Change Is Coming to the 340B Drug Discount Program

Vol. 10 No. 9

AuthorThe year 2014 is expected to bring major changes to the 340B Drug Discount Program.  To understand where the Program is going, it helps to know where it has been. 

What is the 340B Drug Program and Why Does it Exist?

Named after the enacting statute,1  the 340B Program was created by legislation in 1992 and is administered by the federal Health Resources and Services Administration (“HRSA”),2 part of the U.S. Department of Health and Human Services (“HHS”).  Drug manufacturers must participate in the 340B Program as a condition of Medicaid and Medicaid coverage for their products.

Through the 340B Program, pharmaceutical manufacturers discount the cost of drugs provided to registered safety net or “covered entity” providers of outpatient services.  The 340B price, known as the “ceiling price,” is calculated based upon confidential pricing data the manufacturer provides to the federal government.  Covered entities must ensure that 340B drugs are used solely for 340B patients and not diverted for other uses and must prevent “duplicate discounts” by ensuring that 340B drugs are exempt from Medicaid rebate3 invoicing.

The 340B Program has grown tremendously in recent years, and that growth has been accompanied by criticism from multiple sources.  Much of the criticism stems from a disagreement as to the purpose of the 340B Program.

Pharmaceutical manufacturers and other industry groups assert that the 340B Program was the natural outgrowth of the 1990 Medicaid Drug Rebate Program, through which manufacturers pay rebates to states based on the manufacturers’ reported “best price” for drugs reimbursed by Medicaid.4  Since “best price” was defined to include all discounts, drug manufacturers were effectively discouraged from discounting drugs as a form of charity for safety net providers.   Through the 340B Program, the mandatory discounts provided to qualified safety net providers are exempt from “best price” reporting for Medicaid rebate purposes.5  Manufacturers question whether 340B drugs are now being provided for non-charity purposes and whether inadequate oversight means they are paying duplicate discounts in the form of Medicaid rebates for 340B drugs.6   

Hospitals, safety net clinics, and other institutional providers assert that the 340B program was created to allow safety net providers to access deeply discounted drugs in order to stretch limited resources and treat as many needy patients as possible.7 They bristle at attempts to limit access to 340B drugs, arguing that the ability to provide 340B drugs to insured patients and obtain full insurance reimbursement allows them to increase services for the indigent, consistent with the underlying purpose of the 340B Program.8

This divide frames much of the present controversy about the 340B Program.

What Do Critics Say About the 340B Program?

The 340B Program was the subject of a September 2011 report by the Government Accountability Office (“GAO”).9  The GAO noted the explosive growth in the number of covered entities qualified to dispense 340B drugs, in the use of those drugs, and in the profits generated by insurance coverage of 340B drugs.  The GAO was critical of HRSA’s lackluster oversight of the 340B Program and its use of a vague definition of who qualified to be a 340B “patient.”10

Members of Congress have also questioned the operations of HRSA and the 340B Program on issues such as access to 340B drugs and pricing, HRSA audit and oversight activity, and use of 340B profits.11 Trade associations have jockeyed to issue reports on the problems in, or the success of, the 340B Program, depending on their view of the purpose of the 340B Program.12 

The 340B Program in 2014

The year 2014 is expected to bring major changes to the 340B Program.  So far this year, covered entities and drug manufacturers have already seen (1) increased HRSA audit activity and imposition of sanctions; (2) HHS-OIG stepping up its oversight and criticism; (3) written arguments in a lawsuit over 340B orphan drug rules; and (4) increased funding for HRSA oversight.   But it is HRSA’s planned publication of regulations in June 2014 that may have the greatest impact on the Program.

1. HRSA Audit Activity

    Since the publication of the GAO report, HRSA has increased its oversight and now requires covered entities to be recertified.13 HRSA has also intensified its audit activities, with the goal of conducting 200 compliance audits each year.14  While it is not clear how many audits have been completed to date, HRSA does periodically publish audit results on its website.15 Those reports generally identify compliance violations in up to two-thirds of the completed audits.  The most common findings involved (i) drug diversion or dispensing a 340B drug to a non-patient or inpatient; (ii) duplicate discounts or billing the drug to Medicaid without protections against invoicing for Medicaid drug rebates; and (iii) database errors in listing of related entities or contract pharmacies.16  Before January 2014, resulting sanctions for those violations were always reported as “pending.”

In January 2014, HRSA issued its report on finalized FY 2012 audits17 and for the first time indicated it had imposed some sanctions.   For about half of the audited entities with an adverse finding involving drug diversion, a sanction of “repayment to manufacturer” is listed.  No other monetary consequences have been reported.  For the other adverse findings in the audits, HRSA lists the sanctions as “pending.”18

2. HHS-OIG Actions

     In its 2014 Work Plan,19  HHS’ Office of Inspector General (“OIG”) announced it will be conducting three reviews of the 340B Program, examining:

a. The extent to which HRSA and 340B covered entities oversee compliance by 340B contract pharmacies;

b. The extent to which HRSA has implemented prior OIG recommendations regarding 340B covered entities’ access to 340B ceiling prices; and

c. Whether changes in practice or procedure might allow Medicare Part B to receive the benefit of 340B discounts when reimbursing for 340B drugs.20 

Within days of releasing its Work Plan, the OIG issued its first report.

In its report, Contract Pharmacy Arrangements in the 340B Program,21 the OIG found that two compliance problems highlighted in HRSA audits – diversion of 340B drugs to non-patients and duplicate discounts due to failure to appropriately track Medicaid billings – are exacerbated by the use of 340B contract pharmacies.  The OIG found that contract pharmacies use varying and inconsistent methods to determine 340B patient eligibility because of “a lack of clarity” in HRSA’s definition of a patient.22  The report also found a lack of adequate processes to avoid duplicate discounts in Medicaid, especially in Medicaid managed care.23  While HRSA has issued guidance on oversight of contract pharmacies,24 the OIG found that most covered entities do not conduct the oversight recommended by HRSA.25

Given the ongoing dispute over the purpose of the 340B program, one other finding was telling: the OIG found that many 340B covered entities do not offer 340B prices to uninsured patients through contract pharmacy arrangements.26  This finding may prove problematic to those 340B Program defenders who argue that the very purpose of the 340B Program is to increase covered entities’ ability to provide healthcare services like prescription drugs to the uninsured.

3. Orphan Drug Rule Lawsuit

In July 2013 HRSA issued regulations27 implementing a Congressional directive28 that excludes orphan drugs from 340B pricing.  Under the regulations, the orphan drug exception only applies to limited types of 340B covered entities and only applies if the drug at issue is being used for its orphan-approved purpose, leaving open the argument that 340B pricing is available if the drug at issue is prescribed for another purpose.

The Pharmaceutical Research and Manufacturers of America (“PhRMA”) filed a lawsuit29 to enjoin enforcement of the new rule, arguing in part that HRSA was not authorized to issue rules interpreting the legislatively adopted orphan drug exception.  Briefing on that case closed January 17, 2014, with many interested parties on both sides filing written argument. A ruling is expected in the coming months. A decision that HRSA lacked authority to adopted rules interpreting the law may well impact HRSA’s planned future rulemaking pertaining to the 340B Program. 

4. Increased Funding for HRSA

    The Omnibus Budget Act30 funding government activities through September 2014 more than doubled the budget for HRSA’s Office of Pharmacy Affairs, from $4.4 million to $10.2 million.   In the President’s proposed federal budget for the next fiscal year, the proposed HRSA funding is $17 million.  These increases are designated for program integrity efforts.  Just what those program integrity efforts involve remains to be seen.31

5. HRSA Planned Rulemaking

     On January 9, 2014 HRSA served notice through a website posting of major changes to come: 

HRSA is currently working to formalize existing program guidance through regulation, designed to cover a number of aspects of the 340B Program. The regulation currently under development will address the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site facilities. We expect to publish this proposed regulation, which will be open for public comment, by June 2014.32


On April 9, 2014 the Office of Management and Budget acknowledged that HRSA had forwarded proposed regulations governing the operations of the 340B Drug Pricing Program for review.33   Barring unforeseen consequences, the government appears on track to publish rules in June 2014. But establishing a full regulatory structure for the 340B Program may be difficult in the absence of a clearly defined objective for the Program.   It also remains to be seen whether HRSA will use these rules to finally settle the dispute over the purpose of the 340B Program.



Section 340B of the Public Health Services Act, codified at 42 U.S.C. §256b.



Under the Medicaid Drug Rebate Program, drug manufacturers are responsible for paying a statutory rebate to Medicaid Programs based upon invoiced Medicaid payments for that manufacturer’s drugs. See


The Alliance for 340B Integrity and Reform, The 340B Drug Discount Program, a Review and Analysis, Winter 2013, available at


U.S. Government Accountability Office Report to Congressional Committees, Drug Pricing: Manufacturer Discounts in the 340B Program Offer Benefits but Federal Oversight Needs Improvement, GAO-11-836, September 2011, at page 7.


The Alliance for 340B Integrity and Reform, The 340B Drug Discount Program, a Review and Analysis, Winter 2013 at pages 16-22.


Safety Net Hospitals for Pharmaceutical Access, Setting the Record Straight on 340B, July 2013, available at


Id, Executive Summary at page 2.


Available at


See 61 Fed. Reg. 55156 (Oct. 1996) for the definition of “patient” for 340B Program purposes; GAO Report 11-836 Conclusions and Recommendations, pages 32-35. 


See e.g.;


See e.g.;


HRSA Letter to Stakeholders re 340B Program Integrity, 2/10/2012, available at


Id.; see also



For FFY 2012, HRSA finalized 51 audits of covered entities.  Of those 51 audits, only 20 audits contained no adverse findings.  In 16 of the audits, HRSA found diversion to non-340B patients; in 19 audits it found duplicate discount violations; and in 15 audits it found database errors (many of the audits contained more than one finding), see It is unknown how many audits from FFYI 2012 have yet to be finalized and reported.


Id, Column 6.


The second and third reviews were announced as new to the Work Plan.  The OIG did not tag the contract pharmacy review as new, even though it did not appear in the 2013 Work Plan.


22Id at page 16.



75 Fed. Reg.  10272; see also

25 at page 16.
26 at page 16.

78 Fed. Reg. 44016; 42 C.F.R. §10.1 et seq.


Section 2302 of the Health Care and Education Reconciliation Act, Public Law 111–152, excluded from the definition of covered outpatient drug those drugs used for a rare disease or condition designated by the Secretary under section 526 of the Federal Food, Drug, and Cosmetic Act.




HRSA is sensitive to complaints that most program integrity efforts focus on 340B covered entities.  In March 2014, HRSA did issue a statement addressing manufacturer 340B pricing,



RIN 09060ABO4,;jsessionid=7FF5CF347FAE99EA70F01985AF4D5B09.


  • Health eSource