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September 25, 2015 Practice Points

HRSA Proposes Relatively Broad Eligibility Criteria in Drug-Pricing Program

The Health Resources and Services Administration’s authority to issue interpretive guidance regarding the 340B program is the subject of ongoing litigation.

By Kara Kasper Cardinale

The Health Resources and Services Administration (HRSA) proposes relatively broad eligibility criteria for certain types of hospitals to participate in the 340B drug-pricing program in draft omnibus guidance released August 28, 2015. Under the program, drug manufacturers extend significant price discounts for outpatient prescription drugs to eligible healthcare organizations and covered entities in an effort to extend "scarce Federal resources as far as possible."

By statute, four types of hospitals may qualify for 340B price discounts, including those: (1) owned or operated by state or local government, (2) "formally granted government powers" by the government, (3) contracting with the government to provide healthcare to low-income individuals not eligible for Medicare or Medicaid, or (4) meeting the statutorily specified disproportionate share (DSH) adjustment percentage. 42 U.S.C. § 256b(a)(4)(L)(i). In particular, hospitals appear to maintain a relatively broad ability to meet 340B eligibility requirements under the third qualification as proposed in the omnibus guidance.

To qualify for 340B under criterion (3), a private, non-profit hospital must have a contract with a state or local government with "enforceable expectations" to provide health care services, including "direct medical care," to low-income individuals. The guidance does not define patients who meet the definition of "low-income" beyond asserting they may not be eligible for Medicare or Medicaid, as specified by statute. The guidance also does not specify the percentage of total healthcare services or the exact types of services patients must receive at the hospital for the hospital to qualify for 340B. Prior to the release of the omnibus guidance, both the Health and Human Services Office of the Inspector General (OIG) and the Government Accountability Office (GAO) highlighted the HRSA's broad administrative discretion in allowing 340B-eligible hospitals to define what constitutes a "low-income" patient and the amount and type of healthcare services provided as potentially expanding the scope of the 340B program beyond its original intent.

The 340B program has grown significantly in recent years in part due to provisions in the Affordable Care Act extending eligibility to children's hospitals, freestanding cancer hospitals, certain rural hospitals, and additional hospitals meeting the disproportionate share adjustment percentage requirement. The amount of drugs purchased by 340B-covered entities (hospitals and other organizations) has increased from about $2.4 billion in 2005 to $7.1 billion in 2013, according to a May 2015 report by the Medicare Payment Advisory Commission. Given the significant expansion of 340B, some policy makers have considered administrative and legislative ways to limit the scope of the program, including some proposals included in the omnibus guidance.

The HRSA released the draft omnibus guidance after it rescinded a proposed rule clarifying 340B program requirements. The agency revoked the rule after a federal district court determined that HRSA has statutory authority to issue regulations only in narrow policy areas related to 340B. The HRSA will accept comments on the draft omnibus guidance through October 27, 2015. The HRSA’s authority to issue interpretive guidance regarding the 340B program is the subject of ongoing litigation.

Kara Kasper Cardinale, Washington, D.C.

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