While audits are part of doing business in the ordinary course, businesses are generally less than eager to open the books. And the same is true when it comes to the 340B Drug Pricing Program. Audits are now making the list of ongoing disputes between manufacturers and covered entities (CEs) participating in the program.

As we previously discussed, under the 340B drug discount program, manufacturers participating in Medicaid agree to provide outpatient drugs at deeply discounted 340B ceiling prices to certain healthcare organizations. And according to the Health Resources and Services Administration (HRSA), the organization tasked with administering the 340B program, enrolled hospitals and other covered entities can achieve average savings of 25% to 50%.

Among other things, one core requirement of participation in the 340B program is compliance with the prohibition against duplicate discounts. Duplicate discounts occur when a covered entity (CE) obtains a 340B discount on a medication and a Medicaid agency obtains a discount in the form of a rebate from the manufacturer for the same medication. To ensure compliance, HRSA requires CEs to have mechanisms in place to prevent duplicate discounts. And as a natural extension of this, HRSA permits manufacturers to audit CEs to confirm the same.

Recently, however, HRSA removed certain formalities from the dispute process, which has led to an increase in manufacturer audit requests and subsequent pushback from CEs on HRSA audit approvals.   

HRSA’s 1996 340B Audit Guidance

HRSA’s 1996 guidance, among other things, requires CEs to permit manufacturers of covered outpatient drugs to audit records of the CE that directly pertain to the CEs compliance with 340B(a)(5) (A) and (B) requirements with respect to drugs of the manufacturer. CEs also must permit manufacturers access to all records of any organization working with a CE to purchase or dispense covered drugs, or to prepare Medicaid reimbursement claims for the CE, and any primary record that could be part of a reasonable audit trail.

HRSA did, however, set forth certain preconditions to a manufacturer audit, including that a manufacturer first provide the CE with written notice of the alleged violation when it has documentation that indicates there is “reasonable cause” to conduct an audit. Reasonable cause means “a reasonable person could believe that a covered entity may have violated a requirement of section 340B(a)(5) (A) or (B) or the Public Health Service (PHS) Act.” The guidelines further provide that a manufacturer may only request HRSA approval for an audit if the issue is not resolved after at least 30 days of “good faith” negotiations between the parties.

HRSA reviews all documentation submitted by a manufacturer requesting an audit and determines whether reasonable cause exists. If determined it does, the audit proceeds forward without HRSA intervention. At the conclusion of the audit, the manufacturer is required to provide a copy of the audit report to the CE. The CE has 30 days to respond to the audit report findings.

HRSA’s 2024 Alternative Dispute Resolution Final Rule

The Alternative Dispute Resolution (ADR) process is not new to the 340B program. It was first mandated under the Affordable Care Act in 2012 and was intended to assist covered entities and manufacturers in resolving disputes regarding overcharging, duplicate discounts, and/or diversion. However, the ADR process was not implemented until nearly a decade later, in 2021. Despite its implementation, because the process widely was considered cumbersome, no ADR claim review has been completed under the process.

As a result of encountering policy and operational challenges with its implementation of the 2020 final rule, on April 18, 2024, HRSA issued its final rule revising the ADR process to be, in its opinion, more accessible, administratively feasible, and timely than the 2020 final rule. HRSA notes that the purpose of the ADR process is to resolve (1) claims by covered entities that they have been overcharged for covered outpatient drugs by manufacturers and (2) claims by manufacturers, after a manufacturer has conducted an audit as authorized by section 340B(a)(5) (C) of the PHS Act, that a CE has violated the prohibition on diversion and duplicate discounts.

HRSA stated that its goal in revising the ADR process was to ensure claims are resolved fairly, efficiently, and expeditiously. To execute on this goal, HRSA eliminated certain process formalities that, according to HRSA, resulted in certain CEs (e.g., small community-based organizations with limited means) not being able to avail themselves of the ADR process. And  while it is still early, based on the increase in manufacturer audit requests, it appears HRSA may have achieved its goal. This outcome may be viewed as favorable or unfavorable to a company depending on whether it is a manufacturer or CE.

The following notable changes were made to the ADR process:

• HRSA removed the requirements that proceedings follow the Federal Rules of Evidence and Federal Rules of Civil Procedure
• HRSA finalized removing the $25,000 minimum dispute in controversy threshold for filing a claim
• HRSA opted to not finalize the proposed suspension of review of ADR claims with issues that are the “same as, or similar” to an issue pending in federal court
• ADR panel members are now required to be 340B subject matter experts from the Office of Pharmacy Affairs (OPA) and must undergo conflicts of interest screening before reviewing a claim
• All parties must demonstrate that they engaged in good faith negotiations and dispute resolution efforts prior to initiating ADR proceedings
• Claims are limited to those involving overcharges, duplicate discounts, and diversion
• A reconsideration process has been established for ADR panel decisions
• The HRSA administrator is permitted to review and reverse, alter, or uphold any 340B panel or reconsideration decision
• HRSA requires that the ADR panel issue a decision within one year of receiving a complete claim for review
• ADR final decisions will be published on HRSA’s website

The final rule dictates that a 340B ADR claim submission be filed within three years of an alleged overcharge, diversion, or duplicate discount violation. HRSA went on to make clear that the ADR process is a remedy open to all manufacturers and covered entities that participate in the program.

Manufacturer Audits of CEs Increase in Frequency

The interplay between manufacturer audits and the filing of an ADR claim is quite simple: Manufacturers are required to conduct an audit of a CE prior to filing an ADR claim alleging a violation. While manufacturer 340B audits have historically been infrequent (HRSA received only two final audits from manufacturers since November 2022), they have become more significant with the finalization of the less formal 340B ADR process.

The limited frequency of manufacturer audits likely resulted from the structure of the prior ADR process (under the 2020 final rule), which was more analogous to formal litigation than dispute resolution. Under the 2020 final rule, after completing an audit, manufacturers were required to adhere to the Federal Rules of Evidence and Civil Procedure, a resource-heavy and costly endeavor, when filing an ADR claim. The negligible number of audit submissions appears to indicate that it was more efficient for a manufacturer to immediately file suit and avoid the audit and ADR processes altogether when seeking to resolve a dispute.  

However, with many of the process formalities removed under the new 2024 final rule, the ADR process may now be the more economical and efficient option for manufacturers. Manufacturers may now be inclined to utilize the updated ADR process, as opposed to seeking court intervention, given they no longer need to establish a minimal amount in controversy or adhere to the Federal Rules of Evidence and Civil Procedure. The recent uptick in manufacturer requests for HRSA audit approvals appears to support this; in other words, the revised, less formal framework under the new 2024 final rule seems to be driving manufacturers to request audits more frequently.

HRSA’s Request for Comment on 2024 Final Rule

On August 7, 2024, HRSA announced plans to submit an Information Collection Request (ICR) to the Office of Management and Budget (OMB). Prior to submitting the ICR to OMB, HRSA seeks comments from the public regarding its burden estimate for initiation of the 340B ADR process and uploading of related documents: “HRSA specifically requests comments on: (1) the necessity and utility of the proposed information collection for the proper performance of the agency’s functions; (2) the accuracy of the estimated burden; (3) ways to enhance the quality, utility and clarity of the information to be collected; and (4) the use of automated collection techniques or other forms of information technology to minimize the information collection burden.” (Agency Information Collection, 89 Fed. Reg. 64,468–64,469 (Aug. 7, 2024)). The deadline to submit public comments is October 7, 2024.

Key Takeaways

With the 340B program having grown from $12.2 billion in 2015 to $54 billion in 2022, it has quietly become the second-largest federal prescription drug program, surpassing Medicare Part B and Medicaid in volume. With billions of dollars at stake, it comes as no surprise that audits have been added to the list of ongoing disputes between manufacturers and CEs. Given the increase in HRSA audit approvals, it appears that HRSA may have achieved its stated goals of ensuring that manufacturers and CEs can avail themselves of the ADR process and resolve claims expeditiously.

Irrespective of whether a company is a manufacturer or a CE, given HRSA’s clear willingness to approve audit requests, all 340B drug discount program participants would be well advised to ensure they have policies and procedures in place to ensure timely compliance with all 340B program requirements. Further, they should ensure they are well-positioned to respond to and efficiently conduct any HRSA approved audit.  

Interested stakeholders should submit comments in response to the ICR by October 7.