the ADAP’s rebate claim would have to be supported by claims level data.

Audits of CEs/Manufacturers and Notice and Hearing Process: The Proposed Guidance details the processes and procedures for HRSA’s audits of CEs and manufacturers alike, and for both, the Proposed Guidance also describes a “notice and hearing” process for disputing HRSA’s audit results. In the case of HRSA audits of manufacturers, the Proposed Guidance would extend HRSA’s audit rights to a “manufacturer (or its contractors, including wholesalers).” For manufacturer audits of CEs, the Proposed Guidance largely tracks existing program parameters, including that the manufacturer retain an independent auditor and continue to honor requests for the 340B price from the CE while the audit proceeds. Notably, the Proposed Guidance does not impose any requirement on HRSA to act on the audit results generated by a manufacturer’s audit of a CE, in contrast to HRSA’s own CE audits, which the Proposed Guidance specifies can result in a CE’s termination from the 340B program or a requirement that the CE submit a corrective action plan. 

Replenishment Models: The Proposed Guidance discusses CE use of replenishment models in the context of the GPO prohibition, the patient definition, and certain other topics. HRSA clearly recognizes these models are the de facto approach for most CEs and does include details regarding how such models must work in order to comply with the provisions of the Proposed Guidance.

Record Retention: The Proposed Guidance would impose a 5 year record retention requirement on CEs and manufacturers alike.

Definitions: The Proposed Guidance includes a number of defined terms, from “carve-in” to “carve-out,” and “child site” and “parent site.” HRSA uses these defined terms throughout the Proposed Guidance preamble and actual text.