On August 27, 2015, The Health Resources and Services Administration (“HRSA”) released the much-anticipated 340B Drug Pricing Program Omnibus Guidance (the “340B Guidance”). For the more than 11,000 registered covered entities participating in the 340B Program,1 as well as the contract pharmacies serving those entities, the 340B Guidance provides clarity on a number of thorny 340B Program issues, but sometimes at a cost. HRSA’s clarifications in many respects represent a stricter resolution of certain issues that had formerly been “gray areas” and that had arguably given some room for covered entities and contract pharmacies to take different reasonable positions. On the other hand, for those covered entities and contract pharmacies that acted conservatively due to lack of guidance, the 340B Guidance may be welcome in these respects.

HRSA is characterizing the 340B Guidance as “proposed” guidance and is giving interested stakeholders an opportunity to provide comments on the proposed guidance. Comments are due 60 days after the date of publication of the 340B Guidance in the Federal Register, which is expected tomorrow.

The 340B Guidance covers a wide range of topics, not all of which can be addressed in this fast-breaking alert. Rather, this alert will provide a high-level overview of those topics in the 340B Guidance that are relevant to the interactions between covered entities and their contract pharmacies. These contract pharmacy issues have historically represented some of the thorniest issues in interpretation of the 340B Program requirements.

Registration of Contract Pharmacies

Despite the calls of some 340B Program critics, the 340B Guidance does not limit the number of contract pharmacy arrangements a covered entity may have. As before, a covered entity may contract with as many contract pharmacies as it deems appropriate so long as it maintains compliance with 340B Program requirements.

A contract pharmacy may only provide 340B drugs to eligible covered entity patients after the pharmacy’s start date in the public 340B database. HRSA will only list a contract pharmacy on the covered entity’s 340B database after a written agreement between the covered entity and contract pharmacy is executed and the covered entity registers that agreement. The written agreement must set forth all contract pharmacy locations and covered entity sites and must ensure compliance with 340B Program requirements. HRSA specifically indicates that the written contract “should also set forth the requirements contained in this proposed guidance.”

Contract pharmacy arrangements must be in compliance with all applicable federal, state, and local laws, including the Federal Anti-Kickback Statute. Only the covered entity may register a contract pharmacy relationship.

Additionally, the 340B Guidance states that HRSA will, as a registration prerequisite, require a covered entity to attest that the contract pharmacy arrangement complies with certain 340B Program requirements. This attestation may lead covered entities to draft contract pharmacy arrangements more conservatively or with greater detail.

Eligible Patient Definition

In the 340B Guidance, HRSA has significantly clarified the 340B eligible patient definition. This clarity, however, tightens the eligible patient definition and will require covered entities to re-evaluate their 340B patient criteria. Provision of 340B drugs to an individual who is not an eligible patient constitutes impermissible diversion.

HRSA proposes a six-element test to determine if an individual is an eligible patient. Under the 340B Guidance, an individual is a patient of a covered entity (on a prescription-by-prescription or order-by-order basis) if:

(1) “The individual receives a healthcare service at a facility or clinic site which is registered for the 340B Program and listed on the public 340B database;

(2) The individual receives a healthcare service provided by a covered entity provider who is either employed by the covered entity or who is an independent contractor for the covered entity, such that the covered entity may bill for services on behalf of the provider;

(3) An individual receives a drug that is ordered or prescribed by the covered entity provider as a result of the service described in (2);

(4) The individual’s healthcare is consistent with scope of the Federal grant, project, designation, or contract;

(5) The individual’s drug is ordered or prescribed pursuant to a health care service that is classified as outpatient; and

(6) The individual’s patient records are accessible to the covered entity and demonstrate that the covered entity is responsible for care.”

If any of the above elements are not met, the individual is not an eligible patient and may not receive 340B drugs. This eligible patient definition is significantly stricter than the existing eligible patient definition. While an entire alert could be devoted to the topic of the eligible patient definition, we will provide just a couple of examples for now as to why the new eligible patient definition is narrower than the older definition. First, the previous eligible patient definition required that the covered entity have “a relationship with the individual, such that the covered entity maintains records of the individual’s health care.” Under the revised definition, an individual must actually receive treatment at a registered site.2 Thus, if an individual sees a physician affiliated with a covered entity at a non-registered location, the individual would not be an eligible patient as a result of that encounter even if the covered entity maintains the individual’s health records.

Additionally, the 340B Guidance clarifies who must provide the healthcare service in order for an individual to be an eligible patient. Under the old definition, an individual must have received services from a “healthcare professional who is either employed by the covered entity or provides healthcare under contractual or other arrangements (e.g., referral for consultation) such that responsibility for the care provided remains with the covered entity.” Under the revised definition, the provider must actually be employed or in an independent contractor relationship with the covered entity.3 According to HRSA, a provider who merely has privileges or credentials at a covered entity arguably does not meet the requirements of this element.

Medicaid Managed Care – Contract Pharmacies Treated More Strictly Than Other Arrangements

While the procedures for preventing duplicate discounts4 with respect to Medicaid fee-for-service (“FFS”) patients have long been established, much confusion has existed on whether and what types of procedures are needed for preventing duplicate discounts with respect to Medicaid Managed Care Organization (“MCO”) patients. Historically, prior to enactment of the Affordable Care Act, only Medicaid FFS patients have represented a risk of duplicate discounts. HRSA has established the 340B Medicaid Exclusion File as the mechanism to prevent duplicate discounts with respect to Medicaid FFS patients. If a covered entity proposes to dispense 340B drugs to Medicaid FFS patients and bill the State Medicaid program for those drugs, the covered entity is considered to have elected “carve-in” status, and its Medicaid billing number and/or NPI number will appear on the Medicaid Exclusion File in such a way as to alert the appropriate State program not to request a rebate from the manufacturer for those drugs.

The Affordable Care Act amended the Social Security Act, extending Medicaid drug rebate eligibility to certain Medicaid MCO drugs. The Affordable Care Act further amended the Social Security Act to specify that covered outpatient drugs dispensed by Medicaid MCOs are not subject to a rebate if also subject to a discount under the 340B Drug Program. However, prior to the release of the 340B Guidance, it was unclear which entities had the responsibility for trying to identify to the state which Medicaid MCO claims are fulfilled with 340B drugs so that the state does not claim a rebate on those Medicaid MCO claims.5 Some covered entities took the conservative position that Medicaid MCO claims should automatically be carved out.

The 340B Guidance indicates that, while generally HRSA will allow covered entities to make their own determinations regarding “carve-in” or “carve-out” status for Medicaid MCO patients, so long as the covered entities have an appropriate process to identify 340B claims, HRSA reaches a stricter conclusion for covered entities that use contract pharmacies. HRSA notes that the “[r]isk of duplicate discounts can increase with certain drug purchasing and distribution systems, including covered entity contract pharmacy arrangements.” Due to these heightened risks of duplicate discounts, HRSA concludes that “when a contract pharmacy is listed on the public 340B database it will be presumed that the contract pharmacy will not dispense 340B drugs to Medicaid FFS or MCO patients [emphasis supplied].”

If a covered entity wishes to overcome this presumption and purchase 340B drugs for its Medicaid FFS or MCO patients and dispense 340B drugs to those patients utilizing a contract pharmacy, the covered entity must “provide HHS a written agreement with its contract pharmacy and State Medicaid agency or MCO that describes a system to prevent duplicate discounts.” Once HHS approves the written agreement, HHS will list on the public 340B database a contract pharmacy as dispensing 340B drugs for Medicaid FFS and/or MCO patients.

Drug Inventory/Replenishment Models

HRSA confirms that replenishment models are “permissible if the covered entity remains in compliance with all 340B requirements.” HRSA indicates that covered entities should frequently monitor the process by which their accumulator software (or other tracking mechanism) tracks drugs dispensed to 340B patients to ensure that each 340B drug order placed is “supported by auditable records demonstrating prior receipt of that drug by a 340B-eligible patient.” According to HRSA, such monitoring processes should be frequent enough to identify and correct any purchasing errors within 30 days of the erroneous purchase.

Interestingly, however, despite setting forth this general guideline for monitoring and identifying errors within 30 days, HRSA does not expressly prohibit the practice of “banking,” in which covered entities retroactively look back over long periods of time at drug purchases not initially identified as 340B-eligible and then attempt to “re-characterize these purchases as 340B eligible and then purchase 340B drugs on the basis of the previous transactions.” Although HRSA observes that covered entities “are responsible for requesting 340B pricing at the time of the original purchase,” HRSA goes on to say that “[i]f a covered entity wishes to re-characterize a previous purchase as 340B, covered entities should first notify manufacturers and ensure all processes are fully transparent with a clear audit trail that reflects the actual timing and facts underlying a transaction.”

Annual Audits of Contract Pharmacies by 340B Covered Entities

HRSA continues to express concern that covered entities do not have sufficient mechanisms in place to ensure contract pharmacy compliance with 340B Program requirements. Thus, the 340B Guidance reiterates HRSA’s position that it expects covered entities to conduct annual audits of their contract pharmacies. Per HRSA: “Conducting these audits using an independent auditor will ensure the pharmacy is following all 340B Program requirements.” HRSA notes that any 340B Program violation detected through these audits should be disclosed to HRSA.

Quarterly Review of Covered Entity Prescribing Records with Contract Pharmacy’s 340B Dispensing Records

As an additional tool for covered entities to monitor contract pharmacy compliance, the 340B Guidance encourages covered entities to conduct quarterly reviews of each contract pharmacy location. As with the annual independent audit requirement, HRSA phrases this as an “expectation” rather than a requirement and reiterates that any 340B Program violation detected through a quarterly review should be disclosed to HRSA.

Repayment to Manufacturers in the Event of Diversion

The 340B Guidance stipulates that covered entities are expected to work with manufacturers regarding repayment of any amounts resulting from a violation of the diversion prohibition “within 90 days of identifying the violation.” HRSA notes that, while manufacturers retain discretion as to whether to request payment based on their own business considerations, manufacturers must comply with applicable law, “including the Federal anti-kickback statute (42 U.S.C. 1320a-7b(B)).”

Removal of Contract Pharmacies by HRSA

The 340B Guidance reiterates HRSA’s position that it may remove a non-compliant contract pharmacy from the 340B Program. In the event of a contract pharmacy termination, the covered entity is responsible for any diversion or duplicate discounts that occurred at the non-compliant contract pharmacy and the covered entity will be liable for any required repayments to manufacturers.


While issues of interpretation and ambiguity will remain with respect to the complex 340B Program provisions, this long-awaited 340B Guidance provides covered entities and contract pharmacies with some degree of increased clarity (for better or for worse) as they strive to accomplish the 340B Program’s requirements. Bass, Berry & Sims will continue to monitor the proposed 340B Guidance. Should you have any questions, please contact one of the authors listed or any member of our Specialty Pharmacy team.

1 Per HRSA, the number of registered covered entities participating in the 340B Program as of January 1, 2015 is 11,530.

2 HRSA notes that the use of telemedicine involving the issuance of a prescription by a covered entity provider is permitted, as long as the practice is authorized under state or federal law and the drug purchase otherwise complies with the 340B Program.

3 Per HRSA, faculty practice arrangements and established residency, internship, locum tenens, and volunteer healthcare provider programs are examples of covered entity-provider relationships that would meet this standard.

4 Duplicate discounts can arise in the Medicaid context because manufacturers potentially have two separate obligations to provide drug discounts with respect to Medicaid patients. Under section 340B(a)(1) of the PHSA, manufacturers are required to provide a discounted 340B price to a covered entity for a covered outpatient drug dispensed to an eligible patient (which may include many Medicaid patients). Under section 1927 of the Social Security Act, manufacturers must also generally provide a rebate to a State for a covered outpatient drug provided to a Medicaid patient. In order to prevent manufacturers from having to make a price concession twice for the same drug, section 340B(a)(5)(A)(i) of the PHSA prohibits duplicate discounts whereby a state obtains a rebate on a drug provided to a Medicaid patient when that same drug was discounted under the 340B Program.

5 Often, it is not obvious which payers are Medicaid MCOs. HRSA notes in the 340B Guidance that, currently, “covered entities report using Bank Identification Numbers, Processor Control Numbers, and National Council for Prescription Drug Programs (NCPDP) codes, among other methods, to identify Medicaid MCO patients and 340B claims.” In some cases, notes HRSA, “States may require covered entities to follow additional steps to prevent duplicate discounts, including use of certain modifiers and codes which identify individual claims as associated with 340B drugs and therefore not eligible for rebate.” HRSA indicates that “[s]uch billing instructions are beyond the scope of the 340B Program.”