Drug Diversion in the 340B Program

The 340B Program is in desperate need of stronger controls and more audits.

Section 340B of the Public Health Service Act requires drug manufacturers participating in the Medicaid Drug Rebate Program to sign an agreement with the Secretary of Health and Human Services. This agreement limits the price that manufacturers may charge certain covered entities for covered outpatient drugs.

The resultant program is called the 340B Drug Pricing Program, which is administered and monitored by the Office of Pharmacy Affairs under the Health Resources and Services Administration (HRSA). Qualifying covered entities in the 340B Program receive a discount of up to 50% off the average wholesale price of outpatient and OTC drugs.

According to HRSA, covered entities include federally qualified health center lookalike programs, certain disproportionate share hospitals and critical access hospitals owned by or under contract with state or local governments, and several categories of facilities or programs funded by federal grants, including federally qualified health centers, AIDS drug assistance programs, hemophilia treatment centers, and family planning clinics.

Eligible patients under the program include those who receive health care services other than drugs from the covered entity. The only exception is patients of state-operated or funded AIDS drug purchasing assistance programs.

Medicare Part B pays hospitals for outpatient drugs provided incident to physician services, while Medicare Part D pays for drugs that are covered under the program. Medicaid pays for 340B outpatient drugs for patients covered under the program, unless a carve out applies.

Drug diversion in the program is defined as a 340B drug being provided to an individual who is not an eligible outpatient of that entity and/or dispensed in an area of a larger facility that is not eligible (eg, an inpatient service or a non-covered clinic).

Examples of drug diversion include:

  • Dispensing 340B drugs at ineligible sites.
  • Not monitoring and correcting inventory.
  • Dispensing 340B drugs written by ineligible providers.
  • Dispensing 340B drugs to non-eligible patients at a contract or onsite pharmacy.

Although no statistics currently illustrate the cost of drug diversion within the 340B Program, if we roughly estimate that 10% of the drugs dispensed get diverted, it would yield a cost of $7.1 million annually.

In 2012, HRSA performed 51 audits that included 450 outpatient facilities and 400 contract pharmacies. Of these audits, 45 were risk-based and 6 were targeted.

HRSA last announced in 2013 that 94 audits were underway, which included 700 outpatient facilities and 1930 contract pharmacies. During these audits, drug diversion, duplicate discounts, and ineligible sites/providers were the common areas of noncompliance.

A duplicate discount occurs when a drug purchased with a 340B discount is also subject to a state Medicaid rebate.

Examples of duplicate discounts include:

  • Billing Medicaid contrary to HRSA Medicaid exclusion file listing.
  • 340B drugs used for Medicaid patients at contract pharmacy with no arrangement to prevent duplicate discounts.
  • Medicaid claims incorrectly coded when provided to the state.
  • Incorrect Medicaid or NPI number in HRSA Medicaid exclusion file.
  • Outpatient sites incorrectly listed on HRSA Medicaid exclusion file.

The number of covered entity sites enrolled in the 340B Program doubled from 8605 in 2001 to 16,572 in 2011. Meanwhile, the number of participating hospitals nearly tripled from 591 in 2005 to 1673 in 2011, and the number of hospital sites almost quadrupled from 1233 in 2005 to 4426 in 2011.

In October 2014, there were a total of 28,306 sites registered with the 340B Program. With more sites qualifying for the program annually, HRSA is challenged with enforcing 340B compliance.

Noncompliance to 340B program impacts patients’ bottom line because the more diversion that occurs, the more drug manufacturers increase prices for both public and private insurers, leading to an increase in rates and charges to patients. If HRSA were able to enforce 340B regulations and audit all hospitals on a continual basis, there would be fewer cases surrounding duplicate discounting, drug diversion, and ineligible site/providers.

Drug manufacturers can also audit covered entities to ensure that they are not engaging in drug diversion or duplicate discounting. If informal negotiations fail, a manufacturer may seek permission from the Office of Pharmacy Affairs to conduct an audit.

In one instance, a hospital in Chicago was selected by Eli Lilly to undergo a 340B audit, which uncovered that 340B drugs valued at more than $750,000 were diverted to inpatients erroneously. The hospital and Lilly settled for $175,000 in repayment, but this opened the door for other drug manufacturers to conduct audits of this same hospital to recoup any 340B funds that may have been diverted during the same time. This was a financial strain to the hospital because the funds recovered are not eligible for insurance, so they must be paid through its cash reserves usually within 60 days of settlement.

The 340B Program is in desperate need of stronger controls and more audits. Through proactive monitoring of drug inventory and dispensing, 340B drug diversion would decrease, leading to a decrease in drug spending.