The new year has already gotten off to a busy start for health care providers that participate in the 340B Drug Pricing Program (“340B Program”) and government agencies that reimburse these providers. Following on the heels of the publication of a Medicaid Covered Outpatient Drug Final Rule (“Final Rule”), the Centers for Medicare and Medicaid Services (“CMS”) recently issued a guidance letter discussing implementation of the Final Rule and informing state Medicaid directors that, under the Final Rule, they should pay 340B Program entities no more than the 340B ceiling price (plus appropriate dispensing fees) for drugs purchased at 340B Program pricing. The Final Rule and the guidance letter could lead to reductions to 340B Program covered entities in some states, at the same time that Congress is considering MedPAC’s recent recommendations to reduce Medicare Part B payments for 340B Program covered entity hospitals. In addition, the White House has proposed a federal health care budget that would expand oversight of the 340B Program.

Covered Outpatient Drug Final Rule and CMS Guidance Letter Address Medicaid Reimbursement for 340B Program Covered Entities

In follow-up to the Final Rule published in the Federal Register on February 1, 2016, CMS issued a letter to state Medicaid directors (“the Letter”) on February 11, 2016 to provide state Medicaid agencies with guidance on how to develop reimbursement methodologies for covered outpatient drugs, consistent with the Final Rule. Under the Final Rule, states are required to develop reimbursement methodologies for drugs consistent with an upper payment limit based on the average acquisition cost (“AAC’) of the drugs, plus a professional dispensing fee. The Letter clarifies that, with regard to drugs purchased under the 340B Program, states should not reimburse at an amount higher than the 340B ceiling price. This requirement extends to drugs purchased by 340B Program covered entities directly or through their contract pharmacies.

As a result of this guidance and the provisions of the Final Rule, states that currently do not distinguish between 340B Program drugs and non-340B Program drugs in their reimbursement mechanisms will be required to amend their reimbursement methodologies, leading to reductions in the reimbursement available to 340B Program covered entities. Such states will need to implement State Plan Amendments (“SPAs”) that comprehensively describe the payment methodology for drugs dispensed by 340B Program covered entities and contract pharmacies, in accordance with the applicable definition of AAC.

It will be critical that 340B Program covered entities in states that have not yet implemented such SPAs monitor guidance from their state Medicaid agencies on the implementation of these new reimbursement requirements. Some states already distinguish between drugs purchased under 340B Program in their reimbursement methodologies, and many such states require 340B Program providers to use a specific modifier on their Medicaid claim forms to indicate that the drugs were purchased through the 340B Program. It is likely that other states will institute similar requirements for 340B Program covered entities as part of their reimbursement changes. States may also face challenges developing appropriate methods for reimbursing drugs dispensed through 340B Program contract pharmacies.

Proposed Budget Seeks to Expand 340B Program Oversight, Rulemaking Authority

The President’s FY 2017 budget (“Budget”) includes a significant increase in funding for the Office of Pharmacy Affairs (“OPA”), which oversees the 340B Program within the federal Health Resources and Services Administration (“HRSA”). The Budget seeks to increase funding from approximately $10 million to $26 million, including $9 million from a proposed user-fee that the Budget describes as a long-term financing strategy to support 340B Program activities. The user fee would be paid based on reported manufacturer sales data.

The funds requested in the Budget would support a number of planned or ongoing activities, included the following:

• New Guidance on Key 340B Program Areas. The Budget states that HRSA is moving forward with the goal of providing more clear policy for all stakeholders, through regulation and guidance. The Budget acknowledges that HRSA lacks explicit regulatory authority in some 340B Program areas, such as the definition of patient, the utilization of contract pharmacies, and hospital charity care requirements, and proposes amendments to the 340B Program statute to grant new authority to issue regulations that have binding and future effect for the program. The Budget also indicates that HRSA is determining next steps with regard to several important new rules or guidance documents, including theproposed “Mega-Regs,” a regulation implementing civil monetary penalty authority for both manufacturers and covered entities, and the development of an administrative dispute resolution process that is anticipated to be proposed during calendar year 2016.

• Enhanced Audit Activity. With the increased funding, HRSA indicates that it would hire and train staff to conduct an additional 100 on-site audits of 340B Program covered entities.

• Information Technology. HRSA proposes to make improvements to the 340B Program Database, which contains information regarding participating covered entities and manufacturers.

• Compliance Management Tool. HRSA proposes to develop a compliance management tool in FY 2016 to expand HRSA’s program integrity efforts.

The Budget requires legislative action to take effect. We will continue to monitor these proposed changes to the 340B Program, and will advise you of important forthcoming changes.