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340B Program: HRSA Releases Ceiling Price and CMP Final Rule

09 January 2017

Health Alert

The Health Resources and Services Administration (HRSA) released its Final Rule regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties (CMPs) on manufacturers that knowingly and intentionally overcharge 340B covered entities. The Final Rule was published in the Federal Register on January 5, 2017. To assist in your review, we have prepared a blackline showing the differences between the proposed and final regulation.

Background: The Affordable Care Act (ACA) amended the 340B statute in 2010 to require the Secretary to provide for the imposition of CMPs on participating manufacturers that "knowingly and intentionally" charge covered entities a price for the purchase of a drug that exceeds the 340B ceiling price. Such penalties are not to exceed US$5,000 for each "instance" of overcharging a covered entity. The ACA amendment specifically provides HRSA with rule-making authority regarding manufacturer CMPs, and also requires HRSA to develop and publish precisely defined standards and methodology for the calculation of the ceiling price. HRSA asserts in the preamble to the Final Rule that it has rulemaking power to issue a binding ceiling price regulation as well, although the statute appears to provide explicit rulemaking authority only with respect to CMPs.

The ACA imposed a deadline of 180 days after March 23, 2010 for the issuance of a CMP regulation. HRSA attempted to comply with that deadline by issuing an Advanced Notice of Proposed Rulemaking in September 2010. HRSA then published the CMP regulation in proposed form in June 2016 and subsequently reopened the comment period in April 2016. A discussion of the proposed rule is available here.

Effective Date: The Final Rule has an effective date of March 6, 2017, 60 days after publication in the Federal Register. As the 340B ceiling price is set on a quarterly basis and this effective date is mid-quarter, HRSA states in the Final Rule preamble that it will not begin enforcing the Final Rule requirements until the start of the next quarter, or April 1, 2017.

Possible Impact of the Trump Administration's Promise to Roll Back New Regulations: There is a longstanding, bipartisan tradition of an incoming President issuing an executive memorandum ordering a 60-day delay in the effective date of any final rule that has not yet taken effect at the time of transition of power (i.e., January 20, 2017). The purpose of the delay is to afford the new administration an opportunity to review such rules and decide whether to initiate rulemakings to rescind or modify them. If President-Elect Trump issues such a memorandum, which he is expected to do, that would delay the effective date of this Final Rule by an additional 60 days, to May 5, 2017. As a result, HRSA could not begin enforcing the Final Rule, assuming it is not modified or rescinded, until after May 5, 2017. That date too, of course, is mid-quarter, so it remains to be seen if HRSA will begin enforcement on that date or will again wait until the beginning of the next calendar quarter.

The Ceiling Price Calculation: The Final Rule codifies the ceiling price calculation as a drug's Average Manufacturer Price (AMP) less its Medicaid Unit Rebate Amount (URA), with the following details:

  • Ceiling Price Reporting System Not a Prerequisite: HRSA states in the preamble that the Final Rule will be implemented independently of other programmatic regulations, and that it is not necessary to implement a ceiling price reporting system prior to finalizing the CMP regulation. A number of comments make reference to the ceiling price reporting system, and the preamble does indicate that HRSA plans to publish guidance in the future on the particular components of the ceiling price reporting system.
  • Decimal Places and Units: The ceiling price is to be calculated to the sixth decimal place, consistent with AMP reporting, and HRSA will round the number to two decimal places for publication in the forthcoming reporting system. In a departure from the proposed rule, the Final Rule does not refer to using the drug's package size and case package size in the ceiling price calculation, but HRSA indicates in the preamble that it intends to address the use of these terms in future guidance related to the ceiling price reporting system.
  • Ceiling Price Estimation for New Drugs: Manufacturers must estimate the ceiling price for new products, and can do so for up to the first three quarters, with the manufacturer reverting to the standard calculation provided in the regulation when an AMP for the drug is known, but no later than the fourth quarter of sales. The Final Rule provides that the ceiling price is to be estimated during this period as wholesale acquisition cost (WAC) less the Medicaid rebate percentage (23.1 percent, 17.1 percent, or 13 percent, depending on the drug). As this is a ceiling price, there presumably would be no limitation on a manufacturer setting the estimated ceiling price below such an amount, if doing so might avoid the need to issue refunds later (see below).
  • Refunds from Manufacturers: The manufacturer is required to "offer to refund or credit" covered entities if the estimated ceiling price for a new drug is higher than the actual ceiling price. This must occur "within 120 days of the determination" by the manufacturer that an overcharge occurred. The preamble makes clear that the determination should occur no later than the fourth quarter after the new drug is available. Refunds also are required when the ceiling price decreases as a result of the restatement of Medicaid data, but it is not clear that the 120 day time limit applies in these instances as well. HRSA states that the refund policy described in the Final Rule applies to new drug ceiling price estimations, and that specific procedures for refunds will be addressed in future guidance. The preamble states that there is no materiality threshold for refunds, and application of a materiality threshold as well as any netting of overcharges against undercharges is not permitted unless agreed to by the covered entity.
  • Penny Pricing: The Final Rule, in keeping with the proposed rule and HRSA's Release 2011-2, mandates that any ceiling price that calculates to less than US$0.01 be set at US$0.01. Despite soliciting additional comments regarding this topic, HRSA specifically states that alternative approaches are not permissible. HRSA explains in the preamble that it believes penny pricing best effectuates the statutory scheme.

CMPs: The Final Rule addresses the definition of an "instance" and "overcharge" but—like the proposed rule—does not define "knowingly and intentionally."

  • Knowing and Intentional: The statute provides for the imposition of CMPs only for knowing and intentional overcharges. The Final Rule does not define "knowingly and intentionally" but the preamble provides examples of circumstances where HRSA would assume the "knowing and intentional" standard is not met, such as:
    • 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 the 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.
    • The preamble also indicates that, as a general principle, HRSA will defer to the OIG to determine whether a particular situation constitutes a "knowing and intentional" overcharge.
  • "Instance" of Overcharging: The statute provides that each "instance" of knowing and intentional overcharging is subject to a CMP that shall not exceed US$5,000. The Final Rule defines an "instance" as any "order" by a covered entity, by NDC-11, that "results in a covered entity paying more than the ceiling price," as that price is now defined by the Final Rule. Each order by NDC-11 is a single instance regardless of the number of units ordered, and without regard to whether the order is placed directly with the manufacturer or through a wholesaler, authorized distributor, or agent. For example, a single order of 100 units of a single NDC-11 would be a single instance. A single order of 100 units of two distinct NDC-11s would be two instances.
  • Process: The OIG will initiate CMP actions under the Final Rule, pursuant to a delegation of authority, utilizing the standards applied to other CMPs under 42 CFR Parts 1003 and 1005. Commenters indicated that those regulations contain a number of provisions that appear unrelated to the 340B program and that it is not clear which provisions in Parts 1003 and 1005 do and do not apply. HRSA dismisses these concerns in the preamble to the Final Rule and states that "no further rulemaking is required" regarding this topic.
  • Distributor Arrangements: Manufacturers are obligated to ensure that the 340B price is made available through any distribution arrangements they may have in place.
  • Retroactive "Instance" and AMP/URA or Estimated Ceiling Price Restatements: An instance of overcharging may occur where (1) revised Medicaid pricing data would result in a ceiling price that is lower than the price initially paid by the covered entity, or (2) the actual ceiling price is lower than the manufacturer's estimated ceiling price for new drugs, and in either case the manufacturer fails or refuses to issue a refund or credit to the covered entity.
  • Offsets Not a Remedy: The Final Rule defines an "instance" at the NDC-11 level and provides that an overcharge on one NDC may not be offset or otherwise remedied by discounts provided on any other NDC or discounts provided on the same NDC on other transactions, orders, or purchases.

Defined Terms: The Final Rule includes a number of definitions that generally cross-reference existing statutory and regulatory definitions.

  • Covered Entity: The term includes entities that are (1) of the type enumerated in the 340B statute, (2) in compliance with the duplicate discount and diversion prohibitions, and (3) registered and listed in the 340B database. Importantly, the second criterion acknowledges that an entity that is in violation of the duplicate discount or diversion prohibitions does not qualify as a covered entity.
  • Covered Outpatient Drug: The term is defined solely by reference to the definition in the Medicaid statute, including the "limiting definition." HRSA rejected the suggestion by commenters to create a separate definition of this term for 340B purposes that excludes the "limiting definition."

As always, it is important to review the Final Rule in detail to identify any issues relevant to your organization. Please feel free to contact the Hogan Lovells GP team with any questions you may have.

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