HSE LEGALcurrents 

On August 28, 2015, the U.S. Department of Health & Human Services (HHS) published proposed guidance — its long anticipated “mega-guidance” — on the 340B drug discount program.  HHS has invited public comments by October 27, 2015.  HHS intends for the final guidance to assist 340B program stakeholders in compliance, and stakeholders should expect HHS to apply any finalized guidance in future audits. 


The 340B program, created by Section 340B of the Public Health Service Act and codified at 42 U.S.C. § 256b, is a drug discount program designed to permit qualifying healthcare entities (covered entities) “to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  The program is open to covered entities with specified Federal designations or which receive funding from designated Federal programs.  Participating pharmaceutical manufacturers must sell outpatient drugs to covered entities at substantial discounts.

Covered entities have explained that participation in the 340B program is often crucial to maintaining and expanding healthcare services for vulnerable patient populations.  Critics have questioned both the value and the integrity of the program.  In response to program integrity concerns, HHS began auditing 340B covered entities several years ago.  Yet HHS declined to publish its audit criteria, including its construction of key 340B compliance elements.  As a result, the Assistant Inspector General, Office of Evaluation and Inspections, of HHS’s Office of Inspector General recently testified to Congress that the guidance issued to date is ambiguous, and “[w]ithout more clarity, it is hard to determine or enforce compliance.” 

Highlights of Proposed Guidance

         HHS has now proposed guidance addressing the following issues, among others: 

  • Eligibility for Hospitals Contracting with State or Local Governments:  One significant element of many hospitals’ 340B eligibility is their contract with a state or local government to provide health care services to low-income individuals.  The proposed guidance would require such hospitals to provide HHS with a certification evidencing such a contract.  That certification would need to be signed by the hospital’s 340B authorizing official “and an appropriate government official (such as the governor, county executive, mayor, or an individual authorized to represent and bind the governmental entity).”  HHS has not published a form or language for this proposed certification.
  • Hospital Child Site Eligibility:  The guidance proposes that the eligibility of a covered hospital’s off-site outpatient facilities or clinics (child sites) to participate in the program turn on whether the [hospital’s] most recently filed Medicare cost report lists each facility or clinic on a line “that is reimbursable under Medicare.”  In addition, the services provided at the child sites must have “associated Medicare costs and charges.”  Likewise, the guidance proposes that child site eligibility would terminate upon “the parent covered entity’s filing of a Medicare cost report which demonstrates the facility is no longer reimbursable.”  HHS has not explained why a child site’s current 340B status should turn on cost reports reflecting that site’s prior, rather than current, relationship with a parent site.
  • Patient Definition: The guidance proposes a new definition of eligible 340B patients.  The six-part test, which would replace the previous three-part test, would require that, to be an eligible patient, an individual must:
    1. receive a health care service at a covered entity’s facility or clinic site which is registered for the 340B Program and listed on the public 340B database;
    2. receive a health care service from a health care provider employed by the covered entity or who is an independent contractor of the covered entity such that the covered entity may bill for services on behalf of the provider;
    3. receive a drug that is ordered or prescribed by the covered entity as a result of the service described in (2), beyond mere infusion or dispensing of a drug;
    4. receive a health care service that is consistent with the covered entity’s scope of grant, project, or contract;
    5. be classified as an outpatient when the drug is ordered or prescribed, where such classification is determined by how the services would be billed to an insurer or other third-party payor; and
    6. have a relationship with the covered entity such that the covered entity maintains access to auditable health care records which demonstrate that the covered entity has a provider-to-patient relationship, that the responsibility of care is with the covered entity, and that each element of the patient definition is met for the 340B drug.

         HHS acknowledges that this proposed definition is a break from past proposals.  

  • Termination Explanations:  In the preamble to the guidance, HHS states, in relevant part, that “[w]hen a covered entity removes itself, its child site, or contract pharmacy arrangement from the 340B Program, the covered entity is expected to provide an explanation and documentation of the termination.”  The guidance does not set forth any specific consequences for covered entities choosing not to provide such explanations.  However, the preamble notes that “failure to provide this information will be considered in any determination regarding the covered entity’s liability to manufacturers and if the organization seeks to re-enroll as a covered entity.”
  • Consequences of GPO Violations:  The guidance proposes removal from the 340B Program as a sanction for group purchasing organization (GPO) violations, unless a covered entity can demonstrate that any violation was “isolated” And the covered entity is otherwise in compliance.  After removal, the guidance would also require covered entities to repay affected manufacturers for any 340B drug purchases made after the date of the first GPO violation.  A covered entity may reenroll if it satisfies HHS that the entity will comply with the prohibition prospectively and repay manufacturers for any past violation.
  • Replenishment and Credit/Rebills:  The proposed guidance would permit entities to replenish inventory with 340B discount drugs if replenishment is “based on actual prior usage for eligible patients.”  The guidance states that “[i]f a covered entity improperly accumulates or tallies 340B drug inventory, even if it is prior to placing an order, the covered entity has effectively” diverted 340B drugs.  Yet the guidance also approves of, and encourages, the “credit and rebill process” used by many covered entities and manufacturers to address errors within a 30-day period from the date of the initial purchase.  HHS does not reconcile its suggestion that any accumulation error is instantly diversion with its encouragement of monthly credit and rebill reconciliations.
  • Carving In/Out Medicaid FFS and Medicaid Managed Care:  The proposed guidance would require covered entities, at registration, to either include (carve in) or exclude (carve out) Medicaid fee-for-service (FFS) patients on an across-the-board basis for any listed NPI or Medicaid provider number.  By contrast, the guidance would allow covered entities to carve in or carve out Medicaid Managed Care Organization (MCO) patients on a site-by-site or MCO-by-MCO basis, provided that the distinction is available to HHS.  The MCO decision would need to be “made available publicly through an Exclusion File or other mechanism.”  HHS seeks public input on the format of any such mechanism.
  • Identifying 340B Medicaid MCO Claims:  The preamble encourages covered entities to work with states and Medicaid MCOs to establish a process for identifying 340B claims.  The proposed guidance would require covered entities to have mechanisms to identify Medicaid MCO patients.  However, HHS acknowledges that state requirements to prevent duplicate discounts, including the use of modifiers or codes in MCO billing, “are beyond the scope of the 340B Program.”
  • Barrier Against Carving In Medicaid FFS or MCO at Contract Pharmacies:  The proposed guidance states that a covered entity’s contract pharmacy may not dispense 340B drugs to Medicaid FFS or MCO patients “unless the covered entity has submitted information to HHS regarding the arrangement and has systems in place with the State Medicaid agency and contract pharmacy to ensure duplicate discounts cannot occur.”  The preamble goes further and would require a “written agreement” between the covered entity and both its contract pharmacy and either the State Medicaid agency (for FFS patients) or the MCO (for MCO patients), describing the system to prevent duplicate discounts.  HHS has not described the expected content or form of such an agreement.
  • Quarterly Reviews and Annual Independent Audits of Contract Pharmacies:  The proposed guidance states that covered entities are “expected” to conduct both quarterly reviews and annual independent audits of “each contract pharmacy location.”  The guidance further states that “[a]ny 340B Program violation detected through quarterly reviews or annual audits of a contract pharmacy should be disclosed to HHS.”  Contrary to prior program guidance, the proposal does not address a materiality threshold for reporting program violations to HHS.
  • Five-Year Record Retention Requirement:  The guidance proposes that covered entities maintain auditable records for a five-year period from the date a 340B drug is ordered or prescribed.  Such records should be maintained for the entity, as well as its child sites and contract pharmacies, and would apply irrespective of program participation.  The proposed guidance would make termination and repayment of manufacturers potential consequences of failing to maintain such records, on the theory that entities “could be presumed to be out of compliance with the 340B Program requirement” in such cases.

The guidance may be found at this link at Volume 80 Fed. Reg. 52300 (Aug. 28, 2015).


The proposed 340B mega-guidance deserves the attention of 340B stakeholders, including covered entities and contract pharmacies.  HSE attorneys can assist in understanding how any final guidance would affect your organization.

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