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GAO Raises Questions about 340B Contract Pharmacies

— Says federal government needs to increase oversight

Last Updated July 6, 2018
MedpageToday

WASHINGTON -- The federal government needs to be a better watchdog when it comes to contract pharmacies that are participating in the 340B drug discount program, according to the Government Accountability Office (GAO).

The Health Resources and Services Administration (HRSA) -- a division of the Department of Health and Human Services (HHS) -- is responsible for auditing the pharmacies, and in a , the GAO listed three main problems with HRSA's work:

  • Lack of data on how many contract pharmacies are participating in the program
  • Weaknesses in the audit process
  • Lack of specific guidance for the providers involved

"As currently structured, weaknesses in HRSA's oversight impede its ability to ensure compliance with 340B program requirements at contract pharmacies," the report's authors concluded. "As the 340B program continues to grow, it is essential that HRSA address these shortcomings."

Number of Contract Pharmacies Growing

The 340B program requires drug manufacturers to sell outpatient drugs at discounted prices to covered healthcare providers -- certain hospitals, such as children's hospitals and those that serve many low-income and uninsured patients, as well as recipients of some federal grants -- in exchange for having their drugs covered by the Medicaid program. Participation in the program is voluntary for both drug companies and providers, but providers have a strong incentive to join in because they can see savings of 20% to 50% on the drugs involved, while drugmakers want to make sure their drugs can be prescribed to Medicaid beneficiaries.

Providers buy and dispense drugs in the 340B program either through in-house pharmacies or through outside, contract pharmacies (or both). The number of contract pharmacies participating has grown substantially in recent years -- from 1,300 in 2010 to about 20,000 in 2017, according to the report. However, "because HRSA does not require covered entities to separately register contract pharmacies to each 'child site' [such as an off-site facility or outpatient clinic] for which a contractual relationship exists, HRSA does not have complete information on which sites of an entity have contracted with a pharmacy to dispense 340B drugs," the report said.

"Additionally, manufacturers do not have complete information on which covered entity sites have contracts with a pharmacy to dispense 340B drugs" -- information that could help drugmakers confirm that they were providing 340B discounts to pharmacies that were actually allowed to get them, the authors noted.

The majority of contract pharmacies (75%) were retail pharmacies, with independent pharmacies making up 20% of those in the program and 5% being other pharmacies, such as specialty pharmacies. This differs from the pharmacy landscape overall in the U.S., in which retail pharmacies comprise about half of drugstores while another third are independent. In addition, "the five biggest pharmacy chains -- CVS, Walgreens, Walmart, Rite-Aid, and Kroger -- represented a combined 60% of 340B contract pharmacies, but only 35% of all pharmacies nationwide," according to the report.

The median distance between the provider and the contract pharmacy was 4.2 miles, although mileage range was wide, from 0 to 5,000 miles, the report found. "When asked why contract pharmacies may be located many miles away from the covered entity, HRSA officials indicated that the pharmacies may provide prescriptions by mail (even if they are not classified as mail-order pharmacies) or dispense specialty drugs," the report said in a footnote. In its response to the GAO report, HRSA officials said that the 5,000-mile distance was for a facility in Connecticut that contracted with a specialty pharmacy in Hawaii -- but the contract was terminated after only 17 days.

Auditing Questions

HRSA uses audits to make sure contract pharmacies are complying with the 340B program's rules, including ensuring that providers aren't receiving both a Medicaid rebate and a 340B discount rate for a single drug. However, although the HRSA audits look at rebates provided through the Medicaid fee-for-service program, they "do not include a review of covered entities' processes to prevent duplicate discounts for drugs dispensed through Medicaid managed care," the report noted. "Currently, there are more Medicaid enrollees, prescriptions, and spending for drugs under managed care than fee-for-service."

The agency also offers little guidance for providers on how to make sure the 340B program rules are being followed, the authors wrote. Guidance written in 2010 states that providers have to ensure their pharmacies comply with 340B's rules, but says "the exact method of ensuring compliance is left up to the covered entity." The guidance also calls for annual audits by an independent auditor, "but HRSA officials told us that covered entities are not required to conduct independent audits and instead are expected to do some form of periodic oversight of their contract pharmacies," the report said.

This lack of guidance means that "some covered entities performed minimal contract pharmacy oversight," according to the GAO. For instance, "officials from a grantee reported auditing claims of five randomly selected patients quarterly, despite treating approximately 900 patients each month." In another case, "officials from a critical access hospital that serves about 21,000 patients a year at its outpatient clinics reported that the annual independent audit of their hospital system reviewed five claims."

GAO made seven recommendations to improve HRSA's oversight of contracted pharmacies in the 340B program, including:

  • HRSA should require covered entities to register contract pharmacies for each site of the entity for which a contract exists
  • HRSA should issue guidance to covered entities on the prevention of duplicate discounts under Medicaid managed care, working with CMS [the Centers for Medicare & Medicaid Services] as HRSA deems necessary to coordinate with guidance provided to state Medicaid programs
  • HRSA should provide more specific guidance to covered entities regarding contract pharmacy oversight, including the scope and frequency of such oversight

HRSA pushed back on some of the recommendations. For example, with regard to registering "child sites" as having contracts with outside pharmacies, the agency says it requires all sites to be listed on written contracts, and that HRSA audits that information.

Hospitals Concerned About Added Burdens

340B hospitals themselves pointed out that contract pharmacies are extremely important to them, especially when it comes to rural hospitals. "In a survey of 340B Health members, 87% of rural hospitals reported they use their contract pharmacy benefit to maintain operations," 340B Health, a trade group for providers in the 340B program, said in a statement. "Disproportionate share hospitals [those serving many low-income or uninsured patients] reported using their contract pharmacy benefit to provide direct services to low-income patients, with 89% using their contract pharmacy [discount] to support uncompensated care and 71% using their [discount] to provide free or discounted drugs to patients."

The group added that it was "concerned that some of these recommendations could make program participation significantly more cumbersome for hospitals without improving transparency or compliance. We look forward to reviewing these recommendations in more detail and continuing to work with lawmakers to protect this vital program."

The National Association of Chain Drug Stores, a trade group for retail pharmacies, said it was still reviewing the report and couldn't respond at press time. The American Hospital Association did not respond to a request for comment.

Marsha Simon, PhD, president of Simon & Co., a healthcare consulting firm here, said the report was "worthy" but that the government's priorities were a little "misplaced" when it comes to drug discounts. "I would put the emphasis elsewhere," said Simon, a former staffer for the late senator Edward M. Kennedy (D-Mass.) who helped write the 340B legislation. In particular, the misclassification of drugs under the Medicaid rebate program, as highlighted in a May 2017 from the HHS Office of Inspector General discussing Mylan's misclassification of its EpiPen, would be more worthy of a close look.

"There are very significant resources [for this] at CMS -- including over $1 billion for program integrity funding ... and we've never taken a look at the basic data being reported by drug manufacturers," she said. "Where are taxpayers best served and program integrity dollars best spent? I think it would be there; that's where 340B discounts are calculated."