Health Reform WK-EDGE How 340B hospitals can navigate restrictions, lower costs of specialty drugs
Monday, December 4, 2017

How 340B hospitals can navigate restrictions, lower costs of specialty drugs

This article is adapted from the November 2017 issue of Reimbursement Advisor, a monthly newsletter from Wolters Kluwer Legal & Regulatory, U.S.

By Travis F. Jackson and Igor Gorlach

Scientific advances have ushered in a new era of specialty drugs that make breakthrough treatments possible for patients facing life-altering or life-threatening diseases such as cancer, Alzheimer's or multiple sclerosis.

This innovation carries potential safety risks for patients. Many pharmaceutical manufacturers have implemented distribution restrictions as a condition of FDA approval or voluntarily to monitor and protect patients from potential side effects. These medical advances also come with sticker shock for patients and providers alike, with treatments for some new cancer drugs costing $100,000 or more per year.

Hospitals that participate in the 340B Drug Pricing Program have a unique opportunity to obtain specialty drugs from manufacturers at reduced prices by ensuring that their pharmacies comply with specialty drug distribution protocols and thus help patients alleviate costs associated with these new treatments.

Many 340B-participating hospitals, however, may not be aware of how they can navigate these distribution restrictions to access specialty drugs at 340B pricing. This Strategic Perspective provides a brief overview of the 340B program, discusses distribution restrictions for specialty drugs, and identifies steps 340B-participating hospitals may take to ensure they have access to these drugs without sacrificing 340B savings.

340B Program Offers Steep Discounts

Congress established the 340B program 25 years ago to help "stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services." [H.R. Rept. No. 102-384 (Part 2), at 12 (1992) (Conf. Rept.).] The 340B program requires pharmaceutical manufacturers who desire coverage for their products to sell outpatient prescription drugs at steep discounts of up to 50 percent to eligible safety-net providers, including certain disproportionate share hospitals. [42 U.S.C. §256b(a)(1); 42 U.S.C. §1396r-8.]

Participating safety-net providers may dispense drugs purchased at 340B discounts to their patients, including to patients who have Medicare or commercial insurance. Some estimates show that sales under the 340B program have consistently grown, reaching $16.2 billion in 2016, and are projected to climb to $23 billion by 2021.

The increase in 340B program sales coincides with increases on spending for prescription drugs overall and for specialty drugs in particular. Prescription drugs accounted for $448.2 billion in sales during 2016, representing a 5.8 percent increase compared with 2015. [Glen T. Schumock, Edward C. Li, et al., "National Trends in Prescription Drug Expenditures and Projections for 2017," 74 Am J Health Syst Pharm 339 (August 1, 2017).] Many factors, including price changes, influence drug spending, but studies have found that specialty drugs contribute disproportionately to these increasing expenditures.

Spending on specialty drugs nearly doubled between 2010 and 2015, representing more than two-thirds of the overall growth in drug spending. Additionally, pharmacy benefit managers have projected that, by 2019, spending on specialty drugs will account for 50 percent of overall drug spending by health plan sponsors.

These growing sales reflect the opportunities specialty drugs create for patients. These drugs offer new—or perhaps the only—treatment options for diseases such as cancer, arthritis and multiple sclerosis, resulting in physicians prescribing them earlier and creating the possibility patients will take these drugs for longer periods of time.

Manufacturers Largely Define "Specialty Drugs"

No consensus exists over what defines a "specialty drug" despite the growing importance of specialty drugs to patients, physicians and payers. These drugs generally share four characteristics:

  1. Used to treat complex chronic and/or life-threatening conditions;
  2. High cost;
  3. Need for patient education, monitoring and management; and
  4. Special storage, handling and administration instructions.

Analysts determined that, of the 44 drugs approved by the FDA in 2015, 28 had some form of distribution restriction imposed by the manufacturer. [Glen Schumock, Edward C. Li, et al., "National Trends in Prescription Drug Expenditures and Projections for 2017," 74 Am J Health Sys Pharm 2017 (citing Hatwig, Thompson, et al., "340B Update and Challenges with Limited Distribution Drugs").] Other studies suggest that nearly $23 billion in drug sales were subject to some form of restricted access in 2016 alone. (See also Alex Brill, REMS and Restricted Distribution Programs, Matrix Global Advisors.).

Some of these distribution restrictions result from the FDA's determination that a drug requires a risk evaluation and mitigation strategy (REMS) to ensure patient safety. Congress provided the FDA with authority in 2007 to require manufacturers to develop a REMS if doing so is necessary to ensure that the benefits of a drug outweigh its risk. [Title IX of the Food and Drug Administration Amendments Act of 2007, P.L. 110-85.] REMS may include medication guides or patient package inserts, specific plans for communicating potential risks to physicians, elements to assure safe use (ETASUs), and/or plans for evaluating those responsible for implementing ETASUs.

ETASUs may include features that significantly disrupt typical acquisition processes for hospitals, pharmacies and other health care providers. For example, the FDA notes that ETASUs may include requiring prescribers to have specific training or experience; mandating special certification for prescribers, pharmacies or distributors; limiting the site where a drug may be dispensed (such as, a hospital); requiring certain laboratory tests to ensure patient safety; or imposing patient registration or monitoring requirements. The FDA also notes that, without ETASUs, "[s]ome drugs would not be able to be approved, or be able to stay on the market."

Nothing prohibits a manufacturer from developing specialized distribution protocols without an approved REMS. For example, one study identified 74 prescription drugs in 2016 that had some form of access restriction in place, and, in nearly 45 percent of these cases, the FDA did not require the restriction. 340B-participating hospitals need to identify these distribution restrictions and develop strategies for navigating them efficiently so that they can ensure access to these specialty drugs at 340B pricing.

Access to 340B Pricing Concerns Congress, HRSA

Ensuring covered-entity access to outpatient drugs at 340B discounts has long concerned Congress, the Health Resources and Services Administration (HRSA) and other federal agencies. HRSA has attempted to address perceived access issues in three ways:

  1. HRSA has implemented provisions of the Patient Protection and Affordable Care Act governing nondiscrimination in sales of outpatient drugs.
  2. HRSA has issued, but postponed, regulations governing how civil monetary penalties may apply to manufacturers that improperly withhold 340B pricing.
  3. HRSA addressed distribution restrictions in its now withdrawn omnibus guidance for the 340B program.

Congress acted through the Affordable Care Act to address perceived access issues by requiring the pharmaceutical pricing agreement entered into between the U.S. Department of Health and Human Services and drug manufacturers to explicitly prohibit any discrimination by manufacturers against 340B covered entities and to guarantee 340B pricing. [42 U.S.C. §256b(a)(1), as amended by Section 7102(b) of the Affordable Care Act (ACA) (P.L. 111-48).] HRSA implemented this change in December 2016 by requiring manufacturers to amend their pharmaceutical pricing agreements by specifically stating they "shall offer each covered entity covered outpatient drugs for purchase at or below the applicable [340B price], if such drug is made available to any other purchaser at any price."

Congress also directed HRSA to subject manufacturers to civil monetary penalties if manufacturers knowingly and intentionally fail to extend 340B pricing to 340B-participating hospitals and other covered entities. [42 U.S.C. §256b(d)(1)(vi), enacted by ACA sec. 7102(a).] HRSA was tasked by Congress to develop and implement regulations governing the imposition of these civil monetary penalties within 180 days of the Affordable Care Act's adoption, but the agency has failed to meet this statutory deadline.

HRSA first proposed regulations on June 17, 2015, establishing the circumstances under which a manufacturer could face civil monetary penalties, and it has since delayed the final rule on the application of civil monetary penalties multiple times, meaning that 340B-participating hospitals will have to wait until at least July 1, 2018, for it to become effective (Proposed rule80 FR 34583, June 17, 2015; Final rule82 FR 45511, September 29, 2017).

HRSA addressed distribution restrictions on the sale of outpatient drugs, such as limited networks of specialty pharmacies or specialty distributors, in its now withdrawn draft omnibus 340B program guidance (Notice, 80 FR 52300, August 28, 2015). HRSA linked the need for distribution restrictions to either REMS implementation, special handling needs or inadequate drug supplies. Even with these restrictions, HRSA cited 340B program nondiscrimination requirements and reminded manufacturers that "340B program pricing requirements apply to such sales."

HRSA attempted to balance drug maker concerns with those of 340B-participating hospitals and other covered entities by establishing the following five requirements for all limited distribution plans:

  1. Explaining the product's limited supply or special distribution requirements and the rationale for restricting distribution;
  2. Assuring restrictions apply equally to both 340B covered entities and non-340B purchasers;
  3. Detailing the drug distribution plan, including a mechanism that allocates sales to both covered entities and non-340B purchasers with no previous purchase history of the restricted drug;
  4. Containing dates the alternative distribution begins and concludes; and
  5. Creating a plan for notifying wholesalers and 340B covered entities of the restricted distribution plan.

Manufacturers and their allies objected to HRSA's attempt to oversee distribution restrictions as contemplated by the draft omnibus guidance. Biotechnology Innovation Organization (BIO), a trade association representing the interests of the biotechnology industry, commented that it was "very concerned" with the proposed guidance because, among other reasons, HRSA had failed to articulate the problem it sought to address and the proposed guidance was vague and overbroad. [BIO, "Comments on 340B Drug Pricing Program Omnibus Guidance," dated October 27, 2015, at 91-93.] Moreover, BIO expressed concern that HRSA did not have "any statutory basis for requiring manufacturers to provide HRSA with notification of any limited distribution arrangements, or for HRSA to review and/or make changes to such plans before they may be implemented, as HRSA apparently proposed."

Apexus, a private company designated by HRSA as its prime vendor for 340B program purposes, also has answered questions from covered entities about distribution restrictions imposed by manufacturers. Shortly before HRSA withdrew its omnibus guidance, Apexus posted the following frequently asked question on its website:

Question: May a manufacturer require only 340B entities to purchase covered outpatient drugs through specialty distribution channels?

Answer: The requirements for offering the 340B ceiling price to covered entities apply regardless of the distribution system. If a manufacturer is using a specialty pharmacy to distribute covered outpatient drugs, it must ensure the covered entity is not overcharged if drugs are accessed through that pharmacy. Consistent with Section 340B(a)(1) of the PHSA, manufacturers are expected to provide the same opportunity for 340B covered entities and non-340B purchasers to purchase covered outpatient drugs when such drugs are sold through limited distributors or specialty pharmacies.[Apexus, Frequently Asked Question #1420 (January 12, 2017).]

Several manufacturers have elected to notify HRSA when they implement distribution restrictions. So far in 2017, five manufacturers have filed distribution protocols with HRSA, and HRSA has made these protocols available on its website to covered entities.

These distribution restrictions resulted from drug shortages and patient-safety concerns. None of these five manufacturer notices expressly cited the existence of REMS as a reason for the distribution restriction, and, in each instance, the manufacturer expressed its commitment to ensuring covered entities received access to 340B pricing in a nondiscriminatory manner.

340B-Participating Hospitals Need Strategies for Navigating Restrictions

340B-participating hospitals have a unique opportunity to navigate distribution restrictions for specialty drugs and enhance access for their patients to the potentially transformative health benefits that these drugs make possible. The high costs associated with specialty drugs make leaving potential 340B savings on the table a non-starter if 340B-participating hospitals are going to fulfill their purposes of stretching scarce federal resources, reaching more eligible patients and providing more comprehensive services.

Navigating manufacturers’ limited distribution requirements takes special focus from hospital administrators, physicians and pharmacy leadership, but it can be accomplished through strategies ranging from simply monitoring the HRSA website and outpatient drug purchases to identify potential distribution restrictions to more complex activities such as developing specialty pharmacy capabilities.

340B-participating hospitals should remain proactive with respect to specialty drug distribution restrictions, such as implementing the following strategies:

  • Monitoring the HRSA website for manufacturer notices. The manufacturer notices on HRSA's website contain information about how covered entities may purchase the manufacturer's specialty drug at 340B pricing. For example, Pfizer's notice for its oncology distribution network encourages 340B-participating hospitals to establish a contract pharmacy relationship with an approved specialty pharmacy as a means of obtaining 340B pricing.
  • Analyzing purchasing information to identify potential restrictions. No requirement currently exists for a manufacturer of a specialty drug to notify HRSA of its distribution restrictions. 340B-participating hospitals may be capable of identifying unreported distribution restrictions by analyzing their purchasing information.
  • Contacting manufacturers regarding access at 340B pricing. HRSA advises covered entities that "[i]f a covered entity is unable to purchase a covered outpatient drug at the 340B price, the entity should first contact the wholesaler and/or manufacturer to determine the underlying issue as to why the product is unavailable at the 340B price.
  • Reaching out to HRSA. If a limited distribution network issue cannot be resolved with the manufacturer, the covered entity should reach out to HRSA. On its website, HRSA offers a template form (created by Apexus) to fill out and email to HRSA when notifying the agency of a 340B price unavailability issue between a covered entity and a manufacturer.

Specialty Pharmacy Capabilities May Enhance Access

Developing specialty pharmacy capabilities may provide 340B-participating hospitals with more immediate access to 340B pricing of these drugs. Doing so also may be attractive for Medicare and commercial shared savings arrangements by equipping these hospitals to better manage the health of patients from diagnosis to treatment and recovery.

By developing specialty pharmacy capabilities, a 340B-participating hospital also can contract directly with payers and "carve in" Medicaid managed care organization claims. In addition to potential financial benefits, a hospital-owned specialty pharmacy may facilitate patient-centered care programs and data-driven outreach to improve patient capture. Hospitals can monitor their patients better and dispense medications in real-time. According to one estimate, provider-owned specialty pharmacies are the fastest growing segment of the specialty pharmacy market, now accounting for 20 percent of specialty pharmacies.

No single definition exists for a specialty pharmacy, but these pharmacies have capabilities that go well beyond filling prescriptions. They provide disease-specific patient education, support adherence to medication regimens, counsel patients about potential side effects, provide access to a nurse and/or pharmacist, coordinate prior authorization and eligibility, and communicate regularly with physicians and other providers involved in the patient's care.

Specialty pharmacies may receive accreditation from independent organizations such as the Accreditation Commission for Health Care, the Center for Pharmacy Practice Accreditation, the Joint Commission, and the Utilization Review Accreditation Commission (URAC).

Accreditation is particularly important for the negotiation of contracts with payers. Accreditation validates a specialty pharmacy's organization and administration, pharmacy operations, clinical management, information systems, and quality. URAC, for example, uses measures in the areas of safe care (e.g., drug-drug interactions), health care management (e.g., call center performance), engagement and experience of care (proportion of days covered), and process (fulfillment of promise to deliver) as part of its accreditation.

To be sure, the development of specialty pharmacy capabilities requires an investment. Initial capital is required to create the specialty pharmacy functions and processes, including hiring and/or training staff.

Accreditation is costly as well, because, in addition to the relatively low cost of the accreditation itself, accreditation requires the achievement and maintenance of the accreditation standards throughout the accreditation period. Yet, given the growing use of limited distribution networks by manufacturers and the rising cost of specialty drugs, developing specialty pharmacy capabilities can be worthwhile for many hospitals.

Hospitals that have established their own specialty pharmacies argue they can do a better job overseeing the use of the specialty drugs they dispense, thanks to immediate access to medical records, laboratory results and physician notes. Additionally, these hospitals have found the start-up costs to be insignificant when compared with the potential benefits of reducing the cost of specialty drugs for their patients and employees, better reimbursement from private payers and access to 340B pricing. One health system noted that it would recover its initial specialty pharmacy investment within 16 months.


340B-participating hospitals can help lower the increasing costs associated with specialty drugs by developing and implementing strategies that fit the size and scope of their operations. Simple strategies include identifying distribution restrictions and then working with pharmaceutical manufacturers and, if necessary, HRSA to navigate these restrictions.

340B-participating hospitals also may consider more complex strategies, such as developing their own specialty pharmacies. Regardless of the strategy selected, 340B-participating hospitals should not walk away from the savings that the 340B program makes possible on specialty drugs.

About the Authors:

Travis F. Jackson is a partner with King & Spalding in Los Angeles, California. He may be reached at [email protected].

Igor Gorlach is an associate with King & Spalding in Houston, Texas. He may be reached at [email protected].

Attorneys: Travis F. Jackson and Igor Gorlach (King & Spalding LLP).

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