GAO Questions Oversight of 340B Program

To understand the genesis of the 340B program, one must begin in 1990 when Congress created the Medicaid rebate program to lower the cost of pharmaceuticals reimbursed by state Medicaid agencies.

The Medicaid rebate program requires drug companies to enter into a rebate agreement with the Secretary of the Department of Health and Human Services (HHS) as a precondition for coverage of their drugs by Medicaid. The rebate agreement specifies that, for each brand name outpatient drug covered under the Medicaid plan, the manufacturer of the drug must pay a rebate to Medicaid based in part on the manufacturer’s “best price” for that drug.

As a result of the Medicaid rebate law, many pharmaceutical companies had a disincentive to continue giving deep discounts on drugs because they would have to pay larger rebates to Medicaid if they gave deeper discounts in the non-Medicaid market (establishing even better “best prices”).

When manufacturers began raising their prices, the Medicaid savings achieved through the rebate program were offset by increased government spending on drugs purchased by other federal- and state-supported providers.

The 340B Drug Discount Program is managed by the Health Resources and Services Administration (HRSA) Office of Pharmacy Affairs (OPA). Section 340B limits the cost of covered outpatient drugs to certain federal grantees, federally qualified health center look-alikes and qualified disproportionate share hospitals.

Participation in the Program results in significant savings estimated to be 20% to 50% on the cost of pharmaceuticals for safety-net providers. The purpose of the 340B Program is to enable these entities to stretch scarce federal resources, reaching more eligible patients and providing more comprehensive services. The number of covered entity sites has nearly doubled in the past 10 years to over 16,500.

The General Accounting Office (GAO) recently interviewed covered entities. Thirteen of the 29 covered entities reported that they generated 340B program revenue that exceeded drug-related costs, which includes the costs of purchasing and dispensing drugs. Of those remaining, 10 did not generate enough revenue to exceed drug-related costs, and 6 did not report enough information to determine the extent to which revenue was generated.

Several factors affected 340B revenue generation, including drug reimbursement rates. Regardless of the amount of revenue generated, all covered entities reported using the program in ways consistent with its purpose. For example, all covered entities reported that program participation allowed them to maintain services and lower medication costs for patients. Entities generating 340B program revenue that exceeded drug-related costs were also able to serve more patients and to provide additional services.

According to the 61 340B program stakeholders interviewed, manufacturers’’ distribution of drugs at 340B prices generally did not affect providers’’ access to drugs. Specifically, 36 stakeholders, including those representing manufacturers, covered entities, and non-340B providers, did not report any effect on covered entities’’ or non-340B providers’’ access.

The remaining 25, also representing a wide range of perspectives on the 340B program, reported that it affected access primarily in two situations: (1) for intravenous immune globulin (IVIG), a lifesaving drug in inherently limited supply; and (2) when there was a significant drop in the 340B price for a drug resulting in increased 340B demand. In both situations, manufacturers may restrict distribution of drugs at 340B prices because of actual or anticipated shortages.

Stakeholders reported that restricted distribution of IVIG resulted in 340B hospitals having to purchase some IVIG at higher, non-340B prices. They also reported that restricted distribution when the 340B price of a drug dropped significantly helped maintain equitable access for all providers.

HRSA’’s oversight of the 340B program is inadequate to provide reasonable assurance that covered entities and drug manufacturers are in compliance with program requirements——such as, entities’’ transfer of drugs purchased at 340B prices only to eligible patients, and manufacturers’’ sale of drugs to covered entities at or below the 340B price.

HRSA primarily relies on participant self- policing to ensure program compliance. However, its guidance on program requirements often lacks the necessary level of specificity to provide clear direction, making participants’’ ability to self-police difficult and raising concerns that the guidance may be interpreted in ways inconsistent with the agency’s intent.

Other than relying on self-policing, HRSA engages in few activities to oversee the 340B program. For example, the agency does not periodically confirm eligibility for all covered entity types, and has never conducted an audit to determine whether program violations have occurred. Moreover, the 340B program has increasingly been used in settings, such as hospitals, where the risk of improper purchase of 340B drugs is greater, in part because they serve both 340B and non-340B eligible patients.

This further heightens concerns about HRSA’’s current approach to oversight. With the number of hospitals in the 340B program increasing significantly in recent years——from 591 in 2005 to 1,673 in 2011——and nearly a third of all hospitals in the U.S. currently participating, some stakeholders, such as drug manufacturers, have questioned whether all of these hospitals are in need of a discount drug program.

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