The Long-Awaited 340B Drug Pricing Program Omnibus Guidance: Part III

Covered Drugs, Replenishment, GPOs and Contract Pharmacies

September 29, 2015

This is the third in a series of updates addressing the 340B Drug Pricing Program Omnibus Guidance published by the Health Resources and Services Administration (HRSA) on August 28, 2015 (Guidance). The proposed Guidance clarifies various aspects of covered entity and drug manufacturer compliance with Section 340B of the Public Health Service Act (PHSA), topics that are currently addressed in a number of HRSA guidance documents published in the Federal Register dating back to 1992. This update addresses issues of covered drugs, drug replenishment, the GPO prohibition and contract pharmacies under the 340B Drug Pricing Program (340B Program).

Definition of Covered Drug

Under the PHSA, 340B Program pricing applies only to a “covered outpatient drug” (Covered Drug), as defined in Section 1927(k)(2) of the Social Security Act. This statutory definition of Covered Drug specifically excludes drugs, biological products, or insulin “provided as part of, or as incident to and in the same setting as, any of the following (and for which payment may be made” under Medicaid “as part of payment for the following and not as direct reimbursement for the drug)” (i.e., payment for the drug is bundled with payment for the services in these settings):

    • Inpatient hospital services
    • Hospice services
    • Dental services (except when Medicaid reimburses the drug separately)
    • Physician’s services
    • Outpatient hospital services
    • Nursing facility and ICF services
    • Lab and X-ray services
    • Renal dialysis services

Note that the bundling limitation only applies to Medicaid reimbursement. If a drug is billed separately/directly to Medicaid, or is billed to the patient or another third party payor, the limitation would not apply. Further, in order to be a Covered Drug, the drug must have an assigned National Drug Code (NDC) and must be used for a medically accepted indication.

Drug Replenishment

The Guidance specifically permits Covered Entities’ use of virtual inventory and replenishment systems to keep track of 340B drug ordering and dispensing, provided these systems comply with all PHSA requirements. The Guidance also makes several important points regarding replenishment system use. First, the Guidance stresses that each 340B order placed using a replenishment model must be supported by auditable records demonstrating receipt of the drug by an eligible patient. Second, the virtual inventory and replenishment system must be accurate at all points in time. For example, a Covered Entity that inaccurately tallies or accumulates 340B drug inventory (even if done prior to ordering) will be considered to have transferred 340B drugs to an ineligible patient in violation of the PHSA. Similarly, a Covered Entity has violated the PHSA if the recorded number of 340B drugs does not match the actual number of 340B drugs in inventory. Third, Covered Entities are responsible for requesting 340B pricing at the time of purchase. A Covered Entity that wishes to re-characterize one or more transactions as 340B-eligible on a retrospective basis (“banking”) must first notify the manufacturer(s) and ensure that the process is transparent, establishing a “clear audit trail that reflects the actual timing and facts underlying a transaction.” Fourth, a Covered Entity should use standard business practices to return unused or expired 340B drugs and to account for waste. Fifth, the Guidance encourages Covered Entities and manufacturers to continue to use the credit and rebill process to correct purchasing errors within 30 days of the purchase. Finally, a Covered Entity should undertake regular reviews of its 340B inventory, and have policies and procedures in place for reconciling discrepancies. These policies and procedures should facilitate creation of auditable records that support compliance with PHSA anti-diversion requirements.  

The GPO Prohibition

The Guidance restates the PHSA’s prohibition that certain 340B Covered Entities (disproportionate share hospitals, children’s hospitals and freestanding cancer hospitals) may not, as a condition of eligibility under the 340B Program, obtain Covered Drugs through a group purchasing organization (GPO) or other group purchasing arrangement. An affected Covered Entity must attest to compliance with the GPO prohibition upon initial enrollment and at each annual recertification. These affected Covered Entities may use a GPO to purchase drugs for inpatient use, or to purchase drugs that do not meet the definition of “covered outpatient drug” described above. This prohibition also extends to any pharmacies owned or operated by these types of Covered Entities, and goes into effect upon the Covered Entity’s enrollment start date. Newly-enrolled Covered Entities are advised to stop purchasing Covered Drugs via a GPO prior to their 340B start date, but may use up any GPO-purchased Covered Drugs that remain in its inventory after its start date.

HHS encourages Covered Entities and manufacturers to continue their standard business practice of working out errors in GPO purchasing within 30 days of an erroneous purchase through the usual credit and rebill process. New under the Guidance, HHS proposes to extend its “notice and hearing” process to alleged GPO purchase violations by Covered Entities. This would give a Covered Entity an opportunity to demonstrate to HHS that its GPO violation was an isolated error, and not a systemic violation what could lead to termination from the 340B Program.

A Covered Entity that is removed from the 340B Program for a GPO violation must offer repayment to any affected manufacturer for discounts on purchases made after the first date of the GPO violation. If a parent site is removed from the 340B Program for a GPO violation, all child sites and contract pharmacies are also terminated. However, it may be possible for a parent to remain in the 340B Program after a child site GPO violation, if the parent can demonstrate that the violation was limited to the child site. The Guidance clarifies that a violation cannot be considered limited to the child site if the parent and the child use the same drug purchasing account.

Contract Pharmacies

A Covered Entity may dispense 340B drugs through its own pharmacy, or may contract with one or more outside licensed pharmacies (Contract Pharmacies) to dispense 340B drugs to its eligible patients. As permitted under state law, a parent site may contract with a Contract Pharmacy on behalf of its child site, or a child site may contract directly with a Contract Pharmacy. Regardless of the specific arrangement, the Covered Entity and Contract Pharmacy must ensure that the benefit of the 340B Program inures to the Covered Entity, and not to the Contract Pharmacy. The Covered Entity will be responsible for any diversion or duplicate discounts which occur at its registered Contract Pharmacies, including possible repayment to manufacturers.

Before it may utilize a Contract Pharmacy, a Covered Entity must register the Contract Pharmacy with HRSA during regular 340B enrollment periods. In addition to various attestations made during enrollment, the Covered Entity and Contract Pharmacy must have in place a written Contract Pharmacy agreement which lists all involved parent, child and Contract Pharmacy locations, and which contains terms that comply with the PHSA and Guidance. Drug manufacturers will begin shipping 340B drugs to Contract Pharmacies, and Contract Pharmacies may begin dispensing to eligible patients on the Contract Pharmacy’s start date listed in the 340B data base. Information regarding audits of Contract Pharmacies will be presented in the next update.

Dykema will present one final update on the Guidance regarding duplicate discounts, record keeping, audit and repayment requirements. Dykema attorney Kathleen A. Reed (231.348.8134),, is available to assist your organization in understanding the proposed Guidance and implementing anticipatory compliance efforts.

All 340B Covered Entities should evaluate their current practices under the proposed Guidance in preparation for any adjustments that may be required once the Guidance is finalized.

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