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

Duplicate Discounting, Recordkeeping, Audit and Repayment

October 7, 2015

This is the fourth and final 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 duplicate discounting, recordkeeping, audit and repayment matters under the 340B Drug Pricing Program (340B Program).

Duplicate Discounting

In addition to the discounting required under the 340B Program, the Social Security Act also requires drug manufacturers to provide a rebate to a state for a covered outpatient drug provided to a Medicaid fee-for-service (FFS) or Medicaid managed care organization (MCO) patient. In order to prevent duplicate discounting under both the 340B Program and the Medicaid rebate, HHS has created the Medicaid Exclusion File. Upon enrolling in the 340B Program, a Covered Entity must notify HHS as to whether it will purchase and dispense 340B Covered Drugs to its Medicaid patients (“carve in”) or will not use 340B discounted drugs to dispense to its Medicaid patients (“carve out”). A Covered Entity that opts to carve in will have its NPI and/or Medicaid billing number listed in the Medicaid Exclusion File, providing states with a mechanism for determining which outpatient drug dispensing events are eligible for a Medicaid rebate, and which are not. A Covered Entity may make different carve in/carve out status decisions with regard to its FFS Medicaid patients than it makes for its MCO Medicaid patients. Further, a Covered Entity may also make different carve in/carve out decisions by Covered Entity site and by MCO. However, the Covered Entity must provide HHS with specific information identifying each site and MCO for inclusion in the Medicaid Exclusion File. A Covered Entity may notify HHS of a change in its carve in/carve out status at any time, but the decision becomes effective only on a quarterly basis.


The PHSA requires Covered Entities to allow HHS and certain manufacturers to audit the Covered Entity’s records that pertain to compliance with 340B Program requirements. Because maintenance of auditable records is a condition of eligibility for the 340B Program, failure to maintain such records can result in termination of the Covered Entity from the 340B Program. However, the Guidance states that HHS will use discretion when terminating for record keeping failures, and will not necessarily terminate if the Covered Entity’s non-compliance is not systemic. For example, a Covered Entity that generally keeps auditable records but is unable to produce records regarding a specific instance of dispensing will not be terminated from the 340B Program, but would be presumed to have diverted the drug for which there is no record, and would be liable for repayment. In addition to termination, a systemic failure of recordkeeping could also subject a Covered Entity to repayment for all time periods during which auditable records were not maintained. HHS will provide a Covered Entity with notice and an opportunity for a hearing prior to termination for ineligibility due to lack of recordkeeping. A dis-enrolled Covered Entity is permitted to re-enroll at the next regular enrollment period at which it can demonstrate compliance with the auditable recordkeeping requirement.

Interestingly, the Guidance does not contain specific requirements for the form or content of the required auditable records. We recommend that a Covered Entity insure that its records can demonstrate compliance with all of the requirements applicable to the Covered Entity set forth in the Guidance. The Guidance also requires that records be maintained with regard to all child sites and Contract Pharmacies, and proposes that they be maintained for not less than five years. For terminated Covered Entities, records must be maintained for five years after the date of termination.


Covered Entity Audits

While the Guidance recommends that Covered Entities undertake regular audits of their compliance with 340B Program requirements, it does not dictate who must audit (internal or external), how often audits must occur, or the content of a such audits, except when the audit pertains to a Contract Pharmacy. In contrast to past HRSA guidelines, the Guidance now specifically recommends that Covered Entities conduct annual audits of their Contract Pharmacies undertaken by independent auditors. Further, as a separate compliance mechanism, the Covered Entity should perform comparisons of the 340B drugs dispensed by a Contract Pharmacy against the Covered Entity’s 340B prescribing records on a quarterly basis. The Guidance instructs Covered Entities to correct any instances of duplicate discounts or diversion discovered during annual audits or quarterly reviews, and report the corrective action to HHS.

HHS Audits

The PHSA also gives HHS authority to audit Covered Entities and drug manufacturers to check for compliance with 340B Program requirements (this update will focus only on HHS audits of Covered Entities, not manufacturers). A Covered Entity that does not give HHS access to all records pertaining to its compliance, including records of child sites and Contract Pharmacies, may be terminated from the 340B Program. HHS is limited to conducting only one audit per Covered Entity at any given time, and is obligated to minimize disruptions to the Covered Entity while conducting the audit. HHS may audit for compliance with 340B Program requirements, satisfaction of enrollment and eligibility requirements, as well as the accuracy of the information in the 340B data base, and may perform its audits on- or off-site.

New under the Guidance, HHS is proposing a notice and hearing process that will give Covered Entities the opportunity to respond to adverse HHS audit findings, “other instances of noncompliance” and proposed loss of 340B Program eligibility. The notice and hearing process will be conducted “on the record” based on documents timely submitted by the Covered Entity in response to a notice from HHS detailing the alleged noncompliance. A Covered Entity’s failure to respond to an HHS notice within 30 days, or to obtain an extension, will constitute the Covered Entity’s agreement with the noncompliance alleged in the HHS notice. HHS will review the Covered Entity’s timely submissions and make a final determination that may require a corrective action plan by the Covered Entity or may result in termination from the 340B Program. The Guidance indicates that HHS will work with Covered Entities to determine a timeline for submitting a corrective action plan. HHS characterizes the corrective action plan and all documentation of its implementation as auditable records that must be maintained by the Covered Entity as such.

Manufacturer Audits

The PHSA authorizes a drug manufacturer to audit a Covered Entity’s compliance with statutory prohibitions against duplicate discounts and diversion of 340B Covered Drugs. A manufacturer is not permitted to audit a Covered Entity’s compliance with 340B Program eligibility requirements. Before it may conduct an audit, a manufacturer must establish, to HHS’s satisfaction, that a “reasonable cause” exists to conclude that a Covered Entity has violated the diversion or duplicate discount prohibitions. The Guidance provides examples of what facts or evidence may constitute reasonable cause, which may include a Covered Entity’s failure to respond to a manufacturer’s questions regarding diversion and duplicate discounts. Additionally, a manufacturer must develop an audit work plan with HHS to insure that its audit is limited to permitted issues. The Guidance explains the standards which apply to manufacturer audits, including use of an independent certified accounting firm to perform the audit in accordance with government auditing standards, and limiting the duration of an audit to one year. The Covered Entity is required, under PHSA, to provide records necessary to conduct the audit as a condition of its eligibility for the 340B Program. At the end of the audit, the independent auditor submits a final audit report to HHS for action.


The PHSA makes a Covered Entity liable to the manufacturer for any discount improperly obtained as a result of diversion (dispensing to ineligible patients), duplicate discounts (using 340B drugs for Medicaid patients for whom the state also receives a rebate) or ineligibility of the entity to participate in the 340B Program. This liability also runs to diversion and duplicate discounting that occurs at a Contract Pharmacy. The Guidance instructs Covered Entities and manufacturers to work together regarding repayment (and refunds) within 90 days of identifying a violation (or overcharge). The manufacturer retains discretion regarding whether or not to request repayment based on business considerations, provided the manufacturer complies with applicable law, including the federal anti-kickback statute, in exercising that discretion. Some manufacturers may decide not to accept repayments below a certain minimum threshold amount, or to use a credit/rebill mechanism to handle repayments. Regardless of the manufacturer’s process or its decisions regarding repayment, the Covered Entity is responsible for submitting a summary of its corrective actions and repayments to HHS for compliance and audit purposes.

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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