Considerations for 340B Pharmacy Contracting

MEMORANDUM

SUBJECT: Considerations for 340B Pharmacy Contracting 

FROM: James L. Feldesman and Michael B. Glomb 

DATE: June 24, 2011

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Background

Since the enactment of Section 340B in 1992,1 federal (and drug manufacturer) enforcement of legal requirements imposed by 340B on “covered entities” has been quite limited. Between health reform legislation and the likelihood that covered entities will expand their 340B projects in light of the changed contract pharmacy guidelines, described below, far more vigorous enforcement is almost certainly on the way.  Those guidelines were issued in March 2010 by the Health Resources and Services Administration (“HRSA”).2  See Notice Regarding 340B Drug Pricing Program – Contract Pharmacy Services, 75 Fed. Reg. 10272.  They became effective on April 5, 2010.

The 2010 guidelines substantially liberalized previous HRSA policy on covered entity contracting with third party pharmacies.  Prior policy generally limited those contracts to one per entity delivery site.  The 2010 version in sharp contrast allows entities to contract with chain pharmacies, multiple community pharmacies, and Pharmacy Benefit Managers (“PBMs”) to provide prescribed drugs to the entity’s patients. There are no limits on the number of such contracts, but because the prescription drugs purchased under 340B may only be provided to covered entity patients, it would make no sense to contract with pharmacies not located conveniently to those patients.  The guidelines also permit a covered entity to dispense 340B drugs both through an in-house pharmacy and through commercial pharmacy contracts.  They replace the previous contract pharmacy guidelines as well as all informal HRSA policy statements and correspondence addressing 340B contract pharmacies.  See 75 Fed. Reg., at 10277.

The ease of pharmacy contracting under the 2010 guidelines virtually invites covered entities to expand their 340B projects through pharmacy contracting.  If the increased volume of covered entities asking our firm for assistance in pharmacy contracting is any indication, that expansion is well under way.

Our firm’s efforts for covered entity clients in the process of utilizing or increasing the utilization of outside pharmacies typically begin with an analysis of the terms of the entity’s pharmacy contracts.  For more and more such clients, we also must review the terms of contracts with vendors proposing to provide management services to the entity (usually) in connection with the entity’s outside pharmacy contracts.

The pharmacy and vendor contracts we review almost always raise significant legal concerns.  Increasingly it is the vendor contracts that worry us the most.  The services vendors offer vary, but virtually all involve relieving the entity of the “headaches” associated with outside 340B pharmacy contracting.  As welcome as relieving the entity’s contracting headaches might be, the problem with such relief is that the liability to the Government (or manufacturers) for all violations of 340B and (generally) other applicable federal law cannot be handed off to a vendor; it remains with the covered entity.

Purpose

This memorandum is based on our concern that many covered entities are expanding (or have expanded) their 340B projects through private pharmacy contracting and, even though they needed (or believed they needed) vendor assistance, they did not have a good understanding of the legal consequences involved.  Without that understanding, even covered entities that need management assistance to contract with and/or oversee outside pharmacies lack the information necessary to assess whether to expand in the first place and how to make as certain as possible that the vendor is competent and the entity’s contract with that vendor fully protects the entity from liability for violations of 340B requirements by, or caused by, the vendor.

Our point that the vendor contract should protect the entity from vendor-created liability has two parts.  The first is whether, by contract, the entity truly can protect itself.  Second, even where vendors sign contracts obligating themselves to indemnify the entity for all such liability, as discussed below, fixing the blame for a violation on the vendor is no simple task.

The purpose of this memorandum is to describe generally 340B covered entity exposure to liability caused by contractors (with a special eye cast toward vendors).  It is not, and should not be viewed as, offering legal opinions.  Its references to 340B and related federal requirements and sanctions are only to convey an informed “sense” of the enforcement risk posed by pharmacy and vendor contracting, along with steps that can be taken to reduce that risk.

Prudent Procurement

The first such step is to procure contractor services in a prudent manner.  Ironically and importantly, federal law and regulation is such that covered entity procurements (or most of them) of pharmacy or vendor services are actually governed by procurement requirements specified in HHS’s federal “grant” regulations.3  Although these regulations are generally thought to apply only to grants, in actuality, they apply to awards of “financial assistance,” a term that in these regulations means not only grants, but other forms of assistance.  Those forms are defined so broadly as to be at least arguably applicable to all 340B covered entities.  And for covered entities that use federal grant funds (in whole or part) to pay the costs of their 340B project, those regulations are likely to apply.  Regardless, the specifics of the procurement requirements within those regulations indicate what a prudent procurement process would look like.4

Covered entities that are tax exempt organizations under Section 501(c)(3) of the Internal Revenue Code have a special interest in establishing such a prudent procurement process.  They risk revocation of their tax exemption if their arrangements with any vendors unreasonably benefit the vendor, such as by paying service fees higher than market rates or disproportionate to their value, or through impermissible revenue sharing arrangements.   A prudent procurement process is designed to ensure against paying excessive costs and, therefore, is an effective way for such organizations to show that their vendors are reasonably paid.

340B Entity Compliance Issues

This section of the memorandum identifies and describes compliance issues we think are especially important to covered entities that are considering or are in the process of expanding their 340B projects through contracting with outside pharmacies.

A.  Certifications

Covered entity violations of the specific responsibilities placed on them by 340B are subject to various (and numerous) sanctions arising under federal law.  To a substantial degree these laws and such sanctions apply to 340B covered entities because of the certifications those entities make to participate in 340B.  The particular certifications are as follows:

1.  Disproportionate Share Hospitals

The enrollment application for Disproportionate Share Hospitals (“DSHs”) requires the hospital’s Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) or Chief Financial Officer (“CFO”) to certify as follows:

The undersigned represents and confirms that he/she is fully authorized to bind the covered entity and certifies that the contents of any statement made or reflected in this document are truthful and accurate; and that the hospital will comply with all requirements and restrictions of Section 340B of the Public Health Service Act and any accompanying regulations or guidelines including, but not limited to, the prohibition on duplicate discounts/rebates, and drug diversion. The undersigned further acknowledges the 340B Covered Entity’s responsibility to contact OPA if the hospital’s status in regard to any of these criteria changes and the hospital is no longer eligible to participate in the 340B program.

Once a DSH is accepted into the 340B program, it must additionally certify that it will not participate in a group purchasing organization or arrangement for the purchase of drugs subject to the 340B ceiling price. It also must certify to the eligibility of the outpatient facilities to be included in the DSH’s 340B Program.

2.  HRSA Funded Grantees

The enrollment application for federally-qualified health centers (“FQHCs”) and other HRSA-funded covered entities requires the following signed statement from the covered entity’s CEO, COO, CFO (or Program Director):

The covered entity listed above will participate in the 340B Drug Pricing Program. The undersigned represents and confirms that he/she is fully authorized to bind the covered entity and certifies that the contents of any statement made or reflected in this document are truthful and accurate. The covered entity will comply with all of the requirements and restrictions of Section 340B of the Public Health Service Act and any accompanying regulations or guidelines, including, but not limited to, the prohibitions on duplicate discounts/rebates, and drug diversion.

3.  Covered Entities with Contract Pharmacies

All covered entities utilizing a contract pharmacy must certify, through the signature of each such entity’s CEO, COO, CFO, or other authorized representative, that:

The undersigned represents and confirms that he/she is fully authorized to bind the Covered Entity or the Pharmacy listed and certifies that the contents of any statement made or reflected into this document are truthful and accurate.  The Covered Entity and the Pharmacy will comply with all of the requirements and restrictions of Section 340B of the Public Health Service Act and any accompanying regulations or guidelines, including, but  not limited to, the prohibitions on duplicate discounts/rebates, and drug diversion.  The Covered Entity and the Pharmacy agree to be in compliance with the provisions of the Contract Pharmacy Services Guidelines as set forth in the Federal Register, Vol 75, No. 43, March 5, 2010 [citation to web site omitted].  The Covered Entity and Pharmacy agree to notify the Office of Pharmacy Affairs, in writing, of any changes in the contract agreement.5

The reason why these certifications expand the vulnerability of covered entities to sanctions for violating 340B requirements is that a false certification of compliance with legal requirements of federal law and regulation is prohibited under an array of federal statutes imposing liability on the violation.  Generally speaking, the violation occurs at the time the certification (if false) is submitted to the federal agency in connection with an application for a benefit of some kind.  Unfortunately, the 340B certifications, fairly read, not only apply to compliance at the time that the certification is presented to officials responsible for determining 340B eligibility, but also to ongoing compliance with the requirements of 340B.  In other words, any subsequent failure to comply with 340B requirements could cause the certification to be viewed as constituting a false representation.

B.  Contractor Associated Liability

Because covered entities remain liable for violations of 340B and related requirements committed by their contractors, it is essential that they include language in their contracts with pharmacies and vendors that not only clearly describes the contractor’s compliance obligations but also clearly makes those contractors financially responsible for any violations that occur on account of their failure to meet those obligations. Contract pharmacies or vendors typically want to use their own contracts, and those contracts often include a clause to the effect that the contractor will comply with 340B requirements.  Such a clause is too vague to assure covered entities full protection from a violation.

Moreover, a contract providing full protection for the entity would require the contractor to indemnify the covered entity for all such liability.  Even if an indemnity clause is included, resistance by the contractor to indemnifying the entity in the case of a violation can be assumed,6 as can the distinct possibility that the covered entity in the end will be forced to sue the contractor to enforce the indemnification obligation.  Moreover, if serious money is owed as a result of the violation, there is a fair chance the contractor will not have the financial ability to pay the sums due.  Also a problem is that the violations contractors could cause include the possibility of criminal and civil penalties being imposed on the entity (or its employees) as to which indemnification would never be adequate.7  We could describe more such problems but the above should be enough for an entity to realize that even with iron-clad guarantees of indemnification, covered entities bear substantial risk for contractor non-compliance because they remain legally responsible for ensuring compliance with Section 340B and other applicable law.8

The sad truth is that the best way for covered entities to protect themselves for contractor actions either is not to utilize contractors at all or pick contractors that (1) know what they are doing (and a track record that shows it), (2) are willing to indemnify fully if they are at fault, and (3) have the financial heft to pay serious money if needed.

Enforcement

The two violations of federal law that would subject a covered entity to sanctions on the face of 340B are “diversion” (i.e. dispensing a 340B drug to an individual who is not a “patient” of the entity (as defined by HRSA)9) and billing the Medicaid program in a manner that would subject the manufacturer to a so-called “duplicate discount.”10  There is a third compliance issue that is likely to become as (if not more) important than those:  excessive payment to contractors.  The 340B program was created and remains in existence to help health care entities that provide services to the poor or persons with medical conditions that are only treatable with drugs far too expensive for them or their families to pay.  Section 340B (just like the provisions of federal law governing Medicaid to Medicaid beneficiaries) is a law that regulates the prices charged by manufacturers – private, profit-making corporations.  If the same pricing controls were enacted for the general public, the law would raise significant Constitutional questions.

Accordingly, to the extent the financial benefits of 340B wind up entirely or principally or significantly in the hands of the private profit-making contractors hired by covered entities to run (or assist in running) their 340B projects, the basic purpose of 340B is undone.  That in another context the price controls instituted by 340B would be constitutionally suspect is the reason why we believe the issue of excessive contractor payments may wind up being the most important violation to federal enforcers.

There are good reasons to think that the enforcement of and imposition of sanctions for violations of federal health and related programs, including 340B, will be substantial.  As far as 340B enforcement is concerned, provisions of health reform legislation, specifically Section 7102 of the Patient Protection and Affordable Care Act, Pub. L. 111-148, as amended by Pub. L. 11-152 (“PPACA”) requires HHS to develop procedures to improve covered entity compliance, including the imposing of monetary sanctions (in addition to the sanctions already available) and the development of an administrative procedure to resolve manufacturer claims of diversion and duplicate discounts.11  The more manufacturers are subject to enforcement, the more active they are likely to become in enforcing their right to audit any 340B covered entity (especially one that complains about the manufacturer’s 340B pricing) for its compliance with 340B’s double discounting and diversion provisions.

Sanctions

Violations of 340B requirements are potentially subject to civil and criminal sanctions under far too many federal laws to cover in this memorandum.  Generally speaking, the laws the Government would be likely to invoke for such a violation would be those relating to false claims.  As we observed previously, the legislative history of Section 340B (among other legal references) makes clear that 340B was enacted for the benefit of covered entities and their patients.  This “benefit,” i.e. the right to purchase covered outpatient drugs at a significant discount and the corresponding obligation of drug manufacturers to sell to a covered entity at no more than a controlled price, is essentially “property” for purposes of federal law.  The implication, reflected in the certifications required in 340B applications referenced above, is that a covered entity will treat that “property/benefit” as intended by 340B in conducting its project. Accordingly, a covered entity that diverts (or permits its vendor to divert) covered drugs to ineligible persons, or permits (intentionally or unintentionally) unreasonable amounts of the revenue from the dispensing of drugs to flow to the vendor instead of using it to further the purposes of the 340B program, arguably has made a false claim under federal law.  An example would be the Program Fraud Civil Remedies Act of 1986,12 under which the Government may impose civil monetary penalties of up to $5,000.00 per claim (in addition to any other remedy available) for false claims or statements in connection with the receipt of property from the Government.

The federal Anti-Kickback Statute13 is another example. Under that statute, it is a criminal offense to knowingly offer or accept anything of value in order to induce patient referrals or the doing of business under a federal health care program.  This statute almost invariably comes into play in dealings between health care providers and vendors (the 340B entity or possible contractor).  HRSA contract pharmacy guidelines specifically warn against contract relationships that could implicate the anti-kickback statute.14

If this memorandum stands for anything, it is that covered entities  should think twice about pharmacy contracting and if they decide to go forward with such contracting, do so by adopting procurement standards that conform to those required under 45 C.F.R. Part 74.  The Appendix to the memorandum is designed to assist those entities in not only adopting those standards but also applying them to avoid problems particular to the nature of the 340B program and the requirements of that program.

APPENDIX FOR COVERED ENTITIES

Key Contracting Principles

The procurement standards (and likely any state or local requirements) can be satisfied by following the measures set forth in Part 74.  At bottom, they simply enunciate common sense business practices for a covered entity contemplating contracting with a vendor. The covered entity will be handing over significant financial and compliance responsibilities to the vendor, and should be assured that the vendor can handle the obligations involved at a fair price for its services.

Among other things, the standards require an entity to determine that the vendor’s services actually are needed, to maximize competition, to perform some form of cost/price analysis, to contract with the party whose offer is most advantageous to the entity, and to document all of the foregoing items.

1. Need for Services

As a starting point, covered entities should evaluate their need for a 340B vendor, in particular vendors whose marketing focuses excessively on generating revenue. In that regard, it is important that covered entities consider certain features of the 340B program.

• The 340B price is a calculated “ceiling” price based on a manufacturer’s “average wholesale price” (“AWP”) reduced by the statutorily required rebate percentage.  Although the ceiling price is calculated by the manufacturer, the underlying AWP data is proprietary. Therefore, historically it has been impossible for covered entities to determine whether the 340B price they are charged is the accurate ceiling price.  Congress attempted to remedy this problem through PPACA by requiring the Secretary of Health and Human Services to publish precisely defined standards for calculating the ceiling price, verifying the prices, and making them available to covered entities through a secure web site.  However, PPACA did not establish a timetable, and (as of April, 2011) HRSA had made it clear that it did not have the resources to carry out that mandate.  Given the prevailing mood in Congress to cut spending, it is uncertain when, if ever, pricing transparency will be achieved.

• The Section 340B discount is important mostly for brand name and/or very expensive pharmaceuticals.  Although there is a “ceiling price” on generic dugs purchased through the 340B program, the methodology for calculating the ceiling price and market forces frequently result in the open market price for generics being lower than the 340B ceiling price.  Many covered entities have developed drug formularies that are heavily weighted toward generics.  Moreover, certain frequently prescribed brand name drugs are about to lose patent protection.   Thus, covered entities may find it desirable to purchase generics on the open market and reserve 340B purchases for the occasional brand name and high priced drugs, thereby eliminating the limitations (and compliance obligations) inherent in the 340B program and the anticipated value of contracting with a 340B vendor. 

• While the 340B program is of enormous value to covered entities and, in many cases, has made it possible for a covered entity to provide pharmaceutical services at all, covered entities must have realistic expectations when entering into a 340B vendor relationship. As noted, vendors typically emphasize the potential for increased revenue.  While that certainly is possible, covered entities should avoid vendor agreements that get them involved in questionable arrangements that are likely to attract scrutiny from HRSA and manufacturers.   Two prominent examples include so-called “case management” delivery models in which the vendor purports to establish, on behalf of the covered entity, the patient relationship necessary to dispense 340B drugs by reviewing a medical record with little or no actual patient contact,  and dispensing 340B drugs to individuals ( typically employees covered under a self insured health plan) who are deemed to be a patient of the covered entity solely on account of the covered entity’s financial responsibility for the patient’s health care.

• It is becoming increasingly evident that third party payers and PBMs acting on behalf of payers are reducing covered entity reimbursement for 340B drugs.  Without belaboring the point, they are effectively hijacking the financial benefit that the 340B Program intended for covered entities and, in that regard, transferring the mandatory discount provided by drug manufactures to their own bottom line.  Obviously, such predatory agreements should be avoided.  Whether and how this trend can be stopped is uncertain.  What is clear, however, is that in the current climate covered entities should be extremely cautious in contracting with vendors that promise financial bonanzas.

2.  Maximize Competition

Covered entities should solicit competitive bids or proposals, unless there is a good reason for not doing so.  The request for bids/proposals should clearly set forth the requirements that the vendor must meet, in particular the 340B compliance requirements, and require the prospective vendor to clearly explain how it proposes to meet those requirements, and the proposed fee structure.  The latter will become the core “deliverable” of the final contract.   At a minimum, the covered entity must conduct some form of price analysis and document the result.

3. Contracting Due Diligence

Once a covered entity has concluded that it would be advantageous to contract with a 340B vendor and has selected a prospective candidate(s), at a minimum the entity should:

(a)    Obtain references from other customers and check out the reference, preferably by observing operations at the reference’s site.

(b)    Obtain a “live” demonstration of how the vendor’s system operates and how it will work in the covered entity’s operational environment. 

(c)    Obtain a “live” demonstration of how the vendor’s system operates with every contract pharmacy in the covered entity’s “network” of contract pharmacies.  This is particularly important now that covered entities can contract with chain pharmacies.  Vendor contracts for chain pharmacies typically are prepared at a national or regional level, but they will be implemented by the “corner drug store” that is part of the chain.  In that regard, the contract is only as good as the individuals who actually will service it on behalf of the covered entity.

(d)    Obtain a sample of the “auditable records” that the vendor will maintain to document the covered entity’s compliance with the key 340B compliance issues: drug diversion and improperly billing Medicaid, i.e., so-called duplicate discounts.  The new contract pharmacy guidelines specifically require a covered entity to maintain auditable records.  In that regard, virtually all vendors promise to produce a myriad of reports for the covered entity.  But reports of results alone are NOT sufficient. There must be a documented audit trail from the originating transaction to the end report in order to verify the reported results.

4.  Execute a Contract that Includes the Covered Entity’s Necessary Terms

While this may seem self evident, virtually all 340B vendors come to the table with their form contract in hand with (possibly) only the financial terms being negotiable.  Because HRSA has published “sample” contract provisions which, presumably, are intended to promote compliance, many vendor contracts simply restate those terms.  This calls into question whether the vendor actually understands and will comply with those obligations.  A covered entity should carefully review every detail of the proposed arrangement and make sure that all of the vendor’s responsibilities, especially those related to the entity’s compliance with Section 340B requirements, are clearly spelled out in the contract document.

Common Contract Problem Areas

1.  Failure to Consider Specific Covered Entity Requirements

Many vendors do not understand (or perhaps ignore) the complex regulatory environment in which covered entities operate.  For example, Section 330 and its implementing regulations impose certain obligations on FQHCs in establishing their charges for services.  Specifically, an FQHC must establish charges for its service consistent with locally prevailing rates (a commercial pharmacy’s usual and customary fee would be relevant here) and designed to cover its costs (not difficult when purchasing under 340B).   Then it must establish a corresponding schedule of discounts, based on an individual’s ability to pay, but no discount may be provided to persons with income at 200% or above of the federal poverty income guidelines (“FPL”), and a “full discount” must be provided to individuals with income below 100% FPL (subject to the charge of a “nominal” fee).  Importantly, an FQHC may not provide discounts to third party payers. Moreover, an FQHC must make “every reasonable effort” to collect payments from patients (according to its fee schedule and corresponding discount schedule) and from third party payers (without application of any discounts).  Finally, an FQHC may not deny services due to an individual’s inability to pay for such services.15  It is the FQHC’s responsibility to establish charges/discounts, not the vendor or the contract pharmacy.

In contrast, we have seen vendor contracts offered to FQHCs with terms such as:

• A guarantee the patient will be charged the “lowest possible price.” Such a charge would be appropriate only for patients below 100% FPL (otherwise the FQHC will not be maximizing revenue) and is inappropriate even then if the patient cannot afford to pay anything.

• Patient charges based on what the contract retail pharmacy charges customers (unrelated to the covered entity’s established schedule of fees/discounts)

• Net income guarantees. (We have seen as much as $35,000 per month guaranteed).  These are particularly problematic because they typically are not based on a realistic analysis of the covered entity’s patient base, i.e. income level and insurance status.
  
  More importantly, an income guarantee could constitute a violation of the federal Anti-Kickback Statute (because it is an offer of remuneration – the guarantee - in exchange for doing business covered under a  federal health care program16 subjecting the covered entity and the vendor to potential criminal liability and civil sanctions.

• Authorization for the vendor to negotiate third party reimbursement on behalf of the covered entity or to accept contract terms on behalf of the covered entity with no assurance that the resulting reimbursement will comply with the Section 330 prohibition on providing discounts to third party payers.

2.  Questionable Fee Structures

A covered entity contracting for contract pharmacy management services must consider three cost components in evaluating the contract terms: (1) cost of the drug (which will typically include wholesaler/distributor markup) (see below); (2) a service/dispensing fee to be paid to the dispensing contract pharmacy; and (3) a service fee payable to the vendor for managing the program.  FQHCs and other HRSA-funded covered entities must comply with the federal procurement standards requirements regarding the appropriateness and reasonableness of these costs, as discussed above.

With regard to item (3), vendors sometimes propose to ensure that appropriate   reimbursement is collected and characterize their service as being akin to a PBM (pharmacy benefit manager), in which case they charge a  fee for “adjudicating” each prescription filled under the arrangement.  We have seen some fee provisions that would be difficult to justify.  For example:

• We have seen contracts under which the vendor charges a covered entity as much as $10.00 per prescription under circumstances where the vendor actually adds no value to the transaction.  If the contract pharmacy holds the third party payer contract, the contract pharmacy presumably performs the “adjudication” function when it processes the prescription.  Moreover, many covered entity patients are likely to be uninsured and eligible for a discount under an FQHC’s (or other applicable covered entity) discount schedule.   In that case, the covered entity knows who the responsible party is (the patient or, in some case where a full discount is appropriate, the covered entity) and advises the pharmacy (as part of its contract) what to collect (if anything) at the point of “sale.”

• We have seen contracts calling for the covered entity to pay a percentage of the pharmacy revenue to the vendor for the management services.   (In one case, the vendor charged a $10.00 per script management fee and 50% of the net revenue, after deducting the pharmacy’s dispensing fee).  These fee terms sometimes are portrayed as “shared savings” arrangements which, in our view, are completely disingenuous.  Any savings in a 340B dispensing model occurs when the covered entity purchases the drug at the applicable discount.  Discount purchasing may, in fact, produce more revenue for the covered entity (depending, of course, on the entity’s patient mix).  It is that revenue that the covered entity ”shares” with the vendor.

Contracts paying unreasonable compensation to vendors are not only a matter of sound procurement practices (subject to government audit under the federal procurement standards), but also raise issues of compliance with the federal income tax exemption statutes and regulations. Simply put, a tax-exempt organization may pay “reasonable compensation” to a vendor.  Unreasonable compensation can result in “excess private benefit” which, in egregious cases, can threaten the exempt organization’s income tax exemption.  Revenue sharing arrangements with a for-profit entity are subject to particular IRS scrutiny. 

3.  Tie-Ins With Drug Wholesalers

Several vendors require a contracting covered entity to purchase its 340B drugs through a specifically identified wholesaler, usually because the vendor has a rebate or similar agreement with the wholesaler.  Thus, it is to the vendor’s advantage to drive business to that particular wholesaler.  However, the vendor contracts do not recognize that FQHCs and other HRSA-funded covered entities, are required to purchase pharmaceuticals in the most cost-effective manner (consistent with the requirements of the federal procurement standards), and to use the HRSA-designated 340B Prime Vendor unless they can demonstrate that purchasing  elsewhere is, in fact, the most cost effective method.  While it is possible that the wholesaler provided by the vendor does, in fact, offer the most advantageous deal to the covered entity, these tie-in contracts do not provide the covered entity with legal assurances or documentation necessary to satisfy the HRSA requirement.  Accordingly, the covered entity will be open to audit findings and potentially to cost disallowances.

4.  Tie-Ins With Contract Pharmacies

There is a vendor that packages “management” services with a contract mail order pharmacy.  There are procurement standards compliance concerns with this type of arrangement, as discussed above. The mail order service is only available to insured patients.  This is problematic for FQHCs (and likely other covered entities) in that it puts the covered entity in the position of discriminating in services based on financial circumstances.  Uninsured low income patients are more likely to benefit from a mail delivery service considering cost and transportation barriers that may make it more difficult for them to pick up a prescription at the pharmacy.

5.  Imprecise/Inaccurate Contract Terms

Many vendor contracts seem to have been written by the marketing department, not the legal department.  Contracts often lack essential terms and/or contain conflicting provisions.  For example:

• Some contracts do not contain provisions required in order for a covered entity to comply with the new contract pharmacy guidelines, e.g. no requirement to maintain “auditable” records.

• The new contract pharmacy guidelines state that OPA “expects” a covered entity to  perform an annual independent audit of its contract pharmacy operations but do not explicitly require it.  We have seen few vendor contracts that clearly preserve the covered entity’s right to perform an independent audit, and several that actually limit the right of a covered entity to audit.

Conclusion

Covered entities may find that contracting with a 340B vendor adds value to their pharmacy program.  However, the expanded opportunities for contract pharmacy delivery models must be undertaken in light of the vastly increased federal emphasis on compliance and accountability which, in all cases, remains with the covered entity.   

• 1. Section 340B is a section within the Public Health Service Act.  It is codified at 42 U.S.C. §256b.  Entities eligible to participate in the 340B program are statutorily described as “covered entities.” Each type of covered entity provides medical benefits to poor communities or to persons with conditions that are unduly expensive to treat.  The program allows those entities to buy prescription drugs needed by their patients at substantially discounted prices.  The discounts result from statutorily authorized controls on manufacturers’ prices.  Those manufacturers may audit covered entities for compliance with 340B requirements with respect to covered entity purchases of their products.
• 2. “HRSA” is the acronym for the Health Resources and Services Administration, the division of the Department of Health and Human Services (“HHS”) responsible for the 340B program.  The office within HRSA that carries out the responsibility is the Office of Pharmacy Affairs (“OPA”).
• 3. These regulations are issued by HHS for all grantees of that Department.  The requirements of those regulations (which include but are not limited to procurements) apply, except where they conflict with statutory authority for a particular grant program.  The regulations for State and local governmental grantees are at 45 C.F.R. Part 92.  Those applicable to others (non-profit organizations, hospitals, etc.) are at 45 C.F.R. Part 74.
• 4. In an appendix to this memorandum, we briefly set out criteria for such a prudent procurement process.
• 5. More certifications are statutorily required under 340B(a)(H), 42 U.S.C. §256b(a)(7).  Further, the contract pharmacy guidelines indicate that a covered entity “should” submit a certification to OPA that it has signed and has in effect an agreement with the contract pharmacy that satisfies the  requirements of the guidelines and that the covered entity has a plan to meet its compliance obligations.  See 75 Fed. Reg. 10278.
• 6. It takes little imagination to think that the contractor would (at the very least) insist that it was not solely responsible for the violation and therefore not fully liable for damages, fines, penalties, etc. arising from the failure to comply.
• 7. If the violation is wholly the contractor’s doing, any monetary penalty and/or criminal prosecution would likely be focused on the contractor.  But investigators and prosecutors in such an instance may not realize that the violation is 100 percent the contractor’s doing (and also might view the violation as arising as a consequence of covered entity approval or oversight failure).
• 8. The covered entity’s responsibility for compliance is stated explicitly in Section 340B (See 42 USC § 256b(a)(5)(D)) and is emphasized in the contract pharmacy guidelines.  See 75 Fed Reg. at 10275.
• 9. See 61 Fed. Reg. 55156 (October 24, 1996).  Note that in January, 2007, HRSA proposed substantial revisions to the patient definition guidelines.  72 Fed. Reg. 1543 (January 12, 2007).  In January 2011, HRSA announced that it intended to withdraw the 2007 proposal and to replace it with a new version.
• 10. Federal law requires drug manufacturers to rebate a percentage of the price of outpatient pharmaceuticals dispensed to patients covered by Medicaid. The price discount available under Section 340B is generally equivalent to the mandated Medicaid rebate.  Accordingly, a manufacturer supplying a drug at 340B pricing also would be required to pay a Medicaid rebate if the drug were dispensed to a Medicaid beneficiary.  Section 340B prohibits covered entities from engaging in transactions that would result in such a duplicate discount. 42 U.S.C. § 256b(a)(5)(A).
• 11. PPACA, Section 7102(a).
• 12. 31 U.S.C. § 3801 et seq.
• 13. 42 U.S.C. § 1320a-7b.
• 14. 75 Fed. Reg. 10279 (March 5, 2010).
• 15. See, generally, 42 U.S.C. 254b(k)(3)(E)(ii).
• 16. A “federal health care program” for this purpose includes Medicare, Medicaid, Tricare, and Veterans programs.  Importantly, it also includes any program that provides health benefits, whether provided directly, through insurance or otherwise, and is funded in whole or in part by the federal government.  This would include FQHCs and other HRSA-funded covered entities.