A Year Of Living Dangerously: 2020 And Maneuvers On The 340B Drug Pricing Program Battlefield – Food, Drugs, Healthcare, Life Sciences

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In a December 12, 2017 Advisory Board article, “The 340B drug pricing controversy,
,” Scott Orwig wrote, “the 340B Drug Pricing
Program is one of the most contentious issues in health care: Its
critics say it ‘hurts patients’ and is being
‘abused’ by hospitals. Its defenders say it’s
‘vital’ to the health of low-income patients and essential
to helping safety net hospitals care for their

Mr. Orwig’s words from 2017 can easily be recycled today as
an apt description of what’s currently going on in the world of
the 340B Drug Pricing Program (“340B Program”). Critics
are still saying that 340B Program-participating hospitals and
other providers (“Covered Entities”) are enriching
themselves on discounts that were meant to bring expensive
prescription drug therapy to the vulnerable populations routinely
treated by the country’s safety-net hospitals. In reply, 340B
Program-participating hospitals are saying that pharmaceutical
manufacturers are enriching themselves at the expense of safety-net
hospitals and the populations they serve.

In this case, the debate at issue relates to the concerns of
pharmaceutical manufacturers and others regarding: (i)
“duplicate discounts” under the 340B Program and the
Medicaid Drug Rebate Program (“MDRP”) – or, as
recently described by the American Hospital Association (AHA), the
“unsubstantiated” concerns of pharmaceutical
manufacturers regarding duplicate discounts; (ii) and the use of
contract pharmacy arrangements by 340B Program-participating
hospital to dispense 340B Program-discounted drugs.

I. Duplicate Discounts

As described in prior articles[1] posted on this Blog, the 340B Program and
the MDRP require manufacturers to provide discounts on outpatient
drugs in order to have their drugs covered by Medicaid. These
discounts take the form of (i) reduced sales prices for Covered
Entities (qualifying hospitals and other healthcare providers) that
participate in the 340B Program and (ii) manufacturer rebates on
MDRP-covered drugs dispensed to Medicaid beneficiaries, such
rebates being shared by states and the federal government.

In order to protect drug manufacturers from the potential of
having to offer “discounts on top of rebates” when a 340B
Program drug is dispensed to a Medicaid beneficiary, federal law
includes a mechanism designed to protect manufacturers against the
possibility of duplicate discounts. According to the federal
statute at 42 U.S.C. §256b(a)(5)(A)(i), revenue
related to the sale of 340B Program drugs dispensed to Medicaid
beneficiaries is to be excluded from the MDRP rebate

Implementation of the above statutory protection against
duplicate discounts requires that state Medicaid programs, when
calculating their MDRP rebates, know when 340B Program-covered
drugs are dispensed to Medicaid beneficiaries. Notwithstanding the
need for such information, in a January 2020 GAO Report, “340B Drug Discount Program: Oversight of the
Intersection with the Medicaid Drug Rebate Program Needs
,” (the “2020 GAO Report”) the GAO
concluded that there was insufficient oversight at the federal
level to ensure that the necessary 340B Program/MDRP information
was being submitted to the state Medicaid agencies to limit the
duplicate discount risks as required under the statute. Therefore,
the GAO recommended that CMS begin requiring state Medicaid
agencies to implement policies and procedures to prevent duplicate
discounts, and that the Health Resources and Services
Administration (“HRSA”), the federal agency charged with
the implementation of the 340B Program, assess Covered Entity
compliance with those policies and procedures.

In response to the GAO’s recommendations, the HRSA issued a
new Program Update on July 20, 2020, that set forth
new Covered Entity registration and recertification requirements,
including a requirement that covered entities indicate whether they
will or will not be billing Medicaid fee-for-service for drugs,
“purchased at 340B prices.” If the Covered Entity
discloses that it will be billing Medicaid fee-for-service for 340B
Program drugs, the Covered Entity must also identify (i) each state
Medicaid program that it plans to bill, and (ii) the billing
number(s) it will list on the bill to each state Medicaid

II. Contract Pharmacies

Citing the issues raised in the 2020 GAO Report and other
governmental reports (see below), pharmaceutical manufacturers have
taken action to rein-in what they see as provider abuse of the 340B
Program at the expense of drug manufacturers. In 2020, such action
has focused on the use of contract pharmacies by 340B
Program-participating hospitals.

Pursuant to contract pharmacy guidelines[2] published by the HRSA in
2010, Covered Entities including 340B Program-participating
hospitals may elect to dispense 340B Program-covered drugs to
patients through contract pharmacy services, an arrangement in
which a Covered Entity signs a written contract with a pharmacy to
provide pharmacy services. As described by the HRSA on its Contract Pharmacy Services Webpage, “the
use of an individual contract pharmacy or multiple contract
pharmacies is voluntary, and a covered entity should first
determine its needs for pharmacy services and the appropriate
distribution mechanism for those services when deciding whether or
not to utilize a contract pharmacy.”

A. Pharmaceutical Manufacturers

According to pharmaceutical manufacturers, the use of contract
pharmacies allows providers to improperly benefit from duplicate
discounts under the 340B Program and the MDRP without the knowledge
or approval of drug manufacturers. Moreover, drugmakers also argue
that the use of contract pharmacies facilitates the diversion of
340B Program discount drugs to persons who are not eligible to
receive them.

In making the above assertions, pharmaceutical manufacturers
often cite to the 2020 GAO Report (see above) as well as two prior
governmental reports issued by the GAO and the Office of Inspector
General (“OIG”) of the Department of Health and Human
Services (“HHS”), respectively. In a 2011 GAO report,
Manufacturer Discounts in the 340B Program Offer
Benefits, but Federal Oversight Needs Improvement
,” (the
“2011 GAO Report”) the GAO concluded that the
“increased use of the 340B program by contract pharmacies and
hospitals may result in greater risk of drug diversion, further
heightening concerns about HRSA’s reliance on participants
self-policing to oversee the program. Operating the 340B program
through contract pharmacies creates more opportunities for drug
diversion compared to in-house pharmacies.” In a 2014 OIG
report, “Contract Pharmacy Arrangements in the 340B
,” (the “2014 OIG Report”) the OIG found
that contract pharmacies create “complications” in
preventing diversion and duplicate discounts. Moreover, following
the concerns raised in the 2011 GAO Report, the 2014 OIG Report
concluded that Covered Entities often fail to make sufficient
compliance efforts to assure that program integrity requirements
are met in the 340B Program when utilizing contract pharmacies.
Finally, the 2014 OIG Report found that hospitals that utilize
contract pharmacies often fail to pass 340B Program discounts on to
uninsured patients who receive their medication at such

Given the above and the perception of drugmakers that the 340B
Program has been corrupted, in part, by the use of contract
pharmacies and the compliance problems they create, multiple
pharmaceutical manufacturers have recently notified 340B
Program-participating hospitals that they will no longer provide
340B Program discounts if hospitals purchase and ship 340B
Program-eligible drugs to specialty or retail pharmacies for
patient pick-ups or deliveries instead of dispensing drugs on site.
In addition, drugmakers have notified hospitals that they may halt
340B Program discounts if hospitals fail to provide them with
claims data for patients enrolled in health plans other than
Medicaid. According to those manufacturers that are requesting such
additional data, the data is needed to identify and resolve
duplicate Medicaid and commercial rebates.

B. Provider Response

In a September 8, 2020 letter (the “AHA Letter“) to HHS, the American
Hospital Association (“AHA”) requested that HHS assist
the AHA member hospitals from the “pernicious tactics” of
drug manufacturers that, according to the AHA, are attempting to
undermine the 340B Program by limiting the distribution of
discounted prescription drugs to 340B Program-participating
hospitals based upon “unsubstantiated” concerns about
duplicate discounts between Medicaid and the 340B Program. Pointing
to the financial distress being experienced by its membership
during the current public health emergency, the AHA castigated the
drug manufacturers as, “attempting to exploit for their
financial benefit the current COVID-19 health care

In prior correspondence sent by AHA to drug
manufacturers on August 21, 2020, AHA wrote that it “is an
outrage that this action is being taken at a time when hospitals
are in the midst of their response to the COVID-19 public health
emergency, which has further demonstrated the fractured, inadequate
state of the prescription drug supply chain,” and that the
drug companies’ actions are “attempting to compel
hospitals to divert critical resources away from the

In specific response to the AHA Letter, drugmakers have accused
AHA as mischaracterizing their actions as an attempt to limit the
distribution of 340B Program-discounted drugs. As described by the
manufacturers, their actions are intended to guard against
duplicate discounts and provide protection against the compliance
problems associated with the use of contract pharmacies.

III. Government Action and Reaction

A. HRSA Comments and Investigation

Although HRSA has acknowledged that it has limited enforcement
authority in relation to its contract pharmacy guidelines (See, Fn.
2), HRSA believes contract pharmacies are a vital function for 340B
providers. According to a statement issued by HRSA on July 8, 2020,
“[HRSA believes] that manufacturers that refuse to honor
contract pharmacy orders could significantly limit access to
340B-discounted drugs for many underserved and vulnerable
populations who may be located in geographically isolated areas and
rely on contract pharmacies as a critical point of access for
obtaining their prescriptions.” To this end, HRSA,
“continues to strongly encourage all manufacturers to sell
340B priced drugs to covered entities directly and through contract
pharmacy arrangements.”

In a September 2, 2020 statement, HRSA announced
that it is investigating whether recent manufacturer policies to
restrict access to 340B Program pricing at contract pharmacies
violates the 340B Program statue and whether sanctions may apply.
In its announcement, HRSA stated that, “We believe that
manufacturers that refuse to honor contract pharmacy orders could
significantly limit access to 340B-discounted drugs for many
underserved and vulnerable populations who may be located in
geographically isolated areas and rely on contract pharmacies as a
critical point of access for obtaining their prescriptions. To this
end, HRSA continues to strongly encourage all manufacturers to sell
340B priced drugs to covered entities directly and through contract
pharmacy arrangements.”

In response to the HRSA announcement, multiple professional
associations representing stakeholders in the 340B Program debate
applauded HRSA’s initiative to commence an investigation. For
example, in a September 3, 2020 Press Release, “ASHP Applauds HRSA, Congress for Inquiries into
Drug Manufacturer Attacks on the 340B Program
,” Tom Kraus,
Vice-President of the Government Relations Division of the American
Society of Health-System Pharmacists, wrote, “We are deeply
concerned by what appears to be a coordinated effort by
manufacturers to restrict the supply of essential drugs to safety
net providers….”It is unconscionable that manufacturers are
compromising patient care for their own financial benefit. We hope
the investigations by HRSA and Congress will shine a light on the
threat these manufacturer actions pose to patient access and the
patient services supported by 340B savings.”

B. Word from the Hill

The contract pharmacy issue and the recent actions of drug
manufacturers have also caught the attention of both parties in
both chambers.

On September 14, 2020, a bipartisan group of more than 240 House
lawmakers sent a letter to Secretary Azar condemning the drug
manufacturer actions, as have several members of the House
Committee on Energy and Commerce. As described by in a
Press Release
from Rep. David B. McKinley, P.E., a signatory to
the September 14, 2020 letter, “Protecting access to
prescription drugs for underserved communities should be a top
priority. Unfortunately, the big pharmaceutical companies’
recent actions to restrict 340B drug discounts could jeopardize the
ability of hospitals to provide vital services to vulnerable
populations….Our letter shows strong bipartisan opposition to
this action, and hopefully will convince HHS to

In a September 15th letter, a group of Democratic
senators asked PhRMA to stop what they allege are likely illegal
moves by drug makers. Finally, on September 17, 2020, a bipartisan
group of 30 Senators sent a letter to HHS Secretary Alex Azar to express
their concerns regarding recent actions from pharmaceutical
manufacturers that, “threaten to undermine the role of
contract pharmacies in the 340B Drug Pricing Program.” Noting
the increased importance of the 340B Program and the role of
contract pharmacies during the COVID-19 public health emergency,
the Senators called upon HRSA to, “take immediate and
appropriate enforcement action to halt [the drug
manufacturer’s] tactics and ensure safety-net providers are
able to continue providing life-saving medications to patients
across the country.”

IV. More to Come

It is clear that the AHA and its 340B Program-participating
members are hoping that HHS steps in and compels the drug
manufacturers to change course in their efforts to restrict access
to 340B Program pricing at contract pharmacies. Certainly, Congress
is pressing HHS to do the same.

However, if HHS refuses to take action against the drugmakers,
the strident rhetoric of the AHA and other 340B Program
stakeholders points to a willingness by such organizations to take
matters into their own hands by taking drugmakers to court and
lobbying Congress to give HRSA more enforcement authority over the
340B Program and, specifically, the ability to enforce HRSA’s
contract pharmacy guidance.

Finally, it is worth noting that the willingness of Congress to
step into the fray by exerting pressure on HHS and the
Administration will likely embolden Covered Entities and their
professional associations to aggressively defend the 340B Program
against what they consider to be attacks by the drugmakers. For
example, in a September 17, 2020 Press Release issued by
340B Health, a membership organization of 340B
Program-participating public and private nonprofit hospitals and
health systems, 340B Health President and CEO Maureen Testoni is
quoted as saying that “the pharmaceutical manufacturers that
are refusing to offer drug discounts are not just ignoring the
federal statute,…they also are ignoring a majority of elected
officials in Congress, who share our view that this behavior is not
only unlawful but also harmful to patients in need and to the
dedicated health professionals who care for them. We reiterate our
call on Secretary Azar to act now.” In an August 18, 2020 340B Health Press Release,
Testoni stated that 340B Health and its constituents are willing to
“pursue all legislative and legal avenues available to us to
defend the safety net” if HHS refuses to take action.

Stay tuned.


1 For example, “
340B Program-Participating Hospitals Object to CMS’s Proposed
Cuts to 340B Program Reimbursement: CMS’s Recent Information
Collection Request,” December 12, 2019, and “
CMS’ Proposed Rule Promoting Value-Based Purchasing for
Medicaid-Covered Drugs: The Comments are In!,” August 19,

2 On July 8, 2020, the HRSA issued a statement saying that, although the contract
pharmacy guidelines, remain in effect, the guidelines are not
legally enforceable.

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