Despite Industry Opposition, HHS to Fine Drug Companies for Overcharging Hospitals

Regulatory NewsRegulatory News | 05 January 2017 |  By 

The US Department of Health and Human Services (HHS) on Thursday finalized a rule that would fine pharmaceutical companies for overcharging hospitals and clinics for drugs purchased under the 340B drug pricing program.

The finalization of the rule, first proposed in 2010, follows fierce criticism of the plan from industry groups PhRMA, BIO and companies including Bayer and Teva.

The final rule calls on drug companies to:

  • calculate the 340B ceiling price on a quarterly basis
  • charge $0.01 per unit of measure if the 340B ceiling price calculation results in a ceiling price that equals zero (see below)
  • use a particular methodology when estimating the ceiling price for a new covered outpatient drug (see further below)

The rule also offers an explanation of how a civil monetary penalty (CMP) would be imposed on a manufacturer that knowingly and intentionally overcharges a covered entity and an explanation of what would constitute an instance of overcharging to trigger a CMP.

The rule will take effect on 6 March 2017, but HHS plans to begin enforcing the requirements on 1 April 2017.


HHS’ Health Resources and Services Administration (HRSA) administers section 340B of the Public Health Service Act (PHSA), which is also referred to as the “340B Drug Pricing Program.”

Section 340B of the PHSA instructs HHS to enter a pharmaceutical pricing agreement (PPA) with certain drug manufacturers. And when such a manufacturer signs a PPA, it is opting into the 340B Program and agreeing to the statutory requirement that the prices charged for covered outpatient drugs to covered entities will not exceed defined 340B ceiling prices, which are based on quarterly pricing data obtained from the US Centers for Medicare & Medicaid Services (CMS).

Obamacare, also known as the Affordable Care Act, added a section to the PHSA, which provides for the imposition of sanctions in the form of civil monetary penalties, which, according to the final rule:

  • shall not exceed $5,000 for each instance of overcharging a covered entity that may have occurred
  • shall apply to any manufacturer with an agreement under Section 340B of the PHSA that knowingly and intentionally charges a covered entity a price for purchase of a drug that exceeds the maximum applicable price.

According to the final rule, these penalties “provide a critical enforcement mechanism for HHS if manufacturers do not comply with statutory pricing obligations under the 340B Program. HHS is also finalizing this rule to provide increased clarity in the marketplace for all 340B Program stakeholders as to the calculation of the 340B ceiling price.”

The calculation of the 340B ceiling price is defined in the PHSA as average manufacturer price (AMP) minus unit rebate amount (URA). If an AMP increases at a rate faster than inflation, the manufacturer pays an additional rebate amount which is reflected in an increased URA, which could result in a 340B ceiling price of zero.

Although infrequent, HHS notes in the final rule that there are instances when the 340B ceiling price does calculate to a price of zero. For example, in the first calendar quarter of 2016, approximately 1% of all drugs listed under the 340B program for that quarter resulted in a price of zero, HHS says.

But HHS does not want to set the price at zero, so it therefore will require manufacturers charge $0.01 for the drug, which is called the “penny pricing policy.”


The proposed rule was first issued in 2010, opened for comment, then reopened later for more comments to address three specific issues: the penny pricing policy; prices for new drugs; and the definition of “knowing and intentional.”

PhRMA called for abandoning the penny pricing policy and sought more clarification on establishing 340B prices for new covered outpatient drugs, as well as other edits.

Also taking issue with the penny pricing policy, Bayer said in its comment: “Requiring manufacturers to charge a penny is not materially different from requiring them to give their drugs away for free -- which HRSA has acknowledged is ‘not reasonable.’ Penny pricing is not only giving away the product for free but is also requiring the manufacturer to absorb losses generated by manufacturing, distributing, and shipping the products. At a minimum, the taking by the government of a manufacturer's products should cover for the cost of manufacturing and distributing the product.”

Teva, meanwhile, said the policy has contributed to drug shortages in the past, “specifically driving manufacturers to cease manufacturing certain drugs rather than be forced to sell such drugs at a loss to 340B covered entities given the ‘penny pricing policy.’”

Final Rule

After consideration of the comments received, HHS says it “is finalizing the penny pricing policy as proposed” as it “best effectuates the statutory scheme.”

And in terms of prices for new drugs, the final rule will “require that manufacturers estimate, using a standardized methodology, the 340B ceiling price for a new covered outpatient drug until there is AMP data available to calculate an actual 340B ceiling price as set forth in 340B(a)(1) of the PHSA.”

That price estimate for new covered outpatient drugs will be wholesale acquisition cost (WAC) minus the Medicaid minimum discount rebate percentages (i.e., 23.1% for most single-source and innovator drugs, 17.1% for clotting factors and drugs approved exclusively for pediatric indications and 13% for generics) until an AMP-derived ceiling price can be identified.

And once the AMP is known, and no later than the fourth quarter that the drug is available for sale, HHS says manufacturers would be required to calculate the actual 340B ceiling price based on AMP for the time under which the 340B ceiling price was estimated.

“The 340B ceiling price is set by the statute and manufacturers are required to charge covered entities that ceiling price,” HHS added. “Therefore, manufacturers are required to issue refunds if it is determined that a covered entity paid a price higher than the 340B ceiling price. HHS has also decided to standardize the pricing estimation during the period for which there is not an AMP available to calculate an actual 340B ceiling price. HHS believes that WAC minus the rebate percentage serves is a fair and reasonable estimated 340B ceiling price.”

340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation


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