August 16, 2016

HRSA Releases Proposed Rule Governing the 340B Administrative Dispute Resolution Process

Arnold & Porter Advisory

On August 12, 2016, the Health Resources and Services Administration (HRSA) published a proposed rule that would create a binding administrative dispute resolution (ADR) process for certain disputes arising under the 340B program (the Proposed Rule).1 The Proposed Rule would implement one of the key 340B program integrity provisions added by the Affordable Care Act (ACA) and replace the current process for resolving disputes between manufacturers and 340B covered entities.

HRSA states that the ADR process "is not intended to be a trial-like proceeding governed by formal review of evidence and procedure. Rather it is an administrative process that is designed to assist covered entities and manufacturers in resolving disputes regarding overcharging, duplicate discounts, or diversion."2 HRSA emphasizes that the new ADR process is not intended to replace good faith negotiations between manufacturers and covered entities, and "should be considered as a last resort in the event good faith efforts to resolve disputes have not been successful."3 Key features of the new process would include:

  • The proposed ADR process would be limited to the following claims: (1) covered entity claims of manufacturer overcharges, and (2) post-audit manufacturer claims of covered entity violations of the duplicate discount and diversion prohibitions.
  • Parties seeking to invoke the ADR process would be required to file claims within three years of the date of the sale or payment at issue.
  • An Administrative Dispute Resolution Panel (340B ADR Panel or Panel), comprised of Federal employees "with demonstrated expertise or familiarity with the 340B Program," will be selected to review each claim.
  • Covered entities could consolidate claims against a manufacturer, and manufacturers could consolidate claims against a covered entity, in certain cases. An association or organization could file a claim on behalf of covered entities, but not on behalf of manufacturers.
  • Manufacturers could only initiate the ADR process after conducting an audit. HRSA does not address whether it is making any changes to its current audit guidelines.
  • Covered entities could submit a written request seeking information from manufacturers, which would be reviewed by the Panel to determine whether it is "reasonable and within the scope of the asserted claim," before the manufacturer would have to respond. Manufacturers would be responsible for obtaining requested information from wholesalers or other third parties.
  • Before issuing a decision, the Panel would issue a draft report to the parties, documenting whether "there is adequate support to conclude that a violation" has occurred. Parties would have 20 business days to respond to the draft, after which the Panel would prepare a final agency decision letter. This final agency decision would be binding on the parties "unless invalidated by an order of a court of competent jurisdiction." HRSA also proposes that the final decision could be used as a basis for imposing sanctions against a manufacturer or 340B covered entity, but does not detail how this would work.
  • HRSA could publish a summary of the claims resolved through the ADR process on the HRSA Web site (including the names of the parties and the nature of the Panel's findings), "at its sole discretion."

Once finalized, this ADR process will replace the HRSA's guidelines on the informal dispute resolution process.4

Importantly, several of the substantive standards that would apply in the ADR process – such as the definition of a manufacturer "overcharge" and criteria for identifying diversion to an individual who is not a "patient" of the covered entity – are likely to be addressed separately either in HRSA's final rulemaking regarding the 340B ceiling price methodology and civil monetary penalty provisions or HRSA's final "omnibus" guidance.5 Currently, the 340B ceiling price methodology and civil monetary penalty final rule is scheduled to be published in November 2016, and the final omnibus guidance is scheduled to be published in December 2016.6

Comments on the Proposed Rule are due October 11, 2016. This Advisory summarizes key aspects of the Proposed Rule.

I. Administrative Dispute Resolution Panel (42 C.F.R. § 10.20)

The Proposed Rule defines the composition and duties of the 340B ADR Panel and discusses how conflicts of interest with the members of the Panel would be prevented.

A. Administrative Dispute Resolution Panel

The 340B statute requires the Secretary to "designate or establish a decision-making official or body within the Department of Health and Human Services" to resolve certain claims filed by covered entities or manufacturers.7 HRSA proposes to establish a Panel with three members chosen from a list of eligible individuals and alternating from claim to claim and one ex-officio, non-voting member chosen from the HRSA Office of Pharmacy Affairs (OPA) staff who will facilitate the review process. The voting members of the Panel would be comprised of Federal employees – the Proposed Rule cites "employees of CMS or the U.S. Department of Veterans Affairs" as examples – "with demonstrated expertise and familiarity with the 340B Program."8

HRSA is soliciting comments regarding the proposed size and composition of the 340B ADR Panel, in particular "whether the 340B ADR Panel should be comprised of a set number of voting members to maintain consistency and transparency across each claim that is reviewed, whether HRSA should retain the flexibility to appoint a requisite number of voting members based on the complexity of the claim and other factors, and whether the 340B ADR Panel should include at least one OPA staff member as a voting member or whether the inclusion of an OPA staff member as an ex-officio, non-voting member is sufficient to ensure adherence to 340B policies and procedures."9 Stakeholders may wish to comment on how HRSA will ensure the Panel members have expertise in the 340B Program, especially if they are drawn from outside HRSA, and how the agency will ensure consistency of decision-making when the Panel members may change from claim-by-claim.

B. Conflicts of Interest

HRSA proposes that, prior to reviewing a claim, each member of the Panel would be screened in accordance with US Office of Government Ethics policies and procedures for potential conflicts of interest and to ensure the fairness and objectivity of the Panel. HRSA states that potential conflicts of interest may include: "(1) financial interest; (2) family or close relation to a party involved; and (3) current or former business or employment relation to a party."10 The Proposed Rule provides as an example of a conflict of interest a situation in which an individual has a conflict of interest with the parties involved in the claim or the subject matter of the claim. In such a case, the individual would not be allowed to review a claim.

C. Duties of the ADR Panel

HRSA proposes that once the Panel receives the claim, the Panel "will consider all documentation provided by the parties and may request additional information or clarification from any party involved with the claim."11 The Proposed Rule adds that the Panel will review claims in a closed session that will exclude the parties, associations and organizations, and legal counsel. However, the Panel may consult with subject matter experts within OPA regarding the requirements of the 340B Program. HRSA proposes that a final decision must represent the decision of the "majority of the Panel members" (which presumably means a majority of the three voting Panel members).

II. Claims (42 C.F.R. § 10.21)

A. Claims Permitted12

The 340B statute requires HRSA to resolve (1) covered entity claims of manufacturer overcharges, and (2) post-audit manufacturer claims of covered entity violations of the duplicate discount and diversion prohibitions. HRSA proposes to permit only these two types of claims in the ADR process.13

Although HRSA notes that the final ADR rule will replace its existing dispute resolution guidelines, which were issued in 1996, HRSA does not mention its existing audit guidelines (part of the same 1996 Federal Register notice as the dispute resolution guidelines). This is important because manufacturers must conduct an audit as a prerequisite to bringing an ADR claim,14 and under the current audit guidelines manufacturers can conduct an audit only if they (1) demonstrate to HRSA's satisfaction that they have "reasonable cause" for the audit; (2) submit their audit workplan to HRSA and give HRSA time to raise objections; and (3) use an outside auditor to perform the audit. In its 2010 advance notice of proposed rulemaking on the ADR process, HRSA acknowledged that these audit guidelines could create a barrier to manufacturers using the ADR process:

The [ADR provisions in ACA] set forth that manufacturers must conduct an audit of a covered entity prior to bringing [an ADR] claim. HRSA currently has guidelines regarding the requirements for initiating an audit (61 FR 65406). However, over the history of the 340B program manufacturers have rarely utilized the process …. HRSA invites comments on whether it is appropriate or necessary to modify the guidelines concerning audits prior to implementing the administrative dispute resolution regulation or whether the current final guidelines are sufficient.

The Proposed Rule does not discuss the comments that HRSA received in response to its question about whether the audit guidelines should be modified before implementing the ADR process, nor does it explain why HRSA apparently has decided not to pursue changes in the audit guidelines.

B. Requirements for Filing a Claim15

Under the Proposed Rule, manufacturers and covered entities seeking to invoke the ADR must file a written claim within three years of the date of sale or payment at issue. HRSA states that it is proposing the three-year limitation on claims submission consistent with the record retention requirements of the 340B Program and specifically seeks comment on this issue. After a claim has been filed, the parties must maintain relevant documents until a final agency decision is issued.

When a covered entity or manufacturer files a claim, it must include documents "sufficient to demonstrate" that the covered entity has been overcharged (in connection with a covered entity claim) or that a covered entity has violated the diversion or duplicate discount prohibition (in connection with a manufacturer claim). The party must also provide any additional documents requested by HRSA to evaluate the veracity of its claims.

Appropriate documentation for a covered entity claim includes invoices that list the purchase price by NDC, the applicable 340B ceiling price (which will be available through a system HRSA is developing to satisfy an ACA requirement16), and "documentation of attempts made to purchase the drug via a 340B account at the ceiling price, which resulted in the instance of overcharging."17 Appropriate documentation for a manufacturer claim includes a final audit report and the covered entity's written response to the audit findings. HRSA notes that it may also request that the manufacturer or covered entity provide documentation of its attempts to resolve the dispute with the other party.

C. Consolidation of Claims18

Covered entities and manufacturers will be permitted to request consolidation of their claims. The statute provides that HRSA's ADR regulations shall include provisions:

(1) permitting the ADR decision-making body, at the request of a manufacturer or manufacturers, "to consolidate claims brought by more than one manufacturer against the same covered entity, where, in the judgment of [the decision-making body] consolidation is appropriate and consistent with the goals of fairness and economy of resources"; and

(2) "to permit multiple covered entities to jointly assert claims of overcharges by the same manufacturer for the same drug or drugs."19

HRSA does not discuss the degree of commonality that would be required for multiple covered entities to consolidate claims against a manufacturer. In particular, it is unclear whether all covered entities would have to claim they were overcharged on the exact same drug or set of drugs, or whether covered entities could consolidate claims if each entity claimed it was overcharged on at least one of a certain set of drugs. The Proposed Rule also does not discuss how close in time the claimed overcharges would have to be to permit consolidation of multiple covered entities' claims.

Where covered entities or manufacturers seek to file a consolidated claim, the claim must include documentation or information demonstrating that each entity individually meets the requirements for filing a claim. The filing must include a letter requesting consolidation and documenting each entity's consent to the consolidation. An association or organization may file a claim on behalf of covered entities (but not manufacturers) where, in addition to meeting the otherwise applicable requirements, each covered entity in the consolidated claim is a member of the association or organization.

As noted above, the 340B statute permits consolidation of manufacturer claims where "appropriate and consistent with the goals of fairness and economy of resources… ."20 HRSA is seeking comment on when consolidation of manufacturer claims against a covered entity is consistent with fairness and economy of resources. HRSA also seeks comment on how manufacturers requesting consolidated claims can meet the audit requirement for filing claims, stating that it "recognizes the operational challenges presented by the statutory requirement for a manufacturer to first conduct audit the covered entity."21

D. Deadlines and Procedures for Filing a Claim22

The party filing a claim must notify the opposing party of the claim within three business days and provide confirmation of such notification to HRSA. HRSA will review the submitted claim and may request more information before accepting a claim. Any additional information requested must be provided within 20 business days.

HRSA will provide notice to the parties informing them of the claim status within 20 business days after receiving the claim and any additional information.

E. Responding to a Submitted Claim23

Once an opposing party has been notified that the claim has been accepted, it will have 20 business days to respond to the allegations (the Proposed Rule does not mention any possibility of time extensions here). The 340B ADR Panel would then request additional information as needed. If the opposing party does not respond to the claim or to the Panel requests, the Panel will render a decision based on the information available.

The Proposed Rule does not provide for any evidentiary hearing or oral argument. A dispute apparently would be decided based on the written evidence and arguments submitted by the parties.

III. Covered Entity Information Requests (42 C.F.R. § 10.22)

The statute requires that the ADR regulations include discovery procedures so that covered entities bringing claims against manufacturers for overcharges can obtain relevant information and documents.24 The Proposed Rule does not include corresponding discovery provisions that would assist manufacturers in obtaining relevant information and/or documents.

Under the Proposed Rule, "a covered entity must submit a written request for information to the 340B ADR Panel no later than 20 business days after the entity was notified by [HRSA] that the claim would move forward for the ADR Panel's review."25 The ADR Panel would review the information request to determine whether it is "reasonable and within the scope of the asserted claim,"26 considering factors such as the scope of the information request, whether there are consolidated claims, and the involvement of third parties in distributing drugs on the manufacturer's behalf. If the ADR Panel decides the request is either unreasonable or exceeds the scope of the asserted claim, it would notify the covered entity in writing, and permit the entity to submit a revised request. If the ADR Panel deems the request to be reasonable and within scope, it would submit the request to the manufacturer.27

HRSA proposes that the manufacturer must "fully respond" to the information request by responding in writing to the 340B ADR Panel within 20 business days.28 If the manufacturer cannot fully respond by the deadline, it "may request one extension in writing within 15 business days."29 The request must include any available information, explain the reason why the timeline is infeasible, and outline a proposed timeline by which the manufacturer would fully respond to the request. After reviewing the extension request, the ADR Panel would notify the parties in writing as to whether the extension would be granted and, if so, the new deadline. If a manufacturer fails to respond to an information request, HRSA proposes that the 340B ADR Panel would make its decision on the claim based on "the claim package that moved forward for review."30

Importantly, the Proposed Rule would require drug manufacturers to obtain relevant information or documents from wholesalers or other third parties that facilitate sales or distribution of the manufacturer's drugs to covered entities.31 However, the statute does not place this obligation on manufacturers. Rather, the procedures contemplated under the statute are those "by which a covered entity may discover and obtain such information and documents from manufacturers and third parties . . . and may submit such documents and information to the administrative official or body responsible for adjudicating such claim."32 Although manufacturers have contractual arrangements with their distributors and other third parties, such contracts may not include provisions under which a manufacturer could compel the third party to provide such information at all, much less within the compressed timeframe set forth in the Proposed Rule.

Overall, the Proposed Rule's provisions on covered entity information requests, if finalized as proposed, could have significant implications for manufacturers. The initial 20-day response time could be infeasible for all but the simplest of information requests. For example, identifying, compiling, and preparing a response to an information request for a consolidated claim spanning multiple covered entities, products, and quarters could take a manufacturer well beyond 20 days; this burden would be compounded if the manufacturer also had to compel third parties to respond within 20 days. The Proposed Rule would permit manufacturers to seek one extension, but there would be no guarantee that it would be granted, or that the revised timeline would be feasible.

IV. Final Agency Decision (42 C.F.R. § 10.23)

HRSA proposes that the Panel, based on the written record before it, would issue a draft report to the parties. This draft would document whether "there is adequate support to conclude that a violation" of Section 10.21(a)(1) (claims by a covered entity) or 10.21(a)(2) (claims by a manufacturer, following conclusion of a covered entity audit) has occurred.33 Parties would have 20 business days to respond to the Panel's draft findings. Once comments have been submitted, the Panel would prepare a final agency decision letter, which may incorporate party rebuttals. In accordance with the 340B statute, the final agency decision would be binding on the parties "unless invalidated by an order of a court of competent jurisdiction."34

The Proposed Rule does not address the extent to which the Panel must explain the reasoning or statutory support for its decisions. It proposes instead that "at its sole discretion" HRSA may publish summaries of the disputes resolved (including names of parties and "the nature of the 340B ADR Panel's findings (e.g., overcharging, duplicate discount, or diversion)").35 Based on this description, it is unclear whether (even assuming a summary of a dispute were published) it would provide insight into how the Panel resolved legal questions and enable stakeholders to evaluate whether disputes were being resolved consistently. HRSA indicates that it will "consider" issuing sub-regulatory guidance on the topic of summaries. 340B stakeholders should consider the extent to which greater transparency regarding Panel decisions and rationales could improve the quality and predictability of decisions (especially given the proposal for Panels with different members), and how these considerations could be balanced against the need to protect confidential pricing information.

HRSA also proposes that the final agency decision of the Panel may be used as a basis for imposing sanctions against a manufacturer or covered entity, in which event HRSA would "work with the party in violation on any remedy and corrective action."36

The Proposed Rule does not envision sanctions being imposed on any party as a part of the ADR process, but what further steps are envisioned in order to impose sanctions after the ADR process concludes is unclear. The Proposed Rule does not discuss whether HRSA would pursue sanctions based on an ADR decision that was being challenged in court.

  1. 340B Drug Pricing Program; Administrative Dispute Resolution, 81 Fed. Reg. 53381 (Aug. 12, 2016). The Proposed Rule refers to its proposals as those of the Department of Health and Human Services (HHS); however, it also lists HRSA as the "Agency" issuing the rule and the Proposed Rule directs that comments should be submitted to HRSA. For convenience, this Advisory refers to HRSA as the agency behind the Proposed Rule.

  2. 81 Fed. Reg. at 53382.

  3. 81 Fed. Reg. at 53382.

  4. 61 Fed. Reg. 65406 (Dec. 12, 1996).

  5. 80 Fed. Reg. 34583 (June 17, 2015); 80 Fed. Reg. 52300 (Aug. 28, 2015).

  6. Current Unified Agenda of Regulatory and Deregulatory Actions (last visited August 15, 2016).

  7. 42 U.S.C. § 256b(d)(3)(B)(i).

  8. 81 Fed. Reg. at 53382.

  9. 81 Fed. Reg. at 53382.

  10. 81 Fed. Reg. at 53382.

  11. 81 Fed. Reg. at 53382.

  12. 81 Fed. Reg. at 53383.

  13. 81 Fed. Reg. at 53383.

  14. 42 U.S.C. § 256b(d)(3)(B)(iv).

  15. 81 Fed. Reg. at 53383.

  16. 42 U.S.C. § 256b(d)(1)(B).

  17. 81 Fed. Reg. at 53383.

  18. 81 Fed. Reg. at 53383-53384.

  19. 42 U.S.C. § 256b(d)(3)(B)(v), (vi).

  20. 42 U.S.C. § 256b(d)(3)(B)(v).

  21. 81 Fed. Reg. at 53384.

  22. 81 Fed. Reg. at 53384.

  23. 81 Fed. Reg. at 53384.

  24. 42 U.S.C. § 256b(d)(3)(B)(iii).

  25. 81 Fed. Reg. at 53384.

  26. 81 Fed. Reg. at 53384.

  27. 81 Fed. Reg. at 53384.

  28. 81 Fed. Reg. at 53384.

  29. 81 Fed. Reg. at 53384 (emphasis added).

  30. 81 Fed. Reg. at 53384.

  31. 81 Fed. Reg. at 53384.

  32. 42 U.S. C. § 256b(d)(3)(B)(iii) (emphasis added).

  33. 81 Fed. Reg. at 53385.

  34. 42 U.S.C. § 256b(d)(3)(C); 81 Fed. Reg. at 53385.

  35. 81 Fed, Reg. at 53385.

  36. 81 Fed. Reg. at 53385.

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