Reed Smith Client Alerts

Authors: Joseph W. Metro

On June 17, 2015, the Health Resources and Services Administration (HRSA) issued a proposed rule to implement civil money penalty (CMP) provisions added to section 340B of the Public Health Service Act1 as part of the Affordable Care Act (ACA).2 Although the proposed rule is relatively limited in scope, and additional 340B program subregulatory guidance is anticipated from HRSA in the future, the proposed rule contains several noteworthy elements that may warrant public comment. HRSA will accept public comments submitted on or before August 17, 2015.

Background Section 340B of the Public Health Service Act requires manufacturers of covered outpatient drugs to offer discounts to specified classes of “covered entities,” which typically include various “safety net” providers serving medically underserved populations. The amount of the discounts is based on manufacturer-supplied pricing data under the Medicaid drug rebate statute, with minimum discounts generally equal to 23.1 percent of a drug’s average manufacturer price (AMP) for single-source and innovator multiple-source (i.e., brand) drugs, and 13 percent of AMP for noninnovator multiple-source (i.e., generic) drugs.3 As part of the ACA, Congress amended section 340B to authorize civil money penalties of up to $5,000 for each knowing and intentional “instance of overcharging” a covered entity by a manufacturer.4

The Proposed Rule The proposed rule addresses three primary issues: (i) the calculation of the 340B “ceiling price” that may be charged to covered entities; (ii) the substantive standards applicable to CMPs; and (iii) the procedures applicable to the imposition of CMPs.

First, proposed section 10.10 of the rule specifies that the “340B ceiling price” is equal to the product of (i) the difference between the AMP for the smallest unit of measure of a product and the Medicaid Unit Rebate Amount, calculated to six decimal places, and (ii) the number of units in the package size in question. HRSA will publish the ceiling price rounded to two decimal places. However, consistent with prior HRSA policies, when the calculated ceiling price is less than $0.01, the ceiling price will be deemed to be $0.01. The proposed rule specifically prohibits manufacturers from using a prior quarter’s ceiling price rather than penny pricing. Further, the proposal provides that in the case of a new drug, the manufacturer must estimate the ceiling price for the first three calendar quarters until sufficient Medicaid pricing data is available, and then “true-up” any overcharges to covered entities through rebates or credits by the end of the fourth calendar quarter.5

Second, for the substantive standards for CMP liability, the proposed rule does not address the statutory intent standard requiring “knowing and intentional” overcharges. Instead, the proposed rule focuses primarily on the important mathematical question of what constitutes a discrete “instance of overcharging.” Proposed section 10.11(b) defines an instance of overcharging as “any order for a covered outpatient drug, by NDC, which results in a covered entity paying more than the ceiling price.” More specifically, each order for an NDC constitutes a single instance, regardless of the number of units ordered. Further, even if an initial charge was correct, if a manufacturer’s Medicaid pricing recalculation results in a change to the ceiling price, the failure or documented refusal to provide a credit or refund based on a lower revised ceiling price may also constitute an instance of overcharging. The proposed rule specifies that the manufacturer is obligated to make available 340B discounts regardless of the product’s distribution method. On the other hand, the rule also clarifies that an instance of overcharging may only occur if a covered entity identifies a purchase as a 340B order at the time of purchase.

Third, for the CMP process, HRSA has delegated its CMP authority to the HHS Office of Inspector General (OIG), and CMP proceedings will follow the OIG’s existing CMP regulations at 42 C.F.R. Parts 1003 (and presumably, Part 1005).

Discussion and Potential Areas for Comment There are several areas with respect to the calculation of the 340B ceiling price where companies may wish to consider comments, including:

  • Confirming that the $0.01 ceiling price would be multiplied by the package size to determine the package price
  • Clarifying that the use of prior quarter ceiling prices is appropriate where prior quarter Medicaid data may be used (e.g., where there are no sales, or where the calculated AMP is a “false positive”)
  • Clarifying whether, in the context of new drug pricing, a manufacturer is only obligated to true-up pricing upon request of a covered entity (as reflected in existing policy), or whether it must do so in all circumstances, and addressing whether the proposed rule allows sufficient time for true-ups

Regarding the definition of an “instance of overcharging,” the following issues may warrant comment:

  • The meaning of “knowing and intentional”
  • Specific examples of how the “per NDC order” standard may apply
  • With respect to recalculation-based overcharges, the timeframes that manufacturers have to make corrections, and whether those corrections must be in response to covered entity requests

Finally, manufacturers may wish to seek additional guidance for mechanisms for making 340B prices available for products distributed exclusively through limited specialty channels, and should also consider the potential procedural limits of the OIG’s existing CMP regulations (e.g., limitations on discovery mechanisms).

Conclusion The 340B program is undergoing tremendous change in terms of operational and regulatory oversight. The CMP proposed rule is the first of several upcoming rulemakings in the area, and stakeholders should carefully review these proposals and consider submitting comments where appropriate.

  1. 42 U.S.C. 256b.
  2. 80 Fed. Reg. 34583 (June 17, 2015).
  3. 42 U.S.C. § 1396r-8.
  4. Id. § 256b(d)(1)(B)(vi).
  5. Again, HRSA states that this approach is consistent with its existing policy. However, its prior guidance suggests that such true-ups are only necessary upon request of a covered entity, rather than an affirmative duty on the part of manufacturers. See 60 Fed. Reg. at 51488 (Oct. 2, 1995).


Client Alert 2015-173