HRSA Issues Final Rule Regarding the 340B Penny Pricing Policy and Manufacturer CMP

January 11, 2017By David C. Gibbons & Alan M. Kirschenbaum

On January 5, 2017, the U.S. Department of Health and Human Services (“HHS”) Health Resources and Services Administration (“HRSA”) issued a Final Rule implementing the 340B Drug Pricing Program Ceiling Price policy and Civil Monetary Penalty (“CMP”) standards, including the knowledge requirement related to overcharging 340B Covered Entities. The Final Rule becomes effective on March 6, 2017, but HRSA stated that it does not intend to enforce the regulation until April 1, 2017, when the following quarter begins.

Section 340B of the Public Health Services Act (“the Act”; codified at 42 U.S.C. § 256b) requires pharmaceutical manufacturers who participate in the Medicaid Drug Rebate Program (“MDRP”) to enter into a Pharmaceutical Pricing Agreement (“PPA”) with HHS, under which the manufacturer agrees to sell Covered Outpatient Drugs to statutorily designated Covered Entities at a price not exceeding a statutory “ceiling price.”

340B Ceiling Price and the Penny Pricing Policy

Section 7102 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), (“ACA”) required HHS to develop a system to enable HHS to verify the accuracy of ceiling prices calculated and reported by manufacturers pursuant to the Act. HHS was required to develop and publish “precisely defined standards and methodology for the calculation of ceiling prices.” 42 U.S.C. § 256b(d)(1)(B)(i)(I).

The 340B ceiling price is calculated based on drug pricing data already reported by manufacturers to the Centers for Medicare and Medicaid Services (“CMS”) under the MDRP. The basic formula for the 340B ceiling price is to take the Average Manufacturer Price (“AMP”), defined under the MDRP as the average price wholesalers pay manufacturers for drugs that are sold to retail pharmacies, as reported quarterly to CMS, and subtract the Unit Rebate Amount (“URA”). The URA is the sum of the basic plus additional rebate. The basic rebate is calculated using a statutorily defined rebate percentage: 23.1 % of AMP for single source or multiple source innovator drugs, 17% of the AMP for clotting factors and drugs for exclusively pediatric indications, and 13% of the AMP for noninnovator drugs. An additional rebate may be due if the quarterly AMP increases at a rate greater than inflation, as measured by the Consumer Price Index—Urban. The URA can equal but not exceed 100% of the AMP for a period. Thus, for purposes of the 340B ceiling price calculation, AMP minus URA could equal zero, thereby resulting in a 340B ceiling price of $0. HRSA recognized that a ceiling price of $0 would be inconsistent with the Act and result in operational challenges. Therefore, HRSA finalized an exception that would set the ceiling price to $0.01 when the formula would result in a ceiling price of $0 — the “Penny Pricing Policy.”

According to the preamble of the Final Rule, many commenters “strongly objected” to HRSA’s Penny Pricing Policy. 82 Fed. Reg. 1216. Pharmaceutical manufacturers argued that HRSA’s rulemaking was arbitrary and capricious, that it would fail to cover the cost of goods and would result in an unlawful taking by the government, and that it would potentially result in drug shortages, diversion, stockpiling, and harm to patients. HRSA countered that the Penny Pricing Policy “reflects a balance between the equities of different stakeholders and establishes a standard pricing method in the market.” 82 Fed. Reg. 1215. HRSA explained that any alternative pricing methodology would result in a price that exceeds the statutory ceiling price formula, adding that the Penny Pricing Policy would impact manufacturers infrequently, as only approximately 1% of 340B drugs sold in the first quarter of 2016 had a calculated ceiling price of zero.

HRSA finalized regulations implementing its Penny Pricing Policy as originally proposed, creating an exception for 340B drugs with a calculated ceiling price of zero by imputing a ceiling price of $0.01 for such products.

340B Ceiling Price—New 340B Drugs

When new drugs enter the market, there are insufficient data available to calculate the AMP, and thereby, the 340B ceiling price. Therefore, HRSA finalized regulations that would set an estimated 340B ceiling price at wholesale acquisition cost (“WAC”) minus the rebate percentage appropriate for the drug category (i.e., single source/innovator multiple source, noninnovator). Once a manufacturer is able to calculate the AMP for a product—no later than four quarters after the drug is made available for sale in the U.S.—then manufacturers will be required to calculate the 340B price based on AMP. Importantly, if the difference between the estimated 340B ceiling price based on WAC and the actual 340B ceiling price based on AMP results in an overcharge to Covered Entities, then the manufacturer must offer a refund of the overcharged amount, or face potential liability under the CMP for charging a Covered Entity a price for a 340B drug that exceeds its ceiling price (see below). The Final Rule states that manufacturers must offer to refund or credit the difference within 120 days after the overcharge occurred.

Unlike previous HRSA guidance on new drug ceiling prices, the Final Rule requires manufacturers to affirmatively contact Covered Entities to offer repayment. However, manufacturers and Covered Entities may pursue “mutually agreed-upon alternative refund arrangements,” such as netting, crediting, or forgiving de minimus or insignificant overcharges. 82 Fed. Reg. 1218, 1220.

Manufacturer Civil Monetary Penalties

The Act provides that CMPs may be imposed upon a manufacturer operating under a PPA who knowingly and intentionally charges a Covered Entity a price for a 340B drug that exceeds the ceiling price. Authority to impose CMPs under the statute has been delegated to the HHS Office of Inspector General (“OIG”). The CMP is up to $5,000 per “instance” of overcharging. An instance of overcharging is defined as any order for a 340B drug at the National Drug Code (“NDC”) level (regardless of the number of units sold in the order), and cannot be offset by manufacturer discounts on other NDCs or discounts on the same NDC made on other transactions, orders, or purchases. Instances of overcharging can be associated with the initial purchase of a 340B drug or upon ceiling price recalculations due to MDRP drug pricing restatements when the manufacturer does not issue a refund or credit for the overcharge. The CMP applies to manufacturers regardless of whether the instance of overcharging occurs on purchases directly from the manufacturer or fulfilled through a wholesale distributor. In the preamble to the Final Rule, HRSA stated that charging a Covered Entity a price for a 340B drug that is higher than the ceiling price is not an overcharge if the Covered Entity does not identify the purchase as 340B-eligible at the time the purchase is made. Furthermore, Covered Entities are not permitted to reclassify a purchase as 340B eligible after such purchase has been made.

In the Proposed Rule, HRSA sought comments on how to define the “knowing and intentional” element of the CMP. In the Final Rule, HRSA declined to provide a bright line definition of this standard, but the preamble does provide examples of circumstances associated with overcharging a Covered Entity that would not be considered a knowing and intentional overcharge. These non-exhaustive examples included:

  • “The manufacturer made an isolated inadvertent, unintentional, or unrecognized error in calculating the 340B ceiling price;
  • “The manufacturer sells a new covered outpatient drug during the period the manufacturer is estimating a price based on this final rule, as long as the manufacturer offers refunds of any overcharges to covered entities within 120 days of determining an overcharge occurred during the estimation period;
  • “When a covered entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase; or
  • “When a covered entity chooses to order non-340B priced drugs and the order is not due to a manufacturer’s refusal to sell or make drugs available at the 340B price.”  82 Fed. Reg. 1221.

The future of this Final Rule is somewhat uncertain. If the provisions of the ACA authorizing HHS to establish regulations implementing CMPs and to develop standards for calculating ceiling prices are repealed by the new Congress, the specific statutory authority for the promulgation of the Final Rule will disappear. In that event, it is questionable whether the Final Rule would survive a challenge to HRSA’s rulemaking authority. See our previous post about PhRMA’s successful challenge to a previous HRSA rule implementing a 340B provision.

Congress also could disapprove or reject the Final Rule regardless of any action taken on the ACA. On November 17, 2016, the House passed the Midnight Rules Relief Act of 2016, H.R. 5982, 114th Cong. (2016), which would amend the Congressional Review Act to allow Congress, by joint resolution, to reject a group of regulations submitted by federal agencies for congressional review within the last 60 days of a legislative session of Congress during the final year of a President’s term. Currently, Congress must reject each regulation on a case-by-case basis. This bill has been referred to a Senate committee.

We will be closely monitoring the impact of the ACA repeal initiative and the Midnight Rules Relief Act on the 340B Program and other government discount programs, and will be posting updates on this blog.

Categories: Health Privacy