Compliance Issues Relating to
Intersection of Medicaid Rebate
and 340B Programs
by
Bill von Oehsen
President and General Counsel
Safety Net Hospitals for Pharmaceutical Access
NAMFCU Directors Symposium
March 24, 2010
Washington, DC
Overview
340B background
Calculating ceiling price
340B litigation update
Medicaid intersection: duplicate discounts
340B-specific billing and payment options
Medicaid billing compliance issues
SNHPA Medicaid billing survey
What’s next?
Additional 340B resources and upcoming events
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Background
340B drug discount program requires pharmaceutical manufacturers
participating in the Medicaid program to provide discounts on
covered outpatient drugs purchased by federally-funded clinics and
other safety net providers referred to as “covered entities”
The rights and obligations of covered entities and manufacturers are
set forth in Section 340B of the Public Health Service Act (PHSA)
Section 1927 of the Social Security Act (SSA) requires
manufacturers to enter into a pharmaceutical pricing agreement
(PPA) with the Secretary of HHS as a condition of Medicaid
covering and paying for the companies’ outpatient drugs
Under the PPA, a manufacturer agrees to provide discounts and
otherwise comply with 340B requirements
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Background (cont’d)
Program is administered by the Health Resources and Services
Administration (HRSA) through the Office of Pharmacy Affairs
(OPA)
Because several aspects of the 340B program depend on
interpretation and application of SSA provisions (e.g. average
manufacturer price, best price, etc.), the Centers for Medicare &
Medicaid Services (CMS) also plays a significant role in 340B
program administration
Covered entities include high-Medicaid disproportionate share
hospitals owned by or under contract with state or local
government; community health centers; ADAPs; family planning
clinics; AIDS, TB and STD clinics; and other grantees under the
Public Health Service Act
Covered entities, manufacturers and other 340B participants are
listed in the OPA database
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Background (cont’d)
Discounts are calculated using the Medicaid rebate
formula; but 340B pricing is better because (1) sales do
not involve retail pharmacies thereby avoiding retail
mark-ups and (2) 340B providers regularly negotiate subceiling prices
Use of drugs limited to “patients” of 340B covered entity
Medicaid billing procedures may need to be adjusted to
avoid manufacturers giving duplicate discounts
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Background (cont’d)
100%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
79%
Private Sector Pricing
66%
“Best Price” 63%
64%
58%
53%
51%
49%
Fr
ee
av
er
ag
e
VA
Fo
ur
B
ig
34
0B
FS
S
an
ad
ia
n
R
ed
ic
ai
d
M
C
eb
at
e
PO
G
M
P
A
A
W
P
42%
Source: Data derived from Prices for Brand-Name Drugs Under Selected Federal Programs, Congressional Budget Office (June 2005)
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Background (cont’d)
82%
71%
Private Sector Pricing
67%
“Best Price” 66%
60%
55%
53%
51%
44%
42%
Source: Data derived from Prices for Brand-Name Drugs Under Selected Federal Programs, Congressional Budget Office (June 2005)
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Calculating Ceiling Price
Manufacturer’s Medicaid drug rebate agreements require drug
companies to calculate average manufacturer price (AMP) and
best price as part of their obligation to pay rebates to Medicaid
for covered outpatient drugs
Medicaid rebate formula also requires manufacturers to calculate
the average total rebate for a drug unit for each dosage and
strength, often referred to as the unit rebate amount (URA)
340B ceiling price = AMP – URA
Accordingly, if a manufacturer miscalculates AMP, best price or
URA in a manner that results in the underpayment of Medicaid
rebates, the miscalculation will lead to 340B providers being
overcharged for the same drug
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Calculating Ceiling Price (cont’d)
April 1st – 30th
May 1st – 15th
June 15th
July 1st
Days 1-30
Days 31-45
Day 75
Day 90
Manufacturer submits
AMP and BP data
from Jan-March to
CMS
CMS validates data and
calculates the unit
rebate amount and the
340B-ceiling price.
Because in middle of
2nd quarter, price not in
effect until beginning
of 3rd quarter, the next
full quarter.
Manufacturer
sends 340B price
to wholesaler
&/or entries
340B price in
effect for 3rd
Quarter, JulySeptember
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Calculating Ceiling Price (cont’d)
Special procedures for calculating 340B price for new drugs:
 Manufacturers must estimate a new drug’s 340B ceiling
price for the first three quarters that the drug is on the
market
 After three quarters, manufacturers will have AMP and
best price data to calculate the ceiling price
 If the manufacturer overestimates the new drug’s price
during the initial three quarter period, it must issue a
refund to the covered entity upon request
Penny prices – Under HRSA policy, if the 340B formula
results in a negative price (because the inflation-based
penalty exceeds AMP minus 15.1% or best price), then the
manufacturers must charge a penny for the drug
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Litigation Update
Manufacturer
Name
Drug Involved
Period/Quarter Covered
by Settlement
Settlement
Date
Settlement Amount
Bayer
Kogenate and
other
Factor/IVIG
Products
January 1993 – August
31, 1999
Sept. 2000
$14 Million
&
$200K for 340B
TAP
Lupron
January 1991 – October
2001
Oct. 2001
$875 Million
Pfizer
Lipitor
1st Quarter - 4th Quarter
1999
Oct. 2002
$49 Million &
$567K for 340B
Bayer and GSK
Cipro, Adalat
CC, Flonase
and Paxil
Cipro:
1st Qtr ’96 – 1st Qtr ’01
Adalat CC:
4th Qtr ’97 – 1st Qtr ’00
Flonase:
rd
3 Qtr ’97 – 3rd Qtr ’00
Paxil:
1st Qtr ‘01
April 2003
Bayer Total:
$257 Million
At least $2.5 Million
to 340B entities
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
GSK Total:
$87.6 Million
At least $9.4 Million
to 340B entities
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Litigation Update (cont’d)
Manufacturer
Name
Drug Involved
Period/Quarter Covered by
Settlement
Settlement
Date
Settlement Amount
January 1991 – December 31,
2002
June 2003
$355 Million
AstraZeneca
Zoladex
Schering-Plough
Claritin
January 1998 – December 31,
2002
July 2004
Total: $345 Million
At least $10.6 Million to
340B entities
KING
Pharmaceuticals
Entire Drug Line
January 1994 – December 31,
2002
October 31,
2005
$124 Million
At least $7 Million to
340B entities
Schering-Plough
Claritin RediTabs
and K-DUR
August 29,
2006
$255 Million civil
settlement
($180 Million criminal
fines)
At least $3.9 million to
340B entities
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
4th
Redi-Tabs:
Qtr ’98 – 2nd Qtr ’02
2nd
K-DUR:
Qtr ’96 – 2nd Qtr ’01
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Litigation Update (cont’d)
Manufacturer
Name
Drug
Involved
Period/Quarter
Covered by
Settlement
Settlement
Date
Settlement
Amount
Bristol-Myers
Squibb
Serzone
1st Qtr ’97 – 4th Qtr ‘97
September 28,
2007
$515 million
$124,000 to 340B
entities
Merck
Zocor, Vioxx
April 1998 – March
2006
February 7,
2008
$671 million
$9 million to 340B
entities
Cephalon Inc.
Gabitril,
Actiq, and
Provigil
January 2001 through
at least 2006
October 2008
Total: $425
Million
At least $1.8
Million for 340B
entities
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B Litigation Update (cont’d)
Manufacturer
Name
Drug
Involved
Period/Quarter
Covered by
Settlement
Settlement Date
Settlement Amount
Eli Lilly
Zyprexa
September of 1999
- March of 2001
January 2009
Total: $1.43 Billion
More than $75,000 to
340B entities
Aventis
Pharmaceuticals
Azmacort,
Nasacort,
and Nasacort
AQ
October. 1, 1995 to
September 30, 2000
May 28, 2009
$95.5 million total
$6.5 Million to 340B
Entities
2000-2004
October 19, 2009
$118 Million,
$7.3 Million for 340B
entities
Mylan
Pharmaceuticals
Inc. and UDL
Laboratories Inc
Various
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Intersection: Duplicate Discounts
Covered entities are generally free to bill and be
reimbursed for 340B drugs without making any
adjustments to their billing procedures, unless
Medicaid is the payer
Covered entities sometimes must bill Medicaid at
reduced prices for 340B drugs
The sole reason that covered entities must adjust their
Medicaid billing practices is to protect manufacturers
from the duplicate discount problem
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Intersection: Duplicate Discounts (cont’d)
Step 1:
Manufacturer
sells drug at
340B
discount
Covered
Entity
Manufacturer
Step 5: Manufacturer
pays rebate on 340B
drug
Step 4: State
submits rebate
request
Step 3: Covered entity bills
Medicaid for 340B drug
State
Medicaid
Agency
Medicaid patient
Step 2: 340B drug
is dispensed to
Medicaid patient
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
STEPS 1 AND 5 = DUPLICATE
DISCOUNT
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Intersection: Duplicate
Discounts (cont’d)
Manufacturers are protected from paying a Medicaid
rebate and giving a 340B discount on the same drug.
PHSA 340B(a)(5)(A); SSA 1927(a)(5)(C)
To avoid the duplicate discount problem, the Secretary
is directed to develop a mechanism that 340B providers
and states can use to ensure compliance; alternatively
covered entities should not seek Medicaid
reimbursement for 340B drugs that are subject to
Medicaid rebates. PHSA 340B(a)(5)(A); SSA
1927(a)(5)(C)
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B-Specific Billing and Payment Options
HRSA guidelines allow covered entities to comply
with the statute in different ways:
1. Bill Medicaid at “acquisition cost” plus the
state-allowable dispensing fee and the state does
not request a rebate. 58 Fed. Reg. 34,058
(6/23/93)
2. “Carve out” Medicaid drugs from the 340B
program and allow the state to collect rebates. 65
Fed. Reg. 13,983 (3/15/00)
3. Follow state guidelines for applicable billing
limits. 65 Fed. Reg. 13,983 (3/15/00)
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
340B-Specific Billing and Payment Options
Options
Covered Entity
Procedures
State Medicaid
Procedures
340B PassThrough
Bills state at actual acquisition
cost (AAC) and submits
pharmacy’s Medicaid billing
number to HRSA for posting on
website
Excludes from rebate request
files any claims paid under
billing number posted on HRSA
website
Medicaid CarveOut
Purchases its Medicaid
outpatient drugs outside 340B
program, bills Medicaid at
regular non-340B rates and
submits “N/A” for posting on
HRSA website
Includes covered entity’s claims
in rebate request files
Shared Savings
Same as 340B pass-through
option except covered entity and
state enter into alternative billing
and payment arrangement
Pays enhanced dispensing fee or
above AAC rates
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Billing Compliance Issues
Question: Has a covered entity overbilled Medicaid if it
does not bill its state at actual acquisition cost (AAC) for
340B drugs?
Answer: Not necessarily
Explanation: There are numerous exceptions to the AAC
billing restriction, for example:
– when billing a managed care organization
– if the drug is not rebatable under Medicaid
– if the state has different billing and reimbursement
limits
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Billing Compliance Issues
(cont’d)
There are some within the Medicaid program who believe that the
AAC billing restriction was established to save money for Medicaid
Not true for several reasons:
1. It is clear in both 340B law and legislative history that the sole
purpose of AAC billing is to compensate states for the loss of
their rebates that they would otherwise receive but for the
protection of manufacturers from duplicate discounts
2. HRSA’s 1993 guidance establishing the AAC billing standard
is an informal, non-binding policy
3. HRSA essentially withdrew the policy in March 2000 when it
issued another guidance directing covered entities to “refer to
their respective Medicaid state agency drug reimbursement
guidelines for applicable billing limits”
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Billing Compliance Issues
(cont’d)
States allow deviation from AAC billing for different reasons:
– State utilizes billing system that does not accommodate
AAC billing
– AAC billing does not affect reimbursement (prospective
payment for Medicaid services)
– Hospital systems do not accommodate AAC billing , so
billing must be by hand and state recognizes onerous
administrative burden
– Regardless of state’s perceived billing and payment policy
for 340B drugs, there may be no clear guidance in statute,
rules, or provider’s manual or transmittal
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Medicaid Billing Compliance Issues
(cont’d)
While HRSA clarified in 2000 that AAC is not required
under federal law, CMS has never issued parallel guidance
Considerable lack of clarity among Medicaid programs
– Many (e.g. Medi-Cal) believe that federal law requires
billing at AAC
– Medicaid auditors in at least three states – FL, AK, NY –
have investigated 340B covered entities for alleged
overbilling
– Federal whistle blower suit against family planning
clinics in Los Angeles sued for billing at other than AAC
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
SNHPA Medicaid Billing Survey
45 percent of the hospital respondents reported that their state
Medicaid agency allowed them to deviate from AAC billing
55 percent indicated that they were not allowed to deviate
10 states that reportedly allow non-AAC billing include:
Arizona, Georgia, Maine, Maryland, Minnesota, New Jersey,
Ohio, Oregon, Texas and West Virginia.
5 states that require AAC billing include: Idaho, Iowa,
Kansas, Rhode Island and South Dakota.
Hospitals in 12 states gave conflicting answers: Arkansas,
California, Florida, Kentucky, Louisiana, Massachusetts,
Michigan, Missouri, New York, North Carolina, Pennsylvania
and Washington
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
What’s Next?
340B Coalition urging CMS and HRSA to work on a uniform
and coherent policy
– 340B Coalition offering input on law, state variations, history
– 340B Coalition keeping pressure on CMS, HRSA to produce
HHS Office of Inspector General reviewing Medicaid billing by
340B covered entities
Time is of the essence:
– June 2009: California legislature mandated AAC billing,
prohibited carve-out
– Medi-Cal results in “lose-lose”. HRSA and CMS have
opportunity to educate states on shared savings “win-win”
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Additional 340B Resources
 Safety Net Hospitals for Pharmaceutical Access
◦ www.snhpa.org
◦ Bill von Oehsen
 william.vonoehsen@snhpa.org or 202-466-6550
◦ Stuart Gordon
 stuart.gordon@snhpa.org or 202-552-5851
 Federal Drug Discount and Compliance Monitor
◦ www.drugdiscountmonitor.com
 SNHPA/340B Job Site
◦ www.rxjobsolutions.com
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Additional 340B Resources (cont’d)
 Office of Pharmacy Affairs
◦ www.hrsa.gov/opa
 340B Prime Vendor Program
◦ www.340Bpvp.com
 Pharmacy Services Support Center
◦ 1-800-628-6297 or www.pssc.aphanet.org
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org
Upcoming Events
14th Annual 340B Coalition Conference
July 19-21, 2010
Washington, DC
www.340bconferences.org
Safety Net Hospitals for Pharmaceutical Access
(202) 552-5850
Bill von Oehsen
william.vonoehsen@snhpa.org