[Federal Register Volume 80, Number 167 (Friday, August 28, 2015)]
[Notices]
[Pages 52300-52324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21246]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Resources and Services Administration

RIN 0906-AB08


340B Drug Pricing Program Omnibus Guidance

AGENCY: Health Resources and Services Administration, HHS.

ACTION: Notice.

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SUMMARY: The Health Resources and Services Administration (HRSA) 
administers section 340B of the Public Health Service Act (PHSA), which 
is referred to as the ``340B Drug Pricing Program'' or the ``340B 
Program.'' This notice proposes guidance for covered entities enrolled 
in the 340B Program and drug manufacturers that are required by section 
340B of the PHSA to make their drugs available to covered entities 
under the 340B Program. When finalized after consideration of public 
comments solicited by this notice, the guidance is intended to assist 
340B covered entities and drug manufacturers in complying with the 
statute.

DATES: Submit comments on or before October 27, 2015.

ADDRESSES: You may submit comments, identified by the Regulatory 
Information Number (RIN) 0906-AB08, by any of the following methods. 
Please submit your comments in only one of these ways to minimize the 
receipt of duplicate submissions. The first is the preferred method.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow instructions for submitting comments. This is the preferred 
method for the submission of comments.
     Email: [email protected]. Include RIN 0906-AB08 in 
the subject line of the message.
     Mail: Krista Pedley, Director, Office of Pharmacy Affairs 
(OPA), Health Resources and Services Administration (HRSA), 5600 
Fishers Lane, Mail Stop 08W05A, Rockville, Maryland 20857.
    All submitted comments will be available to the public in their 
entirety.

FOR FURTHER INFORMATION CONTACT: CDR Krista Pedley, Director, OPA, 
HRSA, 5600 Fishers Lane, Mail Stop 08W05A, Rockville, Maryland 20857, 
or by telephone at (301) 594-4353.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 602 of Public Law 102-585, the ``Veterans Health Care Act 
of 1992,'' enacted section 340B of the Public Health Service Act (PHSA) 
``Limitation on Prices of Drugs Purchased by Covered Entities,'' 
codified at 42 U.S.C. 256b. The intent of the 340B Program is to permit 
covered entities ``to stretch scarce Federal resources as far as 
possible, reaching more eligible patients and providing more 
comprehensive services.'' H.R. REP. No. 102-384(II), at 12 (1992). 
Eligible covered entity types are defined in section 340B(a)(4) of the 
PHSA, and only include health care organizations that have certain 
Federal designations or receive funding from specific Federal programs. 
These include Federally Qualified Health Centers, Ryan White HIV/AIDS 
Program grantees, and certain types of hospitals and specialized 
clinics. Section 7101 of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) (``Affordable Care Act'') expanded the types of 
covered entities eligible to participate in the 340B Program. As of 
January 1, 2015, there were 11,530 registered covered entities 
participating in the 340B Program.
    Section 340B of the PHSA instructs HHS to enter into a 
pharmaceutical pricing agreement (PPA) with certain drug manufacturers. 
If a drug manufacturer signs a PPA, it agrees that the prices charged 
for covered outpatient drugs to covered entities will not exceed 340B 
ceiling prices as defined by statute. HRSA calculates the ceiling 
prices quarterly using pricing data reported to the Centers for 
Medicare & Medicaid Services (CMS). Pursuant to section 340B(a)(1) of 
the PHSA, the 340B ceiling price is calculated by subtracting the Unit 
Rebate Amount from the Average Manufacturer Price. As of January 1, 
2015, there were 644 drug manufacturers participating in the 340B 
Program.
    When an eligible entity voluntarily decides to enroll and 
participate in the 340B Program, it accepts responsibility for ensuring 
compliance with all provisions of the 340B Program, including all 
associated costs. Since 1992, HHS has interpreted the statutory 
requirements of the 340B Program through guidances published in the 
Federal Register, typically after notice and opportunity for comment. 
HHS is proposing this omnibus guidance to provide increased clarity in 
the marketplace for all 340B Program stakeholders and strengthen HHS's 
ability to administer the 340B Program effectively. This notice 
clarifies many current 340B Program guidances. HHS encourages all 
stakeholders to provide comments on this proposed guidance.
    In September 2010, HHS published two advanced notices of proposed 
rulemaking in the Federal Register,

[[Page 52301]]

340B Drug Pricing Program Administrative Dispute Resolution Process (75 
FR 57233 (September 20, 2010)) and 340B Drug Pricing Program 
Manufacturer Civil Monetary Penalties (75 FR 57230 (September 20, 
2010)). HHS issued a proposed rule addressing manufacturer civil 
monetary penalties and calculation of ceiling prices in June 2015 (80 
FR 34583 (June 17, 2015)). Future rulemaking will address the 
administrative dispute resolution process.

II. Summary of the Proposed Guidance

Part A--340B Program Eligibility and Registration

    Section 340B(a)(4) of the PHSA (42 U.S.C. 256b(a)(4)) lists the 
entity types eligible to participate in the 340B Program and further 
requires that such entities must meet the requirements of section 
340B(a)(5) of the PHSA. An entity participating in the 340B Program is 
referred to as a covered entity. HHS lists all covered entity sites 
registered for the 340B Program on the public 340B database.

Covered Entities

Non-Hospital Eligibility
    Non-hospital covered entities described in sections 340B(a)(4)(A) 
through (K) of the PHSA include entities that receive certain Federal 
grants, Federal contracts, Federal designations, or establish Federal 
projects. HHS will list non-hospital covered entities on the public 
340B database if they demonstrate eligibility and provide information 
related to their qualifying grant, contract, designation, or project.
    A non-hospital covered entity also may include associated health 
care delivery sites located at a different address. These associated 
health care delivery sites will be listed on the public 340B database 
as able to purchase and use 340B drugs for their eligible patients if 
the non-hospital covered entity (``parent site'') registers the 
associated sites and provides information demonstrating that each site 
is performing services under the main qualifying grant, contract, 
designation, or project. Once registered, the associated sites of a 
covered entity parent site are termed ``child sites.'' For example, if 
a covered entity sexually transmitted disease (STD) clinic demonstrates 
that an off-site location receives Federal funds, and is performing 
services within the scope of their grant, HHS will list that location 
on its database as a child site of the main clinic. HHS will list sites 
that are sub-recipients of Federal grants, but seeking their own 340B 
identification numbers separate from a parent entity, if those entities 
provide information demonstrating their receipt of eligible Federal 
funds, or in-kind contributions purchased with eligible Federal funds, 
as well as the grant number under which they receive those funds.
Hospital Eligibility
    Section 340B(a)(4)(L) of the PHSA defines the 340B Program 
eligibility requirements for hospitals defined in section 1886(d)(1)(B) 
of the Social Security Act (commonly referred to as ``subsection (d) 
hospitals''). Section 340B(a)(4)(L)(i) specifies three categories of 
hospital eligibility.
    The first category of hospital eligibility under section 
340B(a)(4)(L)(i) of the PHSA requires hospital ownership or operation 
by a State or local government. HHS will list hospitals qualifying 
under this category if they are wholly owned by a State or local 
government and recognized as such in Internal Revenue Service filings 
and acknowledgements, if applicable, or other documentation from 
Federal entities. HHS also will list hospitals operated through an 
arrangement where the State or local government is the sole operating 
authority of a hospital.
    The second category of hospital eligibility under section 
340B(a)(4)(L)(i) of the PHSA requires a hospital to be a public or 
private non-profit corporation which is formally granted governmental 
powers by a unit of State or local government. HHS will list hospitals 
qualifying under this provision if they are formally granted a power 
usually exercised by the State or local government through State or 
local statute or regulation, through creation of a public corporation, 
or through development of a hospital authority or district to provide 
health care to a community on behalf of the government. Examples of 
governmental powers include, but are not limited to, the power to tax, 
issue government bonds, and act on behalf of the government. HHS 
interprets section 340B(a)(4)(L)(i) of the PHSA as excluding hospitals 
that have been granted powers generally granted to private persons or 
corporations upon meeting of licensure requirements, such as a license 
to practice medicine or provide health care services commercially. HHS 
will list a hospital qualifying under this provision when it submits, 
as a part of its registration: (1) The name of the government entity 
granting the governmental power to the hospital; (2) a description of 
the governmental power granted to the hospital and a brief explanation 
as to why the power is considered to be governmental; and (3) a copy of 
any official documents issued by the State or local government to the 
hospital that reflect the formal grant of governmental power.
    The third category of hospital eligibility under section 
340B(a)(4)(L)(i) of the PHSA includes a private non-profit hospital 
which has a contract with a State or local government to provide health 
care services to low-income individuals who are not eligible for 
Medicare or Medicaid. HHS will list hospitals qualifying under this 
provision that provide a signed certification by the hospital's 340B 
Program authorizing official and an appropriate government official 
(such as the governor, county executive, mayor, or an individual 
authorized to represent and bind the governmental entity). The signed 
certification indicates that a contract is currently in place between 
the private, non-profit hospital and the State or local government to 
provide health care services to low-income individuals who are not 
entitled to Medicare or Medicaid. For the purposes of the 340B Program, 
such contract should create enforceable expectations for the hospital 
for the provision of health care services, including the provision of 
direct medical care.
    Sections 340B(a)(4)(M) through (O) of the PHSA extend the 340B 
Program eligibility requirements under section 340B(a)(4)(L)(i) of the 
PHSA to children's hospitals, freestanding cancer hospitals, critical 
access hospitals, rural referral centers, and sole community hospitals, 
and establish the criteria by which these entity types are eligible to 
participate.
Medicare Disproportionate Share Adjustment Percentage
    In addition to the requirements of section 340B(a)(4)(L)(i) of the 
PHSA, certain hospitals are required to exceed a Medicare 
disproportionate share hospital adjustment percentage to be eligible 
for the 340B Program. Calculation of the disproportionate share 
adjustment percentage is described in section 1886(d)(5)(F) of the 
Social Security Act. Disproportionate share hospitals (DSH), children's 
hospitals, and freestanding cancer hospitals must have a Medicare 
disproportionate share adjustment percentage greater than 11.75 or be a 
``Pickle hospital'' as described in section 1886(d)(5)(F)(i)(II) of the 
Social Security Act to be eligible for the 340B Program (sections 
340B(a)(4)(L) and (M) of the PHSA). Rural referral centers and sole 
community hospitals must have a disproportionate share adjustment 
percentage equal to or greater than 8.0

[[Page 52302]]

(section 340B(a)(4)(O) of the PHSA). Critical access hospitals are not 
eligible for Medicare disproportionate share hospital payments and do 
not have a disproportionate share adjustment percentage threshold for 
340B Program eligibility (section 340B(a)(4)(N) of the PHSA).
    HHS will list any hospital qualifying under this provision whose 
latest filed Medicare cost report demonstrates that its 
disproportionate share adjustment percentage meets the statutorily 
required threshold to be eligible for the 340B Program. HHS will list 
children's hospitals that do not submit a Medicare cost report if they 
provide a statement from a qualified independent auditor certifying 
that that the hospital would meet one or both of the criteria in 
section 340B(a)(4)(L)(ii) of the PHSA and including the basis for that 
conclusion.
Eligibility of Off-Site Outpatient Facilities and Clinics (Child Sites)
    All off-site outpatient facilities and clinics (child sites) not 
located at the same physical address as the parent hospital covered 
entity will be listed on the public 340B database, and are able to 
purchase and use 340B drugs for eligible patients, if the hospital 
covered entity provides its most recently filed Medicare cost report 
demonstrating that: (1) Each of the facilities or clinics is listed on 
a line of the cost report that is reimbursable under Medicare; and (2) 
the services provided at each of the facilities or clinics have 
associated outpatient Medicare costs and charges. These facilities and 
clinics will be listed individually even if they share the same 
physical address and/or common off-site location. HHS may also review 
other documentation as necessary to verify eligibility (i.e., a trial 
balance report--a basic summary used by hospitals for financial 
statements).
    HHS does not list the outpatient clinics or departments within the 
same building (i.e., same physical address) of a registered 340B parent 
hospital covered entity on its public 340B database, unless 
specifically requested by the covered entity. However, the hospital 
covered entity remains responsible for ensuring that those outpatient 
clinics or departments within the same building of the hospital meet 
all eligibility and 340B Program requirements in statute.
    HHS will list an outpatient facility of a children's hospital when 
the registration submitted by the hospital demonstrates that the 
requested outpatient facility: (1) Is an integral part of the hospital, 
and (2) would be correctly included on a reimbursable line with 
associated Medicare costs and charges on a Medicare cost report, if 
filed.
    HHS is actively seeking comments on alternatives to demonstrating 
the eligibility of an off-site outpatient facility or clinic. In 
considering alternatives, HHS has explored use of provider-based 
standards (42 CFR 413.65); however, many hospitals choose not to seek 
provider-based designation for their departments or facilities for 
unrelated reasons even though these facilities may qualify for the 
designation. Comments on previously proposed guidance at 72 FR 1543 
(January 12, 2007), highlighted the difficulty in verifying whether 
outpatient facilities and clinics meet provider-based standards. HHS 
has also previously considered use of form CMS 855A, Medicare 
Enrollment Application for Institutional Providers, which is used by 
hospitals to apply to enroll in the Medicare program or make a change 
in the hospital's enrollment information. HHS has found this form 
insufficient as an accurate indicator of the facility's reimbursement 
under Medicare for purposes of 340B Program administration. For those 
parties proposing forms submitted to CMS, please include information 
regarding the deadline for submission of the proposed form, the 
proposed form's relationship to Medicare reimbursement, and other key 
factors.
Non-Hospital Loss of Eligibility
    In all scenarios, the covered entity must immediately notify HHS 
regarding any changes in eligibility for itself or a child site. When a 
covered entity loses 340B Program eligibility, HHS will list that date 
on the public 340B database as the termination date. HHS will update 
the public 340B database as soon as the entity notifies HHS or HHS 
becomes aware that it no longer meets a 340B eligibility requirement. 
If a parent covered entity site is terminated, all child sites and 
contract pharmacy arrangements will be removed from the public 340B 
database with the same termination date. A covered entity is liable to 
manufacturers for repayment for the 340B discounts on any drugs 
purchased for itself, any child site, or any contract pharmacy when the 
covered entity was ineligible for the 340B Program for any reason. A 
non-hospital covered entity would lose 340B Program eligibility 
immediately upon loss of its qualifying Federal grant, contract, 
designation, or project or upon closing of the entity. A child site's 
340B Program eligibility is tied to the eligibility of the parent 
covered entity; if a non-hospital parent covered entity loses 
eligibility to participate in the 340B Program, all registered child 
sites will simultaneously lose eligibility and must cease purchasing 
and using 340B drugs. A child site of a non-hospital covered entity 
will always lose eligibility if the child site closes, or if the child 
site no longer qualifies under the parent covered entity's grant, 
project, designation, or contract. If a parent or child site is 
registered under multiple covered entity types, loss of eligibility for 
any one covered entity type requires the parent and child sites to stop 
purchasing and using 340B drugs under the covered entity type for which 
the sites are no longer eligible. For example, if a site is registered 
for the 340B Program as a Federally qualified health center (FQHC) and 
tuberculosis (TB) clinic, and the parent site loses TB funding, both 
the parent and child sites must immediately stop purchasing and using 
340B drugs under the TB grant and must have its TB 340B identification 
number terminated. The sites may continue purchasing and using 340B 
drugs under its registered FQHC 340B ID for eligible patients.
Hospital Loss of Eligibility
    In all scenarios, the covered hospital entity must immediately 
notify HHS regarding any changes in eligibility for itself or an off-
site outpatient facility or clinic. When a covered entity loses 340B 
Program eligibility, HHS will list that date on the public 340B 
database as the termination date. HHS will update the public 340B 
database as soon as the entity notifies HHS or HHS becomes aware that 
it no longer meets a 340B eligibility requirement. If a parent covered 
entity site is terminated, all off-site outpatient facilities or 
clinics or contract pharmacies will be removed from the public 340B 
database with the same termination date. If any non-eligible entity 
purchased 340B drugs after the date of loss of eligibility, it will be 
noted in the public 340B database. Pursuant to section 
340B(a)(4)(L)(ii) of the PHSA, a hospital covered entity loses 340B 
Program eligibility immediately upon filing of a Medicare cost report 
that demonstrates the hospital's disproportionate share adjustment 
percentage has fallen below the required threshold for the hospital 
type for which it is registered. For example, if a freestanding cancer 
hospital files its cost report on May 30, 2016, with a disproportionate 
share percentage of 10 percent (which is below the required threshold 
for freestanding cancer hospitals, 11.75 percent), that hospital and 
all of its child sites and contract pharmacies will be terminated 
effective May 30, 2016;

[[Page 52303]]

and the covered entity must stop purchasing and using 340B drugs on May 
30, 2016, or be subject to repayment to manufacturers for 340B drugs 
purchased after May 30, 2016. In the case of a children's hospital that 
does not file a Medicare cost report, the hospital would lose 
eligibility upon its required annual independent audit which results in 
a disproportionate share adjustment percentage less than or equal to 
11.75 being issued.
    A hospital covered entity eligible on the basis of having a 
contract with a State or local government will lose 340B Program 
eligibility if its contract with a State or local government expires or 
is terminated. A critical access hospital would lose its eligibility 
for the 340B Program upon losing its critical access hospital 
designation from CMS. In addition, a hospital subject to the group 
purchasing organization prohibition will lose 340B Program eligibility 
as described in this proposed guidance if it fails to comply with the 
prohibition.
    An off-site outpatient facility's eligibility to participate in the 
340B Program is tied to the eligibility of the parent hospital. If a 
parent hospital loses eligibility to participate in the 340B Program, 
all registered child sites will simultaneously lose eligibility and 
must immediately cease purchasing and using 340B drugs. A child site 
may lose eligibility separately from the parent covered entity in 
certain circumstances. An off-site hospital outpatient facility 
registered as a child site will lose 340B Program eligibility 
immediately upon closing, sale or transfer of the outpatient facility, 
or the parent covered entity's filing of a Medicare cost report which 
demonstrates the facility is no longer reimbursable or services 
provided at the facility no longer have associated outpatient costs and 
charges under Medicare. Additionally, a child site may lose eligibility 
separately from the parent hospital covered entity if the child site 
violates the group purchasing organization prohibition.
    A parent covered entity may be liable for repayment to 
manufacturers for any 340B drug purchase made after the child site 
loses eligibility. A parent covered entity must immediately notify HHS 
of any change in eligibility.
Compliance and Loss of 340B Program Eligibility
    Once enrolled in the 340B Program, the covered entity must comply 
with all 340B Program statutory requirements as of the covered entity 
participation start date listed on the public 340B database. The 
covered entity must continue to meet all eligibility requirements for 
the entity type for which it is registered and listed on the public 
340B database. A parent covered entity and its authorizing official 
will be responsible for the compliance of any related child sites. A 
covered entity is also responsible for the compliance of contract 
pharmacy sites that dispense drugs on behalf of the covered entity.

Registration and Termination

Registration
    Sections 340B(d)(2)(B)(i), (ii), and (iv) of the PHSA authorize HHS 
to maintain a single, universal, and standardized identification system 
listing participating covered entities. HHS lists covered entities, 
including any registered associated sites, on its public 340B database. 
The registered covered entity is listed as the ``parent'' site and the 
registered off-site outpatient facility, clinic, eligible off-site 
location or associated site is listed as the ``child'' site. The list 
of covered entity sites on the public 340B database assists 
manufacturers in verifying eligibility for 340B drug purchases. The 
public 340B database includes the name, location, eligibility type, and 
eligibility date for each covered entity, including parent and child 
sites and, when applicable, the date and reason for termination. The 
parent covered entity is given a unique 340B identification number and 
any child site is designated by the same 340B identification number 
followed by a letter or letters (e.g., if the parent entity is 
registered as a disproportionate share hospital with the identification 
number DSH000001, that hospital's eligible off-site outpatient 
facilities or clinics, once registered, will be listed as DSH000001A, 
DSH000001B). Registered parent and child sites are able to purchase and 
use 340B drugs for their eligible patients.
    HHS publishes the conditions and procedures for registration and 
registration deadlines in the Federal Register and on the HHS 340B 
Program Web site (www.hrsa.gov/opa). The current registration periods 
and effective dates for the 340B Program are: October 1-October 15 for 
an effective start date of January 1; January 1-January 15 for an 
effective start date of April 1; April 1-April 15 for an effective 
start date of July 1; and July 1-July 15 for an effective start date of 
October 1. If the 15th falls on a Saturday, Sunday, or Federal holiday, 
the deadline for submitting registrations will be the next business day 
(77 FR 43342 (July 24, 2012)). Special registration procedures apply in 
the case of a public health emergency declared by the Secretary. 
Information will be posted on the 340B Program Web site as to the 
geographic scope and duration of such registration opportunities.
    HHS lists a covered entity on its public 340B database after 
receiving the entity's registration from an appropriate authorizing 
official, such as a chief executive officer, chief operating officer, 
chief financial officer, or an employee who can legally bind the 
covered entity. During registration, the authorizing official attests 
to the covered entity meeting the eligibility criteria and its ability 
to comply with the 340B Program requirements.
    HHS will not list a covered entity on the public 340B database when 
the information submitted pursuant to 340B Program registration does 
not demonstrate the entity is eligible for the 340B Program according 
to the statutory requirements. HHS will not list a non-hospital covered 
entity if the appropriate HHS operating division that administers the 
statutory programs to which eligibility is linked does not verify the 
entity's eligibility. HHS will not list covered entities that are 
hospitals if their latest filed Medicare cost reports (or such 
documentation described for children's hospitals that do not file a 
Medicare cost report) do not verify eligibility of the hospital and 
off-site outpatient facilities or clinics at issue.
    Eligibility for the 340B Program is limited to the categories of 
entities specified in statute. Inclusion of a covered entity in a 
larger organization such as a health system or an Accountable Care 
Organization does not make the entire larger organization eligible for 
the 340B Program or automatically qualify all of the individuals 
receiving services from the larger organization as patients of the 
covered entity for 340B Program purposes. Likewise, if covered entity 
eligibility is limited to a distinct part of a hospital, HHS will not 
list the hospital as a covered entity unless the hospital is otherwise 
eligible and registers for the 340B Program. For example, if a covered 
entity hemophilia treatment center (HTC) is part of a hospital, HHS 
will not list the hospital as a covered entity for the 340B Program 
unless otherwise eligible and registered as such.
    A non-hospital covered entity is listed by HHS under each of its 
eligible entity types, and is able to purchase and use 340B drugs under 
each of its eligible entity types, if the covered entity registers 
accordingly. For example, a covered entity site with the same address 
that is eligible as sexually transmitted disease (STD) and TB clinics 
will register and be listed with a 340B identification number for both 
STD and TB entity types.

[[Page 52304]]

    If a hospital is eligible for the 340B Program as more than one 
hospital entity type, HHS will only list the entity as one hospital 
type. HHS will change the entity type under which a hospital is listed 
if the hospital terminates the previous registration, submits a new 
registration during regular enrollment periods as set forth by HHS, and 
abides by the statutory requirements of the new covered entity type. 
HHS will list contract pharmacies that have written agreements with the 
new entity type if the entity registers these pharmacies as part of its 
new registration.
    HHS lists covered entities on the public 340B database on the 
condition that the entity will immediately update the public 340B 
database information or submit updates to HHS for any changes to any 
portion of its covered entity database record, including changes in its 
child site or contract pharmacy and authorized shipping address 
information.
    The PHSA does not include pharmacies as an entity type that is 
eligible to participate in the 340B Program. HHS lists in-house 
pharmacies owned and operated by the covered entity as an authorized 
shipping address (i.e., the ``ship-to'' field in the public 340B 
database) if 340B drugs will be shipped there directly for use by the 
covered entity. HHS also lists contract pharmacies registered by a 
covered entity to dispense 340B drugs to eligible patients of the 
covered entity. HHS lists central fill pharmacies or repackaging firms 
as an authorized shipping address for a covered entity.
Termination
    HHS lists covered entities on its public 340B database on the 
condition that the covered entity will regularly review and update its 
information on the database. Upon loss of eligibility of a parent site, 
child site, or termination of any contract pharmacy arrangement, the 
covered entity must immediately notify HHS and stop purchasing and 
using 340B drugs at the terminated site(s). HHS requests that the 
covered entity provide the reason for the loss of eligibility, the 
effective date for the loss of eligibility, and the date of the last 
340B drug purchase for a terminated covered entity, child site, or 
contract pharmacy. A covered entity is liable to manufacturers for 
repayment for the 340B discounts on any drugs purchased for itself, any 
child site, or any contract pharmacy when the covered entity was 
ineligible for the 340B Program for any reason.
    HHS is proposing to clarify when a covered entity can re-enroll in 
the 340B Program once removed for violation of an eligibility 
requirement, including the requirement not to use a group purchasing 
organization. A covered entity removed from the 340B Program would be 
able to re-enroll in the 340B Program during the next regular 
enrollment period after it has satisfactorily demonstrated to HHS that 
it will comply with all statutory requirements moving forward and has 
completed, or is in the process of offering repayment to affected 
manufacturers as necessary. HHS is seeking comments on what type of 
information a covered entity would submit to HHS to demonstrate 
compliance to re-enroll in the 340B Program. For example, if removed 
for violation of the group purchasing organization prohibition, a 
hospital could demonstrate it has set up appropriate purchasing 
accounts and, if applicable, software programmed to allocate drug 
purchases to the correct purchasing accounts; it could also submit 
policies and procedures directing proper purchase allocations and a 
self-audit report confirming correct purchasing. Or, hospitals that 
lost eligibility based on DSH percentage, but subsequently won an 
appeal to have the DSH percentage changed, could submit documentation 
of the appeal.

Annual Recertification

    Sections 340B(d)(2)(B)(i) and (ii) of the PHSA require the 
development of procedures for covered entities to update 340B Program 
database information annually, and for HHS to verify the accuracy of 
this information. HHS will list covered entities on its public 340B 
database that annually certify the accuracy of their database 
information and their compliance with 340B Program statutory 
requirements. HHS reviews and verifies this information through HHS 
Operating Divisions, where appropriate, and will terminate a covered 
entity from the 340B Program if it is ineligible by informing the 
entity and noting this in the public 340B database. By certifying 
compliance with all 340B Program requirements, a covered entity attests 
that it employs effective business practices to ensure and monitor 
ongoing compliance, including self-audits where appropriate; maintains 
accurate 340B database information; and notifies HHS in the event the 
entity is no longer eligible for the 340B Program or has violated any 
340B Program requirement, subject to HHS audit.
    A covered entity may voluntarily terminate its 340B Program 
participation (or the participation of a child site or contract 
pharmacy arrangement) during the annual recertification process or at 
any other time. When a covered entity removes itself, its child site, 
or contract pharmacy arrangement from the 340B Program, the covered 
entity is expected to provide an explanation and documentation of the 
termination, the timing of the termination, and the date the covered 
entity has ceased or plans to cease purchasing and using 340B drugs 
under the 340B Program. Failure to provide this information will be 
considered in any determination regarding the covered entity's 
liability to manufacturers, and if the organization seeks to re-enroll 
as a covered entity.
    A covered entity removed for failure to recertify would be able to 
re-enroll for the 340B Program during the next regular enrollment 
period after the covered entity has demonstrated to HHS its ability to 
comply with all 340B Program requirements.

Group Purchasing Organization (GPO) Prohibition for Certain Covered 
Entities

    To be eligible for the 340B Program, disproportionate share 
hospitals (DSH), children's hospitals, and freestanding cancer 
hospitals in the 340B Program are subject to the GPO prohibition in 
section 340B(a)(4)(L)(iii) of the PHSA, which states that to be 
eligible, these hospital covered entities do not ``obtain covered 
outpatient drugs through a group purchasing organization or other group 
purchasing arrangement.'' Section 340B(b)(2)(A) defines ``covered 
outpatient drug'' as the definition in section 1927(k) of the Social 
Security Act (42 U.S.C. 1396r-8(k)). Section 340B of the PHSA does not 
limit GPO participation for inpatient drug purchases. A GPO may only be 
used by one of the affected covered entities to purchase drugs 
dispensed to inpatients or to purchase drugs which do not meet the 
definition of covered outpatient drug. This prohibition extends to any 
pharmacy owned or operated by these covered entities, and takes effect 
as of the start date of enrollment in the 340B Program. The prime 
vendor program established pursuant to section 340B(a)(8) of the PHSA 
is not considered a GPO subject to this prohibition.
    During registration for the 340B Program, the authorizing official 
registering a DSH, children's hospital, or freestanding cancer hospital 
attests it will comply with the statutory GPO prohibition. These 
hospitals also attest to compliance with this prohibition during the 
annual recertification process.

[[Page 52305]]

Exceptions
    The proposed guidance clarifies specific situations which would not 
violate the GPO statutory prohibition. First, the proposed guidance 
clarifies that a GPO account may be used at an off-site outpatient 
facility (i.e., not at the same physical address of the 340B hospital 
covered entity) of a 340B covered entity which is not participating in 
the 340B Program or listed on the public 340B database. HHS is 
proposing that an off-site outpatient facility which is not 
participating or listed on the public 340B database, is able to access 
outpatient drugs through a GPO as long as that facility has a 
purchasing account separate from that of any 340B enrolled site, and 
that facility ensures GPO purchased drugs are never provided to 
outpatients of the hospital or other child sites enrolled in the 340B 
Program. Second, the proposed guidance clarifies that 340B eligibility 
can be maintained when GPO drugs are provided to an inpatient whose 
status is subsequently changed to outpatient by a third party, such as 
an insurer or a Medicare Recovery Audit Contractor, or a hospital 
review, provided there is sufficient documentation of the patient's 
change of status. Finally, HHS is proposing to recognize an exception 
to the GPO prohibition for hospitals that cannot access a drug at the 
340B price or at wholesale acquisition cost (WAC) to prevent 
disruptions in patient care. HHS will consider a hospital in compliance 
with the statute if a hospital covered entity that resorts to using a 
GPO for covered outpatient drugs in this circumstance documents the 
facts surrounding the purchase and provides HHS with the name of drug 
in question, the manufacturer, and a brief description of the attempts 
to purchase the drug at the 340B price and the WAC price prior to 
purchasing the drug through a GPO.
    Under no circumstances may the specific situations noted in these 
exceptions be used to circumvent the GPO prohibition to supply GPO-
purchased covered outpatient drugs to parts of the hospital subject to 
the GPO prohibition.
Drug Replenishment Models
    A large number of hospitals use replenishment models to 
operationalize the 340B Program. HHS clarified its position in a 
February 2013 Policy Release No. 2013-1, Statutory Prohibition on Group 
Purchasing Organization Participation. Just as a hospital subject to 
the GPO prohibition may not purchase covered outpatient drugs using a 
GPO for use with 340B-ineligible outpatients, a hospital that orders 
drugs based on actual prior usage cannot tally 340B-ineligible 
outpatient use for drug orders on a GPO account. A covered entity may 
be found in violation of the statutory GPO prohibition if a 
replenishment model or split billing software is used in a manner 
contrary to the statute. Pursuant to section 340B(a)(5)(C) of the PHSA, 
covered entities using replenishment models should maintain records 
demonstrating that the replenishment model and associated software is 
used in a manner that complies with the statute. Part C of this 
proposed guidance provides further information on drug replenishment 
models.
Use of Previously-Purchased GPO Drugs
    Newly enrolled covered entities subject to the GPO prohibition must 
stop purchasing covered outpatient drugs through a GPO before the first 
day the covered entity is listed on the public 340B database as 
eligible to purchase 340B drugs (``start date''). However, if a covered 
entity has GPO-purchased covered outpatient drugs remaining in 
inventory on or after the covered entity start date for the 340B 
Program, those drugs may be used until expended.
Violations of the Statutory GPO Prohibition
    HHS is aware that manufacturers and covered entities may currently 
work together to identify and correct errors in GPO purchasing within 
30 days of the initial purchase through a credit and rebill process as 
a standard business practice. HHS encourages manufacturers and covered 
entities to continue this practice. This collaboration necessitates a 
covered entity's frequent monitoring of compliance to identify GPO 
purchasing errors within 30 days of the erroneous purchase.
    Under this proposed guidance, HHS proposes to extend the notice and 
hearing process, as described in Part H, to covered entities found in 
violation of the GPO prohibition. As part of the notice and hearing 
process, the covered entity could demonstrate that the GPO violation 
was an isolated error as opposed to a systematic violation. If the 
covered entity were to demonstrate the GPO violation was an isolated 
incident and the covered entity is currently in compliance, the covered 
entity will be permitted to remain in the 340B Program upon submission 
of a corrective action plan.
    If, after notice and hearing, the covered entity's GPO violation 
was determined not to be isolated, the covered entity would be deemed 
ineligible for the 340B Program as of the date of the violation and 
immediately removed. A covered entity removed from the 340B Program 
would be required to offer repayment to affected manufacturers for any 
340B drug purchase made after the first date of violation of the GPO 
prohibition.
    If a parent site were deemed ineligible by HHS due to GPO 
prohibition violation, the parent site, all child sites, and all 
contract pharmacy arrangements would be removed from the 340B Program. 
In the case of a violation that HHS determines is isolated to a child 
site, the child site would be removed from the 340B Program. The parent 
site may be able to remain in the 340B Program if it can demonstrate 
that the GPO prohibition violation was isolated to the child site and 
that the parent site did not violate the GPO prohibition. GPO 
participation cannot be limited to a child site if the parent site also 
purchases drugs on the same account as the child site.

Part B--Drugs Eligible for Purchase Under 340B

    Pursuant to section 340B(a) of the PHSA, a manufacturer 
participating in the 340B Program must offer each covered entity 
covered outpatient drugs for purchase at or below the applicable 
ceiling price if such drug is made available to any other purchaser at 
any price. The term covered outpatient drug is defined in section 
1927(k)(2) of the Social Security Act and is limited by paragraph (3) 
which states:

    ``The term `covered outpatient drug' does not include any drug, 
biological product, or insulin provided as part of, or as incident 
to and in the same setting as, any of the following (and for which 
payment may be made under this title as part of payment for the 
following and not as direct reimbursement for the drug): (A) 
Inpatient hospital services; (B) Hospice services; (C) Dental 
services, except that drugs for which the State plan authorizes 
direct reimbursement to the dispensing dentist are covered 
outpatient drugs; (D) Physicians' services; (E) Outpatient hospital 
services; (F) Nursing facility services and services provided by an 
intermediate care facility for the mentally retarded; (G) Other 
laboratory and x-ray services; and (H) Renal dialysis. Such term 
also does not include any such drug for which a National Drug Code 
number is not required by the Food and Drug Administration or a drug 
or biological used for a medical indication which is not a medically 
accepted indication.'' (Section 1927(k)(3) of the Social Security 
Act). (emphasis added)

    HHS published guidance on May 7, 1993, which stated that a covered 
outpatient drug does not include any drug, biological product, or 
insulin that meets this limiting definition (58 FR 27289, 27291). HHS 
published

[[Page 52306]]

additional guidance on May 13, 1994, which further clarified that, in 
the settings identified in the limiting definition, ``if a covered drug 
is included in the per diem rate (i.e., bundled with other payments in 
an all-inclusive, a per visit, or an encounter rate), it will not be 
included in the [340B Program]. However, if a covered drug is billed 
and paid for instead as a separate line item as an outpatient drug in a 
cost basis billing system, this drug will be included in the program.'' 
(59 FR 25110, 25113).
    The limiting definition includes two parts which, if both are met, 
exclude a drug, biological product, or insulin mentioned in section 
1927(k)(2) of the Social Security Act as a covered outpatient drug. 
First, the drug is ``provided as part of, or as incident to and in the 
same setting as'' the services listed in section 1927(k)(3) and second, 
the payment for such service may be made under Title XIX of the Social 
Security Act and not as direct reimbursement for the drug. This 
guidance proposes that a drug that satisfies both conditions will not 
qualify as a covered outpatient drug in the 340B Program.
    Further, the limiting definition in section 1927(k)(3) to exclude 
covered outpatient drugs for purposes of the 340B Program only applies 
when the drug is bundled for payment under Medicaid as part of a 
service in the settings described in the limiting definition. In 
contrast, a drug provided as part of a hospital outpatient service 
which is billed to any other third party or directly billed to Medicaid 
would still qualify as a covered outpatient drug. Covered entities that 
purchase drugs through the 340B Program which do not meet the 
definition of covered outpatient drug would be subject to repayment to 
affected manufacturers.
    Hospital covered entities subject to the GPO prohibition in section 
340B(a)(4)(L)(iii) of the PHSA must ensure that drugs that meet the 
definition of covered outpatient drug described in section 1927(k) of 
the Social Security Act are purchased using the correct accounts to 
comply with the GPO prohibition. A covered entity must maintain 
auditable records pursuant to section 340B(a)(5)(C) of the PHSA which 
pertain to compliance with this provision.
    In accordance with section 340B(a)(1) of the PHSA, a manufacturer 
may not condition the sale of a covered outpatient drug on covered 
entity compliance with this provision. Remedies for violations would be 
imposed under the enforcement provisions of the 340B Program, but 
manufacturers may not unilaterally deny sales based on such violations.

Part C--Individuals Eligible To Receive 340B Drugs

    Section 340B(a)(5)(B) of the PHSA prohibits covered entities from 
reselling or transferring drugs purchased under the 340B Program to 
individuals who are not patients of the covered entity. HHS is 
proposing a clarified definition of patient for purposes of the 340B 
Program. In its clarification of what constitutes a violation of 
section 340B(a)(5)(B) of the PHSA, HHS also is proposing its 
interpretation of section 340B(a)(5)(D) of the PHSA. Section 
340B(a)(5)(D) of the PHSA states a covered entity violating section 
340B(a)(5)(B) of the PHSA shall be liable to the manufacturer of the 
covered outpatient drug that is the subject of the violation in an 
amount equal to the reduction in the price of the drug. The sale or 
transfer of 340B drugs to an individual not meeting the criteria in 
this section of the proposed guidance is considered diversion.
    HHS has proposed a number of guidances that have addressed the 
definition of a patient. The current guidance, issued in 1996, outlined 
a three-part test which state that an ``individual is a `patient' of a 
covered entity only if:

1. The covered entity has established a relationship with the 
individual, such that the covered entity maintains records of the 
individual's health care;
2. The individual receives health care services from a health care 
professional who is either employed by the covered entity or 
provides health care under contractual or other arrangements (e.g., 
referral for consultation) such that responsibility for the care 
provided remains with the covered entity; and
3. The individual receives a health care service or range of 
services from the covered entity which is consistent with the 
service or range of services for which grant funding or Federally-
qualified health center look-alike status has been provided to the 
entity. Disproportionate share hospitals are exempt from this 
requirement.
    An individual will not be considered a `patient' of the entity 
for purposes of 340B if the only health care received by the 
individual from the covered entity is the dispensing of a drug or 
drugs for subsequent self-administration or administration in the 
home setting.
    An individual registered in a State operated or funded AIDS drug 
purchasing assistance program receiving financial assistance under 
Title XXVI of the PHSA will be considered a `patient' of the covered 
entity for purposes of this definition if so registered as eligible 
by the State program.'' (61 FR 55157-8, October 24, 1996).

    The development of this proposed guidance is meant to address the 
diverse set of 340B covered entities, and was informed by 340B Program 
audits, through which HHS has learned more about how the definition of 
patient is applied in different health care settings.
    Under this proposed guidance, an individual will be considered a 
patient of a covered entity, on a prescription-by-prescription or 
order-by-order basis, if all of the following conditions are met:
    (1) The individual receives a health care service at a facility or 
clinic site which is registered for the 340B Program and listed on the 
public 340B database.
    HHS interprets the statute such that a 340B eligible patient 
receives a health care service from the covered entity, and the covered 
entity is medically responsible for the care provided to the 
individual. An individual who sees a physician in his or her private 
practice which is not listed on the public 340B database or any other 
non-340B site of a covered entity, even as follow-up to care at a 
registered site, would not be eligible to receive 340B drugs for the 
services provided at these non-340B sites. The use of telemedicine 
involving the issuance of a prescription by a covered entity provider 
is permitted, as long as the practice is authorized under State or 
Federal law and the drug purchase otherwise complies with the 340B 
Program.
    An individual will not be considered a patient of the covered 
entity if the individual's health care is provided by another health 
care organization that has an affiliation arrangement with the covered 
entity, even if the covered entity has access to the affiliated 
organization's records. Access to an individual's records by a covered 
entity, by itself, does not make the individual a patient of that 
covered entity.
    (2) The individual receives a health care service provided by a 
covered entity provider who is either employed by the covered entity or 
who is an independent contractor for the covered entity, such that the 
covered entity may bill for services on behalf of the provider.
    Faculty practice arrangements and established residency, 
internship, locum tenens, and volunteer health care provider programs 
are examples of covered entity-provider relationships that would meet 
this standard. Simply having privileges or credentials at a covered 
entity is not sufficient to demonstrate that an individual treated by 
that privileged provider is a patient of the covered entity for 340B 
Program purposes.
    If a patient is referred from the covered entity for care at an 
outside

[[Page 52307]]

provider and receives a prescription from that provider, the drug in 
question would not be eligible for a 340B discount at that covered 
entity. However, when the patient returns to the covered entity for 
ongoing medical care, subsequent prescriptions written by the covered 
entity's providers may be eligible for 340B discounts.
    (3) An individual receives a drug that is ordered or prescribed by 
the covered entity provider as a result of the service described in 
(2).
    An individual will be considered a patient of a covered entity if 
the health care service received results in a drug order or 
prescription. The use of telemedicine, telepharmacy, remote, and other 
health care service arrangements (e.g., medication therapy management) 
involving the issuance of a prescription by a covered entity is 
permitted, as long as the practice is authorized under State or Federal 
law and otherwise complies with the 340B Program.
    An individual would not be considered a patient of a covered entity 
whose only relationship to the individual is the dispensing or infusion 
of a drug. The dispensing of or infusion of a drug alone, without a 
covered entity provider-to-patient encounter, does not qualify an 
individual as a patient for purposes of the 340B Program. However, if 
the covered entity infuses a drug and meets all other criteria as 
defined in this section, an individual may be classified as a patient 
for purposes of 340B.
    (4) The individual's health care is consistent with scope of the 
Federal grant, project, designation, or contract.
    In the case of a covered entity with 340B eligibility based on 
receipt of a Federal grant, Federal project, Federal designation, or 
Federal contract, individuals will be considered patients only if they 
are receiving health care at a covered entity site from a covered 
entity provider which is consistent with the health care service or 
range of services designated in the Federal grant, project, 
designation, or contract. These criteria extend to each child site of a 
covered entity. If a child site's scope of grant, project, or contract 
is more limited than that of the parent site, individuals will be 
considered patients if they are receiving health care at the child site 
which is consistent with the health care service or range of services 
delegated to the child site. For example, if a child site of an FQHC is 
limited in its scope of grant to treating pediatric individuals, then 
only individuals receiving pediatric care meeting the limitations 
specified in the child site scope of grant would be eligible to receive 
340B drugs.
    A covered entity registered as one of the hospital covered entity 
categories is not subject to this limitation. However, a hospital that 
is only enrolled in the 340B Program on the basis of a Federal grant, 
contract, or project is subject to this limitation. For example, a 
hospital that is not enrolled as one of the hospital covered entity 
types may instead receive a grant for a family planning project. In 
this case, the hospital cannot access 340B drugs for patients receiving 
care outside of those facilities and outside the scope of the Federal 
family planning project.
    With respect to Indian Tribes or Tribal Organizations whose 340B 
Program eligibility arises solely from the Indian Self-Determination 
and Education Assistance Act, Public Law 93-638 (ISDEAA), use of 340B 
drugs is limited to those individuals that the tribe or tribal 
organization is authorized to serve under its ISDEAA contract, in 
accordance with the requirements in Section 813 of the Indian Health 
Care Improvement Act.
    (5) The individual's drug is ordered or prescribed pursuant to a 
health care service that is classified as outpatient.
    Section 340B(a)(1) of the PHSA establishes the 340B Program as a 
drug discount program for covered entities furnishing covered 
outpatient drugs. Therefore, an individual cannot be considered a 
patient of the entity furnishing outpatient drugs if his or her care is 
classified as inpatient. An individual is considered a patient if his 
or her health care service is billed as outpatient to the patient's 
insurance or third party payor. The covered entity should maintain 
auditable records documenting any changes in patient status due to 
insurer determinations.
    The outpatient status of individuals who are self-pay, uninsured, 
or whose care is provided by the hospital covered entity's charity care 
program, would be determined by the covered entity's documented, 
auditable policies and procedures. We expect that most such policies 
include categorizing a patient as inpatient or outpatient based on how 
the services would have been billed to Medicare or another third party 
payer, if such patient were eligible.
    (6) The individual's patient records are accessible to the covered 
entity and demonstrate that the covered entity is responsible for care.
    An individual will be considered a patient if he or she has an 
established relationship such that the covered entity maintains 
auditable health care records that demonstrate the covered entity has a 
provider-to-patient relationship for the health care service that 
results in the order or prescription and that the covered entity 
retains responsibility for care that results in every 340B drug 
ordered, dispensed, or prescribed to an individual.
Records
    Pursuant to section 340B(a)(5)(C) of the PHSA, which requires 
covered entities to permit audits of records directly pertaining to 
compliance, covered entities must maintain records that demonstrate 
that all of the criteria above were met for every prescription or order 
resulting in a 340B drug being dispensed or accumulated through a 
replenishment model.
Eligibility for Covered Entity Employees
    The 340B Program does not serve as a general employee pharmacy 
benefit or self-insured pharmacy benefit. HHS guidance has always 
specified, and this proposed guidance continues to make explicit, that 
only individuals who are patients of the covered entity are eligible 
for drugs purchased through the 340B Program. Employees of covered 
entities do not become eligible to receive 340B drugs solely by being 
employees, but by being a patient as defined in this guidance. Covered 
entities that solely have financial responsibility for employees' 
health care, and contract with prescribing health care professionals 
loosely affiliated or unaffiliated with the covered entity, would not 
meet the level of responsibility for health care services as outlined 
in this guidance. A covered entity would be acting primarily as the 
insurance provider for these individuals and not as the health care 
provider of these individuals. For 340B Program purposes, there is a 
fundamental difference between the individuals for whom the covered 
entity provides direct health care services and meets all criteria in 
this section and employees for whom a covered entity only provides 
insurance coverage.
AIDS Drug Assistance Program (ADAP)
    HHS proposes to reaffirm its long standing position that an 
individual enrolled in a Ryan White HIV/AIDS Program AIDS Drug 
Assistance Program funded by Title XXVI of the PHSA will be considered 
a patient of the covered entity for purposes of this definition.
Emergency Provisions
    HHS proposes to recognize the unique circumstances that arise 
during a public health emergency declared by the Secretary and to allow 
certain flexibilities for demonstrating that an individual is a patient 
of a covered

[[Page 52308]]

entity in these situations (e.g., limited medical documentation or a 
site not listed in the 340B database). A covered entity is expected to 
maintain auditable records pertaining to the effective dates and 
alternate methods to be used during the Secretarial-declared public 
health emergency.
Drug Inventory/Replenishment Models
    Covered entities use replenishment models to manage drug inventory, 
including 340B drugs, which is permissible if the covered entity 
remains in compliance with all 340B requirements. For example, a 340B 
covered entity that sees many different types of patients (e.g., 
inpatients, 340B-eligible outpatients, and other outpatients) would 
tally the drugs dispensed to each type of patient and then replenish 
the drugs used by reordering from the appropriate accounts. Some 
covered entities use software, referred to as accumulators, to track 
drug use for each patient type. The accumulator software would indicate 
which drugs are available to reorder on various accounts. In this 
example, the covered entity counts the units or amounts received by 
each 340B eligible patient. Once the covered entity has dispensed 
enough of a certain drug to equal an available package size, the 
covered entity could reorder that drug at the 340B price. Once drugs 
are received in inventory, the drugs lose their identity as 340B drugs, 
inpatient GPO drugs, or outpatient non-340B/non-GPO drugs. Each 340B 
drug order placed should be supported by auditable records 
demonstrating prior receipt of that drug by a 340B-eligible patient.
    If the covered entity improperly accumulates or tallies 340B drug 
inventory, even if it is prior to placing an order, the covered entity 
has effectively sold or transferred drugs to a person who is not a 
patient, in violation of section 340B(a)(5)(B) of the PHSA. A similar 
violation would occur if the recorded number of 340B drugs does not 
match the actual number of 340B drugs in inventory, if the covered 
entity maintains a virtual or separate physical inventory.
    HHS is aware that manufacturers and covered entities currently work 
together to identify and correct errors in purchasing within 30 days of 
the initial purchase through a credit and rebill process. HHS 
encourages manufacturers and covered entities to continue this 
practice. This collaboration requires a covered entity's frequent 
monitoring of compliance to identify purchasing errors within 30 days 
of the erroneous purchase and communicating with the manufacturer.
    On occasion covered entities have attempted to retroactively look 
back over long periods of time at drug purchases not initially 
identified as 340B eligible, sometimes looking back at drug purchases 
over several years. Covered entities then attempt to re-characterize 
these purchases as 340B eligible and then purchase 340B drugs on the 
basis of these previous transactions. This practice is sometimes 
referred to as ``banking.'' Covered entities are responsible for 
requesting 340B pricing at the time of the original purchase. If a 
covered entity wishes to re-characterize a previous purchase as 340B, 
covered entities should first notify manufacturers and ensure all 
processes are fully transparent with a clear audit trail that reflects 
the actual timing and facts underlying a transaction.
    Regular reviews of 340B drug inventory ensure that any inventory 
discrepancy is accounted for and properly documented to demonstrate 
that 340B drugs are not diverted. A covered entity should follow 
standard business procedures to return unused or expired 340B drugs and 
appropriately account for waste of 340B drugs (e.g., discards after 
expiration dates). Policies and procedures regarding 340B drug 
inventory discrepancies, and how the covered entity will reconcile any 
discrepancy in 340B drugs, can assist in meeting this standard. Without 
this information documented in auditable records, a covered entity 
would not be able to demonstrate that drug inventory discrepancies have 
not resulted in diversion.
Repayment
    Covered entities must comply with section 340B(a)(5)(D) of the 
PHSA, which assigns liability to a covered entity if it violates the 
diversion prohibition in section 340B(a)(5)(B) of the PHSA. Covered 
entities are expected to work with manufacturers regarding repayment 
within 90 days of identifying the violation. A manufacturer retains 
discretion as to whether to request repayment based on its own business 
considerations, provided that, when exercising its discretion, the 
manufacturer complies with applicable law, including the Federal anti-
kickback statute (42 U.S.C. 1320a-7b(B)). For example, a manufacturer 
may prefer not to accept payments below a de minimis amount or to 
process repayments owed through a credit/rebill mechanism. 
Manufacturers should bear in mind the potential impact of such 
decisions on CMS price reporting requirements. A covered entity must 
notify HHS and each affected manufacturer of diversion and is expected 
to document notification attempts in auditable records.
    The covered entity is responsible for reporting a summary of its 
corrective actions taken to HHS for transparency, compliance, and audit 
purposes (see Part H).

Part D--Covered Entity Requirements

Prohibition of Duplicate Discounts

    Under section 340B(a)(1) of the PHSA, manufacturers are required to 
provide a discounted 340B price to a covered entity for a covered 
outpatient drug. Under section 1927 of the Social Security Act, 
manufacturers must generally provide a rebate to a State for a covered 
outpatient drug provided to a Medicaid patient. However, section 
340B(a)(5)(A)(i) of the PHSA prohibits duplicate discounts whereby a 
State obtains a rebate on a drug provided to a Medicaid patient when 
that same drug was discounted under the 340B Program. While Medicaid 
drug rebates were previously limited to Medicaid fee-for-service (FFS) 
drugs, section 2501(c) of the Affordable Care Act amended the Social 
Security Act, extending Medicaid drug rebate eligibility to certain 
Medicaid Managed Care covered outpatient drugs. Section 2501(c) further 
amended the Social Security Act to specify that covered outpatient 
drugs dispensed by Medicaid Managed Care Organizations (MCOs) are not 
subject to a rebate if also subject to a discount under section 340B of 
the PHSA.
Fee for Service
    Pursuant to section 340B(a)(5)(A)(ii) of the PHSA, HHS established 
the 340B Medicaid Exclusion File as the mechanism to prevent duplicate 
discounts. The 340B Medicaid Exclusion File is posted on the public 
340B database to enable 340B covered entities, States, and 
manufacturers to determine whether a covered entity purchases 340B 
drugs for its Medicaid FFS patients.
    Under this proposed guidance, a covered entity will be listed on 
the public 340B database if it notifies HHS at the time of registration 
whether it will purchase and dispense 340B drugs to its Medicaid FFS 
patients (carve-in) and bill the State, or whether it will purchase 
drugs for these patients through other mechanisms (carve-out). A 
covered entity electing carve-in will then have their Medicaid billing 
number, National Provider Identifier (NPI), or both listed on HHS' 340B 
Medicaid Exclusion File. Covered entities must provide any Medicaid

[[Page 52309]]

billing number/NPIs they use to bill Medicaid for 340B drugs for 
listing on the 340B Medicaid Exclusion File if they intend to bill 
Medicaid at any associated sites registered with the 340B Program. 
Covered entities that wish to bill Medicaid for their non-340B eligible 
sites should work with their state to receive a different NPI number 
for that purpose.
Medicaid Managed Care
    The covered entity may make a different determination regarding 
carve-in or carve-out status for MCO patients than it does for FFS 
patients. An entity can make different decisions by covered entity site 
and by MCO, but must provide to HRSA identifying information of the 
covered entity site, the associated MCO, and the decision to carve-in 
or carve-out. This information may be made available on a 340B Medicaid 
Exclusion file. HRSA seeks comments on the utility of this billing 
information for other stakeholders, as well as the format through which 
it is made public.
    While the proposed use of a 340B Medicaid Exclusion File would 
identify the covered entity billing practices used for MCO patients, 
HHS encourages covered entities, States, and Medicaid MCOs to work 
together to establish a process to identify 340B claims. First, covered 
entities should have mechanisms in place to be able to identify MCO 
patients. Second, covered entities and States should continue to work 
together on various methods to prevent duplicate discounts on Medicaid 
MCO drugs. Currently, covered entities report using Bank Identification 
Numbers, Processor Control Numbers, and National Council for 
Prescription Drug Programs (NCPDP) codes, among other methods, to 
identify Medicaid MCO patients and 340B claims. In some cases, States 
may require covered entities to follow additional steps to prevent 
duplicate discounts, including use of certain modifiers and codes which 
identify individual claims as associated with 340B drugs and therefore 
not eligible for rebate. Such billing instructions are beyond the scope 
of the 340B Program.
340B Medicaid Exclusion File Changes
    After enrollment, a covered entity can change its election to 
purchase and dispense 340B drugs for Medicaid FFS and/or MCO patients 
by notifying HHS. While changes to how a covered entity uses 340B drugs 
for its Medicaid FFS and MCO patients can be submitted at any time, the 
changes are only effective on a quarterly basis. A covered entity 
should ensure the changes are correctly reflected on the 340B Medicaid 
Exclusion File prior to implementation to permit full transparency for 
the State, MCO, and manufacturers, thus ensuring the avoidance of 
duplicate discounts.
    HHS is seeking comments regarding alternative mechanisms to 
supplement the 340B Medicaid Exclusion File to allow covered entities 
to take a more nuanced approach to purchasing, for example, only using 
340B drugs for Medicaid FFS and MCO patients when appropriate for 
service delivery but maintaining practices that prevent the statutorily 
prohibited duplicate discounts. HHS seeks information about current 
state arrangements that could be adapted for use as Federal standards 
for these supplements or alternatives.
Contract Pharmacy
    Risk of duplicate discounts can increase with certain drug 
purchasing and distribution systems, including covered entity contract 
pharmacy arrangements. Therefore, in accordance with the statutory 
requirement under 340B(a)(5)(B)(ii) to establish a mechanism to prevent 
duplicate discounts, HHS will examine those systems and determine if 
adjustments have to be made to the system to prevent duplicate 
discounts. Due to these heightened risks of duplicate discounts, when a 
contract pharmacy is listed on the public 340B database it will be 
presumed that the contract pharmacy will not dispense 340B drugs to 
Medicaid FFS or MCO patients. If a covered entity wishes to purchase 
340B drugs for its Medicaid FFS or MCO patients and dispense 340B drugs 
to those patients utilizing a contract pharmacy, the covered entity 
will provide HHS a written agreement with its contract pharmacy and 
State Medicaid agency or MCO that describes a system to prevent 
duplicate discounts. Once approved, HHS will list on the public 340B 
database a contract pharmacy as dispensing 340B drugs for Medicaid FFS 
and/or MCO patients.
Repayment
    HHS and approved manufacturer 340B Program audits include the 
review of covered entity compliance with the duplicate discount 
prohibition. If the information provided to HHS does not reflect the 
covered entity's actual billing practices, the covered entity can be 
found in violation of the duplicate discount prohibition and may be 
required to repay manufacturers if duplicate discounts have occurred 
due to the inaccurate information.
    In the event that a covered entity is unable to use a 340B drug for 
a Medicaid FFS or MCO patient in a particular instance, it should have 
a mechanism in place to notify the State Medicaid agency and MCO. HHS 
encourages States, MCOs, and covered entities to work together to 
ensure records are accurate and auditable.

Maintenance of Auditable Records

    Section 340B(a)(5)(C) of the PHSA requires a covered entity to 
permit the Secretary and certain manufacturers to audit covered entity 
records that pertain to the entity's compliance with 340B Program 
requirements. Documentation of compliance would include records of 
contract pharmacies used by covered entities to dispense 340B drugs. 
Failure to maintain the records necessary to permit such auditing is 
failure to meet the requirements of section 340B(a)(5) of the PHSA. A 
covered entity's failure to maintain auditable records is grounds for 
losing eligibility to participate in the 340B Program.
    340B Program stakeholders have requested a standard for records 
retention, and HHS agrees that it is important, especially in assisting 
covered entities and manufacturers in preparing for audits and 
understanding the time and scope limitations of 340B Program audits. 
Therefore, HHS is proposing a record retention standard for all 340B 
Program records for a period of not less than 5 years, which HHS 
believes appropriately balances the need for a covered entity to 
document its compliance with 340B Program requirements and the covered 
entity's effort and expense required to maintain records for an 
extended period of time. This standard would also apply to records 
pertaining to all child sites and contract pharmacies. In the case of 
termination, a terminated covered entity or associated site is expected 
to maintain records pertaining to compliance with 340B statutory 
requirements for five years after the date of termination. If during an 
audit, HHS finds a pattern of failure to comply with 340B Program 
statutory requirements, this provision does not preclude HHS from 
accessing existing records prior to the 5-year period for its review.
    In accordance with the statute, a covered entity's failure to 
provide required records is grounds for termination from the 340B 
Program. This guidance further clarifies associated repayment to 
manufacturers, as well as restrictions on when an entity can re-enroll 
in the 340B Program. However, HHS proposes to use discretion for those 
entities whose failure to retain records is non-systematic. A non-
systematic recordkeeping violation would occur if the covered entity 
generally has

[[Page 52310]]

available records but cannot produce a certain specific record 
demonstrating compliance with a 340B Program requirement. For example, 
if a covered entity can generally produce 340B records for patient 
eligibility, but cannot produce a record for a particular patient who 
received a 340B drug, the drug purchase would be presumed to be in 
violation of section 340B(a)(5)(B) of the PHSA (diversion) and the 
entity may be liable for repayment to the manufacturer; however, the 
covered entity would not be removed from the 340B Program.
    Any failure to retain records that prevents the auditing of 
compliance would constitute a violation under section 340B(a)(5)(C) of 
the PHSA. This systematic failure could result in a determination of 
ineligibility and the covered entity may be liable for repayment to 
manufacturers for periods of ineligibility. Prior to removal, a covered 
entity would be entitled to notice and hearing pursuant to this 
guidance regarding removal from the 340B Program for failure to meet a 
statutory 340B Program eligibility requirement. A covered entity 
removed for systematic failure to maintain records would be able to re-
enroll in the 340B Program during the next regular registration period 
after the covered entity has demonstrated to HHS its ability to comply 
with all 340B Program requirements, including the requirement to 
maintain auditable records.

Part E--Contract Pharmacy Arrangements

    Section 340B(a)(4) of the PHSA specifies the types of entities 
eligible to participate in the 340B Program, but does not specify how a 
covered entity may provide or dispense such drugs to its patients. The 
diverse nature of eligible entity types (e.g., FQHCs, rural referral 
centers, disproportionate share hospitals) has resulted in a variety of 
drug distribution systems. Under the 340B Program, 340B drugs may not 
be diverted to non-patients, duplicate discounts must be prevented, and 
a covered entity must have auditable records pertaining to its 
compliance with these requirements. Covered entities must ensure that 
all drug distribution arrangements with third parties to provide or 
dispense 340B drugs to patients meet 340B Program statutory 
requirements.
    In 1996, HHS issued guidance recognizing covered entity use of 
contract pharmacy arrangements, which are permitted under State law, to 
dispense 340B drugs. The 340B statute does not prohibit the use of 
contract pharmacies. The guidance permitted covered entities to use a 
single contract pharmacy arrangement in addition to any in-house 
covered entity pharmacy service and outlined other requirements (61 FR 
43549, August 23, 1996). Beginning in 2001, HHS permitted certain 
covered entities to conduct Alternative Methods Demonstration Projects 
(AMDP) to use and develop multiple contract pharmacy arrangements to 
access 340B drug pricing. HHS issued revised guidance in 2010 which 
permitted a covered entity to use multiple contract pharmacy 
arrangements, to include multiple contract pharmacy locations (75 FR 
10772, March 5, 2010). Congress intended the benefits of the 340B 
Program to accrue to participating covered entities. Each covered 
entity should carefully evaluate its relationships with contract 
pharmacies (i.e., cost/benefit analysis) to make certain that the 
relationship benefits the covered entity and is in line with the intent 
of the Program.
    A covered entity may contract with one or more licensed pharmacies 
to dispense 340B drugs to the covered entity's patients, instead of or 
in addition to an in-house pharmacy. If permitted under applicable 
State and local law, a covered entity may contract with one or more 
pharmacies on behalf of its child sites, or a child site may contract 
directly with a pharmacy. A covered entity may contract with a pharmacy 
location (or pharmacy corporation to include multiple pharmacy 
locations) as an individual covered entity and for its child sites. The 
contracts establishing these arrangements are expected to meet the 
standards identified in this proposed guidance and all applicable 
Federal, State, and local laws. A covered entity contracting with a 
pharmacy to dispense 340B drugs should be aware of the Federal anti-
kickback statute and how such provisions could apply to arrangements 
with contract pharmacies. HHS will continue its policy of referring 
cases of suspected violations of the anti-kickback statute to the HHS 
Office of Inspector General (OIG). A covered entity whose 340B 
eligibility is based on the receipt of a Federal grant, Federal 
project, Federal designation, or Federal contract must also ensure that 
no grant, project, designation, or contract conditions are violated in 
its contract pharmacy arrangements.
Registration
    The 340B registration deadlines and effective dates, announced in 
the Federal Register, apply to all changes in the covered entity's list 
of contract pharmacies, whether initially registering a contract 
pharmacy agreement or adding contract pharmacy locations to an existing 
contract with a pharmacy organization. A contract pharmacy is not an 
eligible 340B covered entity and therefore does not receive a 340B 
identification number.
    HHS only lists contract pharmacy locations on a covered entity's 
340B database record once a written contract exists between the covered 
entity and contract pharmacy and the covered entity registers those 
arrangements. The written contract should include all locations of a 
single pharmacy company the covered entity plans to use and all child 
sites that plan to use the contract pharmacies. The written contract 
should also set forth the requirements contained in this proposed 
guidance. Pursuant to 340B statutory auditing requirements, the 
contract should be available to HHS upon request.
    To further strengthen 340B Program integrity, registration of a 
contract pharmacy will only be accepted from a covered entity. Pursuant 
to section 340B(a)(5)(B) of the PHSA, which prohibits covered entities 
from reselling or otherwise transferring drugs to persons who are not 
patients of the covered entity, a parent covered entity may contract 
with a pharmacy only on its own behalf as an individual covered entity 
and for its child sites. Groups or networks of covered entities may not 
register or contract for pharmacy services on behalf of their 
individual covered entity members.
    Under this proposed guidance, required documentation for 
registration would include a series of compliance requirements and a 
covered entity's attestation regarding its arrangement with the 
contract pharmacy. Manufacturers and wholesalers are required to ship 
only to the authorized shipping addresses listed for the covered entity 
in the public 340B database. The contract pharmacy may only provide 
340B drugs to patients of the covered entity after the contract 
pharmacy's start date in the public 340B database. Likewise, the 
contract pharmacy location must cease dispensing 340B drugs on behalf 
of the covered entity on or before the date that contract pharmacy 
location is terminated. Any changes to existing contract pharmacy 
arrangements should be reflected on the covered entity record in the 
public 340B database and requested by submitting an online change 
request form.
    A covered entity can request additional contract pharmacy locations 
under a public health emergency declared by the Secretary. Special 
registration instructions and

[[Page 52311]]

requirements would be published on the HRSA Office of Pharmacy Affairs 
Web site (www.hrsa.gov/opa).
Compliance With Statutory Requirements
    Through audits of covered entities' arrangements with contract 
pharmacies, HHS has observed that not all covered entities have 
sufficient mechanisms in place to ensure their contract pharmacies' 
compliance with all 340B Program requirements. To ensure compliance 
with 340B statutory requirements, HHS is proposing compliance 
mechanisms for covered entities that contract with pharmacies to 
dispense 340B drugs. The covered entity would retain complete 
responsibility for contract pharmacy compliance with 340B Program 
requirements.
    If noncompliance is occurring within contract pharmacy 
arrangements, it is essential that any issues be promptly identified 
and corrected. HHS is proposing standards for audit and quarterly 
reviews to ensure that compliance efforts related to contract 
pharmacies result in the early identification of problems, 
implementation of corrections, and the prevention of future compliance 
issues. The 2010 contract pharmacy guidance recommended annual audits 
of contract pharmacies; this proposed guidance further clarifies the 
expectations of this recommendation.
    HHS believes that covered entities that do not regularly review and 
audit contract pharmacy operations are at an increased risk for 
compliance issues. An annual audit of each contract pharmacy location 
will provide covered entities a regular opportunity to review and 
reconcile pertinent 340B patient eligibility information at the 
contract pharmacy and help prevent diversion. Conducting these audits 
using an independent auditor will ensure the pharmacy is following all 
340B Program requirements. Additionally, as a separate compliance 
mechanism, the covered entity should compare its 340B prescribing 
records with the contract pharmacy's 340B dispensing records at least 
quarterly to ensure that neither diversion nor duplicate discounts have 
occurred. A covered entity should correct any instances of diversion or 
duplicate discounts found during either the annual audit or quarterly 
review and report corrective action to HHS.
    A patient is not required to use the covered entity's in-house 
pharmacy, where such service exists, or a covered entity's contract 
pharmacy to receive a prescription drug. A drug manufacturer would not 
be required to offer the covered entity a 340B priced-drug when a 340B-
eligible patient chooses to have a prescription filled at a non-
contract pharmacy or a contract pharmacy location not listed on the 
covered entity's 340B database record.
Diversion, Duplicate Discounts, and Removal From the 340B Program
    HHS may remove a contract pharmacy location from the 340B Program 
if HHS finds that the contract pharmacy is not complying with 340B 
Program requirements. A covered entity is liable for diversion or 
duplicate discounts which occur at any of the covered entity's contract 
pharmacy locations, including potential repayments to manufacturers.

Part F--Manufacturer Responsibilities

Pharmaceutical Pricing Agreement

    A manufacturer that has entered into a Medicaid Drug Rebate 
Agreement pursuant to section 1927(a) of the Social Security Act (42 
U.S.C. 1936r-8(a)) is required, pursuant to section 1927(a)(5), to 
enter into a Pharmaceutical Pricing Agreement (PPA) with the Secretary 
as described in section 340B(a) of the PHSA. Under the PPA, a 
manufacturer must offer all covered outpatient drugs, as defined in 
section 1927(k) of the Social Security Act, from each of the 
manufacturer's labeler codes to covered entities participating in the 
340B Program at no more than the statutory 340B ceiling price. A 
manufacturer that is not subject to a Medicaid Drug Rebate Agreement 
may voluntarily enter into a PPA for all of its covered outpatient 
drugs, as defined in section 1927(k) of the Social Security Act.
    The PPA incorporates 340B Program statutory obligations and records 
a manufacturer's agreement to abide by them. By executing the PPA when 
it enrolls in the 340B Program, a manufacturer agrees to all 340B 
Program statutory requirements, including statutory and regulatory 
changes that occur after execution of the PPA. In the event of a 
transfer of ownership of the manufacturer, the PPA is automatically 
assigned to the new owner.
    In addition, the following expectations apply to participating 
manufacturers:
    (a) For a manufacturer whose 340B Program participation is required 
by virtue of its participation in the Medicaid Drug Rebate Program, 
sign a PPA within 30 days of enrolling in the Medicaid Drug Rebate 
Program;
    (b) submit timely updates to its 340B database record and PPA to 
ensure that any new covered outpatient drug is added to the 340B 
Program;
    (c) maintain auditable records demonstrating 340B Program 
compliance for no less than five years and provide such records when 
requested; and
    (d) permit HHS to audit manufacturer compliance.
Termination
    If a manufacturer withdraws from the Medicaid Drug Rebate Program, 
the manufacturer may continue to participate in the 340B Program 
voluntarily. If a manufacturer withdraws from the Medicaid Drug Rebate 
Program, HHS will presume continued participation in the 340B Program 
unless and until the manufacturer advises HHS otherwise. A manufacturer 
that has voluntarily entered into a PPA and does not participate in the 
Medicaid Drug Rebate Program may terminate its PPA by notifying HHS 
during the annual recertification process or at any other time, in 
accordance with the terms of the PPA. When a manufacturer voluntarily 
participating in the 340B Program requests termination, the 
manufacturer should provide an explanation and documentation of the 
termination, the timing of the termination, and the date the 
manufacturer will cease offering covered outpatient drugs under the 
340B Program.
    A manufacturer that terminates a PPA should maintain auditable 340B 
Program records for 5 years after the termination pertaining to 
compliance with all 340B Program statutory requirements during the time 
that the manufacturer had a PPA. Refunds and credits specified under 
this proposed guidance may still be imposed on a terminated 
manufacturer for 340B drugs sold above the ceiling price during the 
time that the manufacturer had a PPA in effect.

Obligation To Offer 340B Prices to Covered Entities

    Pursuant to section 340B(a)(1) of the PHSA, a manufacturer subject 
to a PPA must offer all covered outpatient drugs at no more than the 
340B ceiling price to a covered entity listed on the public 340B 
database. For manufacturers signing their first PPA by virtue of 
participating in the Medicaid Drug Rebate Program, the effective date 
for 340B pricing for covered outpatient drugs to any covered entity is 
the same date the drug is first included in the Medicaid Drug Rebate 
Program, or the date of enactment of section 340B of the PHSA, if 
inclusion in the Medicaid Drug Rebate Program preceded November 4, 
1992. For manufacturers voluntarily signing a PPA, the effective date 
for 340B pricing is the date the agreement

[[Page 52312]]

is signed by both parties. For manufacturers with an existing PPA that 
have new drugs approved, the effective date for 340B pricing for the 
new drug is the date the drug is first available for sale.
    Pursuant to section 340B(a)(1) of the PHSA, a manufacturer shall 
rely on the information in the public 340B database to determine 
whether the manufacturer must offer the 340B price and not base its 
offer on a covered entity's assurance of compliance with the 340B 
Program. HHS will continue to provide communications and Web site 
notices to manufacturers to alert them to covered entity additions or 
deletions in the public 340B database that occur during a calendar 
quarter due to special circumstances (e.g., additions to covered entity 
sites because of a public health emergency declared by the Secretary; 
termination of a covered entity site).
Limited Distribution of Covered Outpatient Drugs
    Certain covered outpatient drugs may be required to be dispensed by 
specialty pharmacies (e.g., drugs approved with a risk evaluation and 
mitigation strategy (REMS) pursuant to section 505-1 of the Federal 
Food, Drug, and Cosmetic Act). As a result, certain manufacturers may 
use a restricted network of certified specialty pharmacies, which do 
not fall under the terms of a contract pharmacy agreement or wholesaler 
contract for the distribution of drugs to a covered entity. Other 
covered outpatient drugs may become intermittently limited in supply 
due to manufacturing issues, supply chain problems, or other issues.
    The manufacturer may develop a limited distribution plan when a 
covered outpatient drug must be handled in a special manner (e.g., 
special refrigeration), or when the available supply of a covered 
outpatient drug is not adequate to meet market demands. 340B Program 
pricing requirements apply to such sales. Pursuant to section 
340B(a)(1) of the PHSA, which requires manufacturers to ``offer each 
covered entity covered outpatient drugs for purchase at or below the 
applicable ceiling price if such drug is made available to any other 
purchaser at any price,'' the plan will be reviewed by HHS to ensure 
that the manufacturer is treating 340B covered entities the same as all 
non-340B providers. To reduce the potential for disputes and ensure 
that limited distribution plans are transparent to all stakeholders, 
HHS is proposing that a manufacturer notify HHS in writing of any 
limited distribution plan prior to implementation. HHS proposes that 
the plan include the following information: a description of product 
information (drug name, dosage, form, and NDC) and details of a non-
discriminatory practice for restricted distribution to all purchasers, 
including 340B covered entities, which includes each of the following 
components: (1) An explanation of the product's limited supply or 
special distribution requirements and the rationale for restricted 
distribution among all purchasers; (2) an assurance that manufacturers 
will impose these restrictions equally on both 340B covered entities 
and non-340B purchasers; (3) specific details of the drug allocation 
plan, including a mechanism that allocates sales to both covered 
entities and non-340B purchasers with no previous purchase history of 
the restricted drug; (4) the dates the restricted distribution begins 
and concludes; and (5) a plan for the notification of wholesalers and 
340B covered entities of the restricted plan.
    HHS may publish all submitted limited distribution plans on the 
340B Web site. If HHS has concerns about the plan, it will work with 
the manufacturer to incorporate mutually agreed upon revisions to the 
plan prior to posting the plan on the 340B Web site. Covered entities 
that have concerns regarding the manner in which a particular plan is 
implemented are first encouraged to resolve them in good faith with 
manufacturers. Where such issues are not resolved, covered entities 
should contact HHS for appropriate action or involvement of other 
federal agencies (e.g., Office of Inspector General, Department of 
Justice) to bring the issue to resolution.
Additional Discounts Permitted
    Pursuant to section 340B(a)(10) of the PHSA, a manufacturer may 
choose to sell a covered outpatient drug below the ceiling price to a 
covered entity. Such pricing is voluntary and need not be offered to 
all covered entities.

Procedures for Issuance of Refunds and Credits

    Pursuant to section 340B(d)(1)(B) of the PHSA, this proposed 
guidance establishes clarity around the procedures for issuing refunds 
and credits in the event that there is an overcharge. HHS also outlines 
its proposed oversight of this process to ensure that refunds are 
issued accurately and within a reasonable period of time, both in 
routine instances of retroactive adjustment to relevant pricing data as 
well as exceptional circumstances such as erroneous or intentional 
overcharging for covered outpatient drugs.
    If a manufacturer charges a covered entity more than the 340B 
ceiling price, the manufacturer must refund or credit that covered 
entity an amount equal to the price difference between the sale price 
and the correct 340B price for that drug, multiplied by the units 
purchased. A refunds or credits may also be necessary in the case of a 
drug price restatement by manufacturers. This refund or credit is 
expected to occur within 90 days of the determination by the 
manufacturer or HHS that an overcharge occurred. Multiple price 
calculations will be required if the 340B price changed during the 
affected period of overcharges. A manufacturer may only calculate the 
refund by NDC, and would not be allowed to calculate refunds in any 
other manner, including (but not limited to) aggregating purchases, de 
minimis amounts, and netting purchases. The covered entity may choose 
to have the manufacturer apply a credit to its account rather than 
receive a refund of any incorrect payment. If a covered entity fails to 
act to accept a direct repayment (e.g., cash a check) within 90 days of 
a manufacturer's refund and the repayment amount is undisputed by the 
covered entity, the covered entity has waived its right to repayment.
    Pursuant to section 340B(d)(1)(B)(ii) of the PHSA, a manufacturer 
must submit to HHS, along with the price recalculation information, an 
explanation of why the overcharge occurred, how the refund will be 
calculated, and to whom refunds or credits will be issued.

Manufacturer Recertification

    The 2010 amendments to section 340B(d)(1)(A) of the PHSA provide 
for improvements in manufacturer compliance with 340B Program pricing 
requirements. Pursuant to this authority, HHS is proposing a 
manufacturer recertification process. Under this proposed guidance, HHS 
will list manufacturers as participating in the 340B Program if they 
annually review and update 340B database information. A manufacturer 
should provide HHS with any changes to 340B database information as 
changes occur. HHS may also request additional documentation to verify 
the information provided.
    HHS understands that manufacturers may transfer ownership and 
control of labeler codes or NDCs after signing a PPA. Annual 
recertification for manufacturers with a PPA will ensure that all 
stakeholders have the most up-to-date information regarding the covered 
outpatient drugs subject to the 340B price, particularly for 
manufacturers that have voluntarily

[[Page 52313]]

entered into a PPA that do not participate in the Medicaid Drug Rebate 
Program. This process is designed to prevent pricing violations and 
improve the accuracy of the public 340B database.

Part G--Rebate Option for AIDS Drug Assistance Programs

    HHS proposes to continue the long-standing practice of providing 
the option for AIDS Drug Assistance Programs (ADAPs) to participate in 
the 340B Program through a rebate model. Section 340B(a)(1) of the PHSA 
provides that the amount paid to a manufacturer for covered outpatient 
drugs takes into account any rebate or discount, as provided by the 
Secretary. The ADAP rebate option has been operational since 1998, 
after a proposed notice sought comment on the option (62 FR 45823 
(August 29, 1997)), and a final notice was published in the Federal 
Register (63 FR 35239 ((June 29, 1998)). This proposed guidance would 
continue the policy of allowing ADAPs to access 340B prices on covered 
outpatient drugs either through a direct purchase option (i.e., at the 
340B ceiling price), a rebate after the purchase, or a combination of 
both mechanisms (``hybrid'').
    HHS expects ADAPs seeking to pursue the rebate mechanism to take 
three actions. First, the ADAP is expected to inform HHS during the 
registration process whether it will participate using direct purchase, 
a rebate option, or both. Second, the ADAP is expected to make a 
qualified payment, as defined in this proposed guidance. Third, the 
ADAP is expected to submit claims-level data to a manufacturer in 
support of each qualified payment to receive a rebate from that 
manufacturer.
    ADAPs will be expected to submit claims-level data to manufacturers 
to support the ADAPs' rebate requests. HHS will provide subsequent 
guidance regarding the data to be provided in support of rebate 
requests. Data elements may include: The ADAP name and state, 
medication name/label name, medication national drug code, the package 
size, the date of dispensing, the ADAP payment for the medication (to 
include the amount paid to the dispensing pharmacy as a payment, 
copayment, or deductible), an assurance that the claim is not for a 
drug subject to a Medicaid rebate, and, when applicable, an assurance 
that the ADAP paid the patient's health insurance premium (which, in 
turn, paid for the medication). HHS welcomes public comment regarding 
this proposed data submission, especially regarding the suitability of 
the claims-level data elements mentioned above for ADAP submission to 
manufacturers for purposes of receiving a rebate.
Qualified Payment
    Under this proposed guidance, ADAPs make a qualified payment of 
covered outpatient drugs in two circumstances. First, the ADAP purchase 
of a covered outpatient drug at a price greater the 340B ceiling price 
constitutes a qualified payment. Second, the ADAP purchase of the ADAP 
client's insurance, in addition to the ADAP payment of the copayment, 
coinsurance, or deductible, constitutes a qualified payment for a 
covered outpatient drug.
    Section 2615(a) of the PHSA allows ADAPs to use a portion of their 
grant funds to purchase health insurance policies that, at a minimum, 
include at least one drug in each class of core antiretroviral 
therapeutics from the HHS Clinical Guidelines for the Treatment of HIV/
AIDS, and coverage for other essential medical benefits. After the 
implementation of the rebate option for ADAPs, Congress further 
specified under the Ryan White CARE Act Amendments of 2000, Public Law 
106-345, that certain statutory requirements imposed by title XXVI of 
the PHSA must be met by ADAPs when purchasing health insurance 
policies. Section 2616(f) of the PHSA indicates that such health 
insurance coverage must include a full range of therapeutics to treat 
HIV/AIDS, including measures for the prevention and treatment of 
opportunistic infections, and that the costs of the health insurance 
must not exceed the costs of otherwise providing the therapeutics. ADAP 
funds may be used to cover any costs associated with the health 
insurance policy, including copayments, coinsurance, deductibles, and 
premiums. Therefore, it is the view of HHS that the use of ADAP funds 
to make a qualified payment as outlined above, after the ADAP has 
engaged in the necessary cost-effectiveness analysis demonstrating that 
the costs of the health insurance do not exceed the costs of otherwise 
providing the therapeutics, constitutes a purchase of necessary drugs 
for ADAP clients that is consistent with the statutory eligibility for 
State-operated AIDS drug purchasing assistance programs and the 
statutory provision allowing the program to purchasethe drugs through 
an insurance mechanism rather than a direct purchase. Recognizing this 
mechanism gives full effect to both statutes: Section 340B of the PHSA 
and the Ryan White HIV/AIDS Program statute.
    After careful analysis, HHS has determined that the payment by the 
ADAP of a copayment, coinsurance, or deductible, in the absence of also 
paying for the health insurance premium, is too attenuated within the 
context of the 340B Program to constitute a ``purchase.'' Therefore, 
implementation of this proposed guidance would result in manufacturers, 
upon request of the ADAP, providing rebates only when the ADAP 
purchases drugs directly, or when the ADAP purchases health insurance, 
through payment of the health insurance premium, and pays the 
copayment, coinsurance, or deductible that covers the drug purchases at 
issue. HHS recognizes that ADAPs can cover the cost of health insurance 
(e.g., premiums, co-pays, co-insurance, deductibles, etc.) to ensure 
access to HIV medications and care. Therefore, we are seeking comments 
on how this policy may impact those practices. In addition, HHS 
recognizes that the proposed guidelines regarding the types of payments 
that will qualify a drug purchase by an ADAP for a 340B rebate (section 
(b) of Part G) present unique challenges that may require changes to 
program practices, to an ADAP's drug payment processes, or to State 
law. Therefore, to allow for the development of systems and any other 
necessary changes in order to make qualified payments on behalf of an 
ADAP client for those states utilizing the rebate option, HHS is 
proposing to delay the effective date of section (b) of Part G, 
defining qualified payment, for 12 months after the publication date of 
the final guidance.
    To ensure that particular drugs have been paid for by the ADAP's 
purchased health insurance, HHS is proposing that the ADAP document the 
transaction, as demonstrated by the ADAP's payment of a copayment or 
deductible, or such other auditable evidence that links the drug 
purchase at issue to the ADAP's purchased insurance policy. In this 
situation, the rebate would be paid regardless of how the ADAP 
expenditure compares to the 340B ceiling price for the drug.
    While this proposed guidance is subject to comment and 
finalization, HHS encourages ADAPs and drug manufacturers to work 
together to minimize any disruptions in current rebate practices.
Multiple 340B Discounts and Rebates
    HHS is aware that ADAP clients may also be patients of other 
covered entities. Therefore, pursuant to the 340B statute, HHS proposes 
that no covered entity may obtain 340B pricing (either through a rebate 
or through a direct purchase) on a drug purchased by another covered 
entity at or below the

[[Page 52314]]

340B ceiling price. All covered entities, including ADAPs, must ensure 
that drugs that have been purchased at or below the ceiling price for a 
patient of a covered entity are not also subject to any additional 340B 
discounts.
    Nothing in this proposed guidance prohibits a manufacturer from 
voluntarily extending additional discounts or rebates on 340B drugs.
Audits
    Pursuant to section 340B(a)(5)(C) of the PHSA, an ADAP 
participating in the 340B Program, whether through the rebate option, 
direct purchase option, or both, is subject to a 340B Program audit by 
HHS, as detailed in Part H of this proposed guidance.
Obligation To Provide Rebates
    Pursuant to a manufacturer's obligation under section 340B(a)(1) of 
the PHSA to charge no more than the ceiling price for covered 
outpatient drugs (taking into account any rebate or discount, as 
provided by the Secretary), a manufacturer with a PPA would pay a 
rebate on a claim submitted for a qualified payment for a covered 
outpatient drug to an ADAP registered for the 340B Program under the 
rebate option or the hybrid option.
Rebate Amount
    The question has arisen as to the determination of the appropriate 
level of rebates in cases where the ADAP paid the health insurance 
premium and the copayment, coinsurance, or deductible. In formulation 
of this proposed guidance, HHS considered a percentage rebate whereby 
an ADAP would be entitled to a percentage of the rebate on a dispensed 
drug contingent on the percentage of the total cost of the drug borne 
by the ADAP. Upon review of the approach, HHS concluded that this 
mechanism would be so operationally burdensome as to be inoperable. 
Percentage calculations would entail increased administrative costs and 
require access to pricing information about the total amounts paid and 
total cost of the drug that may not be available to ADAPs. The 
accounting requirements of such an approach would decrease the 
efficiency and effectiveness of the program even if the necessary 
information were readily available.
    This proposed guidance specifies that the rebate owed to the ADAP 
is equal to the Medicaid drug rebate amount described in section 
1927(c) of the Social Security Act. In accordance with section 340B(a) 
of the PHSA, requiring that ``the amount to be paid . . . to 
manufacturers . . . for covered outpatient drugs . . . does not 
exceed'' the 340B ceiling price, the rebate option is equivalent to the 
direct purchase option.
    HHS supports an approach that allows for a rebate for drugs where 
ADAPs have directly expended funds to purchase a covered outpatient 
drug for an eligible patient. Under this approach, the ADAP is entitled 
to a rebate for each of the units purchased with a direct payment of 
ADAP funds. In cases involving health insurance coverage, the ADAP is 
entitled to a rebate on each unit of covered outpatient drugs when it 
has paid for the ADAP client's health insurance and the drug copayment, 
coinsurance, or deductible. This approach avoids additional unnecessary 
accounting requirements that would be required in percentage-of-cost 
approaches.
    Manufacturers are expected to maintain records that provide 
sufficient documentation to determine the correct rebate amounts to be 
paid to ADAPs as part of auditable records.

Part H--Program Integrity

HHS Audit of a Covered Entity

    Under section 340B(a)(5)(C) of the PHSA, HHS has the authority to 
audit (acting in accordance with procedures established by the 
Department) covered entities to monitor their compliance with the 
statutory prohibition of duplicate discounts (section 340B(a)(5)(A) of 
the PHSA) and diversion (section 340B(a)(5)(B) of the PHSA). The audits 
permit HHS to assess a covered entity's compliance with the 340B 
Program. These audits also help HHS and participating covered entities 
identify and mitigate program risk as well as identify best practices 
regarding compliance. HHS reserves the right to refer matters to other 
Federal agencies as appropriate.
    A covered entity participating in the 340B Program is subject to 
audit by HHS to determine whether it is complying with 340B statutory 
requirements. Pursuant to section 340B(a)(5)(C) of the PHSA, HHS must 
be provided access to all records pertaining to compliance, including 
those of any child site or pharmacy which is under contract with the 
covered entity. Failure to provide records can result in termination 
from the 340B Program. To reduce burden on covered entities, HHS will 
ensure that only one 340B Program audit of a covered entity is 
conducted or ongoing at any time. HHS will notify the covered entity of 
its intent to audit for 340B compliance. Pursuant to authority vested 
in HHS to maintain an accurate and up-to-date list of covered entities 
(section 340B(d)(2)(B) of the PHSA), HHS will review covered entity 
eligibility and 340B database information as part of an audit. HHS may 
audit the parent covered entity site, any child site, and any pharmacy 
under contract with that covered entity. Additionally, HHS may audit 
other 340B identification numbers associated with the parent or child 
site. An HHS audit may include either an on-site review, an off-site 
review of documentation requested by HHS, or both. To the extent 
possible, HHS will perform a 340B Program audit at a time and in a 
manner which minimizes disruption to the covered entity's operations 
and maximizes the ability to conduct a thorough 340B Program review. 
HHS may make public any final audit findings.
Notice and Hearing for Noncompliance
    Pursuant to section 340B(a)(5)(D) of the PHSA, HHS is proposing a 
notice and hearing process under which a covered entity has the 
opportunity to respond to adverse audit findings and other instances of 
noncompliance or to respond to the proposed loss of 340B Program 
eligibility. The notice and hearing process will be conducted based on 
the written submissions of the involved parties. HHS proposes to 
initiate the notice and hearing process by providing written notice to 
a covered entity of a proposed finding of noncompliance with specific 
340B Program requirements. This notice will be sent to the covered 
entity's authorizing official as listed on the public 340B database and 
specify a 30-day response deadline. The covered entity responds in 
writing to each issue of noncompliance, providing details and 
documentation where appropriate. Failure to respond by the deadline 
specified will be construed as the covered entity's agreement with the 
specific allegations of noncompliance included in the notice. HHS will 
then proceed to make final findings of noncompliance and to take 
appropriate actions. If a covered entity anticipates the inability to 
respond by a particular deadline, it is expected to request an 
extension. HHS will consider such requests on a case-by-case basis.
    HHS will review all documents and information submitted by the 
covered entity regarding its position on the covered entity's 
noncompliance. HHS will issue a final written notice with its final 
determination regarding noncompliance. In the case of HHS's 340B 
Program audits, the initial notice and final notice will include a 340B 
Program audit report.

[[Page 52315]]

    If a final determination of noncompliance is made, the covered 
entity may have to submit a corrective action plan as outlined in this 
proposed guidance. If HHS's final determination of noncompliance 
includes a finding that the covered entity is no longer eligible for 
the 340B Program (e.g., the latest filed Medicare cost report showing a 
disproportionate share adjustment percentage below the threshold, loss 
of grant funding, lack of auditable records, GPO violation), it will be 
removed from the 340B Program. The entity is responsible for repayment 
to affected manufacturers for 340B drug purchases made after the date 
the entity first violated a statutory requirement.
Corrective Action Plan for 340B Program Noncompliance
    If a covered entity submits a corrective action plan that addresses 
all findings of noncompliance, HHS may determine that the covered 
entity can continue to participate in the 340B Program. A corrective 
action plan should include, at minimum: The correction of each finding 
of noncompliance, the implementation of measures to prevent future 
occurrences of noncompliance, plans to make offers of repayment to 
affected manufacturers for discounts improperly received or to work 
with State Medicaid offices regarding duplicate discounts, if 
applicable, and a timeline for corrective actions to be taken.
    HHS will work with a covered entity to specify the time frame for 
the submission of the corrective action plan based on the scope of the 
findings and will determine if the submitted corrective plan is 
acceptable. HHS may verify a covered entity's compliance with its HHS-
approved corrective action plan at any time. A corrective action plan 
and its subsequent implementation are considered auditable records and 
should be maintained as such. Failure of an entity to correct 
compliance issues or submit a corrective action plan may result in 
further HHS action, including termination from the 340B Program.

Manufacturer Audit of a Covered Entity

    Under section 340B(a)(5)(C) of the PHSA, a drug manufacturer 
participating in the 340B Program is authorized to audit a covered 
entity's compliance with the statutory prohibitions against duplicate 
discounts and diversion of 340B drugs (sections 340B(a)(5)(A) and (B) 
of the PHSA). The statute does not permit a manufacturer to audit 
covered entity's compliance with 340B Program eligibility requirements 
(e.g., GPO prohibition, disproportionate share adjustment percentage), 
although a manufacturer may refer such issues to HHS for its review. A 
manufacturer should work in good faith with a covered entity to resolve 
any concerns related to duplicate discounts and diversion of 340B drugs 
before requesting HHS approval to audit the covered entity.
Reasonable Cause
    This section proposes a ``reasonable cause'' standard, by which a 
manufacturer, prior to audit, documents to HHS's satisfaction that a 
reasonable person could conclude, based on reliable evidence, that a 
covered entity, its child sites, or contract pharmacies may have 
violated either section 340B(a)(5)(A) or (B) of the PHSA. Examples of 
reasonable cause include, but are not limited to: (1) Significant 
changes in quantities of specific drugs ordered by a covered entity 
without adequate explanation by the covered entity; (2) significant 
deviations from national averages of inpatient or outpatient use of 
certain drugs without adequate explanation by the covered entity; and 
(3) evidence of duplicate discounts provided by manufacturers or State 
Medicaid agencies. A covered entity's refusal to respond to 
manufacturer questions related to 340B drug diversion and duplicate 
discounts may also be construed as reasonable cause.
Procedures and Audit Work Plan
    To ensure that the audits pertain to compliance with the 
prohibitions against duplicate discounts and diversion, HHS proposes 
that a manufacturer submit an audit work plan for HHS approval prior to 
conducting such an audit. The manufacturer may consult with HHS on its 
grounds for reasonable cause prior to submitting documentation or a 
work plan. HHS will review the reasonable cause documentation and the 
scope of the audit work plan. HHS may limit the scope of the audit to 
ensure that the audit is conducted with the least possible disruption 
to the covered entity. If HHS has concerns regarding the audit work 
plan, it may require manufacturers to revise certain audit procedures.
Audit Standards
    General standards for manufacturers conducting a 340B Program audit 
include the use of an independent certified public accountant to 
perform the audit in accordance with Government Auditing Standards, the 
protection of confidential patient information, and a total audit 
duration of not more than 1 year. Pursuant to section 340B(a)(5)(C) of 
the PHSA, a covered entity must provide records pertaining to 
compliance of the covered entity, child sites, and any related contract 
pharmacy with the prohibition against duplicate discounts and 
diversion. Failure of a covered entity to provide auditable records 
within 30 days of the request is a violation of section 340B(a)(5)(C) 
of the PHSA. A covered entity and manufacturer must continue to meet 
all 340B Program requirements during an audit. At the completion of the 
audit, the auditors prepare a final audit report and submit it to HHS. 
The cost of the audit shall be borne by the manufacturer.

HHS Audit of a Manufacturer and its Contractors

    Section 340B(d)(1)(B)(v) of the PHSA authorizes HHS to audit a 
manufacturer or wholesaler to ensure 340B Program compliance. In this 
guidance, HHS is proposing standards for audits of a manufacturer or 
wholesaler that manufactures, processes, or distributes covered 
outpatient drugs in the 340B Program. The HHS audit may include either 
an on-site review, an off-site review of documentation requested by 
HHS, or both. HHS will notify the manufacturer of its intent to audit 
for 340B Program compliance.
    HHS audits all relevant records retained by the manufacturer or any 
of its contractors (such as wholesalers) to assess its compliance with 
340B Program requirements. Failure to provide or give access to records 
or respond to requests for information within HHS-specified time frames 
may result in further action by HHS or referral for investigation 
(e.g., United States Department of Justice or the HHS OIG). HHS may 
make public any final audit findings.
Notice and Hearing Regarding Audit Findings
    After the conclusion of the audit, if HHS determines that a 
manufacturer has violated the 340B Program, the manufacturer will be 
provided opportunity for notice and hearing. HHS will send the 
manufacturer written notification of any audit findings and will notify 
the manufacturer of the deadline to respond with its agreement or 
disagreement with each proposed finding. If a manufacturer fails to 
respond to the proposed findings within the required deadlines and 
fails to request an extension, HHS will conclude the manufacturer has 
concurred with all findings. HHS will review any documentation 
submitted in making a final determination and will advise the 
manufacturer of its final

[[Page 52316]]

determination in written audit findings, and request corrective action, 
as needed. HHS will notify CMS and other government agencies of these 
actions, as appropriate.
Corrective Action Plan
    A manufacturer's corrective action plan is expected to include 
correction of past instances of noncompliance, implementing measures to 
prevent future occurrences, refunds of overpriced 340B drugs to 
affected covered entities pursuant to this proposed guidance, when 
applicable, and a timeline for corrective actions to be completed. HHS 
will specify the time frame for the submission of this corrective 
action plan and determine if the submitted corrective plan is 
acceptable. HHS will also determine when an audit is closed. HHS may 
verify a manufacturer's compliance with its HHS-approved corrective 
action plan at any time.

III. Proposed Guidance

Definitions

    340B identification number is the unique identifier HHS provides to 
a covered entity participating in the 340B Program.
    Associated site is a health care delivery site which is not located 
at the same physical address as a non-hospital covered entity, but is 
part of and delivers outpatient services for the non-hospital covered 
entity. An associated site, once enrolled in the 340B Program, is 
referred to as a child site.
    Authorized billing address is the covered entity address designated 
for 340B billing purposes in the covered entity's 340B database record. 
The authorized billing address is designated in the public 340B 
database by the ``bill to'' field.
    Authorized shipping address is a covered entity address designated 
for receiving 340B drugs. Authorized shipping addresses which are part 
of the covered entity are termed ``ship to'' in the covered entity's 
340B database entry. A registered contract pharmacy is an authorized 
shipping address.
    Authorizing official is an individual who can legally bind a 
covered entity to contract, such as a chief executive officer, chief 
operating officer, chief financial officer, or program manager, who 
attests to the covered entity's 340B Program compliance.
    Carve-in refers to the purchase and dispensing of 340B drugs to a 
covered entity's Medicaid patients.
    Carve-out refers to the purchase and dispensing of non-340B drugs 
to a covered entity's Medicaid patients.
    Child site is a non-hospital covered entity associated site or a 
hospital covered entity outpatient facility with 340B Program 
eligibility derived from an enrolled parent site, and that is enrolled 
in the 340B Program and is listed on the public 340B database.
    CMS is the Centers for Medicare & Medicaid Services.
    Contract pharmacy means a pharmacy not owned by the covered entity, 
but under contract with and listed on the covered entity's 340B 
database record.
    Disproportionate share hospital (DSH) is a hospital covered entity 
registered for the 340B Program under section 340B(a)(4)(L) of the 
PHSA.
    Group purchasing arrangement is any arrangement, other than the 
Prime Vendor Program, created to leverage the purchasing power of 
multiple entities to obtain discounts from manufacturers, distributors, 
and other vendors based on collective buying power.
    Group purchasing organization (GPO) is an entity that contracts 
with purchasers, such as hospitals, nursing homes, and home health 
agencies, to aggregate purchasing volume and negotiate final prices 
with manufacturers, distributors, and other vendors.
    Hospital covered entity, within the 340B Program, means a covered 
entity registered for the 340B Program as one of the covered entity 
types described in section 340B(a)(4)(L), (M), (N), or (O) of the PHSA.
    In-house pharmacy means a pharmacy that is owned by, and a legal 
part of, the 340B covered entity.
    Medicaid Drug Rebate Program and Medicaid Drug Rebate Agreement 
mean, respectively, the program described in section 1927 of the Social 
Security Act and a signed agreement between the Secretary and the 
manufacturer, to implement the provisions of section 1927 of the Social 
Security Act.
    Non-hospital covered entity is a covered entity which is registered 
for the 340B Program as one of the covered entity types described in 
sections 340B(a)(4)(A) through (K) of the PHSA.
    Parent site is a covered entity which has met the eligibility 
criteria for participation specified in section 340B(a)(4) of the PHSA, 
is enrolled in the 340B Program, and is listed on the public 340B 
database.
    Prime Vendor Program is a program established by the Secretary 
pursuant to section 340B(a)(8) of the PHSA for price negotiation, 
distribution facilitation, and other activities in support of the 340B 
Program.
    Rebate percentage is an amount (expressed as a percentage) equal to 
the average total rebate required under section 1927(c) of the Social 
Security Act with respect to each dosage, form, and strength of a 
single source or innovator multiple source drug during the preceding 
calendar quarter; divided by the AMP for such a unit of the drug during 
such quarter.
    Replenishment is a process by which a covered entity reorders drug 
inventory based on actual prior drug usage.
    State has the meaning set forth in 42 U.S.C. 201(f).
    Wholesale acquisition cost (WAC) has the meaning set forth in 42 
U.S.C. 1395w-3a(c)(6)(B).

Part A--340B Program Eligibility and Registration

    Section 340B(a)(4) of the Public Health Service Act (PHSA) (42 
U.S.C. 256b(a)(4)) lists the entity types eligible to participate in 
the 340B Program and further requires that such entities must meet the 
requirements of section 340B(a)(5) of the PHSA. An entity participating 
in the 340B Program is referred to as a covered entity. There are two 
main categories of covered entities: (1) Non-hospital covered entities 
described in sections 340B(a)(4)(A) through (K) of the PHSA and (2) 
hospital covered entities described in sections 340B(a)(4)(L) through 
(O) of the PHSA.

Non-Hospital Covered Entities

    (a) Eligibility. A non-hospital entity will be listed on the public 
340B database if it registers and establishes that it receives a 
qualifying Federal grant, Federal contract, Federal designation, or 
Federal project as defined in sections 340B(a)(4)(A) through (K) of the 
PHSA. HHS will assign a unique 340B identification number to represent 
each entity type for which a non-hospital covered entity registers and 
demonstrates eligibility, and list the entity accordingly on the public 
340B database.
    (b) Associated site eligibility. An associated site which is 
authorized to provide health care services through the scope of a 
Federal grant, Federal project, Federal designation, or Federal 
contract of a covered entity as defined in section 340B(a)(4)(A)-(K) of 
the PHSA may be eligible to participate in the 340B Program. Once 
registered for the 340B Program, the associated site will be referred 
to as a child site. The child site will be listed on the public 340B 
database, and can purchase and use 340B drugs, if the Departmental 
division which oversees such grant, project, designation, or contract 
verifies the eligibility. HHS will list on the public 340B database all 
sites associated with

[[Page 52317]]

multiple covered entities under each covered entity type.
    (c) Loss of eligibility. A non-hospital covered entity and its 
child sites are immediately ineligible for the 340B Program upon 
closing of the covered entity or upon loss of the parent covered 
entity's qualifying Federal grant, Federal project, Federal 
designation, or Federal contract. The entity may be liable to impacted 
manufacturers for 340B drug purchases made when the entity was 
ineligible for the 340B Program, and this information may be made 
available to the public. Additionally, a child site will lose 
eligibility in the following scenarios:
    (1) Termination of the grant, project, designation, or contract of 
a child site. A child site immediately loses eligibility for the 340B 
Program, separately from the parent covered entity, if the child site 
no longer qualifies under the parent covered entity's grant, project, 
designation, or contract.
    (2) A child site registered through multiple statutory sections. If 
a child site loses eligibility for one of the multiple covered entity 
types for which it is registered, it may continue purchasing and using 
340B drugs only for the registered covered entity type(s) which remains 
eligible for the 340B Program.

Hospital Covered Entities

    (a) Eligibility. HHS will list hospital covered entities on its 
public 340B database if the entity establishes that it meets the 
eligibility requirements in section 340B(a)(4)(L), (M), (N), or (O) of 
the PHSA. A hospital which qualifies for the 340B Program as more than 
one of the statutorily-defined hospital types may only register as one 
hospital covered entity type. A hospital covered entity must comply 
with all 340B Program requirements for the hospital covered entity type 
for which it registered. If a hospital covered entity qualifies as 
another covered entity type, the hospital covered entity may change its 
covered entity type by registering as a different covered entity type 
during a regular registration period. The hospital covered entity will 
only be eligible under the new covered entity type as of the start date 
listed on the public 340B database for the new 340B identification 
number.
    HHS interprets the provisions in section 340B(a)(4)(L), (M), (N), 
or (O) of the PHSA in the following manner:
    (1) Government owned or operated. In accordance with section 
340B(a)(4)(L)(i) of the PHSA, HHS will consider a hospital eligible for 
the 340B Program on the basis of being ``owned or operated by a unit of 
State or local government'' if the hospital is either wholly owned by a 
State or local government and recognized as such in Internal Revenue 
Service filings and acknowledgements, if applicable, or other 
documentation from Federal entities; or operated through an arrangement 
where the State or local government is the sole operating authority of 
a hospital.
    (2) Governmental powers. In accordance with section 
340B(a)(4)(L)(i) of the PHSA, HHS will consider a hospital eligible for 
the 340B Program on the basis of being ``formally granted governmental 
powers by a unit of State or local government'' if HHS receives 
certification that a State or local government formally delegates to 
the hospital a power usually exercised by the State or local 
government. The delegation may be granted through State or local 
statute or regulation; a contract with a State or local government; 
creation of a public corporation; or development of a hospital 
authority or district to provide health care to a community on behalf 
of the government.
    (3) Contract with a State or local government. In accordance with 
section 340B(a)(4)(L)(i) of the PHSA, HHS will consider a hospital 
eligible for the 340B Program on the basis of having ``a contract with 
a State or local government to provide health care services to low-
income individuals who are not entitled to benefits under title XVIII 
of the Social Security Act or eligible for assistance under the State 
plan under this title'' if it provides a signed certification by the 
hospital's 340B Program authorizing official and an appropriate 
government official (such as the governor, county executive, mayor, or 
an individual authorized to represent and bind the governmental 
entity). The signed certification indicates that a contract is 
currently in place between the private, non-profit hospital and the 
State or local government to provide health care services to low-income 
individuals who are not entitled to Medicare or Medicaid. For the 
purposes of the 340B Program, such contract should create enforceable 
expectations for the hospital for the provision of health care 
services, including the provision of direct medical care.
    (4) Disproportionate share adjustment percentage. For hospitals 
qualifying through sections 340B(a)(4)(L)(ii) and 340B(a)(4)(O) of the 
PHSA, HHS will review a hospital's most recently filed Medicare cost 
report to ensure the hospital meets the statutorily required 
disproportionate share adjustment percentage. A disproportionate share 
hospital (section 340B(a)(4)(L) of the PHSA), children's hospital 
(section 340B(a)(4)(M) of the PHSA), or freestanding cancer hospital 
(section 340B(a)(4)(M) of the PHSA) may alternatively seek eligibility 
as a hospital as described in section 1886(d)(5)(F)(i)(II) of the 
Social Security Act. A children's hospital which is not required to 
file a Medicare cost report may provide, in a time frame determined by 
HHS, a statement from a qualified independent auditor certifying that 
the auditor performed an audit on the records of the children's 
hospital, that the auditor is familiar with Federal rules and 
regulations relevant to its findings, and found that the hospital would 
meet the criterion in section 340B(a)(4)(L)(ii) of the PHSA.
    (b) Off-site outpatient facility eligibility. A hospital covered 
entity as defined in section 340B(a)(4)(L), (M), (N), or (O) of the 
PHSA may have one or more off-site outpatient facilities or clinics 
that deliver outpatient services for the hospital. Off-site outpatient 
facilities and clinics will be listed on the public 340B database, and 
may purchase or use 340B drugs for eligible patients, if the most 
recently filed Medicare cost report lists each facility or clinic on a 
line that is reimbursable under Medicare, and demonstrates that the 
services provided at the facility or clinic have associated outpatient 
Medicare costs and charges.
    For a children's hospital which does not file a Medicare cost 
report, HHS will list an off-site outpatient facility if the parent 
hospital authorizing official submits a signed statement which 
certifies the requested outpatient facility:
    (1) Is an integral part of the children's hospital whose patients 
meet the requirements of this guidance; and
    (2) Would be correctly included on a reimbursable line with 
associated Medicare outpatient costs and charges on a Medicare cost 
report, if filed.
    (c) Loss of eligibility. A hospital covered entity and its child 
sites are immediately ineligible upon closing of the hospital or upon 
change of ownership or contract status which results in the hospital 
failing to qualify under 340B(a)(4)(L)(i) of the PHSA. A hospital which 
qualifies for the 340B Program on the basis of a disproportionate share 
adjustment percentage will lose eligibility immediately upon filing of 
a Medicare cost report for which the disproportionate share adjustment 
percentage falls below the statutory threshold. A hospital which 
qualifies for the 340B Program as described in section 
1886(d)(5)(F)(i)(II) of the Social

[[Page 52318]]

Security Act will lose eligibility immediately upon filing of a 
Medicare cost report for which the hospital does not meet the 
requirements of section 1886(d)(5)(F)(i)(II) of the Social Security 
Act. A children's hospital which does not file a Medicare cost report 
will lose eligibility for the 340B Program immediately upon an annual 
independent audit which results in a disproportionate share adjustment 
percentage less than or equal to 11.75. Additionally, a registered 
child site will lose eligibility in the following scenarios:
    (1) Immediately upon closing of the clinic or facility or when sold 
or transferred to any entity.
    (2) Upon filing of a Medicare cost report that demonstrates that 
the site is not listed as reimbursable, or the services no longer have 
associated outpatient costs and charges reimbursed by Medicare.
    (3) For hospitals subject to the GPO prohibition, immediately upon 
use of a GPO for covered outpatient drugs as specified in this 
guidance.

Registration and Termination

    (a) Registration. Sections 340B(d)(2)(B)(i), (ii), and (iv) of the 
PHSA require HHS to maintain a single, universal, and standardized 
identification system listing participating covered entities. HHS 
publishes and regularly updates this list of covered entities and their 
registered associated sites on the public 340B database. The registered 
covered entity is listed as the ``parent'' site and the registered off-
site outpatient facility or associated site is listed as the ``child'' 
site. If an authorizing official submits a registration that 
demonstrates eligibility for the 340B Program, the covered entity is 
listed on the public 340B database, assigned a unique 340B 
identification number, and is able to purchase and use 340B drugs for 
their eligible patients. The inclusion of a covered entity within a 
larger organization does not make the entire organization eligible for 
the 340B Program.
    HHS will not list a pharmacy on its public 340B database nor assign 
it a 340B identification number, as a pharmacy is not an eligible 
covered entity under the PHSA. HHS will list a covered entity-owned and 
operated pharmacy as an authorized shipping address for the parent and 
any child sites.
    HHS may provide a special registration opportunity for entities 
during a public health emergency declared by the Secretary. The 
geographic scope and time period limitations of the Secretary's public 
health emergency notice will govern limits for this special 
registration.
    (b) Termination. HHS lists covered entities on its public 340B 
database on the condition that the covered entity will regularly review 
and update 340B database information. Upon loss of eligibility of a 
parent site, child site, or termination of any contract pharmacy 
arrangement, the covered entity must immediately notify HHS and stop 
purchasing and using 340B drugs. HHS requests that the covered entity 
provide information pertaining to the reason for the loss of 
eligibility, the effective date for the loss of eligibility, and the 
date of the last 340B drug purchase for a terminated covered entity, 
child site, or contract pharmacy. A covered entity is liable to 
manufacturers for repayment for the 340B discounts on any drugs 
purchased for itself, any child site, or any contract pharmacy when the 
covered entity was ineligible for the 340B Program for any reason.
    A covered entity removed from the 340B Program would be able to re-
enroll to the 340B Program during the next regular enrollment period 
after it has satisfactorily demonstrated to HHS that it will comply 
with all statutory requirements moving forward and is in the process of 
offering repayment to affected manufacturers, if necessary.

Annual Recertification

    In order to continue to be listed as an eligible covered entity and 
purchase 340B drugs, a covered entity annually recertifies that the 
covered entity, its child sites, and its contract pharmacy arrangements 
meet all 340B Program eligibility and compliance requirements. This 
recertification shall be carried out in a manner and time frame 
specified by HHS. If a covered entity cannot attest to compliance or is 
no longer eligible, the covered entity shall cease purchasing and using 
340B drugs and terminate its listing and that of any child site, or 
associated contract pharmacy arrangement which is no longer eligible or 
for which compliance cannot be attested. A covered entity which 
voluntarily terminates its listing and that of any child site, or any 
contract pharmacy arrangement from the 340B Program, is expected to 
provide information and documentation for voluntary termination and 
whether it purchased 340B drugs during a period of ineligibility. The 
covered entity is responsible for repayment to manufacturers in the 
amount of the discounts for 340B Program drug purchases made after the 
date the covered entity or child site became ineligible for the 340B 
Program. HHS may review submissions during recertification or at any 
time to determine if the covered entity remains eligible and may remove 
the covered entity from the public 340B database for failure to meet 
340B Program eligibility requirements.

Group Purchasing Organization Prohibition for Certain Covered Entities

    Covered entities subject to the group purchasing organization (GPO) 
prohibition in section 340B(a)(4)(L)(iii) of the PHSA shall not obtain 
any covered outpatient drugs (including covered outpatient drugs given 
to non-340B patients) through a GPO or other group purchasing 
arrangement on or after the start date of enrollment in the 340B 
Program, including any pharmacy owned or operated by the covered 
entity, except in circumstances described in paragraph (a) of this 
section. Violations of the statutory prohibition concerning the use of 
GPOs are addressed in paragraph (d) of this section. A prime vendor 
program established pursuant to section 340B(a)(8) of the PHSA is not 
considered a GPO or group purchasing arrangement under this section. 
Inclusion of off-site outpatient facilities and clinics in the entity's 
340B database record demonstrates that these facilities and clinics are 
subject to the GPO prohibition.
    (a) Exceptions. A GPO used to obtain covered outpatient drugs in 
the following situations and off-site outpatient facilities and clinics 
will not be considered in violation of the statutory GPO prohibition.
    (1) An off-site outpatient clinic of a 340B hospital covered entity 
if the outpatient clinic is located at a separate physical address from 
the 340B parent covered entity, is not participating in the 340B 
Program or listed on the public 340B database, and purchases drugs 
through a separate account from the 340B parent covered entity;
    (2) A GPO-purchased drug provided to an inpatient who, upon 
subsequent review (e.g., insurer, Medicare Recovery Audit Contractor, 
or hospital review), results in the designation of that patient as an 
outpatient for payment purposes; and
    (3) A hospital which can only access a covered outpatient drug 
through a GPO account. In such case, the hospital is expected to 
document attempts to purchase the drug at the 340B price and wholesale 
acquisition cost price and report the circumstances to HHS, including 
drug name, manufacturer, and summary of attempts made to acquire the 
drug.
    (b) Drug replenishment models. A covered entity electing to use a

[[Page 52319]]

replenishment model should be able to clearly demonstrate through 
auditable records that the replenishment model, along with any 
associated software, is used in a manner that complies with the 
statute.
    (c) Use of previously-purchased GPO drugs. A covered entity subject 
to the GPO prohibition must cease purchasing or obtaining covered 
outpatient drugs through a GPO before the first day the covered entity 
is listed on the public 340B database as eligible to purchase 340B 
drugs. A covered entity subject to the GPO prohibition with GPO-
purchased covered outpatient drugs remaining in inventory on the 
effective date of enrollment in the 340B Program may use those drugs 
until expended.
    (d) Violations of the statutory prohibition on use of GPOs. The 
340B statute makes compliance with the GPO prohibition a condition of 
eligibility. Therefore, a covered entity found in violation of the GPO 
prohibition will be considered ineligible and removed from the 340B 
Program after a notice and hearing process as described in Part H. 
However, if a covered entity can demonstrate the violation is an 
isolated error, HHS may allow the covered entity to continue 340B 
Program participation under a corrective action plan. A covered entity 
found in violation must offer to repay affected manufacturers for any 
340B drug purchase made after the date of the first GPO violation.
    If a GPO prohibition violation occurs at a parent site, and the 
parent site is terminated from the 340B Program, all child sites 
registered through the parent covered entity will be removed from the 
340B Program. If the GPO prohibition violation can be limited to 
certain child sites, only those child sites where the violation 
occurred will be removed, but repayment for periods of ineligibility 
must be offered. GPO violations by child sites may only be limited if 
the child site has auditable records which show that the child site:
    (1) Is located in a building separate from the parent site and 
other child sites; and
    (2) All drug purchasing for the sites occur using separate purchase 
accounts from the parent site and other child sites.
    (e) Re-enrollment in the 340B Program. A covered entity removed 
from the 340B Program for a GPO prohibition violation would be able to 
re-enroll during the next regular registration period after it has 
satisfactorily demonstrated to HHS that it will comply with the GPO 
prohibition going forward and is in the process of offering repayment 
to affected manufacturers.

Part B--Drugs Eligible for Purchase Under the 340B Program

    A covered outpatient drug, as defined in section 1927(k)(2) and (3) 
of the Social Security Act, is eligible for purchase under the 340B 
Program. For purposes of the 340B Program, only drugs bundled for and 
receiving such bundled reimbursement under Title XIX of the Social 
Security Act described in section 1927(k)(3) will be considered 
excluded from the definition of covered outpatient drug.

Part C--Individuals Eligible To Receive 340B Drugs

    (a) Criteria. Section 340B(a)(5)(B) of the PHSA prohibits covered 
entities from reselling or otherwise transferring a 340B drug to a 
person who is not a patient of the entity. HHS interprets this section 
to include all patients that meet all of the following criteria on a 
prescription-by-prescription or order-by-order basis:
    (1) The individual receives a health care service at a covered 
entity site which is registered for the 340B Program and listed on the 
public 340B database;
    (2) The individual receives a health care service from a health 
care provider employed by the covered entity or who is an independent 
contractor of the covered entity such that the covered entity may bill 
for services on behalf of the provider.
    (3) An individual receives a drug that is ordered or prescribed by 
the covered entity provider as a result of the service described in 
(2). An individual will not be considered a patient of the covered 
entity if the only health care received by the individual from the 
covered entity is the infusion of a drug or the dispensing of a drug.
    (4) The individual receives a health care service that is 
consistent with the covered entity's scope of grant, project, or 
contract;
    (5) The individual is classified as an outpatient when the drug is 
ordered or prescribed. The patient's classification status is 
determined by how the services for the patient are billed to the 
insurer (e.g., Medicare, Medicaid, private insurance). An individual 
who is self-pay, uninsured, or whose cost of care is covered by the 
covered entity will be considered a patient if the covered entity has 
clearly defined policies and procedures that it follows to classify 
such individuals consistently; and
    (6) The individual has a relationship with the covered entity such 
that the covered entity maintains access to auditable health care 
records which demonstrate that the covered entity has a provider-to-
patient relationship, that the responsibility for care is with the 
covered entity, and that each element of this patient definition in 
this section is met for each 340B drug.
    (b) Exceptions.
    (1) AIDS Drug Assistance Program. An individual enrolled in a Ryan 
White HIV/AIDS Program AIDS Drug Assistance Program funded by Title 
XXVI of the PHSA will be considered a patient of the covered entity for 
purposes of this definition.
    (2) Public health emergency declared by the Secretary. If normal 
health care operations are disrupted due to a public health emergency 
declared by the Secretary, a covered entity may request, and HHS may 
authorize, a covered entity to temporarily follow alternate patient 
eligibility criteria. A covered entity must maintain auditable records 
that document the alternate patient eligibility criteria used and the 
exact dates for which alternate patient eligibility criteria are in 
effect.
    (c) Replenishment. To avoid a violation of the statutory 
prohibition on diversion, a covered entity that utilizes a drug 
replenishment model may only order 340B drugs based on actual prior 
usage for eligible patients of that covered entity as defined by this 
guidance.
    (d) Repayment. If a 340B drug is found to have been diverted to an 
individual who is not a patient of the covered entity contrary to the 
statutory prohibition on diversion, the covered entity is responsible 
for offering repayment to all affected manufacturers. A covered entity 
is also responsible for any repayment for 340B drugs diverted from a 
child site or through its contract pharmacy arrangements.
    (e) Corrective action requirement. A covered entity should notify 
HHS of its corrective actions regarding diversion, including any 
manufacturer agreements on repayment.

Part D--Covered Entity Responsibilities

Prohibition of Duplicate Discounts

    Section 340B(a)(5)(A)(i) of the PHSA prohibits duplicate discounts 
whereby a State obtains a rebate on a drug provided to a Medicaid fee-
for-service or managed care organization patient when that same drug 
was discounted under the 340B Program.
    (a) 340B Medicaid Exclusion File. Pursuant to section 
340B(a)(5)(A)(ii) of the PHSA, which requires HHS to create mechanisms 
to ensure duplicate discounts do not occur, HHS has established the 
340B Medicaid Exclusion File as the mechanism to prevent duplicate 
discounts. The 340B

[[Page 52320]]

Medicaid Exclusion File is posted on HHS's public Web site to enable 
340B covered entities, States, and manufacturers to determine whether a 
covered entity purchases 340B drugs for its Medicaid patients.
    (1) Medicaid Fee-for-Service. HHS lists the covered entity's 
Medicaid provider number and/or National Provider Identifier (NPI) used 
by a covered entity or its child sites to purchase 340B drugs for its 
Medicaid Fee-For-Service (FFS) patients on the 340B Medicaid Exclusion 
File. The listing of a covered entity's Medicaid provider number or NPI 
on the Medicaid Exclusion File means that all drugs billed to Medicaid 
FFS under the Medicaid provider number are purchased through the 340B 
Program. If a covered entity's provider number or NPI is not listed on 
the 340B Medicaid Exclusion File, all drugs billed under the Medicaid 
provider number or NPI are purchased outside of the 340B Program.
    (2) Medicaid Managed Care. The covered entity may choose whether to 
use 340B drugs for its Medicaid Managed Care Organization (MCO) 
patients. The covered entity may make differing selections by covered 
entity site and managed care organization so long as such distinction 
is made available to HHS. This information may be made available 
publicly through an Exclusion File or other mechanism. In addition, a 
covered entity should have mechanisms in place to identify Medicaid MCO 
patients.
    (b) Change requests. A covered entity may make changes to its use 
of 340B drugs for Medicaid FFS or MCO patients after initial 
registration for itself or its child sites during HHS-specified 
timeframes. A covered entity must inform HHS of the change prior to 
being implemented.
    (c) Contract pharmacy. Unless otherwise noted on the public 340B 
database, contract pharmacies will not dispense 340B drugs for Medicaid 
FFS or MCO patients. If a covered entity wishes to purchase 340B drugs 
for its Medicaid FFS or MCO patients and dispense 340B drugs utilizing 
a contract pharmacy, the covered entity will provide a written 
agreement for HHS approval with its contract pharmacy and State 
Medicaid agency or MCO that describes a system to prevent duplicate 
discounts.
    (d) State notification. In the event that a covered entity is 
unable to use a 340B drug for a Medicaid FFS or MCO patient in a 
particular instance, it is expected to document the reason and have a 
mechanism in place to notify the State Medicaid agency or MCO.
    (e) Repayment. In accordance with section 340B(a)(5)(D) of the 
PHSA, if the information provided to HHS does not reflect the covered 
entity's actual billing practices, the covered entity may be found in 
violation of the duplicate discount prohibition and would be required 
to repay rebate amounts to manufacturers if duplicate discounts have 
occurred due to the inaccurate information.

Maintenance of Auditable Records

    A covered entity must maintain auditable records demonstrating 
compliance with all 340B Program requirements for itself, any child 
site, and any contract pharmacy for 5 years from the date the 340B drug 
was ordered or prescribed, regardless of whether the entity continues 
to participate in the 340B Program. 340B Program records must be made 
available to HHS at any time and to certain manufacturers pursuant to 
an audit. If an entity, any child site, or any contract pharmacy 
terminates its 340B Program participation, an entity must maintain 
applicable auditable records for 5 years after the date of termination.
    (a) Failure to maintain records. If a covered entity cannot produce 
records pertaining to compliance with any specific 340B Program 
requirement during an audit or pursuant to a request from HHS, the 
covered entity could be presumed to be out of compliance with that 340B 
Program requirement and subject to the penalty applicable to the 
requirement. If a covered entity systematically fails to maintain 
auditable records, which is a statutory eligibility requirement, or 
fails to provide them as requested by HHS or a manufacturer authorized 
to conduct an audit, the covered entity will be removed from the 340B 
Program after a notice and hearing process as described in this 
guidance. A covered entity deemed ineligible and removed from the 340B 
Program for failure to maintain auditable records would be liable for 
repayment to manufacturers for periods of ineligibility.
    (b) Re-enrollment in the 340B Program. A covered entity that has 
been removed from the 340B Program for failure to maintain auditable 
records may re-enroll for the 340B Program during the next regular 
registration period after it has demonstrated to HHS its ability to 
comply with all 340B Program requirements, including the ability to 
maintain auditable records.

Part E--Contract Pharmacy Arrangements

    Regardless of the availability of an in-house pharmacy, a covered 
entity may contract with one or more licensed pharmacies to dispense 
340B drugs to eligible patients of the covered entity (as defined in 
this guidance) provided the arrangement is in accordance with all other 
statutory 340B Program requirements and applicable Federal, State, and 
local laws, including the Federal anti-kickback statute (42 U.S.C. 
1320a-7b(B)). In the case of a covered entity whose 340B Program 
eligibility is based on a Federal grant, Federal contract, Federal 
designation or Federal project, any contract pharmacy arrangement must 
comply with all grant, contract, or project requirements. A covered 
entity may contract with one or more pharmacies on behalf of child 
sites if permitted by law in the applicable jurisdiction and the 
relationship is recognized and reflected in the covered entity's 340B 
database record. A child site may contract directly with a pharmacy if 
not prohibited by Federal, State, or local law.
    (a) Registration. Once listed on the public 340B database, the 
contract pharmacy may provide 340B drugs to eligible patients of the 
covered entity (defined in this guidance). HHS will list contract 
pharmacies on the public 340B database if a written contract exists 
between the covered entity and contract pharmacy that includes all 
locations of a single pharmacy company that the covered entity plans to 
use and all child sites that plan to use the contract pharmacies. As 
the covered entity maintains responsibility for compliance with 340B 
statutory requirements, a covered entity is the only party that may 
submit a contract pharmacy registration, certify a contract pharmacy, 
make changes to the contract pharmacy arrangements listed on the public 
340B database, and verify that all public and non-public information in 
the 340B database regarding its contract pharmacies is accurate. A 
covered entity may request additional contract pharmacy locations under 
a public health emergency declared by the Secretary for the geographic 
area and time period specified in the declaration, provided all other 
340B Program requirements are met.
    HHS may remove a contract pharmacy from the 340B Program if HHS 
finds that the contract pharmacy is not complying with 340B Program 
requirements. The covered entity is responsible for offering repayment 
in the amount of the 340B discount to a manufacturer for 340B drugs 
dispensed by a contract pharmacy that has not adhered to 340B Program 
requirements.
    (b) Compliance with statutory requirements. A covered entity must

[[Page 52321]]

follow all 340B statutory requirements when utilizing a contract 
pharmacy, including, but not limited to:
    (1) Prevention of diversion. The covered entity and contract 
pharmacy are expected to have a system in place to verify the patient's 
eligibility for each 340B drug dispensed by the contract pharmacy and 
must prevent diversion as prohibited in section 340B(a)(5)(B) of the 
PHSA.
    (2) Prevention of duplicate discounts. A covered entity's contract 
pharmacy may not dispense 340B drugs to Medicaid patients of the 
covered entity unless the covered entity has submitted information to 
HHS regarding the arrangement and has systems in place with the State 
Medicaid agency and contract pharmacy to ensure duplicate discounts 
cannot occur.
    (3) Contract pharmacy oversight. The covered entity is expected to 
conduct quarterly reviews and annual independent audits of each 
contract pharmacy location; the results of these reviews are included 
in the records' requirements of section 340B(a)(5)(C) of the PHSA. Any 
340B Program violation detected through quarterly reviews or annual 
audits of a contract pharmacy should be disclosed to HHS. Covered 
entities are subject to the applicable penalties for instances of 
duplicate discounts and diversion.

Part F--Manufacturer Responsibilities

Pharmaceutical Pricing Agreement

    Pursuant to the statutory requirements of section 340B(a)(1) of the 
PHSA, a manufacturer that has entered into a Medicaid Drug Rebate 
Agreement pursuant to section 1927(a) of the Social Security Act must 
also enter into a pharmaceutical pricing agreement (PPA) pursuant to 
section 340B(a) of the PHSA. Under the PPA, a manufacturer must offer 
all covered outpatient drugs, as defined in section 1927(k) of the 
Social Security Act, from each of the manufacturer's labeler codes to 
covered entities participating in the 340B Program at no more than the 
statutory 340B ceiling price. A manufacturer that does not have a 
Medicaid Drug Rebate Agreement may voluntarily enter into a PPA. By 
signing the PPA, a manufacturer agrees to comply with all 340B Program 
statutory requirements, including statutory and regulatory changes that 
occur after execution of the PPA. In the event of a transfer of 
ownership of the manufacturer, the PPA is automatically assigned to the 
new owner. The following expectations apply to participating 
manufacturers:
    (1) For a manufacturer whose 340B Program participation is required 
by virtue of its participation in the Medicaid Drug Rebate Program, 
sign a PPA within 30 days of enrolling in the Medicaid Drug Rebate 
Program;
    (2) Submit timely updates to its 340B database record and PPA such 
that any new covered outpatient drug is added to the 340B Program;
    (3) Maintain auditable records demonstrating 340B Program 
compliance for no less than 5 years and provide such records to HHS 
when requested; and
    (4) Permit HHS to audit manufacturer compliance.
    A manufacturer that has voluntarily signed a PPA with the Secretary 
may terminate its 340B Program participation at any time in accordance 
with the terms of the PPA. When a manufacturer voluntarily 
participating in the 340B Program requests termination, the 
manufacturer should provide an explanation and documentation of the 
termination, the timing of the termination, and the date the 
manufacturer will cease offering covered outpatient drugs under the 
340B Program.

Obligation To Offer 340B Prices to Covered Entities

    Pursuant to section 340B(a)(1), a manufacturer subject to a PPA 
must offer all covered outpatient drugs at no more than the ceiling 
price to a covered entity listed on the public 340B database. The 
public 340B database provides information to allow manufacturers to 
determine if a covered entity is participating in the 340B Program or 
for any changes to eligibility.
    (a) Effective date. For manufacturers signing their first PPA by 
virtue of participating in the Medicaid Drug Rebate Program, the 
effective date for 340B pricing for existing covered outpatient drugs 
to any covered entity is the same date the drug is first included in 
the Medicaid Drug Rebate Program, or the date of enactment of section 
340B of the PHSA, if inclusion in the Medicaid Drug Rebate Program 
preceded November 4, 1992. For manufacturers voluntarily signing a PPA, 
the effective date for 340B pricing is the date the agreement is signed 
by both parties. For manufacturers with an existing PPA that have a new 
drug approved, the effective date for 340B pricing for the new drug is 
the date the drug is available for sale.
    (b) No conditioning of sales. In accordance with section 340B(a)(1) 
of the PHSA, a manufacturer is required to offer 340B drugs to each 
covered entity if it is available to any other purchaser at any price. 
Manufacturers may not condition the offer of the 340B ceiling price on 
a covered entity's assurance of compliance with 340B Program 
requirements.
    (c) Limited distribution plan. A manufacturer using a specialty 
pharmacy or a restricted distribution network, or needing to limit 
distribution due to potential or actual shortages, is expected to 
notify HHS in writing prior to implementation of such limited 
distribution plan. HHS may publish plans on the 340B Web site. HHS will 
work with manufacturers if there are concerns regarding the plan prior 
to making public. A manufacturer's limited distribution plan is 
expected to include each of the following components:
    (1) An explanation of the product's limited supply or special 
distribution requirements and the rationale for restricted distribution 
among all purchasers;
    (2) An assurance that the manufacturers will impose these 
restrictions equally on both 340B covered entities and non-340B 
purchasers;
    (3) Specific details of the drug distribution plan, including a 
mechanism that allocates sales to both covered entities and non-340B 
purchasers with no previous purchase history of the restricted drug;
    (4) The dates the alternative distribution begins and concludes; 
and
    (5) A plan for notification of wholesalers and 340B covered 
entities of the restricted plan.
    (d) Additional discounts permitted. A manufacturer may choose to 
sell a covered outpatient drug below the 340B ceiling price to a 
covered entity. Such pricing is voluntary and need not be applied to 
all 340B covered entities.

Procedures for Issuance of Refunds and Credits

    Pursuant to section 340B(d)(1)(B)(ii) of the PHSA, which requires 
HHS to establish procedures for manufacturers to issue refunds, a 
manufacturer must refund or credit a covered entity when there is an 
overcharge in an amount equal to the price difference between the sale 
price and the correct 340B price for that drug, multiplied by the 
number of units. The refund or credit is expected occur within 90 days 
of the determination by the manufacturer or HHS that an overcharge 
occurred.
    (a) Required information. A manufacturer must submit to HHS the 
340B ceiling price recalculation information, an explanation of why the 
overcharge occurred, how the refunds will be calculated, and to which 
covered entities refunds or credits will be issued.

[[Page 52322]]

    (b) Waiver. Unless the refund amount is subject to a dispute, if 
the covered entity receiving a direct repayment fails to take action to 
accept or execute the repayment within 90 days of receipt of the 
repayment, the covered entity has waived the right to that repayment.

Manufacturer Recertification

    A participating manufacturer should review and update 340B database 
information on an annual basis

Part G--Rebate Option for AIDS Drug Assistance Programs

    A State AIDS Drug Assistance Program eligible to participate in the 
340B Program under section 340B(a)(4)(E) of the PHSA may register for 
and participate in the 340B Program through this rebate option. 340B 
Program participation by an AIDS Drug Assistance Program via the rebate 
option or the hybrid option (participation in the 340B Program both 
through the direct purchase option and the rebate option) is subject to 
all the same applicable obligations, requirements, and duties imposed 
on other covered entities.
    (a) Procedures for the AIDS Drug Assistance Program rebate option.
    (1) Only an AIDS Drug Assistance Program registered under the 
rebate option or the hybrid option and listed on the public 340B 
database may request rebates pursuant to this section.
    (2) An AIDS Drug Assistance Program is expected to make a qualified 
payment, as defined in paragraph (b) of this section, for an eligible 
patient, as defined in this guidance.
    (3) An AIDS Drug Assistance Program is expected to submit claims-
level data to manufacturers which document a qualified payment was made 
to support each request for a rebate.
    (b) Qualified payment. A qualified payment by an AIDS Drug 
Assistance Program for a covered outpatient drug is:
    (1) A direct purchase by the AIDS Drug Assistance Program of a 
covered outpatient drug at a price greater than the 340B ceiling price; 
or
    (2) A payment by the AIDS Drug Assistance Program of the health 
insurance premiums that cover the covered outpatient drug purchases at 
issue and payment of a copayment, coinsurance, or deductible for the 
covered outpatient drug.
    (c) Multiple 340B discounts and rebates. An AIDS Drug Assistance 
Program participating via the rebate option or hybrid option described 
in this section may not request a 340B rebate for a drug which was 
already purchased by another covered entity at or below the 340B 
ceiling price.
    (d) Audits. An AIDS Drug Assistance Program participating in the 
340B Program through the rebate option or hybrid option is subject to 
audit by HHS.
    (e) Manufacturer rebates.
    (1) Manufacturer obligation to offer rebates. Pursuant to a 
manufacturer's obligation under section 340B(a)(1) of the PHSA to 
charge no more than the ceiling price for covered outpatient drugs 
(taking into account any rebate or discount, as provided by the 
Secretary), a manufacturer must pay a rebate for a covered outpatient 
drug to an AIDS Drug Assistance Program, which has registered for the 
340B Program under the rebate option or hybrid option and has made a 
qualified payment for such covered outpatient drug.
    (2) Amount of rebate. The rebate owed to an AIDS Drug Assistance 
Program for a qualified payment for a covered outpatient drug is equal 
to the rebate described in section 1927(c) of the Social Security Act, 
multiplied by the units of drug included in the rebate claim.

Part H--Program Integrity

HHS Audit of a Covered Entity

    Pursuant to section 340B(a)(5)(C) of the PHSA, a covered entity 
participating in the 340B Program, including all its child sites and 
contract pharmacies, is subject to audit by HHS to determine if it is 
complying with all 340B Program requirements. HHS will ensure that only 
one 340B Program audit of a covered entity, its child sites, and 
contract pharmacies is in process at any given time, including a 340B 
Program audit by a manufacturer. HHS will notify the covered entity of 
its intent to audit. HHS will have the option to conduct an on-site 
review, a review of documentation submitted to HHS, or both.
    (a) Provision of auditable records. At HHS's request, the covered 
entity shall provide or arrange for access to all specified records 
pertaining to 340B Program compliance on behalf of the parent covered 
entity site, its child sites, and its contract pharmacies by the 
deadline specified. Failure to provide records or respond to requests 
for information within HHS-specified deadlines may result in the 
penalties specified in this guidance for failure to maintain auditable 
records and termination from the 340B Program.
    (b) Notice and hearing. HHS will initiate a notice and hearing 
process under which a covered entity has the opportunity to respond to 
adverse audit findings and other instances of noncompliance or to 
respond to the proposed loss of 340B Program eligibility. HHS initiates 
the process by providing written notice that will specify a 30-day 
response deadline. The covered entity responds in writing to each issue 
of noncompliance, providing supporting documentation as necessary, 
including but not limited to a revised or amended cost report accepted 
for filing. HHS will issue a final written notice with is final 
determination regarding noncompliance. If the final determination of 
noncompliance includes a finding that the covered entity is no longer 
eligible, HHS will determine the removal date. The covered entity is 
liable for repayment to affected manufacturers for purchases made after 
the date the entity loses its eligibility.
    (c) Corrective action plans. HHS considers a covered entity in 
compliance with 340B statutory requirements if the entity has submitted 
a corrective action plan that documents the correction of any finding 
of noncompliance, explains measures taken to prevent future occurrences 
of noncompliance, includes a plan to offer affected manufacturers 
repayment for discounts improperly received, if applicable, and states 
a timeline for corrective actions to take place. HHS will review 
corrective action plans and work with covered entities to revise 
submitted corrective action plans to appropriately address the required 
components. HHS may verify a covered entity's compliance with an HHS-
approved corrective action plan at any time. Failure of an entity to 
submit a corrective action plan may result in further HHS action, 
including termination from the 340B Program.
    (d) Public information. HHS may make the final audit results 
available to the public.

Manufacturer Audit of a Covered Entity

    Pursuant to section 340B(a)(5)(C) of the PHSA, a drug manufacturer 
participating in the 340B Program may audit the records of a covered 
entity, its child sites, and its contract pharmacies regarding 
compliance with the 340B Program requirements that prohibit duplicate 
discounts and diversion of the manufacturer's drugs if the manufacturer 
has reasonable cause to believe the entity is not complying with these 
requirements. Drug manufacturer concerns regarding the 340B Program 
eligibility of a covered entity or compliance with 340B Program 
requirements other than diversion and duplicate discounts may be 
referred to HHS for investigation. A covered entity must permit an HHS-
approved audit to

[[Page 52323]]

be conducted by the manufacturer's auditor.
    (a) Adherence to 340B Program requirements. Until HHS makes a 
determination of a 340B Program violation, a manufacturer must continue 
to sell covered outpatient drugs at no more than the 340B ceiling price 
to the covered entity, and the covered entity must continue to comply 
with all 340B Program requirements. Alleged noncompliance, the filing 
of a manufacturer audit work plan, or the conduct of an audit do not 
affect the statutory obligations of the manufacturer or the covered 
entity.
    (b) Procedures for requesting and conducting an audit. The 
manufacturer shall follow the steps below in requesting and conducting 
an audit.
    (1) Initial notification to the covered entity. The manufacturer 
notifies the covered entity in writing if it believes the covered 
entity has violated the prohibition concerning duplicate discounts or 
diversion (section 340B(a)(5)(A) or (B) of the PHSA) and engages the 
covered entity in good faith to resolve the issues for at least 30 days 
from the covered entity's receipt of such written notification.
    (2) Submission of basis for reasonable cause and audit work plan. 
If the manufacturer cannot resolve the matter through good faith 
negotiations with the covered entity, the manufacturer may submit its 
grounds for reasonable cause with supporting documentation and evidence 
of its attempt to resolve the matter with the covered entity, and its 
audit work plan to HHS.
    (3) HHS review. HHS will review the request, all submitted 
documentation, and the audit work plan. HHS will notify a manufacturer 
of any concerns regarding the audit work plan or the manufacturer's 
basis for reasonable cause and may require revision of certain audit 
procedures.
    (4) Covered entity audit requirements. A covered entity subject to 
manufacturer audit must provide access to records demonstrating 
compliance with sections 340B(a)(5)(A) and (B) of the PHSA within the 
scope of the audit. The covered entity is also responsible for 
arranging access to or directly providing child site and contract 
pharmacy records relevant to the audit.
    (5) Audit scope. The scope of the audit is limited to drugs 
provided by that manufacturer which should not include a review of 
auditable records exceeding the 5-year record retention standard. 
Manufacturers must protect proprietary information of the covered 
entity at all times.
    (6) Patient confidentiality. Patient confidentiality must be 
observed throughout the audit process and in the final audit report, in 
accordance with HIPAA requirements at 45 CFR parts 160, 162, and 164.
    (7) Post-audit. The manufacturer submits the final audit report to 
the covered entity and the covered entity shall provide its response to 
the manufacturer on the audit report's findings and recommendations 
within 30 days of receipt of the audit report. A covered entity's 
failure to respond shall be considered as the covered entity's 
agreement with the audit findings. If the covered entity agrees with 
the audit report findings and recommendations either in full or in 
part, the covered entity shall include in its response to the 
manufacturer a description of the actions planned or taken to address 
the audit findings and recommendations. When the covered entity does 
not agree with the audit report findings and recommendations, the 
covered entity shall provide its rationale for the disagreement to the 
manufacturer.
    (8) Audit reports. The manufacturer submits copies of the final 
audit report and covered entity responses to HHS.
    (9) Other Federal agencies. HHS may also refer findings to other 
Federal agencies, the HHS OIG, or other Departmental divisions, as 
appropriate.
    (c) Manufacturer audit work plan. The manufacturer's audit work 
plan is expected to include the following elements:
    (1) Audit objectives, scope, and methodology;
    (2) Skill and knowledge of the auditor's personnel including 
supervisors, and any intended use of consultants, experts, and 
specialists;
    (3) Tests and procedures to be used to assess a covered entity's 
system of internal controls;
    (4) Procedures to be used to determine the 340B purchases 
questioned as potential violations of section 340B(a)(5)(A) or (B) of 
the PHSA; and
    (5) Procedures to be used to protect patient confidentiality 
consistent with HIPAA requirements at 45 CFR parts 160, 162, and 164, 
and the covered entity's proprietary information.

HHS Audit of a Manufacturer and Its Contractors

    Pursuant to section 340B(d)(1)(B)(v) of the PHSA, a manufacturer 
(or its contractors, including wholesalers) participating in the 340B 
Program may be subject to audit by HHS to determine whether it is 
complying with 340B Program requirements in statute, regulations, and 
the PPA. HHS will notify the manufacturer or wholesaler in writing of 
HHS's intent to audit for 340B Program compliance.
    (a) Provision of auditable records. The manufacturer shall provide 
all requested records demonstrating 340B Program compliance on behalf 
of itself and any wholesaler or organization which performs 340B 
Program requirements or contracts for the manufacturer. Failure to 
provide records or respond to requests for information within the HHS-
specified time frames may result in further action by HHS or referral 
for investigation.
    (b) Notice and hearing. HHS will provide the manufacturer with 
written notice of any proposed audit findings and will request a 
response within 30 days. The manufacturer shall respond to HHS with its 
agreement or disagreement with each audit finding and provide 
documentation to support its disagreement within the specified 
deadline. The manufacturer will be deemed to agree with any audit 
finding the manufacturer does not specifically address or if the 
manufacturer fails to respond to the HHS notification of audit findings 
within the specified deadline. HHS will review all documentation, 
including documents submitted by the manufacturer, and advise the 
manufacturer or wholesaler of its final determination regarding audit 
findings. HHS will request a corrective action plan within a specified 
time to address findings, as needed. If HHS determines that a 
manufacturer no longer meets the requirements of the 340B Program, HHS 
will provide the manufacturer with notice and hearing pursuant to this 
section.
    (c) Corrective action plan. A corrective action plan is submitted 
within 30 days of receiving HHS's audit findings of noncompliance. This 
corrective action plan addresses each audit finding of noncompliance, 
documents the correction of all findings of noncompliance, institutes 
measures to prevent future occurrences of noncompliance, offers 
affected covered entities repayment for instances of overcharging, if 
applicable, and states a timeline for corrective actions to occur. HHS 
will determine if the submitted corrective action plan is sufficient. 
HHS may verify a manufacturer's compliance with the HHS-approved 
corrective action plan at any time.
    (d) Public information. HHS may make the final audit results 
available to the public.


[[Page 52324]]


    Dated: August 14, 2015.
James Macrae,
Acting Administrator, Health Resources and Services Administration.
    Approved: August 17, 2015.
Sylvia M. Burwell,
Secretary.
[FR Doc. 2015-21246 Filed 8-27-15; 8:45 am]
 BILLING CODE 4165-15-P