Background The 340B Program was created following the enactment of the Medicaid  Drug Rebate Program and gives 340B covered entities discounts on  outpatient drugs comparable to those made available to state Medicaid  agencies. HRSA is responsible for administering and overseeing the  340B Program. Program Participants Eligibility for the 340B Program, which is defined in the PHSA, has  expanded over time, most recently through the Patient Protection and  Affordable Care Act (PPACA), which extended eligibility to additional  types of hospitals. Entities generally become eligible by receiving  certain federal grants or by being one of six hospital types. Eligible  grantees include clinics that offer primary and preventive care services,  such as Federally Qualified Health Centers, clinics that target specific  conditions or diseases that raise public health concerns or are expensive  to treat, and AIDS Drug Assistance Programs, which serve as a “payer of  last resort” to cover the cost of providing HIV-related medications to  certain low-income individuals. Eligible hospitals include certain children’s  hospitals, free-standing cancer hospitals, rural referral centers, sole  community hospitals, critical access hospitals, and general acute care  hospitals that serve a disproportionate number of low-income patients,  referred to as disproportionate share hospitals (DSH). To become a  covered entity and participate in the program, eligible entities must  register with HRSA and be approved. Entity participation in the 340B  Program has grown over time to include more than 38,000 entity sites,  including more than 21,000 hospital sites and nearly 17,000 federal  grantee sites (see fig. 1). To be eligible for the 340B Program hospitals must meet certain  requirements intended to ensure that they perform a government function  to provide care to the medically underserved. First, hospitals generally  must meet specified DSH adjustment percentages to qualify.  Additionally, they must be (1) owned or operated by a state or local  government, (2) a public or private nonprofit corporation that is formally  delegated governmental powers by a unit of state or local government, or  (3) a private, nonprofit hospital under contract with a state or local  government to provide health care services to low-income individuals who  are not eligible for Medicaid or Medicare. All drug manufacturers that supply outpatient drugs are eligible to  participate in the 340B Program and must participate in order to have  their drugs covered by Medicaid. To participate, manufacturers are  required to sign a pharmaceutical pricing agreement with HHS in which  both parties agree to certain terms and conditions. Program Structure,  Operation, and Key  Requirements The 340B price for a drug—often referred to as the 340B ceiling price—is  based on a statutory formula and represents the highest price a  participating drug manufacturer may charge covered entities. Covered  entities must follow certain requirements as a condition of participating in  the 340B Program. For example  covered entities are prohibited from subjecting manufacturers to  “duplicate discounts” in which drugs prescribed to Medicaid  beneficiaries are subject to both the 340B price and a rebate through  the Medicaid Drug Rebate Program.  covered entities are also prohibited from diverting any drug purchased  at the 340B price to an individual who does not meet HRSA’s  definition of a patient. This definition, issued in 1996, outlines three  criteria that generally state that diversion occurs when 340B  discounted drugs are given to individuals who are not receiving health  care services from covered entities or are only receiving non-covered  services, such as inpatient hospital services. (See table 1 for more  information on HRSA’s definition of an eligible patient.) Covered  entities are permitted to use drugs purchased at the 340B price for all  individuals who meet the 340B Program definition of a patient  regardless of whether they are low-income, uninsured, or  underinsured. A covered entity typically purchases and dispenses 340B drugs through  pharmacies—either through an in-house pharmacy, or through the use of  a contract pharmacy arrangement, in which the covered entity contracts  with an outside pharmacy to dispense drugs on its behalf. The adoption  and use of contract pharmacies in the 340B Program is governed by  HRSA guidance. HRSA’s original guidance permitting the use of contract  pharmacies limited their use to covered entities that did not have in-house  pharmacies and allowed each covered entity to contract with only one  outside pharmacy. However, March 2010 guidance lifted the restriction  on the number of pharmacies with which a covered entity could  contract. Since that time, the number of unique contract pharmacies has  increased significantly, from about 1,300 at the beginning of 2010 to  around 18,700 in 2017 (see fig. 2); and, according to HRSA data, in 2017,  there were more than 46,000 contract pharmacy arrangements. HRSA  guidance requires a written contract between the covered entity and each  contract pharmacy. Covered entities are responsible for overseeing  contract pharmacies to ensure compliance with prohibitions on drug  diversion and duplicate discounts. HRSA guidance indicates that covered  entities are “expected” to conduct annual independent audits of contract  pharmacies, leaving the exact method of ensuring compliance up to the  covered entity. Drug manufacturers also must follow certain 340B Program requirements.  For example, HRSA’s nondiscrimination guidance prohibits  manufacturers from distributing drugs in ways that discriminate against  covered entities compared to other providers. This includes ensuring that  drugs are made available to covered entities through the same channels  that they are made available to non-340B providers, and not conditioning  the sale of drugs to covered entities on restrictive conditions, which would  have the effect of discouraging participation in the program. HRSA Has  Implemented GAO’s  Recommendation to  Improve Its Oversight  of the 340B Program  by Conducting Audits In our September 2011 report, we found that HRSA’s oversight of the  340B Program was weak because it primarily relied on covered entities  and manufacturers to police themselves and ensure their own compliance  with program requirements. Upon enrollment into the program, HRSA  requires participants to self-certify that they will comply with applicable  340B Program requirements and any accompanying agency guidance,  and expects participants to develop the procedures necessary to ensure  and document compliance, informing HRSA if violations occur. HRSA  officials told us that covered entities and manufacturers could also  monitor each other’s compliance with program requirements, but we  found that, in practice, participants could face limitations to such an  approach. Beyond relying on participants’ self-policing, we also found that HRSA  engaged in few activities to oversee the 340B Program and ensure its  integrity, which agency officials said was primarily due to funding  constraints. Further, although HRSA had the authority to conduct audits  of program participants to determine whether program violations had  occurred, at the time of our 2011 report, the agency had never conducted  such an audit. In our 2011 report, we concluded that changes in the settings where the  340B Program was used may have heightened the concerns about the  inadequate oversight we identified. In the years leading up to our report,  the settings where the 340B Program was used had shifted to more  contract pharmacies and hospitals than in the past, and that trend has  continued in recent years. We concluded that increased use of the 340B  Program by contract pharmacies and hospitals may have resulted in a  greater risk of drug diversion to ineligible patients, in part because these  facilities were more likely to serve patients that did not meet the definition  of a patient of the program. To address these oversight weaknesses, we recommended that the  Secretary of HHS instruct the Administrator of HRSA to conduct selective  audits of covered entities to deter potential diversion. In response to that  recommendation, in fiscal year 2012, HRSA implemented a systematic  approach to conducting annual audits of covered entities that is outlined  on its website. HRSA audits include entities that are randomly selected  based on risk-based criteria (approximately 90 percent of the audits  conducted each year), and entities that are targeted based on information  from stakeholders (10 percent of the audits conducted). HRSA currently  audits a total of 200 entities per year, which accounts for less than 2  percent of covered entities. (See table 2.) As a result of the audits already conducted, HRSA has identified  instances of non-compliance with program requirements, including  violations related to drug diversion and the potential for duplicate  discounts. The agency has developed a process to address non- compliance through corrective action plans. The results of each year’s  audits are available on HRSA’s website, and we currently have work  underway reviewing HRSA’s efforts to ensure compliance with 340B  Program requirements at contract pharmacies that includes an  examination of HRSA’s audits of covered entities. HRSA Implemented  One of Three GAO  Recommendations to  Clarify Program  Guidance In our 2011 report, we found that HRSA’s guidance on three key program  requirements lacked the necessary level of specificity to provide clear  direction, making it difficult for participants to self-police or monitor others’  compliance, and raising concerns that the guidance could be interpreted  in ways that were inconsistent with its intent. First, we found that HRSA’s nondiscrimination guidance was not  sufficiently specific in detailing practices manufacturers should follow to  ensure that drugs were equitably distributed to covered entities and non- 340B providers when distribution was restricted. Some stakeholders we  interviewed for the 2011 report, such as covered entities, raised concerns  about the way certain manufacturers interpreted and complied with the  guidance in these cases. We recommended that HRSA further clarify its  nondiscrimination guidance for cases in which distribution of drugs is  restricted and require reviews of manufacturers’ plans to restrict  distribution of drugs at 340B prices in such cases. In response, HRSA  issued a program notice in May 2012 that clarified HRSA’s policy for  manufacturers that intend to restrict distribution of a drug and provided  additional detail on the type of information manufacturers should include  in such restricted distribution plans. In addition, we found a lack of specificity in HRSA’s guidance on two  other issues—the definition of an eligible patient and hospital eligibility for  program participation. Specifically, we found that HRSA’s guidance on the definition of an eligible patient lacked the  necessary specificity to clearly define the various situations under  which an individual was considered eligible for discounted drugs  through the 340B Program. As a result, covered entities could  interpret the definition either too broadly or too narrowly. At the time of  our report, agency officials told us they recognized the need to  provide additional clarity around the definition of an eligible patient, in  part because of concerns that some covered entities may have  interpreted the definition too broadly to include non-eligible  individuals, such as those seen by providers who were only loosely  affiliated with a covered entity. HRSA had not issued guidance specifying the criteria under which  hospitals that were not publicly owned or operated could qualify for  the 340B Program. For example, we found HRSA guidance lacking  on one of the ways hospitals could qualify for the program, namely by  executing a contract with a state or local government to provide  services to low-income individuals who are not eligible for Medicaid or  Medicare. Specifically, we found that HRSA did not outline any criteria  that must be included in such contracts, such as the amount of care a  hospital must provide to these low-income individuals, and did not  require the hospitals to submit their contracts for review by HRSA.  As a result, hospitals with contracts that provided a small amount of  care to low-income individuals not eligible for Medicaid or Medicare  could claim 340B discounts, which may not have been what the  agency intended. Given the lack of specificity in these areas, we recommended that HRSA  (1) finalize new, more specific guidance on the definition of an eligible  patient, and (2) issue guidance to further specify the criteria that hospitals  not publicly owned or operated must meet to be eligible for the 340B  Program. HRSA agreed with these recommendations and had planned to  address them in a comprehensive 340B Program regulation that it  submitted to the Office of Management and Budget for review in April  2014. However, HRSA withdrew this proposed regulation in November  2014 following a May 2014 federal district court ruling that the agency had  not been granted broad rulemaking authority to carry out all the provisions  of the 340B Program. After this ruling, the agency issued a proposed  Omnibus Guidance in August 2015 to interpret statutory requirements for  the 340B Program in areas where it did not have explicit rulemaking  authority, including further specificity on the definition of a patient of a  covered entity and hospital eligibility for 340B Program participation.  However, in January 2017, the agency withdrew the guidance following  the administration’s January 20 memorandum directing agencies to  withdraw or postpone regulations and guidance that had not yet taken  effect. In March 2018, HRSA indicated that it was working with HHS to  determine next steps regarding the proposed Omnibus Guidance, which  included the patient definition, but that it was unable to further clarify  guidance on hospital eligibility without additional authority. HRSA also  noted that the administration’s fiscal year 2019 budget proposal requests  rulemaking authority, which, if enacted, would provide the agency with the  authority to regulate hospital eligibility for the 340B Program. GAO Has Ongoing  Work Related to the  340B Program GAO has ongoing work related to 340B contract pharmacies and the  characteristics of hospitals participating in the program.  Specifically,  given the increase in the number of contract pharmacies in the 340B  Program and concerns that contract pharmacy arrangements present an  increased risk to the integrity of the program, we were asked to review  contract pharmacy use under the 340B Program. In our forthcoming  report, we plan to describe the extent to which covered entities contract with pharmacies  to distribute 340B drugs, and the characteristics of these pharmacies; describe financial arrangements selected covered entities have with  contract pharmacies and third-party administrators related to the  administration and dispensing of 340B drugs; describe the extent to which selected covered entities provide  discounts on 340B drugs dispensed by contract pharmacies to low- income, uninsured patients; and examine HRSA’s efforts to ensure compliance with 340B Program  requirements at contract pharmacies. In addition, with the growth in the number of hospitals participating in the  340B Program and Medicaid coverage expansions as a result of PPACA,  we were asked to review how hospitals that participate in the 340B  Program compare to other hospitals. In our forthcoming report, we plan to  address how hospitals that participate in the 340B Program compare to non- 340B hospitals in terms of certain characteristics; and how, if at all, the characteristics of 340B and non-340B hospitals  changed after state Medicaid coverage was expanded under PPACA. We expect to issue these reports this summer. Chairman Alexander, Ranking Member Murray, and Members of the  Committee, this concludes my statement. I would be pleased to respond  to any questions you may have. GAO Contacts and  Staff  Acknowledgments For further information about this statement, please contact Debra A.  Draper at (202) 512-7114 or draperd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this testimony. Key contributors to this statement were  Michelle Rosenberg, Assistant Director; Amanda Cherrin, Sandra  George, and David Lichtenfeld. This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.
According to HRSA, the purpose of the 340B Program, which was created in 1992, is to enable covered entities to stretch scarce federal resources to reach more eligible patients, and provide more comprehensive services. Covered entities can provide 340B drugs to eligible patients regardless of income or insurance status and generate revenue by receiving reimbursement from patients' insurance. The program does not specify how this revenue is to be used or whether discounts are to be passed on to patients. The number of participating covered entity sites—currently about 38,000—has almost doubled in the past 5 years and the number of contract pharmacies increased from about 1,300 in 2010 to around 18,700 in 2017. In recent years, questions have been raised regarding oversight of the 340B Program, particularly given the program's growth over time. In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B Program and made recommendations for improvement. Among other things, this statement describes HRSA actions in response to GAO recommendations to improve its program oversight. For this statement, GAO obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement the 2011 GAO recommendations. More detailed information on the objectives, scope, and methodology can be found in GAO's September 2011 report. The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to covered entities—eligible clinics, hospitals, and others—in order to have their drugs covered by Medicaid. Covered entities are only allowed to provide 340B drugs to certain eligible patients. Entities dispense 340B drugs through in-house pharmacies or contract pharmacies, which are outside pharmacies entities contract with to dispense drugs on their behalf. The number of contract pharmacies has increased significantly in recent years. In its September 2011 report, GAO found that the Health Resources and Services Administration's (HRSA) oversight of the 340B Program was inadequate to ensure compliance with program rules, and GAO recommended actions that HRSA should take to improve program integrity, particularly given significant growth in the program in recent years. HRSA has taken steps to address two of GAO's four recommendations: HRSA initiated audits of covered entities . GAO found that HRSA's oversight of the 340B Program was weak because it primarily relied on covered entities and manufacturers to ensure their own compliance with program requirements and HRSA engaged in few oversight activities. GAO recommended that HRSA conduct audits of covered entities and in fiscal year 2012, HRSA implemented a systematic approach to conducting annual audits of covered entities. HRSA now audits 200 covered entities a year, which is less than 2 percent of entities participating in the 340B Program. Audits conducted to date have identified instances of non-compliance with program requirements, including the dispensing of drugs to ineligible patients. GAO currently has work underway reviewing HRSA's efforts to ensure compliance at contract pharmacies, which includes an examination of HRSA's audits of covered entities. HRSA clarified guidance for manufacturers. GAO found a lack of specificity in guidance for manufacturers for handling cases in which distribution of drugs is restricted, such as when there is a shortage in drug supply. GAO recommended that HRSA refine its guidance. In May 2012, HRSA clarified its policy for manufacturers that intend to restrict distribution of a drug and provided additional detail on the type of information manufacturers should include in their restricted distribution plans. HRSA has not clarified guidance on two issues. GAO also found that HRSA guidance on (1) the definition of an eligible patient and (2) hospital eligibility criteria for program participation lacked specificity and recommended that HRSA clarify its guidance. HRSA agreed that clearer guidance was necessary and, in 2015, released proposed guidance that addressed both issues. However, in January 2017, the agency withdrew that guidance in accordance with recent directives to freeze, withdraw, or postpone pending federal guidance. In March 2018, HRSA indicated it was in the process of determining next steps related to guidance on the patient definition, but would need additional authority to further clarify guidance on hospital eligibility; rulemaking authority for the 340B Program was requested in the administration's fiscal year 2019 budget proposal.