September 29, 2015

HHS Issues Proposed 340B Program Omnibus Guidance: Five Things to Watch

Holland & Knight Alert
Melissa A. Wong


  • The Department of Health and Human Services (HHS) recently issued a proposed omnibus rule to clarify existing guidance relevant to all 340B Drug Pricing Program stakeholders.
  • Comments on this proposed guidance, due by Oct. 27, 2015, likely will focus on new requirements that may present operational challenges in implementation, including a six-part test for determining patient eligibility for 340B drugs and supplemental measures to prevent duplicate discounts.

The 340B Drug Pricing Program (340B Program), established by Section 602 of the Veterans Health Care Act of 1992, is administered by the Health Resources and Services Administration (HRSA) of HHS. The 340B Program requires drug manufacturers to provide outpatient drugs to particular "covered entities" at a reduced price. HHS recently issued proposed guidance on the 340B Program, with the intent "to provide increased clarity in the marketplace for all 340B Program stakeholders and strengthen HHS's ability to administer the 340B Program effectively."1 Although this omnibus guidance consolidates much of the existing 340B Program guidance, the following proposed provisions merit special attention, particularly to those covered entities, drug manufacturers and other 340B Program stakeholders interested in submitting comments to HHS.

1. Defining Covered Outpatient Drugs Eligible for Purchase Under the 340B Program

Although HHS will continue to utilize the same statutory definition of the term "covered outpatient drug" under Sections 1927(k)(2) and 1927(k)(3) of the Social Security Act to determine the drugs eligible for purchase under the 340B Program, the proposed omnibus guidance clarifies how this definition, and particularly, the "limiting definition" under Section 1927(k)(3), would apply. Specifically, the proposed guidance states that a drug, biological product or insulin cannot qualify as a covered outpatient drug under the 340B Program if it meets both of the following conditions:

  • The drug is "provided as part of, or as incident to and in the same setting as," the services listed in Section 1927(k)(3) — such as inpatient hospital, hospice, dental or nursing facility services.
  • The payment for such services may be made under Medicaid and not as direct reimbursement for the drug.

In short, drugs are excluded from 340B Program eligibility if the drug is bundled for payment under Medicaid as part of the service and in the settings listed in the limiting definition. However, if a drug is provided as part of a hospital outpatient service and is separately and directly billed to Medicaid or a third party payer, the drug could still qualify as a covered outpatient drug under 340B.

Although this guidance helps better define the types of drugs eligible under the 340B Program, the implementation of this guidance by covered entities may prove challenging. Covered entities would be required to monitor and record 340B dispensing by payer and payment structure, and also would be required to account for reversals and refunds that may change the payer or payment structure after a claim is billed. Hospital covered entities subject to the 340B Program's prohibition on using group purchase organizations or arrangements to purchase drugs must also carefully identify which drugs could be classified as covered outpatient drugs for the purposes of the 340B Program, or else risk their eligibility as a covered entity. We expect that 340B Program stakeholders will raise several practical concerns about implementing this proposed guidance.

2. New Six-Part Test for Patients of a Covered Entity

The sale or transfer of 340B Program drugs to individuals who are not patients of a covered entity is considered diversion. In the proposed guidance, HHS suggests replacing the current three-part test for determining patient eligibility with a new six-part test that requires a prescription-by-prescription or order-by-order determination that an individual meets all of the following conditions:

  • The individual receives a healthcare service at a facility or clinic site that is registered for the 340B Program and is listed on the public 340B Program database.
  • The individual receives a healthcare service provided by a covered entity provider who is either an employee or independent contractor of the covered entity, such that the covered entity may bill for services on behalf of the provider.
  • The individual receives a drug that is ordered or prescribed by the covered entity provider as a result of the healthcare service.
  • The individual's healthcare is consistent with the scope of the federal grant, project, designation or contract.
  • The individual's drug is ordered or prescribed pursuant to a healthcare service that is classified as outpatient.
  • The individual's patient records are accessible to the covered entity and demonstrate that the covered entity is responsible for that care.

HHS notes that this six-part test was developed as HHS learned more about how the definition of a patient applied in different and diverse health care settings. The difficulty again in this case is how covered entities and other 340B Program stakeholders operationally implement the proposed requirements to ensure each individually dispensed prescription is accurately attributed to an eligible patient.

3. Replenishment, Rebilling and Repayment

Covered entities and contract pharmacies do not necessarily maintain a separate inventory of their 340B drugs, but instead may tally the drugs dispensed to each type of patient and replenish their overall drug supply when needed by reordering from the appropriate accounts. As long as the covered entity or contract pharmacy otherwise complies with all 340B requirements, HHS permits the use of this system. However, according to the proposed guidance, if a covered entity improperly accumulates or tallies its 340B drug inventory, even prior to placing an order, the covered entity would be deemed to have sold or transferred a drug to a person who is not a patient of a covered entity. Similarly, if there is a mismatch between the recorded number of 340B drugs and the actual number of 340B drugs in the virtual or separate physical inventory, HHS also will consider this a violation that constitutes diversion.

If a covered entity identifies diversion, the entity must work with the manufacturer to make a repayment within 90 days of identifying the violation. Manufacturers do retain discretion as to whether they will request a repayment from the covered entity, or instead refrain from requesting repayment in instances where the amount is de minimis or can be corrected through a credit and rebill process. Still, HHS proposes in the guidance that covered entities must notify HHS and each affected manufacturer of diversion. The covered entity is also responsible for reporting a summary of its corrective actions to HHS.

Although 340B Program stakeholders may be supportive of the discretion provided to covered entities for the management of their drug inventories, and to manufacturers in determining whether to request repayment from covered entities, they may raise issue with the concept that diversion can occur even before an order is placed for a 340B drug. In addition, a covered entity's obligation to report diversion to HHS and manufacturers makes no exception for de minimis amounts.

4. How to Prevent Duplicate Discounts

HHS prohibits duplicate discounts, whereby a covered entity cannot obtain a 340B Program discount on a drug that is already subject to a Medicaid drug rebate. HHS maintains the 340B Medicaid Exclusion File as a mechanism to help prevent duplicate discounts. If covered entities elect to purchase and dispense 340B drugs for their Medicaid patients, or to "carve-in," they must inform HRSA upon enrollment in the 340B Program so that they can be listed on the Medicaid Exclusion File accordingly.

The proposed guidance suggests that a Medicaid managed care organization (MCO) may elect to carve-in and dispense 340B drugs to its patients, or "carve-out" and purchase drugs through other mechanisms. The entity can make different determinations to participate by covered entity site and by MCO, as long as the entity provides to HRSA the identifying information of the covered entity site, the associated MCO and the decision to carve-in or carve-out. This information would also be included in the Medicaid Exclusion File.

HHS is soliciting comments on how to supplement the Medicaid Exclusion File, which is only available on a quarterly basis, to allow covered entities to appropriately utilize 340B purchasing for their Medicaid fee-for-service and managed programs, while still ensuring appropriate safeguards that prevent duplicate discounts. In this case, HHS appears to recognize the operational complexity in complying with these requirements and seeks information about potential processes that could be used as a federal standard.

5. New Procedures in the Auditing of Covered Entities and Contract Pharmacies

HHS intends to continue exercising its authority to audit covered entities for 340B Program compliance, especially where diversion and duplicate discounts are concerned. Manufacturers may audit covered entities as well, but only based on a proposed "reasonable cause" standard where diversion or duplicate discounts are suspected at the covered entity, its child sites or contract pharmacies. Covered entities, in turn, are expected to conduct annual audits, as well as proposed "quarterly reviews" that are more limited in scope, to ensure contract pharmacies also comply with 340B Program requirements.

HHS has proposed a new notice and hearing process for covered entities, wherein the entity will be given the opportunity to respond, in writing and within 30 days, to adverse audit findings or a proposed loss of 340B Program eligibility. HHS will subsequently issue its final determination regarding non-compliance, at which point a covered entity may be required to submit a corrective action plan. Corrective action plans must address all findings of non-compliance, and at a minimum should include the following items:

  • correction of each finding of non-compliance
  • implementation of measures to prevent future occurrence of non-compliance
  • plans to make offers of repayments to affected manufacturers, or plans to work with state Medicaid offices to correct duplicate discounts
  • a timeline for corrective actions to be taken

If HHS' final determination includes a finding that the covered entity is no longer eligible for the 340B Program, the entity must repay affected manufacturers for 340B drug purchases made after the date the entity first violates a statutory requirement, rather than a date of discovery or a date of the audit finding. We anticipate that 340B Program stakeholders will provide comments on this provision in particular, and on the other proposed program integrity measures suggested. Stakeholders should watch for final guidance to determine whether changes to their 340B compliance programs will be required. 


180 Fed. Reg. 52300 (August 28, 2015).


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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