The Office of Inspector General (OIG) recently issued a report titled “State Efforts to Exclude 340B Drugs from Medicaid Managed Care Rebates.” In its report, OIG wanted to study the different methods that states were using to prevent illegal “duplicate discounts” that occur as a result of the interaction between the Medicaid drug rebate program and the 340B drug-discount program. OIG revealed that the systems a majority of states have for preventing duplicate discounts are actually quite vulnerable, and recommended that the Centers for Medicare & Medicaid (CMS) and the Health Resources and Services Administration (HRSA) work together to improve them. The OIG focused on duplicate discounts through managed care organizations (MCO), not through fee-for-service (FFS).
By way of background, Medicaid requires that drug manufacturers pay “rebates” to states if the manufacturers want their drugs to be eligible for payment by Medicaid. These rebates are then shared between the states and the federal government. These rebates make it more affordable for the Medicaid program to pay for the drugs in question.
The 340B drug pricing program requires drug manufacturers to provide discounts to certain eligible health care providers, known as “covered entities,” in order for those drugs to be eligible for payment by Medicaid. The key difference between this program and the more general Medicaid drug rebate program is that the 340B program was specifically designed to help providers who served the country’s most vulnerable populations. According to the Congressional report accompanying the legislation, the 340B Program was meant “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”
The problem that OIG set out to investigate was the issue of “duplicate discounts” for MCOs. Duplicate discounts occur when drug manufacturers pay Medicaid rebates on drugs sold at the already-discounted 340B price. This is illegal, and for good reason. Duplicate discounts effectively mean that manufacturers are discounting their drugs twice, even though they agreed to do so only once.
States have a very important logistical role in preventing duplicate discounts because they are the ones that invoice manufacturers for the Medicaid rebates. Specifically, a state invoices manufacturers after it evaluates the drug utilization data that is submitted to it by providers. In order to prevent duplicate discounts, a state needs a way to differentiate between utilization data from 340B-purchased drugs and non-340B drugs. Generally, states may achieve this using either one of two methods. The first is the “provider-level method,” whereby the state excludes all drug claims from its utilization data that are billed by a 340B entity. The second is the “claim-level method,” whereby each individual drug claim is explicitly identified as a 340B drug claim.
It turns out, according to the OIG, the majority of states don’t actually have the most effective systems in place to make clear the distinction between 340B and non-340B purchased drugs. 35 of the 37 states reviewed by OIG had methods for identifying 340B-purchased drugs. 30 of those 35 states used provider-level methods in some capacity, and 22 of those states exclusively used provider-level methods. OIG pointed out in the report that the provider-level method is prone to inaccuracies because it assumes all drug claims from a 340B entity are the same. Therefore, this method could exclude non-340B purchased drugs simply because they were billed from a 340B entity. This means that states could be forgoing Medicaid rebates they would otherwise be entitled to. Alternatively, the provider-level method may include 340B-purchased drugs in a state’s utilization data even though the 340B entity chose to only purchase drugs at the 340B price for a select portion of their Medicaid population (e.g. only for FFS, but not Medicaid MCO patients). This then results in duplicate discounts borne by the manufacturer.
OIG recommended to CMS that it should require states to use claim-specific methods for identifying 340B-purchased drugs prior to including them in their utilization data. OIG also recommended that HRSA should revise its proposed 340B Omnibus Guidance to make it clear that covered entities must follow their respective states’ claim-specific methods for identifying 340B-purchased drugs.
CMS’s response to OIG’s recommendations was an unequivocal “no.” Specifically, CMS said that there is no statutory basis for requiring states to use claim-level methods, and therefore it would not impose one on its own. However, HRSA did concur with the OIG’s recommendation. But considering that CMS has refused to require states to use claim-level methods, HRSA’s instructions that 340B entities follow their states’ lead in implementing claim-level methods is basically immaterial.