340B Drug Allocation Provision In Tax Bill Needs Clarification, Attorney Says

A provision in a tax bill passed by the House May 28 would require manufacturers facing a shortage of an inpatient drug used by 340B program hospitals to submit a drug allocation plan to HHS for approval.

Such language could prove to be a "looming disaster," according to Sidley Austin partner Bill Sarraille, who represents drug firms in his practice.

The provision contained in the "American Jobs and Closing Tax Loopholes Act," H.R. 4213, states that "if the supply of a covered inpatient drug is insufficient to meet demand, then the manufacturer may use an allocation method that is reported in writing to, and approved by, the [HHS] Secretary and does not discriminate on the basis of the price paid by covered entities or on any other basis related to the participation of an entity in the [340B] program."

Language of H.R. 4213 was released May 20, and the bill passed the House May 28 by a vote of 215-204. Another provision in the bill would extend 340B drug discounts to include inpatient drugs as well as outpatient drugs for hospitals serving low-income populations (¹ (Also see "Inpatient Drug Discounts For 340B Providers Resurface In Jobs Bill" - Pink Sheet, 20 May, 2010.)).

While a variety of 340B-related provisions were considered as part of health care reform legislation, some of which made it to enactment and some of which did not, a requirement for HHS to sign off on an allocation method was not among them.

What worries Sarraille, who spoke in an interview, is that if the language is not clarified to say that an allocation system can go into effect before HHS approval, "all existing allocation systems would presumably not be valid as of the time the statute is enacted" and for any new drug shortage, no allocation system could go into effect until the agency approves it.

As a result, certain 340B entities could end up getting preferential distribution treatment until the allocation method was approved, because "essentially the 340B entities would have to be sold to."

Ted Slafsky, who heads the 340B hospital association Safety Net Hospitals for Pharmaceutical Access, said in an interview that 340B hospitals do not want to push to be first in line for low-inventory drugs, but want to be sure they have a fair allocation. He said that manufacturers sometimes use a shortage as an excuse not to provide 340B pricing to eligible entities.

On the other hand, Sarraille maintained that often a shortage will happen when there is a "penny pricing" situation, which is a quirk of the pricing system in 340B (² (Also see "“Penny Pricing” Guidance Document On Hold Until 340B Office Gets Funding" - Pink Sheet, 25 Aug, 2008.)). He said certain 340B entities might stockpile large quantities of a penny-priced drug in the hope of making essentially a 100 percent markup down the line on those drugs.

"And so every other patient from every other provider, even other 340B entities, would have no access to product at all. This is a looming disaster if it's not clarified," Sarraille said.

SNHPA Seeks Improved Discount Provision

With regard to the extension of 340B discounts to inpatient drugs, the language would not apply the discount to as many institutions as was previously considered under health care reform. SNHPA said it will work to get language making it easier for more entities to participate.

"We are concerned about the limited nature of this expansion and whether our hospitals can implement it," Slafsky wrote in an e-mail. "Two thirds of the hospitals in the 340B program would not get any benefit from this expansion." This is because the bill says to qualify for the inpatient discount, a hospital would have to have a Medicare disproportionate share adjustment percentage of 20.2 percent (a way of measuring service to low-income populations), compared to just 11.75 percent for basic 340B participation.

Furthermore, for hospitals that will be eligible, "it is not easy for them to track which patients would qualify for these discounts," Slafsky wrote. This is because the discount could only be used on drugs for patients with no drug coverage through a health plan, and Slafsky said it is very difficult for a hospital to segment patients by whether they have insurance.

H.R. 4213 is a compromise bill worked out between Senate and House leaders and primarily deals with tax issues and job creation, but includes a section on health care, including an extension of the COBRA health care tax credit and an extension of the federal government's increased financial contribution for Medicaid programs. The bill will now go to the Senate for consideration.

The Pharmaceutical Research and Manufacturers of America would not comment on the bill.

- Scott Steinke ( ³ [email protected] )