HHS Proposes January 1, 2019 Rollout of the 340B Drug Pricing Program’s Civil Monetary Penalties and Clarified Drug Ceiling Price Calculation

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On November 2, 2018, the Health Resources and Services Administration of the United States Department of Health and Human Services ("HHS") issued a notice of proposed rulemaking proposing to change the effective date of prior regulations implementing the civil monetary penalty provisions of the 340B Drug Pricing Program (the “340B Program”) from July 1, 2019 to January 1, 2019. The prior regulations had also clarified the methodology that drug manufacturers should use to calculate ceiling prices for 340B-covered outpatient drugs. If the proposed rule is finalized as written, drug manufacturers that have signed pharmaceutical pricing agreements ("PPAs") with HHS may be subject to civil monetary penalties for knowingly and intentionally overcharging 340B-covered entities for covered outpatient drugs beginning next year.

The Public Health Service Act ("PHSA") Section 340B was amended in 2010 to authorize civil monetary penalties for overcharges related to 340B drug ceiling prices, and to direct HHS to clarify the 340B drug ceiling price calculation methodology. Although the PHSA had previously established a drug ceiling price calculation, ambiguity remained regarding calculated ceiling prices of less than $0.01 and ceiling prices for newly approved and released drugs. HHS issued guidelines in 1995 indicating that drug manufacturers could estimate 340B ceiling prices for new drugs until sufficient data were available to calculate ceiling prices according to the statute. However, those guidelines did not clarify how drug manufacturers should calculate the ceiling price for new drugs, nor did they address ceiling prices of less than $0.01.

The 2010 amendments to the PHSA afforded HHS an opportunity not only to establish civil monetary penalty enforcement standards for overcharging 340B-covered entities, but also to clarify the ambiguities surrounding the 340B drug ceiling price requirement. However, regulations stalled under the Obama administration, which issued a final rule in January 2017 (the 2017 Final Rule). Shortly thereafter, the Trump administration delayed the effective date of the 2017 Final Rule five times, most recently in a final rule issued on June 5, 2018, which delayed the 2017 Final Rule’s effective date until July 1, 2019. Although the Trump administration indicated that the delays were required to develop comprehensive policies to address the rising costs of prescription drugs, this approach garnered provider pushback due to the lack of transparency and accountability regarding the ceiling prices that drug manufacturers were actually charging covered entities for drugs under the 340B Program.

On September 11, 2018, the American Hospital Association ("AHA") and other 340B provider stakeholders filed a complaint against HHS in the United States District Court for the District of Columbia challenging the repeated delays to the effective date of the 2017 Final Rule. In a press release, the AHA suggested a direct link between its lawsuit and the new proposed rule, which would accelerate the effective date of the 2017 Final Rule from July 1, 2019 to January 1, 2019. Likely not a coincidence, the most recent notice of proposed rulemaking was issued promptly on the heels of that lawsuit, with comments due back to CMS on or before November 23 and rollout scheduled for the beginning of the new year.

The 2017 Final Rule introduces new accountability for drug manufacturers participating in the 340B Program, who could potentially face substantial civil monetary penalties once the 2017 Final Rule goes into effect. The rule will also afford institutional providers an opportunity to monitor future drug prices to confirm compliance with 340B requirements.

Ceiling Price Calculation

The 2017 Final Rule requires that drug manufacturers calculate the ceiling price for covered outpatient drugs on a quarterly basis. Consistent with the PHSA, it defines the ceiling price as the Average Manufacturer Price ("AMP") from the preceding calendar quarter for the smallest unit of measure for the drug, minus the Medicaid Unit Rebate Amount ("URA") for the drug. Drugs for which the ceiling price is less than $0.01 will have a ceiling price of $0.01.

The 2017 Final Rule also replaces prior HHS guidelines for calculating the ceiling price for newly approved and released drugs by setting forth the methodology that drug manufacturers must use to calculate temporary ceiling prices. The Rule requires manufacturers to estimate the 340B ceiling price for such drugs by subtracting the URA percentage from the wholesale acquisition cost ("WAC") of the drug until the AMP is known and no later than the fourth quarter that the drug is available for sale. Once the AMP is known, the manufacturer must charge the 340B ceiling price (AMP minus URA) and, within 120 days, repay the covered entity for any excess amounts charged above that price.

“Knowingly and Intentionally”

The 2017 Final Rule provides that, in most cases, whether an instance of overcharging was knowingly and intentionally carried out (and therefore whether it may lead to the imposition of civil monetary penalties) will be a case-by-case determination based upon the facts. In response to commenter feedback, HHS generally declined to enumerate factors it would consider in conducting such an analysis. However, the 2017 Final Rule does provide that, if a manufacturer does not offer a refund to a covered entity after discovering that it has overcharged the covered entity for a new drug, such an instance of overcharging would meet the “knowingly and intentionally” requirement.

Moreover, the 2017 Final Rule enumerates the following situations in which a drug manufacturer would not be considered to have knowingly and intentionally overcharged a covered entity:

• The manufacturer made an isolated inadvertent, unintentional, or unrecognized error in calculating the 340B ceiling price; and
• The manufacturer sells a new covered outpatient drug during the period the manufacturer is estimating a price, as long as the manufacturer offers refunds of any overcharges within 120 days of discovering the overcharge.

However, the scenarios above would be considered instances of overcharging that would require the drug manufacturer to reimburse the covered entity for any amounts charged above the ceiling price.

The 2017 Final Rule explains that the following situations would not constitute instances of overcharging and therefore would neither require repayment of overcharges nor lead to civil monetary penalties:

• The covered entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase; and
• The covered entity chooses to order non-340B priced drugs for any reason other than the manufacturer’s refusal to sell or make the drugs available at the 340B price.

Conclusion

The proposed acceleration of the effective date of the 2017 Final Rule would increase drug manufacturers’ accountability for 340B-compliant prices for covered outpatient drugs beginning January 1, 2019, by requiring prices to be calculated according to the methodology specified in the 2017 Final Rule and introducing civil monetary penalties against manufacturers that knowingly and intentionally overcharge providers. 340B-covered entities would have improved ability to verify that the prices they are paying for drugs under the 340B Program are consistent with PHSA requirements and would be empowered to report manufacturer overcharges to HHS with the knowledge that enforcement action might ensue.