MDRP and 340B: Updates from last week

On October 13, 2021, the in-person portion of the annual informaconnect Medicaid Drug Rebate Program (MDRP) Conference concluded in New Brunswick, New Jersey.  A day earlier, on October 12, 2021, a joint hearing was held in Novartis Pharms. Corp. v. Espinosa, et al., 1:21-cv-01479-DLF (D.D.C.) and United Therapeutics Corp. v. Espinosa et al., 1:21-cv-01686-DLF (D.D.C.) to consider the question of whether manufacturers may restrict the circumstances under which they offer the 340B ceiling price through contract pharmacy arrangements.  We provide highlights from both events below.

David Tawes, Regional Inspector General, HHS OIG, “OIG Updates: Audits and Case Studies from the Manufacturer Perspective”

Mr. Tawes described a number of recent, ongoing, and upcoming U.S. Health and Human Services Department, Office of the Inspector General (“OIG”) reports.  Among other things, the following items were noteworthy:

  • Upcoming report on “Accuracy of Manufacturer-Reported Average Sales Pricing.”  As part of the Consolidated Appropriations Act, 2021, Congress recently directed OIG, to “assess and submit to Congress,” by January 1, 2023, a report on the accuracy of average sales price (“ASP”) information submitted by manufacturers, “including the extent to which manufacturers provide false information, misclassify drug products, or misreport information.”  Congress directed that the report “shall include any recommendations on how to improve the accuracy of such information.”
  • Mr. Tawes made clear that OIG was not approaching its assessment from a position of expecting that there were inaccuracies in ASP, but that the report would likely be modeled on OIG’s 2019 work on manufacturer reasonable assumptions under the MDRP.  As part of the process, OIG expects to be requesting information from the manufacturers of the 30 highest cost Medicare (likely Part B) drugs, and OIG will also work with the Centers for Medicare & Medicaid Services (“CMS”).  Mr. Tawes specifically requested that manufacturers reach out to him if there are particular issues or questions they wish to see addressed as part of this report.  He noted that OIG anticipates moving forward with this Work Plan item shortly, given the January 2023 deadline, and thus requested that any manufacturer input be provided as soon as possible.
  • OIG’s recent orphan drug report discussed.  Mr. Tawes noted concerns over the high price of orphan drugs that were highlighted in a recent OIG report titled, “High-expenditure Medicare drugs often qualified for Orphan Drug Act incentives designed to encourage the development of treatments for rare diseases.”  Mr. Tawes explained that 16 of the highest cost Part B drugs and 6 of the highest cost Part D drugs have orphan drug status, and many of these drugs are also approved and primarily used for non-orphan drug indications.  Mr. Tawes further noted that the 340B program may be an incentive for manufacturers to seek an orphan drug designation, given that the orphan drug exclusion is tied to being designated as an orphan drug instead of approved for an orphan drug indication.
  • A 2020 report on inclusion of non-covered self-administered drugs in Part B payment rate calculation.  Mr. Tawes was the author of a 2020 report on inclusion of the ASP for non-Part B versions of Part B drugs in Part B payment rate calculations, available here.  The report identified what OIG characterized as a loophole in the Part B reimbursement rules that allowed for the inclusion of the ASP for certain noncovered, self-administered forms of Part B drugs.  The report found that excluding the ASPs of those non-Part B versions of the Part B drugs in the Part B payment rate would have saved Medicare and its beneficiaries nearly half a billion dollars in 2017 and 2018.  Congress addressed the issue through the Consolidated Appropriations Act, 2021 by (1) directing OIG to conduct studies to identify non-covered self-administered drugs, the ASPs for which the OIG determines should be excluded from the Part B reimbursement rate and (2) directing CMS to adjust the reimbursement amount as it deems appropriate.  CMS subsequently proposed to implement this change in this year’s physician fee schedule proposed rule.  Mr. Tawes did not address the process for making those determinations but noted that he found it easy to do so by reference to how these products are advertised on manufacturer websites.

In addition, Mr. Tawes noted that part of the reason that we may not see more reports from OIG on the MDRP or 340B is that 80 percent of their funding is from Health Care Fraud and Abuse Control Program or “HCFAC” and must be used for Medicare and Medicaid.  Only the remaining 20 percent can be used for other programs.

Aaron Vandervelde, Managing Director, BRG, “Contract Pharmacy Arrangements: Implications for Stakeholders”

Following up on his recent report on “For-Profit Pharmacy Participation in the 340B Program,”  Mr. Vandervelde presented his research on the implications of contract pharmacies for today’s 340B program.  Highlights of his presentation include:

  • The profit margin (i.e., the difference between the reimbursement rate and the ceiling price) on 340B drugs dispensed through contract pharmacies is an estimated 72 percent.
    • Mr. Vandervelde further noted that where a vertically integrated pharmacy benefit manager (“PBM”), through a contract pharmacy, dispenses a drug that was purchased at the 340B ceiling price, it may realize profit margins 3 to 10 times greater on the prescription than for drugs not purchased at the 340B ceiling price. 
    • Where a drug is not purchased at the 340B price, the PBM may receive a rebate from a manufacturer negotiated on behalf of a health plan or employer, which rebates Mr. Vandervelde estimates are passed through to that plan or employer 90 percent of the time.
    • Where the drug is purchased at the 340B ceiling price instead, Mr. Vandervelde suggests that more of the profits are retained by the PBM and those vertically integrated PBM profits go up at the expense of the rebates for the health plans and employers.
  • The capture rate, defined as the percentage of prescriptions filled at a 340B in-house or contract pharmacy, has grown from 32 percent in 2017 to 39 percent in 2019.  Mr. Vandervelde attributes this to increases in the number of in-house and contract pharmacies and covered entity “steering” of patients to these pharmacies.
  • Mr. Vandervelde believes his research shows an expansion of the patient definition used by 340B covered entities, including their contract pharmacies, following the outcome in Genesis Health Care v. Azar.  In that case, a covered entity sued the Health Resources and Services Administration (“HRSA”) for trying to enforce 340B patient definition-based audit findings of diversion against the entity, in response to which HRSA withdrew its findings.

Contract Pharmacy Litigation Update

On October 12, 2021, U.S. District Court Judge Dabney Friedrich held a joint hearing on pending motions in the ongoing Novartis and United Therapeutics 340B contract pharmacy lawsuits, Novartis Pharms. Corp. v. Espinosa, et al. and United Therapeutics Corp. v. Espinosa et al.  Novartis and United Therapeutics are each challenging’s HRSA’s May 17, 2021 letter in which the agency informed the manufacturers that their contract pharmacy policies are in violation of the 340B statute and threatened to impose civil monetary penalties if they fail to honor contract pharmacy arrangements.  Below are a few of the highlights from the hearing:

  • Judge Friedrich indicated that the text of the 340B statute does not speak to whether manufacturers are required to honor contract pharmacy arrangements.   
  • Among other things, she  asked whether the government can win its case if it loses the textual argument. 
  • Judge Friedrich also asked whether covered entities always maintain title to drugs shipped to contract pharmacies. 
  • In conclusion Judge Friedrich indicated that a ruling will be issued shortly. 

An oral argument hearing in the AstraZeneca contract pharmacy case has been scheduled for Monday, October 18, at 3:00 p.m. Eastern Time. The public videoconference link for the hearing can be found under the “Additional Resources” sidebar to the right.”


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As always, it is important that you carefully review this information in light of considerations that may be relevant to your organization and specific drugs.  In particular, if you believe there are items of note to raise to OIG in connection with its ongoing work reviewing ASP issues, we encourage you to work with you Legal Counsel to evaluate whether and how to best communicate such information.



Authored by Alice Valder Curran, Ken Choe, Kathleen A. Peterson, Samantha D. Marshall, and Mahmud Brifkani.


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