On January 5, 2017, the Health Resources and Services Administration within the Department of Health and Human Services (HHS) finalized a rule on how the 340B Drug Program sets ceiling prices for 340B drugs and on civil monetary penalties for manufacturer who charge covered entities more than the 340B ceiling price (the “final rule” or “rule”).  As we are only a few weeks away from a new administration, this rule falls within the look-back period under the Congressional Review Act which allows majorities in both houses of Congress to use expedited procedures to disapprove recent regulations. However, without congressional intervention, the rule will be effective March 6, 2017.

In the final rule, HHS affirmed its current process for setting 340B ceiling prices. HHS uses the formula of the Average Manufacturer Price (AMP) less Unit Rebate Amount (URA) to set ceiling prices. (Although raised by commenters, HHS did not outline the process for disseminating ceiling prices to Medicaid agencies through a reporting system indicating that this would be accomplished via informal guidance.) Importantly, the final rule keeps in place the current methodology for setting ceiling prices when the URA equals or is greater than the AMP—the so-called “penny pricing policy.” In instances such as these, when the ceiling price would be equal to or less than zero, HHS sets the ceiling price at a penny. This allows operational systems set-up for purchasing drugs to proceed normally and accords with the 340B statute’s use of the term “sale.” Manufacturers pushed back hard on this policy indicating that they found it to be “arbitrary and capricious” and could constitute an “illegal taking of private property by the government.” However, HHS held strong to its policy noting that anything else would reward manufacturers for raising prices faster than inflation and be inconsistent with the 340B statute. What’s more, HHS indicated that the penny pricing policy has been in place for years and has not resulted in significant stockpiling of cheap drugs, diversion, harm to patients, or abuse of controlled substances, as some commenters argued.

The rule also provides further detail regarding the imposition of Civil Monetary Penalties (CMPs) on manufacturers that “knowingly and intentionally” charge a covered entity more than the 340B ceiling price. The Affordable Care Act provides authority for HHS to impose CMPs of up to $5,000 for each instance of overcharging by manufacturers. In the final rule, HHS mostly defers to the Office of the Inspector General (OIG) at HHS to determine when an overcharge by manufacturers rises to the knowing and intentional threshold. (OIG has extensive experience implementing similar CMPs.) Additionally, HHS intentionally did not incorporate additional detail on the standard so as to allow the OIG to evaluate each factual case separately. Most commentators applauded this move by HHS.

However, the final rule does include some questionable interpretations by HHS. For example, HHS formally incorporated several criteria into the definition of a “covered entity.” The final rule adopts the position that the requirements of Section 340B(a)(5) of the Public Health Service Act (PHSA) (i.e. the prohibitions on diversion and duplicate discounts) are part of the definition of a “covered entity.” Additionally, HHS added to the covered entity definition the requirement that entities register and appear on the 340B database during the quarter of a 340B transaction.  Theoretically, under this interpretation, HHS could deem an entity as not meeting the definition of a covered entity for one instance of diversion, making all other purchases ineligible for 340B (rather than just the diverted ones).  Depending on how HHS enforces the definition, covered entities may be vulnerable to extensive repayment obligations to manufacturers related to findings of diversion.

HHS also rejected the argument made by commenters that the 340B statute requires a different definition of “covered outpatient drug” than is used in the Medicaid rebate statute. (This is unsurprising given that Section 340B of the PHSA explicitly cites the Medicaid rebate statute definition.)  However, the definition of covered outpatient drug codified at Section 1927(k)(3) of the Social Security Act excludes drugs billed as part of a global fee in certain non-FQHC settings. As Medicaid and Medicare move more towards bundled payments, the definition in the Medicaid rebate statute could be a significant barrier to covered entities using 340B drugs in those programs.

For additional information regarding 340B and this new regulation, please contact an attorney at Feldesman Tucker Leifer Fidell LLP at (202) 466-8960.