340B: Are We Monitoring Compliance Effectively and Efficiently Michael Earls, CPA Senior Manager BKD East Region 340B Drug Program Leader mearls@bkd.com June 11, 2014

Overview of Today’s Presentation Todays presentation has three (3) primary learning objectives: Discuss recent developments of the 340B drug program (10 - 15 minutes) Apply recommended audit procedures to ensure ongoing compliance (10 - 15 minutes) Apply recommendations for opportunities to maximize savings, some of which may have additional reimbursement opportunities not related to 340B (10 minutes) Slides providing a quick recap and hot topics included – not covered today, provided for informational purposes 3

Overview of Today’s Presentation Please ask questions! Will hold 5 – 10 minutes for Q&A and available afterword, but feel free to ask throughout the presentation 3

340B Program: Recent Developments Several recent communications from HRSA/OPA and others: Orphan drug rule changes – 2013 (see next slide) Recertification changes (annual requirement) – 2013 Program audit results – 2014 340B Drug Pricing Program: Important Benefit, Significant Responsibility – 2014 Contract pharmacy oversight – 2014 Hospital registration overview – 2014 9

340B Program: Recent Developments HHS Fiscal 2014 Budget and OIG Work Plan Charity Care concerns (2014 – Alliance for Integrity Reform of 340B) Continued negative media attention Federal Court vacates orphan drug rule - 2014 9

340B Program: Recent Developments Orphan drug rule changes (2013) Orphan drug rule is applicable to covered entities participating as SCH, RRC, CAH & free-standing cancer hospitals Since 2010, these types of covered entities have been unable to purchase orphan drugs at 340B price, regardless of illness the drug was prescribed to treat Orphan drugs are defined by§ 526 of Federal Food, Drug, and Cosmetic Act for rare disease or condition 9

340B Program: Recent Developments Orphan drug rule changes (2013) July 23, 2013, Health Resources Services Administration (HRSA) published long-awaited final regulations on orphan drugs Based upon issuance of final regulations, the following changes occurred October 1, 2013 Covered entities registered as SCH, RRC, CAH & free-standing cancer hospitals will be eligible to receive 340B pricing on orphan drugs where orphan drugs are not used to treat rare disease referred to as orphan illness 10

340B Program: Recent Developments Orphan drug rule changes (2013) Based upon issuance of final regulations: Anticipated result – additional savings for some covered entities HRSA makes it clear covered entity has responsibility to maintain auditable records that demonstrate compliance with terms of orphan drug exclusion requirements Rule is expected to continue protecting financial incentives for manufacturing drugs designated as orphan drugs 11

340B Program: Recent Developments Orphan drug rule changes (2013) Potential concerns or issues if 340B-covered entity uses orphan drugs within 340B-eligible patients Development of auditable tracking system How to ensure prescriptions filled at covered entity’s retail pharmacy or through contract pharmacy were not related to treatment of rare disease (is an eligible dispensation) 12

340B Program: Recent Developments 2013 Recertification Process Changes Some changes to recertification process authorizing officials should be aware of Changes emphasize importance of understanding qualification requirements Some very specific attestations that caused many covered entities to challenge internally their understanding of program 13

340B Program: Recent Developments 2013 Recertification Process Authorizing official must attest to following eight statements “As an Authorized Official, I acknowledge the 340B covered entity’s responsibility to abide by & further certify on behalf of the covered entity that: all information listed on the 340B Program database for the covered entity is complete, accurate, and correct; continued on next slide 14

340B Program: Recent Developments the covered entity meets all 340B Program eligibility requirements, including section 340B(a)(4)(L)(iii) if applicable – the Group Purchasing Organization prohibition – which ensures that the covered entity does not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement; the covered entity is complying with all requirements and restrictions of Section 340B of the Public Health Service Act and any accompanying regulations or guidelines, including, but not limited to, the prohibition against duplicate discounts/rebates under Medicaid and the prohibition against transferring drugs purchased under 340B to anyone other than a patient of the entity; continued on next slide 15

340B Program: Recent Developments the covered entity maintains auditable records demonstrating compliance with the requirements described in paragraph (3) above; the covered entity has systems/mechanisms in place to ensure ongoing compliance with the requirements described in (3) above; if the covered entity uses contract pharmacy services, that the contract pharmacy arrangement is being performed in accordance with OPA requirements and guidelines, including, but not limited to, that the covered entity obtains sufficient information from the contractor to ensure compliance with applicable policy and legal requirements and the entity has utilized an appropriate methodology to ensure compliance (e.g., through an independent audit or other mechanism); continued on next slide 16

340B Program: Recent Developments the covered entity acknowledges its responsibility to contact OPA as soon as reasonably possible if there is any material change in 340B eligibility and/or material breach by the covered entity of any of the foregoing; and the covered entity acknowledges that if there is a breach of the requirements described in paragraph (3) that the covered entity may be liable to the manufacturer of the covered outpatient drug that is the subject of the violation, and depending upon the circumstances, may be subject to the payment of interest and/or removal from the list of eligible 340B entities.” 17

340B Program: Recent Developments These attestations are very important! Critical to understand where 340B is being utilized, and compare independently to database What are your systems/mechanisms for ensuring ongoing compliance? Material breach – FAQ ID 1665 (Apexus) – refers to non-compliance with any 340B program requirements 17

340B Program: Recent Developments Compliance trends March 2010 – PPACA requires GAO study on use & oversight of 340B program September 2011 – GAO issues report Covered entities are effectively using the program Oversight is lacking Need for clearer guidance evident (specifically regarding definition of patient) Still pending – HRSA is currently drafting omnibus 340B rule – June 2014? 18

340B Program: Recent Developments Brief history (continued) October 2011 – HRSA OPA issues response to Senator Grassley’s concerns, similar to GAO report Indicates selected audits will begin in 2012 March 2012 – Policy release describing audits Expansion of covered entities & appeal of contract pharmacy option have created additional attention to program 19

340B Program: Recent Developments Compliance trends Common findings from HRSA reviews include Incorrect database information Diversion and duplicate discounts *Compliance with these requirements remains hospital’s obligation even in contract pharmacy arrangement Expectation of Corrective Action Plan for Findings When diversion & duplicate discount findings occur, timelines & resolution processes are required 21

340B Program: Recent Developments Compliance trends What potential findings/concerns are we seeing: Lack of formal policies and procedures Incorrect database information Evaluation of differing contract pharmacy dispensation fee arrangements Internal processes to review the program Understanding of how to MD election was made and potential effect on Managed Care plans Others 21

340B Program: Recent Developments 340B Drug Pricing Program: Important Benefit, Significant Responsibility – 1/2014 Continued emphasis from HRSA and belief 340B Drug Program is critical in stretching scarce federal resources Notes studies support covered entities using savings to expand volume of care to vulnerable patient populations HRSA stated “the 340B program provides eligible entities with an important benefit that comes with significant responsibility” 29

340B Program: Recent Developments Contract Pharmacy Oversight – 2/2014 HRSA re-emphasizes commitment to strengthening 340B program integrity Indicates it has renewed focus around contract pharmacy arrangements Covered entities remain ultimately responsible for compliance; compliance challenges are unique Stronger language around independent audits expected Indicated no oversight, violation of program requirements 29

340B Program: Recent Developments Hospital Registration Overview – 4/2014 HRSA releases updated guidance regarding process and requirements for registration of eligible hospitals and participating child sites Hospital registration process – requirement of complete enrollment package or registration will be deleted! For child sites, need to register each service separately (example provided is an off-site location that provides radiology, physical therapy, and pediatric) 29

340B Program: Recent Developments HHS Fiscal 2014 Budget and OIG Work Plan $6 million of additional funding for program oversight Endorsed by SNHPA and PhRMA Work plan includes two program initiatives: Contract pharmacy arrangements and extent to which covered entities and HRSA oversee compliance Determine what steps HRSA has taken to address OIG’s previous recommendation to provide 340B-covered entities with access to 340B ceiling prices 29

340B Program: Recent Developments Negative Media Attention There is an element of reputational risk in addition to compliance risk! Many articles written by media and other groups scrutinizing the 340B drug program: Senator Grassley - letters to HRSA, NC Hospitals, Walgreens Many other examples However, many publications as well defending the 340B drug program (SNHPA, HRSA, others) 29

340B Program: Recent Developments Federal Court vacates Orphan Drug Rule – 5/2014 PhRMA sued HHS in September 2013 arguing: Orphan Drug Rule was contrary to meaning in ACA HHS did not have authority to implement it Court issued ruling on May 23, 2014 agreeing with PhRMA. What does this mean? Depends – did covered entity elect to carve-in orphan drugs? What will HHS’ response be? Will “mega-reg” be delayed? 29

340B Program: What is HRSA Audit Process Audit process as described on HRSA.gov: Only one audit of a covered entity permitted at any one time. When HRSA has received request from manufacturer to conduct an audit, HRSA will determine whether audit should be performed by Government or manufacturer Audits will be performed in minimum time necessary with minimum intrusion on covered entity’s operations 18

340B Program: What is HRSA Audit Process HRSA Audit process (continued): HRSA’s 340B Program audits review covered entity compliance with respect to eligibility status, including compliance with the Group Purchasing Organization (GPO) prohibition as applicable (see 42 USC 256b(a)(4)(L)(iii)), duplicate discounts, and diversion as defined by42 USC 256b(a)(5)(A) and (B) HRSA regional auditors conduct audit field work for the HRSA Office of Pharmacy Affairs (OPA) 18

340B Program: What is HRSA Audit Process HRSA Audit process (continued): HRSA regional auditors obtain and review select program data and internal controls. Audit procedures include, at a minimum: review of relevant policies and procedures and how they are operationalized; verification of eligibility, including GPO and outpatient clinic eligibility; verification of internal controls to prevent diversion and duplicate discounts, including appropriateness of inpatient/outpatient designations and Medicaid exclusion file designations; review of contract pharmacy compliance; and test 340B drug transaction records on a sample basis 18

340B Program: What is HRSA Audit Process HRSA Audit process (continued): HRSA regional auditors forward preliminary findings to OPA for review. OPA reviews the preliminary findings, drafts a Final Report and issues the report to covered entity, with a request for a corrective action plan (if applicable). 18

340B Program: Key Audit Definitions Diversion 340B drugs to individuals not meeting outpatient criteria Drugs relate to services for inpatients/NRCC areas of hospital Prohibits resale or transfer of drugs purchased at 340B to person not a patient of covered entity Focus on defining “patient” & “covered entity” Most recent definition of “patient”―1996 Who is “covered entity”? Medicare cost report test & where services are provided Where finance & pharmacy operations meet 22

340B Program: Key Audit Definitions Duplicate discounts – recent program notice 340B laws prohibit application of both 340B price discount (front end) & payment of pharmacy rebate to state Medicaid (back end) on same drug claim General options for covered entities Carve-out Medicaid from 340B drug purchases (GPO exclusion needs considered) Carve-in Medicaid – Requires verifying Medicaid exclusion file is accurate What about Medicaid managed care or other state programs with Title XIX funding? 23

340B Program: Key Audit Definitions Medicaid duplicate discount Some states slow to establish & communicate Medicaid billing requirements & potential modifiers Transition to Medicaid managed care has created confusion Contract pharmacies should not “Carve-in” unless arrangement with state Medicaid exists Recommendation – Engage in ongoing dialogue with Medicaid pharmacy directors of states where you file claims―a “win-win” solution may be available Responsibility for avoiding duplicate discounts is on the covered entity 24

340B Program: Compliance Concerns Consequences of noncompliance Repayment of discount Suspension from 340B program Possible CMPs for knowing & intentional violations Does this give rise to false claim liability (ripe for qui tam actions?) Changing landscape of enforcement & audit 25

340B Program: General Audit Considerations Audits can be performed internally by a covered entity or by an outside third party What if our third-party administrator is performing self- audit functions? What should be included in an audit? How often should an audit be performed? 26

340B Program: General Audit Considerations Common findings from HRSA audits: being prepared is critical Performance of internal review procedures throughout the year is critical (there are free sample audit guides available, including from APEXUS) Is an internal review enough? Covered entities should consider independent mock reviews performed by independent third party New compliance challenges, including “expectation of” annual independent audits, especially surrounding contract pharmacy relationships 26

340B Program: Audit Preparation Preparing for an audit – examples internal procedures: Gather all policies & procedures related to 340B Obtain data policies for any vendor software Obtain copies of all 340B contracts with pharmacies and/or other 340B service providers Obtain all Medicaid ID numbers, provider numbers & NPIs for all entity sites billing Medicaid (including Medicaid managed care) for 340B drugs & point of contact with State Medicaid agency (could represent multiple states & MD contracts) 27

340B Program: Audit Preparation Preparing for an audit – examples internal procedures Obtain population of all 340B dispensations for specified period of time (typically six months) & select samples based on high-cost drugs & Medicaid transactions Additional procedures should be developed around contract pharmacy relationships Who internally should perform this self-monitoring? Is internal review enough based on expectation of independent audits? 28

340B Program: Audit Preparation Other compliance considerations What type of entity did you apply as (DSH, RRC, SCH, CAH, FQHC, etc.) Who is tracking DSH percentage? GPO exclusion rule Cherry picking (DSH covered entity only) 340B price is not always best, but OPA expects that you use 340B price for all OP drugs Capture correct NDC for OP drug used 29

340B Program: Audit Performance As a covered entity, you will need to decide which is most effective and efficient approach Typical sample size of 50 per 6 month period, can fluctuate based on how often being reviewed (internally vs. externally) Where should focus be? Main hospital(s) vs. provider based clinic/RHC vs. contract pharmacy? Expectation of an independent audit – how often performed and what is process? Existence of 340B compliance committee (IA)? 29

340B Program: Opportunities Consideration of contract pharmacy relationships Don’t jump all in – be mindful of compliance challenges Financial performance of contract pharmacy relationships (not just about compliance) Physicians being RCC vs. NRCC (potential for non- 340B reimbursement, but what about funding cuts) Do you qualify as a RRC or SCH vs. DSH? Appropriate monitoring of changing NDC’s and mapping in accumulator 29

340B Program: Conclusion Questions? 35

THANK YOU FOR ATTENDING. LEARN MORE AT BKD.COM 340B Program: Conclusion THANK YOU FOR ATTENDING. LEARN MORE AT BKD.COM FOR MORE INFORMATION Michael R. Earls, CPA Senior Manager mearls@bkd.com 260.460.4068 :

340B Program: Quick Overview Primary stakeholders of 340B Drug Program: Drug Manufacturers Covered Entities Office of Pharmaceutical Affairs Patients Patient Protection and Affordable Care Act (PPACA) expanded definition of covered entity Program intent: “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services” H.R. Rep. No. 102-384(II), as 12 (1992) 4

340B Program: Quick Overview Established by §602 of Veterans Health Care Act of 1992 Codified as §340B of Public Health Service Act (PHSA) Section 340B instructs Department of Health and Human Services (HHS) to enter into agreements with drug manufacturers of covered outpatient drugs (required if participating in Medicaid/Medicare Part B) Administered by Office of Pharmacy Affairs (OPA) within the Health Resources Services Administration (HRSA) Prime Vendor Program (PVP) – currently Apexus 4

340B Program: Quick Overview From 1992 – 2011 Program growth due to several new laws expanding the ability to participate Medicare Prescription Drug, Improvement and Modernization Act of 2003 Deficit Reduction Act of 2005 PPACA 4

340B Program: Quick Overview From 1992 – 2011 As of 2011, number of hospitals participating reached 1,673, or 1/3 of all U.S. hospitals 16,500+ covered entity sites, nearly double the number reported in 2001 (approximately 8,600) In 2011, the GAO issued report on 340B Drug Program, concluding concerns around HRSA’s oversight of program

340B Program: Quick Overview Provides discounts on outpatient drugs purchased by “safety net” providers and 11 types of federal grantees for eligible patients Spending on 340B drugs estimated at $6 billion annually in 2011 Average savings of 25 – 50% for eligible covered entities on outpatient drugs Manufacturers expressed concerns around savings; and are they being used in ways consistent with purpose of program 5

340B Program: Quick Overview Provides discounts on outpatient drugs purchased by “safety net” providers and certain types of federal grantees for eligible patients (FQHC, etc.) Savings can be used to: Provide discounts on drugs to patients Expand services by provider to patients Provide services to more patients 5

340B Program: Quick Overview Traditional method (pre-PPACA) Hospital DSH percent exceeding 11.75% payment add-on Updated SSI percentages may affect DSH qualifying percent Annual recertification of DSH percent now required Not-for-profit (NFP) entity with contract with local government to care for indigent Agree also not to use Group Purchasing Organization (GPO) for outpatient drugs 6

340B Program: Quick Overview Contract pharmacy arrangements Retail pharmacies contracted for “Bill To/Ship To” arrangement Multiple contract pharmacy guidelines went into effect on April 5, 2010 (removed maximum number of relationships) Virtual inventory models (replenishment model) Significant opportunity to expand Rx access Covered entities remain responsible for 340B compliance for contract pharmacy transactions 7

340B Program: Quick Overview PPACA revisions All NFP/governmental critical access hospitals (CAH) are eligible Sole community hospitals (SCH) & rural referral centers (RRC) eligible if DSH percent exceeds 8% Many hospitals qualify as a RRC Does your DSH hospital qualify? 8

340B Program: Quick Overview For the past three years, 340B covered entities operating in very different world! Issuance of GAO report brought forth significant concerns, and changes were enacted Beginning in 2012, HRSA conducting audits of covered entities (51 completed in 2012; results publicly available) HRSA released 51 results of audits, included review of 410 covered entity sites 9

340B Program: Quick Overview Drug manufacturers performing audits (results & exact number not public record; Commander Pedley noted 6 submitted through December 2013) HRSA vs. drug manufacturer audit Covered entities have increased awareness of 340B drug program and concerns around compliance Communications increasing of late 9

340B Program: Quick Overview Apexus (Prime Vendor Program) membership Continues to be liaison for covered entities No cost to be Apexus member if covered entity Valuable resources: FAQ section on website 340B University Example policy and procedure manuals Call center, etc. Other great resources 9

340B Program: Quick Overview Participating 340B sites increased (25,000+ as of March 31 vs. 16,500 in 2011) With recent releases of revised SSI percentages, many covered entities are either removing themselves from program or changing registration type (RRC or SCH, if available) – this can result in compliance concerns as well Contract pharmacy arrangements – 18% of covered entities have these relationships; only 25% have more than 5 9

340B Program: Other Hot Topics Manufacturer audits & communication increasing Respond timely to manufacturer requests to resolve questions without their need to request OPA for approval for full audit Manufacturers are performing increasing analytics on data to identify outliers in drug purchasing Some initial focus has been seen on duplicate discount issues Manufacturers have access to some Medicaid claims level data 31

340B Program: Other Hot Topics Health care reform & ACA impact? Changes to Medicare DSH formula ― impact on 340B? What will congressional appetite be for 340B if insurance expansion is realized as intended? Caution regarding projections for this program into the future is recommended 32

340B Program: Other Hot Topics Congressional intent of the program Debated by some members of Congress Several hospitals challenged to respond on use of funds generated from program savings Monitoring this issue in Congress is important Developing method of tracking 340B savings & documenting how funds are used for indigent & underserved patients is current best practice 33

340B Program: Other Hot Topics 340B Compliance Plan for Outpatient, Mixed-Use & Contract Pharmacy programs Demonstrates good-faith commitment to compliance Increases likelihood of identifying & correcting mistakes Includes multiple aspects of program & process for responding to concerns identified Reconsideration of provider-based physicians Eligible to extend 340B savings to provider-based physicians 34

340B Program: Other Hot Topics Even with changes that have occurred in past three years, this is only the beginning It is pretty evident with increase of recent developments, 340B Program will not “go away” Mega Reg expected June 2014 for comment (as of 4/9/14 is under review at OMB) 35

340B Program: Other Hot Topics Mega Reg addresses four main items: Off-site outpatient locations – guidance issues on 4/8/14 is clear indication of where this is heading – more detailed enrollment information to ensure each “suite” is listed separately Could NRCC requirement be modified? What about integration of EMR? Who really “maintains” the medical record now? Patient definition (continued next slide) 35

340B Program: Other Hot Topics Mega Reg addresses four main items: Patient definition – currently has three criteria: Established a relationship and maintains records of care; Receives health care services from a health care professional who is either employed or under contractual/other arrangements Receives health care service or range consistent with grant funding received (DSH exempt from this requirement) Could EMR integration change this? 35

340B Program: Other Hot Topics Mega Reg addresses four main items: Contract pharmacy requirements Guidance issued early 2014 appears to indicate movement toward requirement for external audit Could be based on number of pharmacies Hospital eligibility criteria – raising or lowering DSH threshold to be consistent across the board for PPS hospitals? 35

340B Program: Other Hot Topics 340B program & related multiple contract pharmacy relationships can be very beneficial but complicated to ensure compliance Compliance risks are a reality to be monitored closely Regardless of 340B program administrator selected, make sure hospital is comfortable with definitions & policies applied to program Critical to stay abreast of communications 35

THANK YOU FOR ATTENDING. LEARN MORE AT BKD.COM 340B Program: Conclusion THANK YOU FOR ATTENDING. LEARN MORE AT BKD.COM FOR MORE INFORMATION Michael R. Earls, CPA Senior Manager mearls@bkd.com 260.460.4068 :