Compliance Issues Relating to Intersection of Medicaid Rebate and 340B Programs

1. Compliance Issues Relating to Intersection of Medicaid Rebate and 340B Programs by Bill von Oehsen President and General Counsel Safety Net Hospitals for Pharmaceutical Access NAMFCU Directors Symposium March 24, 2010 Washington, DC

2. Overview 340B background Calculating ceiling price 340B litigation update Medicaid intersection: duplicate discounts 340B-specific billing and payment options Medicaid billing compliance issues SNHPA Medicaid billing survey What’s next? Additional 340B resources and upcoming events

3. 340B Background 340B drug discount program requires pharmaceutical manufacturers participating in the Medicaid program to provide discounts on covered outpatient drugs purchased by federally-funded clinics and other safety net providers referred to as “covered entities” The rights and obligations of covered entities and manufacturers are set forth in Section 340B of the Public Health Service Act (PHSA) Section 1927 of the Social Security Act (SSA) requires manufacturers to enter into a pharmaceutical pricing agreement (PPA) with the Secretary of HHS as a condition of Medicaid covering and paying for the companies’ outpatient drugs Under the PPA, a manufacturer agrees to provide discounts and otherwise comply with 340B requirements

4. 340B Background (cont’d) Program is administered by the Health Resources and Services Administration (HRSA) through the Office of Pharmacy Affairs (OPA) Because several aspects of the 340B program depend on interpretation and application of SSA provisions (e.g. average manufacturer price, best price, etc.), the Centers for Medicare & Medicaid Services (CMS) also plays a significant role in 340B program administration Covered entities include high-Medicaid disproportionate share hospitals owned by or under contract with state or local government; community health centers; ADAPs; family planning clinics; AIDS, TB and STD clinics; and other grantees under the Public Health Service Act Covered entities, manufacturers and other 340B participants are listed in the OPA database

9. 340B Background (cont’d) Discounts are calculated using the Medicaid rebate formula; but 340B pricing is better because (1) sales do not involve retail pharmacies thereby avoiding retail mark-ups and (2) 340B providers regularly negotiate sub-ceiling prices Use of drugs limited to “patients” of 340B covered entity Medicaid billing procedures may need to be adjusted to avoid manufacturers giving duplicate discounts

12. Calculating Ceiling Price Manufacturer’s Medicaid drug rebate agreements require drug companies to calculate average manufacturer price (AMP) and best price as part of their obligation to pay rebates to Medicaid for covered outpatient drugs Medicaid rebate formula also requires manufacturers to calculate the average total rebate for a drug unit for each dosage and strength, often referred to as the unit rebate amount (URA) 340B ceiling price = AMP – URA Accordingly, if a manufacturer miscalculates AMP, best price or URA in a manner that results in the underpayment of Medicaid rebates, the miscalculation will lead to 340B providers being overcharged for the same drug

13. Calculating Ceiling Price (cont’d)

14. Special procedures for calculating 340B price for new drugs: Manufacturers must estimate a new drug’s 340B ceiling price for the first three quarters that the drug is on the market After three quarters, manufacturers will have AMP and best price data to calculate the ceiling price If the manufacturer overestimates the new drug’s price during the initial three quarter period, it must issue a refund to the covered entity upon request Penny prices – Under HRSA policy, if the 340B formula results in a negative price (because the inflation-based penalty exceeds AMP minus 15.1% or best price), then the manufacturers must charge a penny for the drug Calculating Ceiling Price (cont’d)

15. 340B Litigation Update

16. 340B Litigation Update (cont’d)

18. 340B Litigation Update (cont’d)

19. Medicaid Intersection: Duplicate Discounts Covered entities are generally free to bill and be reimbursed for 340B drugs without making any adjustments to their billing procedures, unless Medicaid is the payer Covered entities sometimes must bill Medicaid at reduced prices for 340B drugs The sole reason that covered entities must adjust their Medicaid billing practices is to protect manufacturers from the duplicate discount problem

21. Medicaid Intersection: Duplicate Discounts (cont’d) Manufacturers are protected from paying a Medicaid rebate and giving a 340B discount on the same drug. PHSA 340B(a)(5)(A); SSA 1927(a)(5)(C) To avoid the duplicate discount problem, the Secretary is directed to develop a mechanism that 340B providers and states can use to ensure compliance; alternatively covered entities should not seek Medicaid reimbursement for 340B drugs that are subject to Medicaid rebates. PHSA 340B(a)(5)(A); SSA 1927(a)(5)(C)

22. 340B-Specific Billing and Payment Options HRSA guidelines allow covered entities to comply with the statute in different ways: 1. Bill Medicaid at “acquisition cost” plus the state-allowable dispensing fee and the state does not request a rebate. 58 Fed. Reg. 34,058 (6/23/93) 2. “Carve out” Medicaid drugs from the 340B program and allow the state to collect rebates. 65 Fed. Reg. 13,983 (3/15/00) 3. Follow state guidelines for applicable billing limits. 65 Fed. Reg. 13,983 (3/15/00)

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24. Medicaid Billing Compliance Issues Question: Has a covered entity overbilled Medicaid if it does not bill its state at actual acquisition cost (AAC) for 340B drugs? Answer: Not necessarily Explanation: There are numerous exceptions to the AAC billing restriction, for example: when billing a managed care organization if the drug is not rebatable under Medicaid if the state has different billing and reimbursement limits

25. Medicaid Billing Compliance Issues (cont’d) There are some within the Medicaid program who believe that the AAC billing restriction was established to save money for Medicaid Not true for several reasons: It is clear in both 340B law and legislative history that the sole purpose of AAC billing is to compensate states for the loss of their rebates that they would otherwise receive but for the protection of manufacturers from duplicate discounts HRSA’s 1993 guidance establishing the AAC billing standard is an informal, non-binding policy HRSA essentially withdrew the policy in March 2000 when it issued another guidance directing covered entities to “refer to their respective Medicaid state agency drug reimbursement guidelines for applicable billing limits”

26. States allow deviation from AAC billing for different reasons: State utilizes billing system that does not accommodate AAC billing AAC billing does not affect reimbursement (prospective payment for Medicaid services) Hospital systems do not accommodate AAC billing , so billing must be by hand and state recognizes onerous administrative burden Regardless of state’s perceived billing and payment policy for 340B drugs, there may be no clear guidance in statute, rules, or provider’s manual or transmittal Medicaid Billing Compliance Issues (cont’d)

27. While HRSA clarified in 2000 that AAC is not required under federal law, CMS has never issued parallel guidance Considerable lack of clarity among Medicaid programs Many (e.g. Medi-Cal) believe that federal law requires billing at AAC Medicaid auditors in at least three states – FL, AK, NY – have investigated 340B covered entities for alleged overbilling Federal whistle blower suit against family planning clinics in Los Angeles sued for billing at other than AAC Medicaid Billing Compliance Issues (cont’d)

28. SNHPA Medicaid Billing Survey

29. What’s Next? 340B Coalition urging CMS and HRSA to work on a uniform and coherent policy 340B Coalition offering input on law, state variations, history 340B Coalition keeping pressure on CMS, HRSA to produce HHS Office of Inspector General reviewing Medicaid billing by 340B covered entities Time is of the essence: June 2009: California legislature mandated AAC billing, prohibited carve-out Medi-Cal results in “lose-lose”. HRSA and CMS have opportunity to educate states on shared savings “win-win”

30. Additional 340B Resources Safety Net Hospitals for Pharmaceutical Access www.snhpa.org Bill von Oehsen william.vonoehsen@snhpa.org or 202-466-6550 Stuart Gordon stuart.gordon@snhpa.org or 202-552-5851 Federal Drug Discount and Compliance Monitor www.drugdiscountmonitor.com SNHPA/340B Job Site www.rxjobsolutions.com

31. Additional 340B Resources (cont’d) Office of Pharmacy Affairs www.hrsa.gov/opa 340B Prime Vendor Program www.340Bpvp.com Pharmacy Services Support Center 1-800-628-6297 or www.pssc.aphanet.org

32. Upcoming Events 14th Annual 340B Coalition Conference July 19-21, 2010 Washington, DC www.340bconferences.org