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HRSA Issues Additional 340B Compliance Audit Reports and Program Rules

on Wednesday, 31 July 2013 in Health Law Alert: Erin E. Busch, Editor

This month, the Health Resources and Services Administration (HRSA) issued additional 340B Program compliance audit results and its final rule on the orphan drug exclusion—clarifying several matters relevant to 340B covered entities amid continuing Program expansion and scrutiny by industry stakeholders. 


The federal 340B Drug-Pricing Program requires pharmaceutical manufacturers to provide substantial discounts on outpatient drugs purchased by certain safety-net providers—340B “covered entities”—in order for their drugs to qualify for Medicaid reimbursement. Covered entities are subject to the prohibitions on drug diversion (dispensing or utilizing 340B-discounted drugs for individuals who do not qualify as eligible outpatients of the provider) and duplicate discounts (obtaining both a front-end 340B discount and a back-end Medicaid rebate on the same drug).


HRSA has always had the ability to conduct audits of covered entities, but the Program historically relied on participant and manufacturer self-policing with respect to these key compliance requirements. Following significant Program growth—fueled by the 2010 expansion of 340B eligibility to rural providers, including critical access hospitals (CAHs)—and in response to congressional mandate and recommendations by Program stakeholders, the agency began systematic compliance audits in 2012. 


Out of the 51 audits HRSA performed last year, it has completed and released details on 34. It found noncompliance in nearly half of these reviews, including in 9 out of 22 hospital audits. Adverse findings range from incorrect database records—e.g. inappropriately listing closed outpatient locations and terminated contract pharmacies in the OPA database—to drug diversion and incorrectly billing Medicaid in violation of the prohibition on duplicate discounts. While HRSA can require noncompliant providers to undertake remedial action and repay manufacturers for wrongfully obtained discounts, and may ultimately terminate them from the 340B Program, corrective actions and sanctions are still pending for nearly all of its deficiency findings to date.


HRSA has confirmed that we can expect escalating compliance monitoring. The agency ultimately plans to audit between 200 and 400 covered entities, with a focus on providers believed to have a higher risk of noncompliance as well as providers who are the subjects of complaints. We also expect increased independent audits by pharmaceutical manufacturers who suspect noncompliance and are authorized to review covered entities practices and recover erroneously received discounts after obtaining HRSA approval that there is “reasonable cause” to believe a provider has engaged in drug diversion or has obtained duplicate discounts. 


Absent full disclosure of the audit results, we can only speculate on possible penalties and the precise tools and techniques used by auditors to determine provider compliance with 340B Program requirements. But given the current enforcement environment and concerns expressed by Program participants, manufacturers, and members of Congress, all covered entities should review existing 340B policies and processes and actively evaluate compliance with applicable Program standards on an ongoing basis.


Effective October 1, 2013, certain entities must also consider their continuing compliance with the orphan drug exclusion in accordance with the final rule published by HRSA on July 23rd.


This exclusion prevents free-standing cancer hospitals, CAHs, rural referral centers, and sole community hospitals from purchasing pharmaceuticals used to treat certain rarely occurring conditions at 340B prices in order to protect manufacturers’ financial incentives to develop the drugs for rare conditions. The FDA’s current orphan drug list includes over 300 well-known therapies, including Avastin, Botox and Remicade.


The final rule retains the narrow interpretation of the orphan drug exclusion offered in the 2011 proposed regulation. As finalized, these covered entities are only prohibited from purchasing an orphan drug at a 340B discount when prescribed to treat the disease or condition for which it was designated as such by the FDA, and not if the drug is used for a non-orphan indication. Further, HRSA will require manufacturers to presume that a covered entity’s request for an orphan drug at a 340B price means that it satisfies this requirement and will use the drug for non-orphan treatment purposes.


HRSA’s position therefore places sole responsibility to demonstrate compliance with the orphan drug exclusion with the affected covered entities. It directs providers to maintain auditable records to demonstrate compliance in the event that they develop a system to track and trace the indication for which a particular unit of a drug is utilized. If a provider is unable to satisfy this recordkeeping requirement, HRSA states that it should purchase all orphan drugs, regardless of indication, outside of the 340B Program. A covered entity’s registered outpatient facilities may opt-out of 340B for purposes of orphan drug purchasing even if its parent site does not; all contract pharmacies, however, must follow the same approach as the sponsoring covered entity with respect to these purchases. Compliance with limits on orphan drug prices are subject to HRSA and manufacturer audits.


The final rule on the orphan drug exclusion takes effect October 1, 2013 and is available at  

Whitney C. West

Read the Full Newsletter: Health Law Advisory July 31, 2013

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