340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation, 1210-1230 [2016-31935]

Agencies

• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 82, Number 3 (Thursday, January 5, 2017)]
[Rules and Regulations]
[Pages 1210-1230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31935]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

42 CFR Part 10

RIN 0906-AA89


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

AGENCY: Health Resources and Services Administration, Department of 
Health and Human Services (HHS).

ACTION: Final rule.

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SUMMARY: The Health Resources and Services Administration (HRSA) 
administers section 340B of the Public Health Service Act (PHSA), 
referred to as the ``340B Drug Pricing Program'' or the ``340B 
Program.'' This final rule will apply to all drug manufacturers that 
are required to make their drugs available to covered entities under 
the 340B Program. This final rule sets forth the calculation of the 
340B ceiling price and application of civil monetary penalties (CMPs).

DATES: This rule is effective March 6, 2017.

FOR FURTHER INFORMATION CONTACT: CAPT Krista Pedley, Director, Office 
of Pharmacy Affairs (OPA), Healthcare Systems Bureau (HSB), HRSA, 5600 
Fishers Lane, Mail Stop 08W05A, Rockville, MD 20857, or by telephone at 
301-594-4353.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 602 of Public Law 102-585, the ``Veterans Health Care Act 
of 1992,'' enacted section 340B of the PHSA, ``Limitation on Prices of 
Drugs Purchased by Covered Entities,'' codified at 42 U.S.C. 256b. The 
340B Program permits covered entities ``to stretch scarce Federal 
resources as far as possible, reaching more eligible patients and 
providing more comprehensive services.'' H.R. REP. No. 102-384(II), at 
12 (1992). Eligible covered entity types are defined in section 
340B(a)(4) of the PHSA. Section 340B of the PHSA instructs HHS to enter 
into a pharmaceutical pricing agreement (PPA) with certain drug 
manufacturers. When a drug manufacturer signs a PPA, it is opting into 
the 340B Program and it agrees 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 Centers for Medicare & Medicaid Services 
(CMS). Section 7102 of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) as amended by section 2302 of the Health Care and 
Education Reconciliation Act (Pub. L. 111-152) (HCERA) (hereinafter 
referred to as the ``Affordable Care Act''), added section 
340B(d)(1)(B)(vi) of the PHSA, which provides for the imposition of 
sanctions in the form of civil monetary penalties, which--
    (I) shall be assessed according to standards established in 
regulations to be promulgated by the Secretary;
    (II) shall not exceed $5,000 for each instance of overcharging a 
covered entity that may have occurred; and
    (III) 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 under subsection 340B(a)(1).
    The Affordable Care Act also added section 340B(d)(1)(B)(i)(I) of 
the PHSA, which requires ``[d]eveloping and publishing through an 
appropriate policy or regulatory issuance, precisely defined standards 
and methodology for the calculation of ceiling prices . . .'' CMPs 
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

[[Page 1211]]

stakeholders as to the calculation of the 340B ceiling price.
    Since 1992, HHS has administratively established the terms and 
certain elements of the 340B Program through guidelines published in 
the Federal Register, typically after publication of a notice in the 
Federal Register and opportunity for public comment. In September 2010, 
HHS published an advanced notice of proposed rulemaking (ANPRM) in the 
Federal Register, ``340B Drug Pricing Program Manufacturer Civil 
Monetary Penalties'' (75 FR 57230, September 20, 2010). After 
consideration of the comments received on the ANPRM, HHS published a 
notice of proposed rulemaking (NPRM) in the Federal Register (80 FR 
34583, June 17, 2015) entitled, ``340B Drug Pricing Program Ceiling 
Price and Manufacturer Civil Monetary Penalties Regulation'' to 
implement CMPs for manufacturers who knowingly and intentionally charge 
a covered entity more than the 340B ceiling price for a covered 
outpatient drug and to provide increased clarity on the requirements of 
manufacturers to calculate the 340B ceiling price on a quarterly basis. 
The public comment period closed on August 17, 2015, and HHS received 
approximately 35 comments. HHS reopened the comment period (81 FR 
22960, April 19, 2016) to invite additional comment on several specific 
areas of the NPRM: 340B ceiling price calculations that result in a 
ceiling price that equals zero (penny pricing), the methodology that 
manufacturers utilize when estimating the ceiling price for a new 
covered outpatient drug, and the definition of the knowingly and 
intentionally standard for manufacturer CMPs. The additional comment 
period closed on May 19, 2016, and HHS received approximately 70 
comments during this additional comment period. The following section 
presents a summary of the comments received, grouped by subject, and a 
response to each grouping. All comments on the proposals included in 
the NPRM and the reopening Notice were considered in developing this 
final rule, and changes were made as described. Other changes were also 
made to improve clarity and readability.

II. Summary of Proposed Provisions and Analysis and Responses to Public 
Comments

    The revisions to 42 CFR part 10 of the final rule are described 
according to the applicable section of the final rule. This final rule 
replaces Sec.  10.1, Sec.  10.2, Sec.  10.3, and Sec.  10.10, adds a 
new Sec.  10.11, and eliminates Sec.  10.20 and Sec.  10.21.

General Comments

    Comments received during both comment periods addressed general 
issues. We have summarized those comments and have provided a response 
below.
    Comment: Several commenters urge HHS to specify that the effective 
date of the final rule be prospective and at least two quarters after 
the final rule's publication in the Federal Register. In addition, the 
commenters urge HHS to build in a significant grace period with respect 
to manufacturer compliance to give manufacturers sufficient time to put 
the necessary system capabilities in place. Other commenters asked HHS 
to revise the effective date of the final rule to 180 days after March 
23, 2010, which would allow HHS to impose CMPs retroactively.
    Response: The final rule is effective March 6, 2017. HHS recognizes 
that the effective date falls in the middle of a quarter. As such, HRSA 
plans to begin enforcing the requirements of this final rule at the 
start of the next quarter, which begins April 1, 2017. Manufacturers 
that offer 340B ceiling prices as of the quarter beginning April 1, 
2017, must comply with the requirements of this final regulation. HHS 
believes that this timeframe provides manufacturers sufficient time to 
adjust systems and update their policies and procedures. HHS disagrees 
that the rule should be implemented retroactively. An attempt to apply 
the final rule retroactively would be administratively burdensome and 
difficult to implement for all stakeholders.
    Comment: Several commenters urge HHS to defer the final rule 
pending the issuance of additional substantive program guidance. The 
commenters state that the issuance of substantive guidance first is 
more consistent with fundamental fairness in a civil penalty 
enforcement context, inasmuch as program stakeholders should understand 
their substantive obligations prior to any enforcement activity. The 
commenters also request that HHS finalize the information collection 
request (ICR) and gain experience first with administering the 340B 
ceiling price reporting system.
    Response: HHS does not believe that the issuance of additional 
guidance is needed in order to implement this final rule. The 
provisions of this final rule will be effectively implemented 
independent of other programmatic regulations and guidances. Current 
policies under the 340B Program provide stakeholders with sufficient 
guidance regarding programmatic compliance. Regarding the ICR, HHS 
submitted an ICR pertaining to the collection of information for the 
340B ceiling price reporting system in compliance with section 
3507(a)(1)(D) of the Paperwork Reduction Act of 1995. The Office of 
Management and Budget (OMB) approved the ICR on September 28, 2015, 
after a formal notice and comment process (80 FR 22207, April 21, 
2015). This final rule contains specific information related to the 
calculation of the 340B ceiling price and the imposition of CMPs 
against manufacturers who knowingly and intentionally overcharge a 
covered entity; therefore, it is not necessary to implement the 340B 
ceiling price reporting system prior to finalizing this rule.
    Comment: A commenter requests that HHS provide login credentials to 
state Medicaid staff to facilitate dissemination of 340B ceiling price 
information. Alternatively, HHS could develop a different means of 
providing states with quarterly updates of 340B ceiling price 
calculations (e.g., via designated state technical contacts).
    Response: We appreciate the commenters concern, and HRSA and CMS 
are jointly working on alternative ways to share this information with 
states.
    Comment: Several commenters argue that HHS does not have rulemaking 
authority to issue a binding ceiling price regulation, as it does not 
have general rulemaking authority with respect to the 340B Program. 
Regarding 340B ceiling prices, commenters point out that Congress 
directed HHS under section 340B(d)(1)(B)(i)(I) of the PHSA to establish 
``precisely defined standards and methodology for the calculation of 
ceiling prices'' via ``an appropriate policy or regulatory issuance.'' 
They argue, however, that in other parts of the statute, Congress more 
clearly directs HHS to issue regulations. For instance, under section 
340B(d)(1)(B)(vi)(I), Congress directed HHS to implement civil monetary 
penalties pursuant to ``standards established in regulations.'' 
Commenters argue that Congress intended to confer a different level of 
authority and did not give HHS authority to issue regulations in this 
area.
    Response: HHS has the statutory authority under section 
340B(d)(1)(B)(i)(I) of the PHSA to develop and publish through 
appropriate policy or a regulatory issuance, such as this final rule, 
the precisely defined standards and methodology for the calculation of 
340B ceiling prices. The fact that Congress limited HHS to proceed by 
rulemaking

[[Page 1212]]

with regard to other authorities in the statute does not negate the 
choice that Congress expressly provided to HHS in section 
340B(d)(1)(B)(i)(I) to proceed through either policy or regulation.
    Comment: Some commenters suggest that the rule should require 
manufacturers to provide background information to HHS regarding 340B 
sales, including information such as the identity of the 340B covered 
entity billed for a given drug and the shipping location of the drug.
    Response: HHS appreciates these comments; however, they are beyond 
the scope of this final rule.
    Comment: Commenters noted that the rule only addressed one of the 
340B Program integrity improvements required by the Affordable Care 
Act--CMPs for manufacturers. They suggested that HHS should not 
finalize this rule and should instead issue a new, comprehensive NPRM 
that addresses all the improvements as required by the Affordable Care 
Act. For instance, the commenters opposed the implementation of CMP 
procedures absent HHS's creation of an Administrative Dispute 
Resolution (ADR) process.
    Response: HHS is choosing to issue separate rulemakings for the 
different areas of the 340B Program integrity improvements that the 
Affordable Care Act mandates and for which HHS has rulemaking 
authority. HHS is addressing the administrative dispute resolution 
process and issued an NPRM August 12, 2016, in the Federal Register (81 
FR 53381). HHS anticipates finalizing the administrative dispute 
resolution regulation after the comments have been reviewed and 
considered.
    Comment: Commenters note that the Affordable Care Act requires 
manufacturers to report to HHS the 340B ceiling price each quarter as 
well as any prior period lagged price concessions that could affect 
prior quarter 340B ceiling prices by changed average manufacturer price 
(AMP), Best Price, and unit rebate amounts (URA). The commenter further 
notes that the proposed rule did not address this circumstance. They 
suggested that HHS establish a secure protocol to submit pricing and 
publish for comment its proposed process for manufacturer reporting of 
such submissions.
    Response: Section 340B(d)(1)(B) of the PHSA requires HHS to develop 
a system to verify the accuracy of 340B ceiling prices calculated by 
manufacturers and charged to covered entities. HHS recognizes the 
utility of the type of policy mentioned in the comments and plans to 
publish guidance on the particular components of the 340B ceiling price 
reporting system.

Subpart A--General Provisions

A. Purpose and Summary of 340B Drug Pricing Program--Sec.  10.1 and 
Sec.  10.2
    Section 10.1 and Sec.  10.2 of the rule provide general information 
concerning section 340B of the PHSA, ``Limitation on Prices of Drugs 
Purchased by Covered Entities.'' Section 10.1 provides the purpose of 
part 10 and Sec.  10.2 provides a summary of section 340B of the PHSA, 
which instructs the Secretary of Health and Human Services to enter 
into agreements with manufacturers of covered outpatient drugs under 
which the amount to be paid to manufacturers by certain statutorily 
defined covered entities does not exceed the 340B ceiling price. 
Manufacturers participating in the 340B Program are required to provide 
these discounts on all covered outpatient drugs sold to participating 
340B covered entities. HHS did not receive any comments with respect to 
these sections and is finalizing these sections as proposed.
B. Definitions--Sec.  10.3
    In the proposed rule, HHS sought to define several terms that were 
used throughout the regulation. These terms included: ``340B Drug,'' 
``Average Manufacturer Price,'' ``Ceiling price,'' ``CMS,'' ``Covered 
entity,'' ``Covered outpatient drug,'' ``Manufacturer,'' ``National 
Drug Code,'' ``Pharmaceutical Pricing Agreement,'' ``Quarter,'' 
``Secretary,'' and ``Wholesaler.'' HHS did not receive comment on the 
following terms, which are finalized in this rule as proposed: 
``Average Manufacturer Price,'' ``Ceiling Price,'' ``CMS,'' ``National 
Drug Code,'' ``Pharmaceutical Pricing Agreement,'' and ``Secretary.'' 
For the remaining terms, HHS received specific comments and have 
summarized those comments below.
1. 340B Drug
    Proposed Sec.  10.3 set forth a definition of the term ``340B 
drug'' as a covered outpatient drug, as defined in section 1927(k) of 
the Social Security Act (SSA), purchased by a covered entity at or 
below the 340B ceiling price required pursuant to a PPA with the 
Secretary. Based on the comments received, HHS is removing this 
definition from the final rule, as HHS believes that the definition is 
unnecessary. HHS received the following comment regarding the 
definition of a 340B drug.
    Comment: Several commenters suggest that HHS remove the proposed 
definition of a ``340B drug'' as the term is not used in the 340B 
statute or proposed regulations and as drafted could lead to confusion 
and uncertainty. The proposed definition also narrowly defines the 
circumstances under which a 340B covered entity can acquire the drug.
    Response: After consideration of the comments received with respect 
to this definition and in light of the definition of covered outpatient 
drug as set forth in section 1927(k) of the SSA, which is also defined 
in this final rule, HHS does not believe the definition is necessary 
and is, therefore, removing the definition of a 340B drug from this 
final rule.
2. Covered Entity
    The proposed rule defined the term covered entity as an entity that 
is listed in section 340B(a)(4) of the PHSA, meets the requirements 
under section 340B(a)(5) of the PHSA, and is registered and listed in 
the 340B database. HHS received several comments regarding the proposed 
definition of covered entity and have summarized them below.
    Comment: Several commenters supported the proposed definition of 
``covered entity'' as it included both registration and database 
listing requirements. They explain that HHS's proposal will improve the 
integrity of the Program, assist manufacturers in meeting their 
obligations, and strengthen manufacturer Medicaid compliance. 
Commenters urge HHS to include in the definition of covered entity that 
an organization must both: (1) Be in compliance with the duplicate 
discount and diversion prohibitions; and (2) be registered and appear 
on the 340B database as a participating entity during the quarter in 
which the transaction is made.
    Response: The term covered entity is defined, in accordance with 
section 340B(a)(4) of the PHSA, to mean an entity that is listed in the 
statute and meets all of the requirements in section 340B(a)(5) 
pertaining to diversion and duplicate discounts. As the definition 
imposed in this final rule already includes that a covered entity must 
comply with section 340B(a)(5), it is not necessary for the definition 
to specify compliance with the requirements pertaining to diversion and 
duplicate discounts The process for appearing on the 340B database is 
separate and distinct from compliance with the requirements in section 
340B(a)(5), and all covered entities listed on the 340B database are 
expected to be in compliance with this provision of the statute.

[[Page 1213]]

3. Covered Outpatient Drug
    The term covered outpatient drug was defined in the proposed rule 
as having the meaning set forth in section 1927(k) of the SSA. HHS 
received several comments on the proposed definition and has summarized 
them below.
    Comment: A few commenters recommended that HHS limit the definition 
of ``covered outpatient drug'' to only the definition at section 
1927(k)(2) of the SSA, and not include the ``limiting definition'' of 
covered outpatient drugs in section 1927(k)(3) of the SSA to prevent 
manufacturers from limiting 340B pricing to drugs that are reimbursed 
separately, as opposed to those reimbursed under bundled payment 
methodologies. Commenters note that CMS is increasingly moving towards 
the use of bundled payments and other types of value-based purchasing 
models with the goal of 50 percent of all Medicaid payments being made 
under alternative payment models by 2018. Therefore, they argue, it is 
highly likely that an increasing number of covered entities will no 
longer be eligible for 340B pricing for Medicaid patients if section 
1927(k)(3) of the SSA is incorporated into this regulation. Commenters 
urge the development of a definition of ``covered outpatient drug'' 
that is specific to the 340B Program and does not track with the 
Medicaid statute, which is limited to the Medicaid Drug Rebate Program 
(MDRP).
    Response: Section 340B(b)(1) of the PHSA states that the term 
``covered outpatient drug'' has the meaning set forth in section 
1927(k) of the SSA. Section 1927(k) includes the limiting definition 
and HHS does not believe that the interpretation of covered outpatient 
drug is contrary to the purpose of the 340B Program. We disagree that 
covered entities will not be eligible for the 340B Program as a result 
of this provision.
4. Manufacturer
    HHS defined the term manufacturer in the proposed rule as having 
the meaning set forth in section 1927(k) of the SSA. HHS received 
several comments on the proposed definition and has summarized them 
below.
    Comment: For the term ``manufacturer,'' commenters urge HHS to 
incorporate its long-standing guidance that a manufacturer ``must hold 
legal title to or possession of the national drug code (NDC) for the 
covered outpatient drugs.'' The commenter explains that the PPA has 
reflected this provision. This is important because there could be 
distinct legal entities that own distinct NDCs and are different 
manufacturers for purposes of the 340B Program.
    Response: Section 340B(b)(1) of the PHSA defines the term as having 
the meaning set forth in section 1927(k) of the SSA. Given the 340B 
statute's direct reference to section 1927(k) of the SSA, HHS does not 
believe that this term needs to be further defined in this final rule. 
However, for 340B Program purposes, a manufacturer would be the entity 
holding legal title or possessing the NDC in question.
    Comment: Commenters urged HHS to clarify the distinction between 
``manufacturers'' and ``wholesalers.'' They suggest HHS specify that 
``traditional'' wholesale distribution operations and contract 
packaging and repackaging operations do not make an entity a 
``manufacturer'' that can be subject to CMPs.
    Response: The definition of ``manufacturer'' is finalized at Sec.  
10.3. To the extent that a wholesale distributor meets the definition 
of ``manufacturer,'' it would need to meet the requirements for 
manufacturers as defined in this rule.
5. Quarter
    The term quarter is defined in the proposed rule as a calendar 
quarter, unless otherwise specified. HHS received several comments on 
this term, which are summarized below.
    Comment: Several commenters support that 340B ceiling prices are 
calculated based on calendar quarters. However, the commenters argue 
that the proposed rule does not recognize the two-quarter lag between 
when a sales transaction occurs and when the applicable 340B ceiling 
price becomes effective. They urge HHS to clarify that 340B ceiling 
price calculations are based on sales transactions from two prior 
calendar quarters. They feel this is supported because calculating the 
340B ceiling price for a particular calendar quarter in the immediate 
preceding quarter is not possible because AMP and Best Price for the 
quarter are not calculated and reported to CMS until 30 days after the 
end of a quarter.
    Response: HHS agrees with the commenters. HHS notes that the 340B 
ceiling price is calculated based on data received from CMS that 
incorporates the quarterly pricing lag. For purposes of this final 
rule, HHS is interpreting the 340B ceiling price calculation provision 
at section 340B(a)(1) to be the AMP reported from the preceding 
calendar quarter minus the URA. Section 10.10(a) of this final rule, 
pertaining to the calculation of the 340B ceiling price, has been 
modified to align with the 340B statute pertaining to AMP calculations 
made in the preceding calendar quarter. For instance, the pricing data 
from the first quarter in any given year is not due to be reported to 
CMS until 30 days into the second quarter. Therefore, the pricing data 
from the first quarter cannot be used to price drugs until the third 
quarter. The definition of quarter will be finalized as proposed.
6. Wholesaler
    The proposed rule defines wholesaler as the term as set forth in 42 
U.S.C. 1396r-8(k)(11). HHS received several comments, which are 
summarized and responded to below.
    Comment: Commenters suggest that HHS uniformly refer to the 
applicable sections of the SSA (as opposed to the reference to the 
United States Code) for purposes of consistency and to avoid any 
potential confusion. Other commenters note that the term ``wholesaler'' 
as defined in section 1927(k)(11) of the SSA is focused on the 
distribution to retail community pharmacies, which are entities that 
cannot qualify as 340B covered entities. They state further that while 
retail community pharmacies may serve as contract pharmacies, not all 
340B covered entities maintain contract pharmacy arrangements. The 
commenters do not think it is appropriate to utilize a definition that 
focuses on drug distribution and retail community pharmacies. In 
addition, commenters urge HHS to ensure that specialty pharmacies, 
including radio pharmacies and nuclear pharmacies, are not included in 
the term ``manufacturer'' or ``wholesaler'' and, therefore, that the 
340B ceiling price is not required to be offered by specialty 
pharmacies, although they may elect to do so. Unlike ``specialty 
distribution,'' which can be an entity that performs the same function 
as a wholesaler, specialty pharmacies are pharmacies that receive, 
rather than distribute drugs.
    Response: After consideration of the comments received on the term 
wholesaler, HHS is removing this term from the final rule. The term 
``wholesaler'' as defined at section 1927(k)(11) of the SSA is not 
appropriate for 340B Program purposes for the reasons cited by 
commenters and it is not necessary to define this term in the final 
rule. With respect to ``specialty distribution'' or ``specialty 
pharmacy,'' HHS notes that it is the manufacturer's responsibility to 
ensure compliance with 340B Program requirements, including the 
requirements set forth in this final rule.
    Comment: Commenters urge HHS to clarify that (1) traditional 
wholesale

[[Page 1214]]

distribution operations (e.g., purchasing or holding for resale or 
distribution) and (2) contract packaging and repackaging operations 
(i.e., where the product does not bear the repackages labeler code) 
will not cause an entity to be a ``manufacturer'' that is potentially 
subject to CMPs. Instead, manufacturers subject to the 340B Program's 
pricing obligations (and potentially CMPs) should be limited to 
entities whose NDC labeler code appears on a drug product, as this 
approach is consistent with CMS and the MDRP.
    Response: Although HRSA recognizes that wholesalers often act as 
independent entities, a manufacturer's failure to ensure that covered 
entities receive the 340B ceiling price through its distribution 
arrangements with wholesalers may be grounds for assessment of civil 
monetary penalties as set forth in this final rule.

Subpart B--340B Ceiling Price

A. Ceiling Price for a Covered Outpatient Drug--Calculation of 340B 
Ceiling Price--Sec.  10.10(a)
    In the proposed rule, HHS recognized that the 340B ceiling price 
for a covered outpatient drug is equal to AMP minus the URA, and will 
be calculated using six decimal places. HRSA proposed to publish the 
340B ceiling price rounded to two decimal places.
    HHS received numerous comments on this provision in the proposed 
rule. In this final rule, HHS has decided to remove the terms ``package 
size'' and ``case package size'' and plans to address these operational 
elements concerning the 340B ceiling price calculation in future 
guidance associated with the 340B Program ceiling price reporting 
system. HHS has addressed specific comments with respect to this issue 
below.
    Comment: Several commenters expressed concern that the terms 
``package size'' and ``case package size'' are confusing and not in the 
340B statute. Commenters argue that ``case package size'' is not a 
metric tabulated or reported under other price reporting programs or 
currently used by manufacturers. Commenters suggest HHS clarify the 
terms to assist stakeholders in understanding how 340B ceiling prices 
are calculated and to ensure consistency in the methodology used by 
manufacturers to calculate 340B ceiling prices. Commenters also urge 
HHS to refrain from introducing new variables without analysis and an 
understanding of the overall ceiling price calculation. Other 
commenters stated that case/package size was proposed in an effort to 
assist HHS in providing sales prices for an 11-digit NDC; however if 
the unit type and units per package are consistent with the units in 
the 11-digit NDC, then the sales price can be derived without using any 
other value.
    Response: After consideration of the comments received, HHS has 
decided to remove ``package size'' and ``case package size'' from the 
final rule as the statute only speaks to the 340B ceiling price 
calculation as being AMP minus URA. HHS does plan to further elaborate 
on the manner that the terms relate to the 340B ceiling price 
calculation, and its use by the market, in future guidance associated 
with the 340B Program ceiling price reporting system.
    Comment: Some commenters noted that the proposed rule would require 
calculation of the ceiling price to six decimal points and that the 
necessity of this added complexity is unclear. They suggested that the 
ceiling prices be reported and calculated in dollars and cents with two 
decimal places. Several commenters support and appreciate that HHS 
plans to publish the ceiling price rounded to two decimal places, which 
makes it easier for covered entities to determine if manufacturers are 
charging them appropriately.
    Response: HHS has concluded that the data utilized for the 340B 
ceiling price calculation should be in the same format as reported to 
CMS. CMS has indicated in Manufacturer Release No. 82 (November 1, 
2010) that when AMP is submitted to the Drug Data Reporting for 
Medicaid (DDR) system, it should be rounded to six decimal places. In 
Manufacturer Release No. 46 (April 18, 2000), CMS modified the rounding 
methodology for the URA and required manufacturers to round URA 
calculations to four digits and because the field codes require six 
digits, CMS ``pads'' positions five and six with zeros. HRSA receives 
both the AMP and URA data from CMS at six decimal places. For the 
purposes of calculating the 340B ceiling price, HHS has decided that 
data utilized for the calculation of the 340B ceiling price will be 
rounded to six decimal places in an effort to ensure an accurate 340B 
ceiling price. HHS will then make the 340B ceiling price available in 
the secure 340B ceiling price system rounded to two decimal places in 
an effort to ensure certainty in the market place.
    Comment: Some commenters urge HHS to clarify in the final rule that 
the ceiling price calculation is based on the quarterly AMP as opposed 
to a monthly AMP.
    Response: AMP is described in section 340B(a)(1) of the PHSA as the 
AMP for the drug under title XIX of the SSA in the preceding calendar 
quarter. The AMP used for the calculation of the 340B ceiling price is 
a quarterly AMP sent to HRSA by CMS on a quarterly basis. We agree with 
the commenters and have modified the final rule to clarify that the 
340B ceiling price is based on quarterly AMP data.
    Comment: Commenters argue that the ceiling price calculation 
mechanics are unclear given that HHS has not yet implemented the 
ceiling price verification mechanism and Web site for covered entities. 
Other commenters request that HHS provide a detailed, standardized 340B 
ceiling price methodology, including a written formula.
    Response: With respect to the 340B ceiling price calculation, HHS 
has determined that this final rule will be limited to the elements 
necessary to calculate the 340B ceiling price as defined at section 
340B(a)(1) of the PHSA. This final rule sets forth the 340B ceiling 
price calculation as AMP minus URA. The development of the 340B ceiling 
price reporting system is proceeding under a separate ICR process that 
is operational in nature and is not contingent upon the specific 
provisions contained in this final rule. This ICR was submitted and 
approved by OMB on September 28, 2015, after a formal notice and 
comment process (80 FR 22207, April 21, 2015, OMB No. 0915-0327).
    Comment: Some commenters encourage HHS to require both 
manufacturers and CMS to report URA values to HHS for verification and 
resolution of anomalies or discrepancies.
    Response: The reporting obligations of manufacturers and HRSA's 
receipt of pricing information from CMS are outside the scope of this 
rule.
B. Ceiling Price for a Covered Outpatient Drug--Exception--Sec.  
10.10(b)
    Where the URA equals the AMP for a drug, the section 340B ceiling 
price formula would result in a ceiling price of zero. The statute, 
however, clearly contemplates a payment to a manufacturer and the act 
of purchasing covered outpatient drugs. Setting a zero dollar ceiling 
price would run counter to the statutory scheme and lead to unintended 
consequences, including operational challenges. For example, some 
information technology systems are not able to generate invoices for 
any prices less than $0.01 and manufacturers may not be able to 
generate an electronic data interchange price update for an item that 
does not have a price of at least $0.01. The NPRM

[[Page 1215]]

therefore proposed that when the 340B ceiling price calculation 
resulted in an amount less than $0.01, a manufacturer charge a $0.01 
per unit of measure.
    In light of the comments received on this particular policy (when 
ceiling price calculations result in a ceiling price that equals a 
zero, or ``penny pricing''), HHS reopened the comment period (81 FR 
22960, April 19, 2016) to solicit additional comment and determine 
whether or not alternatives raised in the comments regarding the penny 
pricing policy would be more appropriate. HHS also sought to provide 
the public with adequate opportunity to comment on alternatives to 
penny pricing.
    The specific alternatives raised by commenters on the NPRM included 
the Federal Ceiling Price (FCP), the most recent positive 340B ceiling 
price from previous quarters, and nominal price. Some commenters stated 
that the FCP, which is the basis for certain Federal government program 
drug purchases, would be a viable alternative. Other commenters 
suggested that charging a ceiling price from previous quarters in which 
the ceiling price was greater than $0.00 would be reasonable. Finally, 
several commenters suggested that nominal pricing, which is a term used 
in the MDRP, would be more appropriate. Other commenters suggested that 
manufacturers should be able to utilize any reasonable pricing 
methodology that they choose.
    In the reopening of the comment period published in the Federal 
Register, HHS received numerous comments supporting and opposing the 
alternatives to penny pricing. Several commenters opposed to the 
alternatives expressed that any alternatives to penny pricing would 
violate the 340B ceiling price formula and would reward manufacturers 
for raising prices faster than inflation. In addition, commenters 
opposed to the alternatives explained that they would directly conflict 
with the intent of the 340B Program by increasing costs for covered 
entities. Other commenters opposing the penny pricing policy suggested 
that the policy would result in drug shortages, stockpiling, diversion, 
harm to patients and abuse. Among support for several of the 
alternatives, these commenters recommended that HHS allow manufacturers 
to select a reasonable pricing methodology in accordance with their 
duty of good faith under the PPA.
    After consideration of the comments received, HHS is finalizing the 
penny pricing policy as proposed. This long-standing policy reflects a 
balance between the equities of different stakeholders and establishes 
a standard pricing method in the market. Specific comments are 
addressed below.
    Comment: Several commenters support the maintenance of the current 
HHS penny pricing proposal, believing it is the best approach for 
calculating the 340B ceiling price, that it is well-established and 
effective, and that it is consistent with HHS' existing policy. Many 
commenters were concerned that any alternatives to penny pricing would 
be inconsistent with the statute. Commenters encouraged HHS to consider 
the unintended impact that changing the penny pricing policy would have 
on the covered entities and the vulnerable populations they serve and 
supported finalizing the original penny pricing proposal. Commenters 
recommended that if alternate proposals were considered, HHS put 
forward more detailed models for thorough review and analysis of impact 
on covered entities.
    Response: HHS agrees with the commenters supporting the current 
policy and is finalizing the penny pricing policy as proposed. HHS has 
established the penny pricing policy that allows for the next positive 
price ($0.01) when the calculation of the 340B ceiling price is zero. 
This policy is consistent with the timing of the 340B ceiling price 
calculation (preceding calendar quarter), and it appropriately aligns 
with the requisite data points (i.e., AMP and URA) for the 340B ceiling 
price as set forth in section 340B(a)(1) of the PHSA. HHS believes that 
the proposed alternatives to penny pricing would be inconsistent with 
the 340B ceiling price formula established in section 340B(a) of the 
PHSA and would raise 340B ceiling prices above the statutory formula in 
ways that would be inconsistent with the statutory scheme. HHS believes 
that the penny pricing policy best effectuates the statutory scheme.
    Comment: Some commenters stated that the inflationary penalty used 
to calculate the URA was established to discourage manufacturers from 
raising the price of drugs faster than inflation (i.e., the rebate 
percentage increases when a manufacturer increases the price of a 
brand-name drug). Further, commenters believed that any alternative 
policy to penny pricing would reward manufacturers for raising prices 
faster than inflation. Commenters stated that the inflationary penalty 
used to calculate the URA was intentionally established by Congress to 
discourage manufacturers from raising the price of drugs faster than 
the rate of inflation and that any alternative to penny pricing would 
ignore this core component of the pricing formula established by 
Congress.
    Response: Under the MDRP, CMS indexes quarterly AMPs to the rate of 
inflation (Consumer Price Index adjusted for inflation-urban). Section 
1927(c)(2)(A) of the SSA provides that if the AMP increases at a rate 
faster than inflation, the manufacturer pays an additional rebate 
amount which is reflected in an increased URA. Historically, because of 
the basic rebate and the inflation factor, section 1927(c)(2)(A) of the 
SSA could increase the rebate amount manufacturers must pay to the 
States, and result in negative 340B ceiling prices. Due to the 
provision in section 1927(c)(2)(D) of the SSA that limits the unit 
rebate amount to 100 percent of the AMP, effective January 1, 2010, an 
increase in the basic rebate and inflation factor would not result in a 
negative 340B price, but could result in a zero 340B ceiling price. The 
methodologies proposed as alternatives to penny pricing would decrease 
the effect of the inflationary component of the statutory formula 
established by Congress (AMP increasing faster than inflation).
    Comment: Commenters acknowledged HHS' authority and obligation to 
define the term ``ceiling price,'' but argued that a literal 
interpretation of the statutory text that would result in a calculated 
340B ceiling price of zero dollars is an absurd outcome.
    Response: The calculation of the 340B ceiling price is defined in 
section 340B(a)(1) of the PHSA as AMP minus URA. Under the MDRP, CMS 
indexes quarterly AMPs to the rate of inflation (Consumer Price Index 
adjusted for inflation-urban). Section 1927(c)(2)(A) of the SSA 
provides that if 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 that there are instances when the 340B 
ceiling price does calculate to a zero price. For example, in the first 
calendar quarter of 2016, approximately 1 percent of all drugs listed 
under the 340B program for that quarter resulted in a zero price.
    For the reasons described in the previous responses, HHS does not 
believe that it is consistent with the statutory scheme to set the 
price at zero. In this circumstance, HHS is therefore requiring that 
manufacturers charge a $0.01 for the drug, which we believe best 
effectuates the statutory scheme by requiring a payment.
    Comment: Several commenters stated that the 340B statute does not 
address situations where the 340B ceiling

[[Page 1216]]

pricing calculation results in zero and therefore the PPA should 
govern. Commenters argued that while the PPA does not directly address 
what should occur when the 340B pricing formula results in zero, it 
provides that the agreement ``shall be construed in accordance with 
Federal common law'' which requires the parties ``gap fill'' by 
negotiating ambiguous requirements in good faith. Other commenters 
offered criteria under which the duty of good faith would be met by a 
reasonable pricing methodology to include that the policy is readily 
and objectively verifiable, is statutorily supported, and represents a 
favorable discount to covered entities.
    Response: The U.S. Supreme Court has stated that PPAs are not 
transactional, bargained for contracts, and that ``PPAs simply 
incorporate statutory obligations and record the manufacturers' 
agreement to abide by them'' (Astra USA v. Santa Clara County, 563 U.S. 
110, 118 (2011)). Moreover, the PPA indicates that any ambiguities 
shall be interpreted in a manner that best effectuates the statutory 
scheme, not that any ambiguities should be negotiated between the 
parties. 340B Program requirements are based on the manner in which the 
Department interprets the statute, and are not subject to a contractual 
negotiation process. For the reasons previously stated, the Department 
has determined that penny pricing is the policy that best effectuates 
the statutory scheme.
    Comment: Commenters suggested that HHS institute a similar policy 
to address zero prices as the Veterans Administration (VA) uses to 
implement the Master Agreement for FCP prices given to certain Federal 
purchasers pursuant to the Veterans Health Care Act of 1992, the same 
legislation that created the 340B Program. They state that the VA 
interprets its program, which is similar to the 340B Program, to 
require a good faith negotiation to set a reasonable price in the event 
of a negative or zero FCP.
    Response: Contrary to the commenters' position, the approach 
utilized by the VA under its separate Prime Vendor Program supports the 
penny pricing policy. Similar to this final rule, the VA sets the price 
of a negative or zero priced FCP at $0.01. The VA's assumption for 
these drugs is, therefore, that prices are set at $0.01. While the VA 
also has an additional mechanism through which manufacturers can 
request nominal increases in the prices of drugs (Department of 
Veterans Affairs, Dear Manufacturer Letter, February 24, 1993), the 
VA's ability to increase prices by a nominal amount above this default 
is based on statutory authority that does not apply to the 340B 
Program. Title 38 U.S.C. 8126(a)(2) states that prices may nominally 
exceed the statutory formula if the VA determines it ``to be in the 
best interests of the Department or such Federal agencies.'' There is 
no similar authority in the 340B statute to exceed the basic price 
calculation, and therefore HHS does not have the same ability to adjust 
the pricing formula set by statute.
    Comment: Many commenters strongly objected to the penny pricing 
policy. They argued that HHS did not articulate a non-arbitrary, non-
capricious reason as to why a $0.01 price is reasonable. Some 
commenters stated that there is no material difference between zero and 
$0.01, and since HHS has already stated that zero is not reasonable, 
$0.01 is also not reasonable. They also argued that the price of zero 
or one penny fails to cover the costs of goods sold, so cannot be 
considered the ``purchase'' of product. Commenters argued that the 
penny pricing policy would result in an illegal taking of private 
property by the government. They also argued the policy would result in 
``arbitrary'' or ``confiscatory'' price controls.
    Response: The longstanding penny pricing policy attempts to strike 
a balance that best effectuates the statutory scheme while ensuring 
that a zero ceiling price does not result. There is no requirement in 
the statute that the price paid must cover the costs of the drug. 
Reading such a requirement into the statute would require the 
evaluation of the costs of not only zero priced drugs, but any drug 
with a 340B ceiling price that is only a nominal amount. HHS does not 
believe that such a system is consistent with the statute. The sale of 
a drug for a cost less than manufacturing costs still constitutes a 
``purchase'' and does not result in the taking of private property.
    HHS disagrees with commenters that there is no material difference 
between setting the price at zero and $0.01. Setting the price at $0.01 
requires a payment and therefore ensures that there is a purchase 
within the meaning of the statute and, as a practical matter, between 
the buyer and seller. Setting the price at zero rather than $0.01 would 
lead to operational challenges. We understand, for instance, that some 
information technology systems are not able to generate invoices for 
any prices less than $0.01 and manufacturers may not be able to 
generate an electronic data interchange price update for an item that 
does not have a price of at least $0.01.
    Manufacturer participation in the 340B Program is also voluntary, 
albeit required in order to participate in the MDRP. Moreover, it is 
important to note that a manufacturer controls when a product reaches a 
zero 340B ceiling price through its own pricing decisions. If a 
manufacturer does not wish to offer a zero 340B ceiling price, the 
manufacturer may choose not to participate in the 340B Program or may 
alter its drug pricing practices so as not to cause a zero 340B ceiling 
price. For example, when AMP increases more quickly than the rate of 
inflation, the manufacturer must pay a greater Medicaid rebate, which 
can also cause a zero 340B price. A manufacturer can control AMP by 
adjusting the prices that it charges for drugs.
    Comment: Some commenters stated the penny pricing proposal is 
likely to result in and/or increase the potential for drug shortages 
and diversion, requiring manufacturers to adopt burdensome and costly 
``alternate allocation procedures'' to correct for the market-
distorting effect of HHS' policies. Commenters further stated the 
continuation of penny pricing policy would further exacerbate drug 
shortages, particularly for generic drugs, given that in the first 
quarter 2017 generic drugs will be subject to an additional rebate in 
the URA formula if the AMP for such drugs rises faster than inflation. 
Given this, the penny pricing provision would result in potential of 
stockpiling, diversion, harm to patients, and abuse of controlled 
substances. Commenters were also concerned that there could be an 
increase in risk evaluation and mitigation strategy (REMS) drugs and 
drugs for which there is a grey or black market.
    Response: The penny pricing policy has been in place for many years 
and HHS does not have evidence that the policy causes significant risks 
of stockpiling, diversion, harm to patients, and abuse of controlled 
substances. HHS has existing policy with regard to manufacturer limited 
distribution plans for sales of covered outpatient drugs to eligible 
340B entities under the 340B Program. Manufacturers may address any 
resultant market distribution challenges by developing and executing a 
plan for limited distribution to all purchasers of the affected drug, 
including 340B covered entities when penny pricing occurs. 
Manufacturers are currently able to develop appropriate limited 
distribution protocols. HHS will be sensitive to plans to address drug 
shortages, stockpiling, and oversupplying of drugs subject to abuse or 
with REMS warnings.

[[Page 1217]]

    Comment: Many commenters stated their desire for the flexibility to 
use any or all of the alternative methods to penny pricing proposed. 
Manufacturer flexibility and discretion to adopt reasonable approaches 
to setting the 340B ceiling price when the ceiling price calculates to 
zero allows manufacturers to recover their costs while providing a 
discounted rate commensurate with the intent of the 340B statute.
    Response: HHS believes it is most appropriate to establish a 
standard price calculation in this circumstance, as it is not practical 
to allow all manufacturers to choose from a variety of methods that 
could result in pricing variations that could create market disruption 
and uncertainty. Therefore, we are finalizing the penny pricing policy 
as proposed.
    Comment: Some commenters were in favor of utilizing nominal pricing 
(less than 10 percent of AMP in the same quarter for which the AMP is 
computed) as an alternative to penny pricing. Commenters also noted 
that the MDRP uses this methodology, and that nominal price is a term 
that appears nine times in the Medicaid statute. They stated further 
that Congress has demonstrated support for applying this concept by 
listing 340B covered entities first among the six potential recipients 
to whom manufacturers may extend a nominal price without impacting best 
price. Commenters stated that nominal price addressed HHS' concern that 
``prices must be based on the immediately preceding calendar quarter.''
    Response: While the term nominal price appears in the Medicaid drug 
rebate statute, it is entirely absent from the 340B statute. Covered 
entities can receive a nominal price without impacting a manufacturers' 
best price for purposes of Medicaid calculations; however, nominal 
pricing is unrelated to the statutorily-mandated 340B Program pricing 
calculation. Although the nominal pricing alternative is based on the 
calendar quarter in which AMP is calculated, consistent with the timing 
of the 340B ceiling price calculation, it does not appropriately align 
with the requisite data points (i.e., AMP and URA) for the 340B ceiling 
price as set in section 340B(a)(1) of the PHSA. HHS will therefore 
finalize penny pricing as proposed.
    Comment: Some commenters favored the utilization of the most recent 
positive AMP or the last positive, non-zero ceiling price as an 
alternative to penny pricing. This approach would result in a 
significant discount to covered entities and would be analogous to the 
process under MDRP where manufacturers are required to report the most 
recent positive AMP if AMP equals zero. Carrying forward the most-
recent, positive quarterly 340B ceiling price would have the practical 
effect of establishing a realistic covered entity purchase price, and 
would reduce the risk of diversion posed by penny pricing.
    Response: The MDRP and the 340B Program are authorized under 
different statutes. While the commenter attempts to draw a comparison 
between the Medicaid AMP policy and the 340B penny pricing policy, AMP 
is not the only component of the 340B ceiling pricing formula, as the 
calculation also includes the URA.
    In addition, utilizing the AMP calculation from the last positive 
quarter would not align with the statutory requirement at section 
340B(a)(1) of the PHSA that the 340B ceiling price be based on the 
preceding calendar quarter's data and could encourage manufacturers to 
manipulate pricing data. In addition, this method ignores the portion 
of the congressionally mandated pricing formula regarding the inflation 
adjustment. Therefore, HHS has determined that this alternative is not 
an adequate alternative and will finalize this rule as proposed.
    Comment: Many commenters were in favor of utilizing the FCP as an 
alternative to penny pricing. Commenters also suggested the FCP offers 
an objectively verifiable benchmark and conveys a significant discount 
to covered entities without driving stockpiling and diversion.
    Response: The FCP has some similarities in intent and price-setting 
methodology to the 340B ceiling price. However, the FCP is generally 
computed once each calendar year and does not align with the 
requirement that 340B ceiling prices be calculated on a quarterly 
basis. Additionally, the FCP is not computed using the required 
calculation points of AMP and URA. Moreover, there is no mention of the 
FCP in the 340B statute. Therefore, HHS has determined that FCP is not 
an adequate alternative and will finalize this rule as proposed.
    Comment: Some commenters requested an exception to the penny 
pricing policy for orphan drugs. They suggest that when 340B sales 
volume exceeds a given threshold (e.g., 15 percent), a manufacturer 
should be permitted to utilize an alternative 340B price, such as its 
lowest commercial price.
    Response: When an orphan drug meets the definition of a covered 
outpatient drug, it would be subject to the requirements as set forth 
in this final rule. Further, the statue does not contemplate an 
alternative pricing methodology for orphan drugs.
C. Ceiling Price for a Covered Outpatient Drug--New Drug Price 
Estimation--Sec.  10.10(c)
    In general, calculation of the current quarter 340B ceiling price 
for each covered outpatient drug is based on pricing data from the 
immediately preceding calendar quarter. For new drugs, there is no 
sales data from which to determine the 340B ceiling price. HHS 
published guidelines in 1995 describing ceiling price calculations for 
new drugs (60 FR 51488, October 2, 1995) and the final rule will 
replace these guidelines.
    In the NPRM, HHS proposed that manufacturers estimate the 340B 
ceiling price for a new covered outpatient drug as of the date the drug 
is first available for sale, and provide HHS an estimated 340B ceiling 
price for each of the first three quarters the drug is available for 
sale. HHS also proposed that, beginning with the fourth quarter the 
drug is available for sale, the manufacturer must calculate the 340B 
ceiling price as described in proposed 42 CFR 10.10(a). Under the 
proposed rule, the actual 340B ceiling price for the first three 
quarters would also have been calculated and manufacturers would have 
been required to provide a refund or credit to any covered entity that 
purchased the covered outpatient drug at a price greater than the 
calculated 340B ceiling price. HHS proposed that any refunds or credits 
owed to a covered entity would be provided by the end of the fourth 
quarter.
    HHS received comments supporting and opposing the various 
components of its proposal on new drug price estimation. Commenters 
requested clarification on de minimis refunds under the proposed 
policy, price estimation methodologies, and whether refund policies 
stated in this regulation apply to all refunds, not just those 
corresponding to new drugs. Several commenters supported a specific 
methodology for calculating new drug prices, which included setting the 
price of the new covered outpatient drug as wholesale acquisition cost 
(WAC) minus the applicable rebate percentage (i.e., 23.1 percent for 
most single-source and innovator drugs, 17.1 percent for clotting 
factors and drugs approved exclusively for pediatric indications, and 
13 percent for generics). Commenters argued that this price would 
eliminate the need to estimate the price for the first three quarters 
and would result in a reasonable 340B ceiling price. Given the comments

[[Page 1218]]

received regarding setting a specific methodology, when HHS reopened 
the comment period, HHS sought comment on this issue. HHS specifically 
requested comment on setting the estimation at WAC minus the applicable 
rebate percentage.
    After consideration of the comments received, HHS is modifying the 
final rule to 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. The methodology set forth 
in this final rule for the estimated 340B ceiling price is WAC minus 
the appropriate rebate percentage. Once the AMP is known, and no later 
than the fourth quarter that the drug is available for sale, 
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 manufacturer is then required to offer a repayment to 
the covered entity the difference between the estimated 340B ceiling 
price and the actual 340B ceiling price within 120 days of the 
determination by the manufacturer that an overcharge occurred.
    For example, if a manufacturer with a PPA has a new drug approved 
for sale in February, and that drug meets the definition of covered 
outpatient drug, the 340B price estimation requirements would apply for 
at least one full calendar quarter. During that time, the manufacturer 
would estimate the 340B ceiling price at WAC minus the appropriate 
rebate percentage until the manufacturer can calculate an AMP for the 
product, resulting in an actual 340B ceiling price based on that AMP. 
The estimation can occur for up to the first three calendar quarters of 
availability, at which point the manufacturer will have the necessary 
pricing data to calculate the 340B ceiling price based on section 
340B(a)(1) of the PHSA.
    Since manufacturers must offer repayments as set forth in this 
section, it is incumbent on them to contact affected covered entities 
as part of that process. During initial contact, a manufacturer and a 
covered entity may both determine that a given overcharge is not 
significant, or agree to other payment options such as netting or 
crediting. In these instances, both parties are free to pursue mutually 
agreed-upon alternative refund arrangements. HHS has summarized and 
provided a response to the comments below.
    Comment: HHS received comments generally supporting and opposing 
the proposal to price new covered outpatient drugs at WAC minus the 
Medicaid minimum discount rebate percentages (i.e., 23.1 percent for 
most single-source and innovator drugs, 17.1 percent for clotting 
factors and drugs approved exclusively for pediatric indications, and 
13 percent for generics) until an AMP derived ceiling price can be 
identified after the third full quarter in which the drug became 
available. In addition, commenters suggested that HHS should not 
require subsequent pricing revisions or a refund once the actual price 
is determined. The commenters stated that such an approach would be 
simpler, while resulting in reasonable proxies for the final 340B 
ceiling prices.
    Response: The 340B ceiling price is calculated based upon AMP minus 
URA data supplied by CMS that is reported by manufacturers under the 
MDRP. Given that the AMP for a new covered outpatient drug may not be 
known for a period of time after the drug comes to market, HHS sought a 
balance between a standardized and universally applicable interim 
pricing requirement, while also ensuring that covered entities 
ultimately receive the 340B ceiling price as defined by the statute. 
Therefore, we have added to the final rule that new covered outpatient 
drugs should be estimated and sold to 340B participating covered 
entities using a standardized formula for the estimation at WAC minus 
the applicable Medicaid drug rebate percentage until an actual 340B 
ceiling price can be determined based on AMP. HHS believes a 
standardized formula for the calculation of the estimation will create 
stability in the market and provide transparency and consistency in the 
process. While the commenter's suggested approach may be feasible, HHS 
does not believe that it is reflective of statutory intent. In 
addition, HHS has maintained in the final rule that once an actual 340B 
ceiling price can be determined, manufacturers will be obligated to 
refund any difference between the estimated 340B price and the actual 
340B ceiling price. If a manufacturer refuses to refund covered 
entities after it has been determined covered entities were overcharged 
during the time the 340B ceiling price was estimated, that could meet 
the knowingly and intentionally standard to apply a CMP. This has been 
clarified in Sec.  10.11 of this final rule.
    Comment: HHS received several comments from covered entity groups 
expressing concern that the proposed new drug price estimation method, 
based on WAC minus the appropriate rebate percentage, would result in 
prices that are significantly higher than estimates derived from other 
methods. Commenters stated that WAC-derived pricing is often 30 percent 
higher than prices available to group purchasing organizations and that 
340B ceiling prices are typically much lower than this estimation.
    Response: HHS believes that the final rule ensures that covered 
entities will be able to receive the 340B ceiling price as defined in 
statute by requiring manufacturers to offer a refund to covered 
entities after the estimation period and within 120 days of determining 
there was an overcharge.
    Comment: Several commenters suggested that the 340B Program follow 
Medicaid policy towards rebates for new drugs, whereby prices are 
determined from the beginning by AMP (rather than WAC) minus the 
applicable discount percentage. The commenters argued that policy 
alignment with Medicaid would greatly simplify rebate program 
administration, and minimize the need for future reconciliation of 
overcharges. Commenters also suggested that HHS should reevaluate such 
a formula for new drug pricing to see how closely it aligns with AMP 
derived pricing after the initial estimation period.
    Response: The CMS Medicaid Covered Outpatient Drug Rule (81 FR 
5270, February 1, 2016) refers to AMP-based pricing only when a new 
version of an existing drug comes to market. In the case of a new drug, 
the Medicaid program does not utilize AMP-based pricing, as there are 
no prior sales data to base it on. Therefore, initial prices must be 
based on another price point. HHS believes that using a standardized 
formula, WAC minus the appropriate rebate percentage, to estimate 340B 
ceiling prices prior to an AMP being available is the most appropriate 
way to implement pricing requirements with regards to new drugs.
    Comment: Regarding the timeframe for new drug price calculations, 
several commenters suggested that new drug pricing follow the VA 
policy, whereby manufacturers are required to provide an initial 
(provisional) FCP statutory discount percentage to the WAC for 30 days, 
followed by a temporary pricing period predicated on the first 30 days 
of commercial sales, and permanent ceiling pricing taking effect after 
the first quarter by applying the statutory discount to the non-Federal 
AMP as it becomes available. Commenters cited the VA timeframe, whereby 
an estimated (WAC-based) price is used for the first month that a new 
drug is available, followed by a switch to a temporary (AMP-based) 
price.

[[Page 1219]]

    Response: HHS believes that it is appropriate to minimize any 
restatements of pricing that occur as a new 340B drug comes to market. 
The VA timeframe does not correlate to the quarterly pricing that 
occurs in the 340B Program. Therefore, HHS has finalized the rule to 
estimate drug pricing as WAC minus the appropriate rebate percentage 
until an actual 340B ceiling price can be computed based on AMP.
    HHS also notes that a provisional FCP is not required by the VA, it 
is optional. In addition, if a provisional FCP is established, it is 
not valid for just the first 30 days. It remains valid until the first 
temporary FCP comes due or is established, which could be up to 75 days 
from launch.
    Comment: Commenters suggested that new drug calculations should not 
be subject to the two-quarter lag typical of other price calculations. 
These commenters recommended establishing an ``interim'' (WAC minus the 
appropriate rebate percentage) ceiling price through the first full 
quarter, followed by pricing based on the AMP, which can be established 
with one quarter of data. Other commenters suggested establishing 
provisional 340B ceiling prices for new drugs based on MDRP statutory 
discounts applied to an available U.S. sales reference price (e.g., WAC 
reduced by estimates for quarterly URA values), thus eliminating the 
need for restatements at a later date.
    Response: The 340B ceiling price is set by the statute and 
manufacturers are required to charge covered entities that ceiling 
price. 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.
    Comment: Commenters among the drug manufacturer community stated 
that it is not necessary to provide price estimates past the first full 
quarter, so that less time will elapse where a new drug ceiling price 
is estimated instead of being based on actual market data. Others 
stated that two quarters was sufficient to calculate prices based off 
the first quarter's sales data. Commenters argued that a shorter 
estimate period would reduce administrative burdens, and lessen the 
need for retroactive refunds.
    Response: HHS agrees that an AMP for a new covered outpatient drug 
may be established after one full quarter has elapsed. Under the final 
rule, once the AMP is known, and no later than the fourth quarter that 
the drug is available for sale, manufacturers would be required to 
calculate the actual 340B ceiling price based on the AMP for the time 
under which the ceiling price was estimated. The estimation can occur 
for up to the first three calendar quarters of availability, at which 
point the manufacturer will have the necessary pricing data to 
calculate the 340B ceiling price based on section 340B(a)(1) of the 
PHSA. The manufacturer must offer to refund or credit the covered 
entity the difference between the estimated ceiling price and the 
actual 340B ceiling price within 120 days of the determination by the 
manufacturer that an overcharge occurred.
    Comment: Commenters were concerned that the proposed timeframe for 
manufacturers to issue refunds or credits is too short. Commenters 
requested that the refund process for overestimated new drug prices 
follow the Medicaid approach of allowing 12 quarters for price 
restatements, followed by 2 quarters for the refund to occur. Other 
commenters wrote in support of the proposed fourth quarter standard.
    Response: The NPRM proposed that refunds or credits be provided to 
entities by the end of the fourth quarter. HHS agrees additional time 
may be necessary to issue refunds. Therefore, HHS has changed the 
NPRM's fourth quarter standard in the final rule. In addition, the 
final rule states that manufacturers must offer to refund or credit the 
covered entity the difference between the estimated 340B ceiling price 
and the actual 340B ceiling price within 120 days of the determination 
by the manufacturer that an overcharge occurred. HHS believes that 120 
days allows the manufacturer and the covered entity an opportunity to 
first determine whether the overcharge is significant, and if not, 
whether to make repayment options such as crediting or netting.
    Comment: Commenters argued that the proposed refund procedure is 
inconsistent with the 1995 guidance (60 FR 51488, October 2, 1995) 
where covered entities are responsible for initiating the refund 
process, and must do so without a third-party intermediary and that the 
refund requests should be made by the end of the fourth full quarter 
after a new drug comes to market.
    Response: Manufacturers are required by statute to provide covered 
entities the statutorily defined 340B ceiling price. Therefore, once a 
manufacturer determines there is an overcharge related to new drug 
price estimation as set forth in this final rule, manufacturers must 
notify covered entities affected and appropriately refund them 
accordingly. This final rule replaces the 1995 guidance in its 
entirety.
    Comment: Commenters stated that requiring refunds following ceiling 
price recalculations would be inconsistent with the 340B statute 
because such refunds would impose an undue cost on manufacturers.
    Response: In accordance with section 340B(a)(1) of the PHSA, 340B 
ceiling prices for covered entities must ``not exceed an amount equal 
to the average manufacturer price for the drug under title XIX of the 
SSA in the preceding calendar quarter, reduced by the rebate 
percentage'' outlined in section 340B(a)(2)(A) of the PHSA. Since the 
necessary predicate of an AMP cannot be known until a drug has been on 
the market for a preceding calendar quarter, we have determined that 
using a reasonable, standardized estimate in the interim, followed by 
refunds as the AMP is calculated, achieves the programmatic goal of 
assuring that covered entities receive refunds owed in both a timely 
and a complete manner. Regarding the cost to manufacturers, this policy 
involves using similar mechanisms currently in use for other refunds 
routinely issued by manufacturers, and does not represent a significant 
added cost.
    Comment: Commenters requested clarification on what is meant by the 
``expected'' versus the ``actual'' price, in addition to requests for 
clarification on methods for developing expected or estimated prices 
for new drugs.
    Response: For the purposes of this rule, ``expected'' can be 
understood as the initial (estimated) 340B ceiling price that is 
charged to a covered entity when there is not yet an AMP to use in the 
340B ceiling price calculation. HHS has added to this final rule a 
standardized formula to the new drug price cost estimation, which is 
WAC minus the appropriate rebate percentage. The ``actual'' 340B 
ceiling price is the price of a new drug once there is an AMP in place 
that is used to calculate the 340B ceiling price per statute.
    Comment: Commenters requested clarification on the potential role 
of wholesalers and distributors in the refund process, specifically in 
identifying covered entities entitled to a refund based on new drug 
price estimation.
    Response: The role of wholesalers and distributors is dependent on 
how individual manufacturers contract with these third parties to 
distribute 340B drugs. Whether wholesalers and distributors play a role 
in the refund process is determined by individual

[[Page 1220]]

manufacturers and their business operations with these stakeholders. 
The requirement to refund a covered entity as outlined in the final 
rule rests with the manufacturers. A manufacturer may use a third party 
to assist in ensuring they meet those requirements.
    Comment: Several commenters requested that there be an exemption 
for de minimis refund amounts resulting from differences between 
initial ceiling price estimates and the establishment of a retroactive 
actual ceiling price after the first three quarters that a new drug 
becomes available. Commenters cited administrative burden in issuing 
refunds for all overcharges, regardless of their significance. 
Commenters representing both the manufacturer and the covered entity 
communities were broadly supportive of a defined threshold, as well as 
a stated timeframe for refunds to be issued.
    Response: Manufacturers are obligated to offer repayments within 
120 days of the determination that an overcharge occurred. HHS does not 
agree that the final rule should set a materiality threshold, and 
believes this is best approached by marketplace arrangements and in 
good faith negotiation between the parties. To the extent that a 
manufacturer and covered entity agree that a de minimis threshold for 
refunds should be established, such a threshold can be established 
through mutual agreement between the manufacturer and covered entity.
    Comment: Regarding overcharges resulting from differences between 
estimated and actual ceiling prices, a number of commenters requested 
that overcharges be netted in a manner similar to MDRP regulations. The 
commenters stated that the MDRP permits manufacturers to aggregate the 
impact of restated prices on each sale to determine the net amount due 
after pricing restatements and that states are not permitted to retain 
excess rebate amounts paid upon recalculations. Commenters suggested 
that because the MDRP and 340B Program are closely intertwined, they 
should be consistently administered and allow a similar netting 
approach as to minimize administrative and financial burden of 
refunding 340B covered entities.
    Response: To the extent there is an agreement between the 
manufacturer and covered entity, HHS does not intend to prevent 
manufacturers from using the industry's practice of netting overcharges 
and undercharges, or to restate ceiling prices based on pricing data 
submitted to CMS. However, the 340B statute is specific to ensuring 
each covered outpatient drug is offered at or below the 340B ceiling 
price. Once it is determined that an overcharge occurred, a 
manufacturer and a covered entity, in good faith, may both determine 
that a given overcharge is not significant, or agree to other payment 
options such as netting or crediting. In these instances, both parties 
are free to pursue mutually agreed-upon alternative refund 
arrangements.
    Comment: Many commenters suggested that covered entities be held 
liable for undercharges that occur during a new drug's estimated 
pricing period.
    Response: Given the nature of the standardized estimated 340B 
ceiling price calculation described in this final rule, HHS views the 
likelihood of undercharges to be low. Because WAC is typically higher 
than the 340B ceiling price and the estimation for new drugs finalized 
in this rule is based on that amount, we believe that new estimation 
undercharges will be minimal. Section 340B(a)(10) of the PHSA states 
that there is no prohibition on larger discounts being offered to 
covered entities. In addition, the statute is specific in addressing 
when a manufacturer overcharges a covered entity and it does not 
address refunds by covered entities if the manufacturer provides a 
price below the 340B ceiling price. Therefore, it will not be addressed 
in the final rule.
    Comment: Commenters requested clarification on whether the refund 
policy described in this rule would apply to all overcharges identified 
during price restatements, and not just those that occur as sales data 
can be applied to new drug pricing. Commenters also requested that HHS 
codify a formal refund procedure in regulation and that the Affordable 
Care Act requires the 340B Program to develop a refund mechanism.
    Response: The refund requirements as set forth in this final rule 
apply as it relates to new drug price estimations. Specific procedures 
for refunds are outside the authority of this final rule and will be 
addressed in future guidance. HHS is finalizing this refund requirement 
as proposed and continues to believe that an instance of overcharging 
may occur at the time of initial purchase or when subsequent ceiling 
price recalculations resulting from pricing data submitted to CMS 
occur.
    Comment: Commenters requested that HHS define ``new drug'' in this 
rule, suggesting the use of NDC-11 or package size as criteria. 
Commenters suggested a clarification that a new package size is not a 
new drug, suggesting that new prices can be derived off known unit 
prices, with any subsequent refunds occurring under the existing 
reconciliation process. Commenters suggested a clarification that a new 
package size of an existing drug should not be considered a new drug 
for purposes of this rule and that the 340B ceiling price should use 
the per unit pricing data (NDC-9) from the existing package sizes 
already in the market.
    Response: For the purposes of this final rule, a new covered 
outpatient drug is any drug that does not have a previous quarter AMP 
calculation from which a price can be derived. HHS does not believe 
this distinction needs to be clarified in the final rule, and 
additional policy on this issue may be developed if the need arises.
D. Manufacturer Civil Monetary Penalties General--Sec.  10.11(a)
    Section 340B(d)(1)(B)(vi) of the PHSA provides for the imposition 
of civil monetary penalties on manufacturers that knowingly and 
intentionally charge a covered entity a price for a 340B drug that 
exceeds the ceiling price. At Sec.  10.11(a) of the NPRM, HHS proposed 
that any manufacturer with a PPA that knowingly and intentionally 
charges a covered entity more than the 340B ceiling price, as defined 
in Sec.  10.10, for a covered outpatient drug, may be subject to a 
civil monetary penalty not to exceed $5,000 for each instance of 
overcharging a covered entity. As indicated in the NPRM, pursuant to a 
delegation of authority, OIG will have authority to impose a CMP. The 
initial release of the NRPM did not define the term ``knowing and 
intentional,'' but based on comments received, HHS reopened the NPRM 
comment period (81 FR 22960, April 19, 2016) to seek comment on the 
definition of the knowing and intentional standard for purposes of HHS' 
CMP authority. HHS offered possible options on how the term should be 
defined. HHS understands that intent is difficult to define, therefore, 
input was solicited on circumstances in which the requisite intent 
should and should not be inferred. In particular, HHS solicited comment 
on the concept that manufacturers would not be considered to have the 
requisite intent in the following circumstances:
     The manufacturer made an inadvertent, unintentional, or 
unrecognized error in calculating the ceiling price;
     A manufacturer acted on a reasonable interpretation of 
agency guidance; or
     When a manufacturer has established alternative allocation 
procedures where there is an inadequate

[[Page 1221]]

supply of product to meet market demand, as long as covered entities 
are able to purchase on the same terms as all other similarly situated 
non-340B covered entities.
    HHS received numerous comments recommending the terms knowingly and 
intentionally be further defined in the final rule. Commenters 
generally supported the listed examples of circumstances where the 
requisite intent is not demonstrated, and a number of commenters 
suggested additional examples. Commenters also raised concern over 
ensuring the terms knowingly and intentionally are not overly 
prescriptive such that they limit the use of a CMP. In the final rule, 
HHS sought balance between a clear and enforceable definition and the 
need to approach each instance of an overcharge with a full view of the 
surrounding circumstances. Given these two goals, HHS is finalizing the 
rule as proposed and has provided additional examples of conduct that 
would not be considered to meet the threshold of ``knowing and 
intentional'' action in this supplementary information section in 
response to comments. In addition, as a general principle, HHS will 
defer to OIG to determine whether a given situation constitutes a 
`knowing and intentional' 340B drug overcharge based on the specific 
case being investigated. HHS believes this will provide the flexibility 
necessary to evaluate an instance of overcharging on a case-by-case 
basis. Below is a summary of the comments received, and HHS' responses.
    Comment: Commenters provided additional examples to be considered 
as not meeting the knowing and intentional threshold, such as periods 
of estimations for new drugs.
    Response: HHS agrees that the period of time for which a 
manufacturer is estimating a 340B ceiling price for new drugs as set 
forth in this final rule may not meet the knowingly and intentionally 
standard, as long as the manufacturer also ensures that the covered 
entities are refunded according to Sec.  10.10(c). However, if a 
manufacturer does not offer to refund a covered entity per Sec.  
10.10(c) of the final rule, that may constitute a knowing and 
intentional overcharge. The final rule has been modified accordingly. 
Examples of circumstances where HHS would assume that a manufacturer 
did not ``knowingly and intentionally'' overcharge a covered entity 
are:
     The manufacturer made an isolated inadvertent, 
unintentional, or unrecognized error in calculating the 340B ceiling 
price;
     The manufacturer sells a new covered outpatient drug 
during the period the manufacturer is estimating a price based on this 
final rule, as long as the manufacturer offers refunds of any 
overcharges to covered entities within 120 days of determining an 
overcharge occurred during the estimation period;
     When a covered entity did not initially identify the 
purchase to the manufacturer as 340B-eligible at the time of purchase; 
or
     When a covered entity chooses to order non-340B priced 
drugs and the order is not due to a manufacturer's refusal to sell or 
make drugs available at the 340B price.
    We note that these examples are not exhaustive, and are intended to 
provide an indication of some types of actions that would not be 
considered ``knowing and intentional'' overcharges. In the NPRM, the 
last two examples above were included in the text of the regulation 
defining instances of overcharging. Upon consideration of public 
comments, HHS believes that the last two examples above should be 
construed as particular circumstances under which an instance of 
overcharging did not occur as opposed to examples of what would 
constitute an instance of overcharging. As a result, HHS is not 
including these two examples in the final regulatory text defining an 
instance of overcharging, but rather providing them here as examples of 
instances where overcharging did not occur. As a general principle, HHS 
will defer to OIG to determine whether a given situation constitutes a 
`knowing and intentional' overcharge based on the specific case being 
investigated.
    Comment: Some commenters suggested that HHS adopt the definition of 
``knowingly'' from the HHS OIG CMP regulations. Under these 
regulations, the term ``knowingly'' is defined as ``a person, with 
respect to information, has actual knowledge of information, acts in 
deliberate ignorance of the truth or falsity of the information, or 
acts in reckless disregard of the truth or falsity of the information, 
and that no proof of specific intent to defraud is required'' (42 CFR 
1003.102 (e)). A few commenters noted that under the canons of 
statutory construction, agencies must assume Congress intended each 
word or phrase to have a distinct meaning.
    Response: HHS does not believe it is appropriate to incorporate 
additional language over and above the statutory language ``knowingly 
and intentionally'' that would limit OIG further in applying this 
penalty. Each factual case is different and will be evaluated 
separately to determine if it may warrant a penalty as set forth in 
this final rule. After consideration of the comments received, HHS has 
decided not to define these terms and to allow OIG the necessary 
flexibility to evaluate each instance of overcharge on a case-by-case 
basis.
    Comment: Commenters offered specific definitions of the term 
``intentionally.'' Several commenters requested that ``intentionally'' 
be defined as ``not due to a mathematical miscalculation, clerical 
oversight, or similar inadvertent error.'' A few commenters requested 
that the term ``intentionally'' be defined as ``consciously committing 
an act or omission that results in an overcharge.'' Commenters 
requested that, when defining the terms ``knowingly'' and 
``intentionally,'' HHS incorporate definitions such as ``actual 
knowledge by the manufacturer, its employees, or its agents of the 
instance of overcharge'' or ``acting consciously and with awareness of 
the acts leading to the instance of overcharge.'' Commenters 
interpreted the statute to say that it must be ``knowing and 
intentional'' on the part of the manufacturer both that the amount 
charged exceeds the ceiling price and that the entity charged is in 
fact a covered entity.
    Response: HHS appreciates commenters' proposed definitions of 
``knowingly and intentionally,'' and also acknowledges commenters' 
concerns about HHS' proposed definitions. HHS agrees that in cases 
where a manufacturer established that the overcharge in question was as 
a result of an isolated act of simple negligence or inadvertent math 
error, then the penalty would not typically apply. However, the facts 
and circumstances of each case would need to be taken into account. For 
example, if a manufacturer inadvertently developed an unreliable 
process that resulted in negligent errors, but later there is knowledge 
of such systematic failures that results in errors in the 340B ceiling 
price calculation that causes overcharges, this could be sufficient to 
meet a knowingly and intentionally standard. After consideration of the 
comments received, HHS has decided not to define these terms and to 
allow OIG the necessary flexibility to evaluate each instance of 
overcharge on a case-by-case basis.
    Comment: Several commenters believed that the statute's requirement 
that conduct must be both ``knowing'' and ``intentional'' to impose 
CMPs sets up a specific and demanding standard and some covered 
entities were concerned that the proposed definitions set the bar so 
high as to have little practical value in ensuring that they receive 
appropriate prices under the

[[Page 1222]]

340B Program. They stated that the intent standard is contrary to 
Congress' intent to give HHS a meaningful enforcement tool, and it will 
not deter manufacturers from overcharging under the 340B statute. 
Further, they noted that the Supreme Court wrote that through CMP 
provisions ``Congress thus opted to strengthen and formalize HHS' 
enforcement authority'' (Astra USA v. Santa Clara County, 563 U.S. 110, 
121-22 (2011)). Other commenters were concerned that the proposed 
definitions would not amount to the heightened threshold for intent 
outlined in the statute, meaning that the proposed definitions would 
capture lesser forms of misconduct than Congress had intended.
    Response: While HHS agrees that the use of the terms knowingly and 
intentionally as set forth in the statute set a high standard for 
imposing penalties, HHS believes it will serve as an enforcement tool 
to ensure manufacturers are charging covered entities at or below the 
340B ceiling price. HHS appreciates commenters' proposed definitions of 
``knowingly and intentionally,'' and also acknowledges commenters' 
concerns about HHS' proposed definitions. HHS has decided not to define 
these terms and to allow OIG the necessary flexibility to evaluate each 
instance of overcharge on a case-by-case basis.
    Comment: HHS provided several possible definitions for knowing and 
intentional when it reopened the comment period: (1) Actual knowledge 
by the manufacturer, its employees, or its agents of the instance of 
overcharge; (2) willful or purposeful acts by, or on behalf of, the 
manufacturer that lead to the instance of overcharge; (3) acting 
consciously and with awareness of the acts leading to the instance of 
overcharge; and/or (4) acting with a conscious desire or purpose to 
cause an overcharge or acting in a way practically certain to result in 
an overcharge. HHS received a number of comments on the proposed 
definitions.
    Response: HHS has decided not to define these terms and to allow 
OIG the necessary flexibility to evaluate each instance of overcharge 
on a case-by-case basis.
    Comment: With respect to the language in the notice of reopening of 
comment period (81 FR 22960, April 6, 2016) that ``manufacturers do not 
need to intend specifically to violate the 340B statute; but rather to 
have knowingly and intentionally overcharged the 340B covered entity,'' 
several commenters expressed concern that this is inconsistent with the 
statutory text. These commenters argued that in order to be subject to 
CMPs, the manufacturer must specifically intend to violate the 340B 
statute, not solely intend to charge a price that is higher than the 
340B ceiling price.
    Response: HHS agrees that CMPs will be applied to a manufacturer 
that knowingly and intentionally overcharges a covered entity. The 
specific intent to violate the 340B statute is not necessarily required 
to be shown to warrant an application of the penalty provision.
    Comment: Commenters expressed concern that any further definition 
of the terms ``knowing'' and ``intentionally'' will constrain HHS' 
ability to judge whether a CMP is appropriate in a given instance. If 
HHS determines that further definition is necessary, they suggested 
using an exclusionary approach, stating specific actions that do not 
rise to the level of requisite intent, rather than an approach that 
names only specific actions that will be considered ``knowing and 
intentional'' in this context. Commenters generally supported the 
listed examples of circumstances where the requisite intent is not 
demonstrated and requested that the examples be explicitly 
characterized as non-exhaustive. Several commenters suggested adding a 
catch-all provision to the list of examples, such as ``other situations 
in which it is reasonable not to infer that a manufacturer acted 
`knowingly and intentionally,' '' or ``any other situation not 
presenting circumstances of a deliberate effort to disobey the law with 
regard to the 340B program.''
    Response: HHS agrees with the commenter's approach. Therefore, 
instead of defining these terms in an inclusive manner, HHS has chosen 
to provide OIG the flexibility to determine what constitutes 
``knowingly'' and ``intentionally'' overcharging a covered entity in a 
particular instance. In addition, HHS provides examples above regarding 
circumstances that would not meet the threshold of knowingly and 
intentionally overcharging a covered entity.
    Comment: With respect to the proposed example ``the manufacturer 
made an inadvertent, unintentional, or unrecognized error in 
calculating the ceiling price,'' one commenter suggested including an 
error ``identifying the eligibility of an entity to receive the 340B 
discount.''
    Response: HHS did not include the suggestion to include an error in 
``identifying the eligibility of an entity to receive the 340B 
discount'' in the final rule to retain flexibility that the penalty be 
applied only where appropriate. However, it should be noted that 340B 
covered entities are listed on the 340B public database, and those 
listed are entitled to the 340B ceiling price.
    Comment: Regarding the proposed example ``a manufacturer acted on a 
reasonable interpretation of agency guidance,'' a commenter was 
concerned that the example was overly broad, since manufacturers may 
decide what is reasonable, and this, therefore, may create a loophole 
for manufacturers to avoid CMPs. They recommended, at a minimum, 
clarifying that this is an objective reasonableness standard, as 
determined by HHS and/or OIG. Several other commenters suggested adding 
exceptions for reasonable interpretations of laws, regulations, and the 
pharmaceutical pricing agreement. Further, one commenter stated that in 
circumstances where the statute and agency guidance conflict, it is 
reasonable for the manufacturer to adopt practices consistent with the 
statute.
    Response: HHS agrees that the proposed example that, ``a 
manufacturer acted on a reasonable interpretation of agency guidance,'' 
was overly broad. OIG would need to consider each circumstance of a 
340B drug overcharge on a case by case basis to determine if that 
circumstance constitutes a ``knowing and intentional action.
    Comment: With respect to the proposed example, ``when a 
manufacturer has established alternative allocation procedures where 
there is an inadequate supply of product to meet market demand, as long 
as covered entities are able to purchase on the same terms as all other 
similarly-situated providers,'' commenters were concerned that this is 
overly broad. They recommended that HHS only provide a safe harbor for 
manufacturers with valid limited distribution plans, and revise Sec.  
10.11 of the final rule to address other situations where a 
manufacturer fails to make 340B drugs available to covered entities to 
the same extent as to non-340B providers. They argued that the statute 
states CMPs are issued when manufacturers ``knowingly and intentionally 
charges a covered entity a price for purchase of a drug that exceeds 
the maximum available price under subsection (a)(1).'' Section 
340B(a)(1) of the PHSA requires that ``the manufacturer offer each 
covered entity covered outpatient drugs for purchase at or below the 
applicable ceiling price if such a drug is made available to any other 
purchaser at any price.'' Therefore, if a manufacturer does not comply 
with the nondiscrimination provision in subsection (a)(1), this 
constitutes an overcharge for purposes

[[Page 1223]]

of the CMP provision. Other commenters recommended that HHS delete this 
example, because it would allow any manufacturer to develop alternative 
allocation procedures to disregard the ceiling price whenever demand 
exceeds supply.
    Response: HHS agrees that the proposed example, ``when a 
manufacturer has established alternative allocation procedures where 
there is an inadequate supply of product to meet market demand, as long 
as covered entities are able to purchase on the same terms as all other 
similarly-situated providers,'' was overly broad. OIG would need to 
consider each circumstance of a 340B drug overcharge on a case by case 
basis to determine if that circumstance constitutes a ``knowing and 
intentional'' action.
    Comment: Commenters suggested that the proposed example, ``when a 
manufacturer has established alternative allocation procedures where 
there is an inadequate supply of product to meet market demand, as long 
as covered entities are able to purchase on the same terms as all other 
similarly-situated providers,'' a manufacturer would not have the 
requisite intent if a covered entity chooses to purchase the 
manufacturer's product through a channel other than the subset of 
distributors through which the 340B ceiling price is available. Another 
commenter suggested that the example read instead, ``. . . as long as 
the manufacturer offers covered entities the opportunity to purchase on 
terms consistent with those offered to other similarly-situated 
entities in the same class of trade.''
    Response: In general, HHS agrees that the penalty provisions 
typically would not be appropriate in a case where a covered entity 
chooses to purchase a covered outpatient drug knowing that the price 
charged exceeds the 340B ceiling price. However, in the case where 
there was sufficient evidence to conclude that this result was due to 
actions by the manufacturer that were knowing and intentional, a 
penalty may be appropriate. Although it may be reasonable to believe 
that such a circumstance is extremely unlikely to arise, HHS does not 
believe it is appropriate or necessary to exclude a possibility that 
may occur.
    Comment: A number of commenters suggested additional examples of 
situations that they believe do not meet the ``knowing and 
intentional'' standard. Some of the examples suggested by commenters 
include, but are not limited to, the following:
     Instances of intentional failure to issue refunds to 
covered entities, because HHS has not yet established procedures for 
issuing refunds;
     A case where a manufacturer was not aware it was selling 
to a covered entity;
     A case where a distributor failed to give a covered entity 
a 340B price through no fault of the manufacturer;
     Situations where there is a reasonable disagreement and no 
established law or agency guidance or circumstances where the 
manufacturer acted based on reasonable assumptions in the absence of 
(or in the face of conflicting) guidance, provided such assumptions are 
consistent with the requirements and intent of section 340B of the PHSA 
and any implementing regulations, and a written or electronic record 
outlining these assumptions is maintained; and
     When a manufacturer has established a uniformly applied 
limited distribution system or risk evaluation and mitigation strategy 
(``REMS'').
    Response: HHS appreciates the efforts commenters made in 
enumerating conduct they believed should be exempt from examples of 
knowingly and intentionally selling a drug above its 340B ceiling 
price. OIG will review these circumstances on a case-by-case basis 
along with the facts for each instance. Rather than try to anticipate 
every circumstance that might occur, HHS believes it more appropriate 
to retain flexibility. To the extent that manufacturers identify 
situations where uncertainty results in unnecessary costs, HHS will 
respond as such circumstances arise and may provide additional guidance 
in the future.
    Additionally, since manufacturers are named in statute as being 
responsible for setting appropriate 340B ceiling prices, they must be 
responsible for the conduct of business partners with whom they have 
contracted. Nevertheless, inadvertent clerical errors, as long as they 
are corrected as soon as identified, would not be considered to be a 
``knowing and intentional'' overcharge.
    Comment: Commenters recommended including as an exemption from 
being considered an overcharge and meeting the knowing and intentional 
threshold when a manufacturer acted on credible evidence that a covered 
entity is engaged in diversion of 340B drugs. They stated that if a 
manufacturer has evidence a covered entity is improperly diverting a 
drug, it should be able to charge the covered entity a price above the 
340B ceiling price. It is argued that this option would create a check 
on 340B drug diversion, since manufacturers have better and timelier 
access to sales data than does HHS.
    Response: HHS does not believe that unilaterally overcharging a 
covered entity based upon suspicion of diversion is warranted under the 
statutory language. Manufacturers cannot condition the sale of a 340B 
drug at the 340B ceiling price because they have concerns or specific 
evidence of possible non-compliance by a covered entity. Manufacturers 
that suspect diversion are encouraged to work in good faith with the 
covered entity, conduct an audit per the current audit guidelines, or 
contact HHS directly.
E. Manufacturer Civil Monetary Penalties--Instance of Overcharging--
Sec.  10.11(b)
    At Sec.  10.11(b) of the proposed rule, HHS defined an instance of 
overcharging for the purpose of imposing a CMP as any order for a 
certain covered outpatient drug, by NDC, which results in a covered 
entity paying more than the 340B ceiling price. An instance of 
overcharging is considered at the NDC level and may not be offset by 
other discounts provided on any other NDC or discounts provided on the 
same NDC on other transactions, orders, or purchases. HHS also proposed 
that manufacturers have an obligation to ensure that the 340B ceiling 
price is provided through distribution arrangements made by the 
manufacturer. An instance of overcharging may occur at the time of 
initial purchase or at subsequent ceiling price recalculations. The 
recalculations are due to pricing data submitted to CMS that results in 
a covered entity paying more than the ceiling price due to failure or 
refusal to refund or credit a covered entity. Finally, HHS proposed 
that a manufacturer's failure to provide the 340B ceiling price is not 
considered an instance of overcharging when a covered entity did not 
initially identify the purchase to the manufacturer as 340B-eligible at 
the time of purchase. Covered entity orders of non-340B priced drugs 
will not subsequently be considered an instance of overcharging unless 
the manufacturer refuses to sell or makes drugs available at the 340B 
ceiling price.
    HHS received comments supporting and opposing the proposed Sec.  
10.11(b). Some commenters opposed certain components of the proposed 
definition, including the proposal to (1) define the term based on 
orders; (2) require manufacturers to ensure 340B pricing regardless of 
distribution arrangements; (3) prohibit offsets; (4) consider as an 
instance of overcharging when a manufacturer fails or refuses to 
provide funds at the time of initial purchases or during subsequent 
ceiling price

[[Page 1224]]

recalculation; and (5) clarify that a manufacturer's failure to provide 
the 340B ceiling price if a covered entity did not initially identify 
such purchases as 340B eligible or that covered entity orders of non-
340B drugs will not be subsequently considered an instance of 
overcharging unless the manufacturers refuses or makes drugs available 
at the 340B ceiling price. These commenters claimed that HHS does not 
have the statutory authority to define the term as such or that such 
definition does not meet the ``knowingly and intentionally'' standard. 
At the same time, other commenters supported these components of the 
proposed definitions as they ensure that covered entities have access 
to covered outpatient drugs under the 340B Program. Specific comments 
are addressed below.
    Comment: Commenters wrote in opposition to the definition of an 
instance of overcharging as any order for a covered outpatient drug, by 
NDC, which results in a covered entity paying more than the ceiling 
price. Some commenters asked HHS to define an instance of overcharging 
more restrictively and on a per-unit basis rather than a per-order 
basis. Doing so would allow OIG to impose penalty amounts commensurate 
with the severity of the violation.
    Response: HHS has determined to finalize the definition of instance 
as proposed. An instance of overcharging is any order for a certain 
covered outpatient drug, by NDC, which results in a covered entity 
paying more than the 340B ceiling price, as defined in Sec.  10.3 of 
this final rule, for a covered outpatient drug. Each order for an NDC 
will constitute a single instance, regardless of the number of units of 
each NDC in that order. This includes any order placed with a 
manufacturer or through a wholesaler, authorized distributor, or agent. 
A single order may contain one or more NDCs; thus a violation of this 
provision may constitute more than one instance depending on the number 
of NDCs in the order. HHS believes that changing the definition to a 
per-unit basis is restrictive and overly burdensome as current 
purchasing occurs at the 11-digit NDC versus a per-unit basis. 
Finalizing the rule as proposed strikes the right balance in applying 
the appropriate penalties.
    Comment: Commenters asked HHS to clarify that the ``order'' is the 
single purchase order, rather than separate line items within a single 
purchase order. Commenters claimed that defining an instance of 
overcharging based on ``orders'' may be interpreted to include 
situations in which estimated 340B ceiling prices for new drugs were 
too high and the manufacturer did not issue refunds to covered entities 
in the time that the rule would require.
    Response: Each order for an NDC will constitute a single instance, 
regardless of the number of units of each NDC in that order. If a 
covered entity orders a single bottle of a covered outpatient drug four 
times in a month, it would be considered four instances of 
overcharging. A single order may contain one or more NDCs; thus a 
violation of this provision may constitute more than one instance 
depending on the number of NDCs in the order. With regards to new drug 
price estimation and refunds to a covered entity, HHS addresses those 
requirements in Sec.  10.10 of this final rule. If refunds in this 
circumstance are not offered to covered entities within 120 days of the 
determination by the manufacturer that an overcharge occurred, it may 
be considered as meeting the definition of knowingly and intentionally 
overcharging the covered entity and the definition of instance would 
apply. This is in alignment with the statute that requires 
manufacturers to provide covered entities the 340B ceiling price.
    Comment: Some commenters suggested that an instance of overcharging 
be defined as each product ceiling price reported by a manufacturer to 
HRSA that contains a price that the manufacturer knows and intends to 
be in excess of the price as calculated. Other comments recommended 
further defining the term to add details related to the instance. For 
example, some recommended inclusion of the following language: all 
mispriced purchases within a quarter on a particular drug to a 
particular customer, intentionally incorrect ceiling prices reported to 
HRSA that actually result in overcharges to one or more registered 
covered entities, and incorrect treatment by a manufacturer of a 
registered covered entity as an organization ineligible for the 340B 
ceiling price. Other commenters asked HHS to include in the definition 
of instance of overcharging, a manufacturer's failure to offer a 
covered outpatient drug to a covered entity to the same extent that the 
drug is offered to other purchasers.
    Response: HHS declines to include additional language as raised by 
the commenters. While the examples provided may result in a covered 
entity being charged above the 340B ceiling price, they relate more to 
defining the knowing and intentional standard, which will be determined 
by OIG on a case-by-case basis. HHS believes it is important to provide 
the necessary flexibility for OIG to determine the facts surrounding a 
specific case. HHS also notes that it is the actual sale of the covered 
outpatient drug above the 340B ceiling price by the manufacturers to 
the covered entity that is the subject of the overcharge per the 
statute.
    Comment: Commenters opposed the proposed extension of the 
manufacturer's responsibility to ensure that covered entities have 
access to 340B pricing for covered outpatient drugs sold by wholesalers 
and distributors. They contend that manufacturers should not be 
responsible for the conduct of their agents, since an agent's actions 
are not knowing and intentional on the part of the manufacturer and 
since these actions are not within the manufacturers' control. A number 
of commenters pointed out that manufacturers may provide wholesalers 
and distributers the 340B pricing but covered entities may not purchase 
drugs at 340B pricing because wholesalers and distributers may add fees 
that may raise the price of drugs above the 340B ceiling price. 
Clarification was requested related to when actions by a wholesaler 
would be attributed to manufacturers when assessing CMPs, and whether a 
distribution fee charged by a wholesaler could cause an overcharge.
    Response: Manufacturers are ultimately responsible for ensuring a 
covered entity receives a drug at or below the 340B ceiling price as 
stated in the statute and per this final rule. Manufacturers also have 
control over the distribution of covered outpatient drugs, including 
those distributed by wholesalers, distributers, and agents wherein the 
terms and conditions of the sales set through these distribution 
arrangements are set by the manufacturer via a contract agreed to and 
between the manufacturer and the distributors. This final rule applies 
solely to manufacturers, even though other third parties have a role in 
ensuring the covered entity receives a drug at or below the 340B 
ceiling price. Manufacturers must consider the wholesaler role in this 
process and work out issues in good faith and in normal business 
arrangements regarding the assurance that the covered entity is 
receiving the appropriate prices. Failure to ensure the covered 
entities are receiving the 340B ceiling prices through a third party 
may be grounds for the assessment of CMPs under this final rule. HHS 
does clarify, however, that fees charged directly by a wholesaler or 
other distributor are not considered part of the 340B ceiling price

[[Page 1225]]

and would not be considered as part of assessing an instance of an 
overcharge.
    Comment: Commenters asked for a clarification that specialty 
pharmacies are not considered ``specialty distribution or wholesalers'' 
and thus are not required to provide 340B pricing. Other commenters 
claimed that the requirements set forth under this section are not 
consistent with the non-discrimination policy, which allows 
manufacturers to establish alternate allocation procedures. Commenters 
requested clarification that CMPs would not apply in a situation where 
a covered entity purchased product in the marketplace when the 
manufacturer was employing a distribution system compliant with HRSA's 
non-discrimination guidance (340B Program Notice Release No. 2011-1.1 
(May 23, 2012)). Some commenters asked HHS to clarify that a refusal by 
the covered entity to purchase drugs through a limited distribution 
arrangement should not be interpreted as the manufacturer's refusal to 
sell or make drugs available at the 340B price for purposes of CMPs.
    Response: All requirements as set forth in this final rule for 
offering the 340B ceiling price to covered entities apply regardless of 
the distribution system. If a manufacturer is using a specialty 
pharmacy to distribute covered outpatient drugs, it must ensure the 
covered entity is not overcharged if drugs are accessed through that 
pharmacy. As to comments suggesting that the rule is inconsistent with 
the current non-discrimination policy, HHS does not believe that is the 
case. Consistent with section 340B(a)(1) of the PHSA, manufacturers are 
expected to provide the same opportunity for 340B covered entities and 
non-340B purchasers to purchase covered outpatient drugs when such 
drugs are sold through limited distributors or specialty pharmacies. 
Manufacturers may continue to develop limited distribution procedures 
provided that those arrangements follow HHS established policy. HHS 
will take into consideration whether a manufacturer has submitted an 
alternate allocation plan to HHS when a manufacturer is being 
investigated for a possible overcharge, whether this plan is compliant 
with the 340B non-discrimination policy, and whether the manufacturer 
is following its plan.
    Comment: Commenters argued that HHS is attempting to interpret and 
apply the ``shall offer'' provision through this rule. Some commenters 
claimed that CMPs do not apply to a shall offer provision until a 
manufacturer signs a PPA that includes that provision.
    Response: Section 340B(a)(1) of the PHSA provides that a 
manufacturer shall offer each covered entity covered outpatient drugs 
for purchase at or below the applicable ceiling price if such drug is 
made available to any other purchaser at any price. This particular 
provision of section 340B(a)(1) is separate and distinct from the 
provision pertaining to the calculation of 340B ceiling prices. Because 
this final rule is applicable to the provision of section 340B(a)(1) 
pertaining to the calculation of the 340B ceiling price, the language 
in the statute regarding ``shall offer'' will not be addressed in this 
final rule.
    Comment: Commenters asked HHS not to finalize the proposed rule 
provision that an instance of overcharging would be considered at the 
NDC level and may not be offset by other discounts provided on any 
other NDC or discounts provided on the same NDC on other transactions, 
orders, or purchases. They argue that offsetting is an industry 
practice and should not meet the knowing and intentional standard. 
Still other commenters pointed out that HHS has not developed a process 
for refunds and without such a standardized refund process, the use of 
offsets should be allowed. For these reasons, the commenters asked that 
HHS finalize the regulation to allow for offsets. Commenters also 
claimed that if finalized, HHS would make the offering of sub-ceiling 
prices mandatory rather than voluntary. Calculating refunds based only 
on restatements that lower the ceiling price, without accounting for 
restatements that raise the ceiling price, would transform the 
voluntary nature of offering sub-ceiling prices into a requirement. 
Other commenters favored allowing offsetting but providing covered 
entities a mechanism to contest the offsets.
    Response: As proposed, and finalized in this rule, an instance of 
overcharging is considered at the 11-digit NDC level and may not be 
offset by other discounts provided on any other NDC or discounts 
provided on the same NDC on other transactions, orders, or purchases. 
The 340B statute is specific to ensuring each covered outpatient drug 
is offered at or below the 340B ceiling price. However, HHS does not 
intend to prevent manufacturers from using the industry's practice of 
netting overcharges and undercharges, or from restating ceiling prices 
based on pricing data submitted to CMS, to the extent that there is 
agreement between the manufacturer and covered entity.
    In regards to comments based on the refund process, HHS has 
finalized that an instance of an overcharge may occur at the time of 
initial purchase or when subsequent ceiling price recalculations occur 
and the manufacturer refuses to refund or issue a credit to a covered 
entity. HHS has clarified in the final rule that this would include 
refusal to refund covered entities according to Sec.  10.10(c) of the 
final rule with regards to new drug price estimation and would include 
refusal to refund a covered entity after restatements to CMS. If a 
covered entity is not refunded when there is an overcharge, the covered 
entity, in essence paid above the 340B ceiling price. While HHS has 
finalized in this rule the requirement to refund if there is an 
overcharge, the specific refund procedures will be addressed under 
separate guidance. Until there is final guidance in place regarding 
refund procedures, manufacturers and covered entities should work in 
good faith and refund in a reasonable manner that is documented by the 
parties involved.
    Regarding the statement that not allowing offsets would force 
manufacturers to sell below 340B ceiling prices, the statute is 
specific in addressing when a manufacturer overcharges a covered entity 
and it does not address refunds by covered entities if the manufacturer 
provides a price below the 340B ceiling price. Therefore, it will not 
be addressed in the final rule.
    Comment: Some commenters asked HHS not to finalize the rule as 
proposed related to penalizing a manufacturer for failure or refusal to 
refund or credit a covered entity. They pointed out that HHS has not 
developed a mechanism to provide such subsequent price recalculations 
and has not established or operationalized a mechanism to retroactively 
revise 340B pricing based on revised Medicaid metrics. Other commenters 
stated that finalizing the rule is premature since HHS has not 
developed a process for credits and refunds.
    Response: HHS has finalized that an instance of an overcharge may 
occur at the time of initial purchase or when subsequent ceiling price 
recalculations occur and the manufacturer refuses to refund or issue a 
credit to a covered entity. This would include refusal to refund 
covered entities according to Sec.  10.10(c) of the final rule with 
regards to new drug price estimation and would include refusal to 
refund a covered entity after restatements to CMS. If a covered entity 
is not refunded when there is an overcharge, the covered entity, in 
essence paid above the 340B ceiling price. The final rule requires a 
refund if there is an overcharge and specific refund procedures will be 
addressed under separate guidance. HHS does not believe that the 
requirements of this rule are dependent

[[Page 1226]]

on the separate issue of how to operationalize a refund process. Until 
there is final guidance in place regarding the refund procedures, 
manufacturers and covered entities should work in good faith and refund 
in a reasonable manner that is documented by the parties involved.
    Comment: Some commenters supported the rule as proposed but asked 
HHS to allow covered entities time to request a reclassification of 
prior purchases as 340B eligible. They asked that HHS finalize the rule 
to require manufacturers to honor a covered entity's request to 
reclassify a purchase from non-340B to 340B and to issue a 
corresponding refund if a covered entity requests such a 
reclassification within 365 days of purchase.
    Response: HHS continues to maintain the decision that a 
manufacturer's failure to provide the 340B ceiling is not considered an 
overcharge if the covered entity did not initially identify the 
purchase to the manufacturer as 340B eligible at the time of purchase. 
HHS does not authorize covered entities to reclassify a purchase as 
340B eligible after the fact. Therefore, HHS has removed this example 
from the final regulation and instead includes it as an example of what 
would not be considered an instance of overcharging in the preamble to 
this rule. Covered entities participating in the 340B Program are 
responsible for requesting 340B pricing at the time of the original 
purchase. If a covered entity wishes to reclassify a previous purchase 
as 340B, covered entities should first notify manufacturers and ensure 
all processes are fully transparent with a clear audit trail that 
reflects the actual timing and facts underlying a transaction. The 
covered entity retains responsibility for ensuring full compliance and 
integrity of its use of the 340B Program.
    Comment: Commenters supported the proposal that it could be 
considered an instance of overcharging when a manufacturer's documented 
refusal to sell or make drugs available at the 340B price results in 
the covered entity purchasing at the non-340B price. However, some 
commenters asked HHS to clarify the term ``documented refusal'' 
mentioned in the preamble. They suggested that the following examples 
not constitute a documented refusal:
     Communications between a manufacturer (or a wholesaler) 
and a covered entity relating to verifying eligibility for 340B prices 
prior to a sale, or
     A manufacturer's failure to provide the 340B ceiling price 
to a covered entity that has violated the prohibition against diversion 
or duplicate discounting.
    Response: Covered entity orders of non-340B priced drugs will not 
subsequently be considered an instance of overcharging unless the 
manufacturer's documented refusal to sell or make drugs available at 
the 340B price resulted in the covered entity purchasing at the non-
340B price. When a manufacturer's documented refusal to sell or make 
drugs available at the 340B ceiling price results in the covered entity 
purchasing at the non-340B price, a manufacturer's sale at the non-340B 
price could be considered an instance of overcharging. An example of 
``documented refusal'' would include any type of manufacturers' written 
communication related to reasons a manufacturer is not providing 340B 
ceiling prices to either a single covered entity or group of covered 
entities. HHS does not agree that a manufacturer could consider not 
selling a 340B drug at the 340B ceiling price to a covered entity based 
on possible non-compliance with program requirements. Regarding 
verifying the eligibility of a covered entity, the 340B public database 
lists all covered entities eligible to purchase 340B drugs in any given 
quarter. The 340B public database should be used by all stakeholders to 
determine and verify covered entity eligibility. In addition to the 
example provided above as ``documented refusal,'' OIG would also review 
information related to such a circumstance on a case-by-case basis to 
determine if a manufacturer has overcharged a covered entity and 
whether the threshold is met to apply CMPs. HHS notes that we are 
removing this specific example from the final regulation and include it 
as an example of what would not be considered an instance of 
overcharging in the preamble to this rule.
    Comment: Some commenters requested that HHS not require that an act 
be ``intentional'' when imposing CMPs and that the penalty be higher 
than $5,000.
    Response: Section 340B(d)(1)(B)(vi) of the PHSA provides for the 
imposition of civil monetary penalties on manufacturers that knowingly 
and intentionally charge a covered entity a price for purchase of a 
drug that exceeds the 340B ceiling price. Additionally, section 
340B(d)(1)(B)(vi)(II) of the PHSA states that CMPs ``shall not exceed 
$5,000 for each instance of overcharging.'' Therefore, HHS has no 
authority to modify the standard of intent, and any CMPs assessed will 
be done in accordance with the amount specified in the 340B statute, as 
adjusted annually for inflation pursuant to the Federal Civil Penalties 
Inflation Adjustment Act Improvements Act of 2015 (section 701 of Pub. 
L. 114-74).
    Comment: A few commenters stated that when imposing CMPs, certain 
documentation should be required to establish that there was a 
``knowing and intentional'' overcharge. They suggested that evidence 
should include documentation that the manufacturer received a request 
for the ceiling price by the covered entity, and either refused in 
writing to provide the ceiling price, or failed to execute a ceiling 
price transaction within a specified period of time.
    Response: The OIG will determine, upon review of the case, the 
appropriate documentation and other information that may be required to 
determine if a CMP should be applied.
    Comment: Commenters requested that the rule specify that HHS should 
not attempt to recover any penalties until at least 60 days after the 
end of any appeal or judicial review. It was also requested that, 
should a party seek data in relation to a CMP proceeding from a third 
party, such as a wholesaler or software vendor, the party seeking data 
may compensate the third party for their assistance, and that the third 
party may require that compensation. Commenters also recommended that 
the rule provide for confidentiality requirements in CMP proceedings, 
in order to ensure the confidentiality of 340B pricing.
    Response: HHS understands the importance of maintaining the 
confidentiality of 340B ceiling price data and will handle such data 
accordingly. More broadly, the pertinent procedures outlined in 42 CFR 
parts 1003 and 1005 will be followed in matters involving the 
imposition of CMPs and any appeals therefrom.
    Comment: Several commenters suggested that the funds collected from 
CMPs should be directed to OIG to support the enforcement of CMPs, to 
the HRSA Office of Pharmacy Affairs, and for HHS to create a 340B 
ceiling price database.
    Response: While HHS appreciates these comments, they are beyond the 
statutory authority of the 340B Program and this final rule.
    Comment: Several commenters supported HHS delegating the authority 
to levy CMPs to OIG, and recommended that the delegation of authority 
to OIG be explicitly stated in the regulation, rather than mentioned in 
the preamble. Additionally, several commenters were also concerned that 
at proposed Sec.  10.11(a), in the sentence ``This penalty will be 
imposed pursuant to the procedures at 42 CFR part 1003 and

[[Page 1227]]

1005'' the term ``procedures'' may be read to not encompass definitions 
and standards for CMPs. Therefore, they suggested modifying the 
sentence to state, ``Pursuant to a delegation of authority, the HHS 
Office of Inspector General (OIG) will have the authority to bring CMP 
actions utilizing the definitions, standards, and procedures applied to 
civil monetary penalties under 42 CFR parts 1003 and 1005.'' It was 
also suggested to add a definition of ``knowingly and intentionally'' 
to section 1003.101 of the OIG regulations.
    Response: HHS does not believe it necessary to add the delegation 
of authority to OIG in the regulatory text. HHS believes that pursuant 
to a separate delegation of authority, OIG has the authority to handle 
CMP actions utilizing the definitions, standards, and procedures 
applied to civil monetary penalties under 42 CFR parts 1003 and 1005, 
as applicable. Consistent with the proposed rule, we have finalized the 
regulatory text indicating that CMPs will be imposed pursuant to the 
procedures contained at 42 CFR part 1003. No further rulemaking is 
required to apply the procedures at 42 CFR part 1003 to the imposition 
of CMPs. HHS will monitor activities relating to the evaluation and 
pursuit of CMPs and, if necessary, will consider issuing additional 
guidance about procedures applicable to such actions.
    Comment: A few commenters were concerned about the decision to 
delegate CMP actions to OIG. They stated that HHS has not identified a 
specific delegation, and that 42 CFR parts 1003 and 1005 only provide 
for the imposition of CMPs under specific statutory authorities, which 
do not include the 340B statute's CMP provisions. They argued that 
unless OIG amends their regulations to apply them to a 340B proceeding, 
HHS will need to develop, take comments on, and ultimately finalize a 
new proposal setting out procedures for seeking and imposing CMPs 
against manufacturers. A few commenters noted that some portions of 42 
CFR parts 1003 and 1005 are inapplicable in a 340B context.
    Response: As noted above, a delegation of authority to OIG for a 
CMP from the Secretary of HHS is sufficient. HHS does not perceive 
there to be any conflict between the procedural aspects of 42 CFR part 
1003 and the imposition of CMPs. HHS notes that 42 CFR part 1005 
applies to appeals of exclusions and civil monetary penalties and 
assessments and would not be directly relevant to the initial 
imposition of a CMP. Accordingly, HHS finalized the regulatory text 
indicating that CMPs will be imposed pursuant to the applicable 
procedures contained at 42 CFR part 1003. No further rulemaking is 
required to apply the procedures at 42 CFR part 1003 to the imposition 
of CMPs. HHS will monitor activities relating to the evaluation and 
pursuit of CMPs and, if necessary, will consider issuing additional 
guidance about procedures applicable to such actions.

III. Regulatory Impact Analysis

    HHS has examined the effects of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 8, 2011), the Regulatory Flexibility Act (September 19, 1980, 
Pub. L. 96-354), the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4), and Executive Order 13132 on Federalism (August 4, 1999).

Executive Orders 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 is supplemental to and reaffirms the principles, 
structures, and definitions governing regulatory review as established 
in Executive Order 12866, emphasizing the importance of quantifying 
both costs and benefits, of reducing costs, of harmonizing rules, and 
of promoting flexibility. Section 3(f) of Executive Order 12866 defines 
a ``significant regulatory action'' as an action that is likely to 
result in a rule: (1) Having an annual effect on the economy of $100 
million or more in any 1 year, or adversely and materially affecting a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, or tribal 
governments or communities (also referred to as ``economically 
significant''); (2) creating a serious inconsistency or otherwise 
interfering with an action taken or planned by another agency; (3) 
materially altering the budgetary impacts of entitlement grants, user 
fees, or loan programs or the rights and obligations of recipients 
thereof; or (4) raising novel legal or policy issues arising out of 
legal mandates, the President's priorities, or the principles set forth 
in the Executive Order. A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more in any 1 year), and a ``significant'' regulatory action 
is subject to review by the Office of Management and Budget (OMB).
    This final rule will not have economic impacts of $100 million or 
more in any 1 year, and, therefore, has not been designated an 
``economically significant'' rule under section 3(f)(1) of Executive 
Order 12866. The 340B Program as a whole creates significant savings 
for entities purchasing drugs through the program, with total savings 
estimated to be $6 billion in CY 2015.\1\ However, this final rule 
would not significantly impact the Program. This final rule codifies 
current policies, some of which have been modified, regarding 
calculation of the 340B ceiling price and manufacturer civil monetary 
penalties. HHS does not anticipate that the imposition of civil 
monetary penalties would result in significant economic impact.
---------------------------------------------------------------------------

    \1\ In CY 2015, 340B covered entities spent approximately $12 
billion on the total purchases of 340B drugs under the 340B Program. 
This data was obtained from the 340B Prime Vendor Program. This 
amount represents 2.6 percent of the overall prescription drug 
market. Assuming covered entities pay 25 to 50 percent less than 
non-340B prices, HHS calculated the estimated total savings in CY 
2015 to be approximately $6 billion.
---------------------------------------------------------------------------

    The 340B Program uses information that already must be reported 
under Medicaid to calculate the statutorily defined 340B ceiling price 
as required by this final rule. Because the components of the 340B 
ceiling price are already calculated by the manufacturers under the 
MDRP and reported to CMS, HHS does not believe this portion of the 
final rule would have an impact on manufacturers. The impact on 
manufacturers would also be limited with respect to calculation of the 
340B ceiling price as defined in this final rule due to the fact that 
manufacturers regularly calculate the 340B ceiling price and have been 
doing so since the program's inception.
    Separate from calculation of the 340B ceiling price, manufacturers 
are required to ensure they do not overcharge covered entities, and a 
civil monetary penalty could result from overcharging if it met the 
standards in this final rule. HHS envisions using these penalties in 
rare situations. Since the Program's inception, issues related to 
overcharges have been resolved between a manufacturer and a covered 
entity and any issues have generally been due to technical errors in 
the calculation. For the penalties to be used as defined in the statute 
and in this rule, the manufacturer overcharge would have to be the 
result of a knowing and intentional act. Based on anecdotal

[[Page 1228]]

information received from covered entities, HHS anticipates that this 
would occur very rarely if at all.
    This rulemaking also proposes that a manufacturer charge a $0.01 
per unit of measure for a drug with a 340B ceiling price below $0.01. A 
small number of manufacturers have informed HRSA over the last several 
years that they charge more than $0.01 for a drug with a ceiling price 
below $0.01. However, this is a long-standing HRSA policy, and HRSA 
believes the majority of manufacturers currently follow the practice of 
charging a $0.01. Therefore, this portion of the regulation would not 
result in a significant impact. This final regulation would allow HRSA 
to enforce the policy in a manner that would require the manufacturer 
to charge a $0.01, and it is likely that manufacturers would charge 
$0.01 in order to avoid the imposition of a civil monetary penalty for 
overcharging a covered entity. HRSA believes manufacturers that 
currently do not comply will come into compliance, which will result in 
the covered entity paying less for these drugs. There will be a cost 
transfer from the covered entity to the manufacturer.
    HHS recognizes that certain administrative costs would be incurred 
for compliance with this final rule. HHS does not collect data related 
to such administrative costs, and compliance costs are expected to vary 
significantly. HHS believes it is reasonable to assume that 
manufacturers would use one-half to one full-time compliance officer to 
ensure compliance with the requirements in this final rule. According 
to the Bureau of Labor Statistics, the mean annual wage for a 
pharmaceutical compliance officer (NAICS 325400, occupation code 13-
1041) is $80,170 in 2015. Inclusion of benefits and overhead (resulting 
in a total labor cost of 1.5 times mean annual wage) yields a total 
annual cost of $120,255 for one compliance officer. Thus, the estimated 
annual cost for labor across all 600 manufacturers is between 
$36,067,500 and $72,153,000.
    We received the following comments on the anticipated impacts on 
drug manufacturers:
    Comment: Regarding the proposed rule's regulatory impact analysis, 
some commenters disagree that the proposed rule is ``not likely to have 
an economic impact of $100 million or more in any 1 year'' and objects 
to its failure to designate the proposed rule as economically 
significant. They argue that resources that would be required to comply 
with the obligations of this proposed rule would extend beyond a 
compliance officer and would include the re-writing and implementation 
of new policies and procedures, and the training of staff.
    Response: The proposed rule and the policies finalized herein 
codify several current policies, some of which have been modified, 
regarding the calculation of the 340B ceiling price and introduce 
manufacturer civil monetary penalties. HHS reviewed the comments 
submitted in response to the NPRM, and has attempted to minimize burden 
for both manufacturers and covered entities in its formulation of the 
final rule, specifically regarding the policy of estimating new drug 
prices (see Sec.  10.10(c)). With the modification made in this final 
rule, we believe that stakeholders' administrative burdens' with 
respect to this policy will be minimal. Through the comments that HHS 
received during both comment periods on the estimation of new drug 
prices, commenters expressed support for this approach and maintained 
that it created an even playing field across all stakeholders as the 
calculation of the 340B ceiling price is easily verifiable by covered 
entities and reduces administrative burden. HHS also understands that 
based on the comments received, the methodology for calculating new 
drugs as set forth in this final rule is already taking place in the 
marketplace and will thus not create any additional burden.
    Manufacturers have always been required to ensure that they do not 
overcharge covered entities per the section 340B(d)(1). This final rule 
incorporates a penalty for knowingly and intentionally overcharging 
covered entities, as discussed in subsequent sections of this final 
rule (see Sec.  10.11(a)). Under current practice, HHS encourages 
manufacturers and covered entities to work in good faith to resolve any 
pricing discrepancies. HHS anticipates this practice to continue and 
anticipates that the imposition of penalties to occur only on a rare 
basis. The remaining policies in the proposed rule and finalized in 
this rule reflect current 340B Program policy and should not result in 
significant economic impacts.
    Comment: Commenters note that manufacturers would have to build 
into their systems the capacity to identify all sales transactions with 
covered entities at the originally charged price, as well as any 
recalculated price, for up to three full years after the original 
transaction. They explain that these prices along with issuing the 
actual refunds to the covered entities could easily exceed $100 million 
per year.
    Response: We note that the 340B Program uses data that 
manufacturers already report to CMS under the MDRP (AMP, URA) to 
calculate the statutorily defined 340B ceiling price. As these 
components of the 340B ceiling price are already calculated by 
manufacturers under the MDRP, HHS does not believe that this will cause 
additional burden on manufacturers.

The Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) and the 
Small Business Regulatory Enforcement and Fairness Act of 1996, which 
amended the RFA, require HHS to analyze options for regulatory relief 
of small businesses. If a rule has a significant economic effect on a 
substantial number of small entities, the Secretary must specifically 
consider the economic effect of the rule on small entities and analyze 
regulatory options that could lessen the impact of the rule. HHS will 
use an RFA threshold of at least a three percent impact on at least 
five percent of small entities.
    The final rule would affect drug manufacturers (North American 
Industry Classification System code 325412: Pharmaceutical Preparation 
Manufacturing). The small business size standard for drug manufacturers 
is 750 employees. Approximately 600 drug manufacturers participate in 
the 340B Program. While it is possible to estimate the impact of this 
final rule on the industry as a whole, the data necessary to project 
changes for specific manufacturers or groups of manufacturers is not 
available, as HRSA does not collect the information necessary to assess 
the size of an individual manufacturer that participates in the 340B 
Program.
    This final rule clarifies statutory requirements for manufacturers, 
including small manufacturers, and codifies current ceiling price 
calculation policies in regulation. HHS is unaware of small 
manufacturers who do not follow the ceiling price policies finalized by 
this regulatory action. The specific elements required as part of the 
calculation of the ceiling price are elements that manufacturers are 
already required to utilize as part of their participation in the 340B 
Program. HHS expects that these elements would continue to be 
available. Therefore, calculation of the ceiling price would not result 
in an economic impact or create additional administrative burden on 
these businesses.
    HHS has determined, and the Secretary certifies that this final 
rule will not have a significant impact on the operations of a 
substantial number of small manufacturers; therefore, we are not 
preparing an analysis of impact for the purposes of the RFA. HHS, 
estimates

[[Page 1229]]

that the economic impact on small manufacturers will be minimal and 
less than three percent.

Unfunded Mandates Reform Act

    Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires 
that agencies prepare a written statement, which includes an assessment 
of anticipated costs and benefits, before issuing ``any rule that 
includes any Federal mandate that may result in the expenditure by 
State, local, and Tribal governments, in the aggregate, or by the 
private sector, of $100 million or more (adjusted annually for 
inflation) in any one year.'' In 2015, that threshold level is 
approximately $144 million. HHS does not expect this final rule to 
exceed the threshold.

Executive Order 13132--Federalism

    HHS has reviewed this final rule in accordance with Executive Order 
13132 regarding federalism, and has determined that it does not have 
``federalism implications.'' This final rule would not ``have 
substantial direct effects on the States, or on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government.'' 
The provisions in this final rule would not adversely affect the 
following family elements: Family safety, family stability, marital 
commitment; parental rights in the education, nurture, and supervision 
of their children; family functioning, disposable income or poverty; or 
the behavior and personal responsibility of youth, as determined under 
Section 654(c) of the Treasury and General Government Appropriations 
Act of 1999.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) requires 
that OMB approve all collections of information by a Federal agency 
from the public before they can be implemented. This final rule is 
projected to have no impact on current reporting and recordkeeping 
burden for manufacturers under the 340B Program. Changes finalized in 
this rulemaking would result in no new reporting burdens.

List of Subjects in 42 CFR Part 10

    Biologics, Business and industry, Diseases, Drugs, Health, Health 
care, Health facilities, Hospitals, 340B Drug Pricing Program.

    Dated: October 3, 2016.
James Macrae,
Acting Administrator, Health Resources and Services Administration.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.

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For the reasons set forth in the preamble, the Department of Health and 
Human Services revises 42 CFR part 10 to read as follows:

PART 10--340B DRUG PRICING PROGRAM

Subpart A--General Provisions
Sec.
10.1 Purpose.
10.2 Summary of 340B Drug Pricing Program.
10.3 Definitions.
Subpart B--340B Ceiling Price
10.10 Ceiling price for a covered outpatient drug.
10.11 Manufacturer civil monetary penalties.

    Authority:  Sec. 340B of the Public Health Service Act (42 
U.S.C. 256b) (PHSA), as amended.

Subpart A--General Provisions


Sec.  10.1  Purpose.

    This part implements section 340B of the Public Health Service Act 
(PHSA) ``Limitation on Prices of Drugs Purchased by Covered Entities.''


Sec.  10.2  Summary of 340B Drug Pricing Program.

    Section 340B of the PHSA instructs the Secretary of Health and 
Human Services to enter into agreements with manufacturers of covered 
outpatient drugs under which the amount to be paid to manufacturers by 
certain statutorily-defined covered entities does not exceed the 340B 
ceiling price.


Sec.  10.3  Definitions.

    For the purposes of this part, the following definitions apply:
    Average Manufacturer Price (AMP) has the meaning set forth in 
section 1927(k)(1) of the Social Security Act, as implemented in 42 CFR 
447.504.
    Ceiling price means the maximum statutory price established under 
section 340B(a)(1) of the PHSA and this section.
    CMS is the Centers for Medicare & Medicaid Services.
    Covered entity means an entity that is listed within section 
340B(a)(4) of the PHSA, meets the requirements under section 340B(a)(5) 
of the PHSA, and is registered and listed in the 340B database.
    Covered outpatient drug has the meaning set forth in section 
1927(k) of the Social Security Act.
    Manufacturer has the meaning set forth in section 1927(k) of the 
Social Security Act, as implemented in 42 CFR 447.502.
    National Drug Code (NDC) has the meaning set forth in 42 CFR 
447.502.
    Pharmaceutical Pricing Agreement (PPA) means an agreement described 
in section 340B(a)(1) of the PHSA.
    Quarter refers to a calendar quarter unless otherwise specified.
    Secretary means the Secretary of the Department of Health and Human 
Services and any other officer of employee of the Department of Health 
and Human Services to whom the authority involved has been delegated.

Subpart B--340B Ceiling Price


Sec.  10.10  Ceiling price for a covered outpatient drug.

    A manufacturer is required to calculate the 340B ceiling price for 
each covered outpatient drug, by National Drug Code (NDC) on a 
quarterly basis.
    (a) Calculation of 340B ceiling price. The 340B ceiling price for a 
covered outpatient drug is equal to the Average Manufacturer Price 
(AMP) from the preceding calendar quarter for the smallest unit of 
measure minus the Unit Rebate Amount (URA) and will be calculated using 
six decimal places. HRSA will publish the 340B ceiling price rounded to 
two decimal places.
    (b) Exception. When the ceiling price calculation in paragraph (a) 
of this section results in an amount less than $0.01 the ceiling price 
will be $0.01.
    (c) New drug price estimation. A manufacturer must estimate the 
340B ceiling price for a new covered outpatient drug as of the date the 
drug is first available for sale. That estimation should be calculated 
as wholesale acquisition cost minus the appropriate rebate percentage 
until an AMP is available, which should occur no later than the 4th 
quarter that the drug is available for sale. Manufacturers are required 
to calculate the actual 340B ceiling price as described in paragraph 
(a) of this section and offer to refund or credit the covered entity 
the difference between the estimated 340B ceiling price and the actual 
340B ceiling price within 120 days of the determination by the 
manufacturer that an overcharge occurred.


Sec.  10.11  Manufacturer civil monetary penalties.

    (a) General. Any manufacturer with a pharmaceutical pricing 
agreement that knowingly and intentionally charges a covered entity 
more than the ceiling price, as defined in Sec.  10.10, for a covered 
outpatient drug, may be subject

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to a civil monetary penalty not to exceed $5,000 for each instance of 
overcharging, as defined in paragraph (b) of this section. This penalty 
will be imposed pursuant to the applicable procedures at 42 CFR part 
1003. Any civil monetary penalty assessed will be in addition to 
repayment for an instance of overcharging as required by section 
340B(d)(1)(B)(ii) of the PHSA.
    (b) Instance of overcharging. An instance of overcharging is any 
order for a covered outpatient drug, by NDC, which results in a covered 
entity paying more than the ceiling price, as defined in Sec.  10.10, 
for that covered outpatient drug.
    (1) Each order for an NDC will constitute a single instance, 
regardless of the number of units of each NDC ordered. This includes 
any order placed directly with a manufacturer or through a wholesaler, 
authorized distributor, or agent.
    (2) Manufacturers have an obligation to ensure that the 340B 
discount is provided through distribution arrangements made by the 
manufacturer.
    (3) An instance of overcharging is considered at the NDC level and 
may not be offset by other discounts provided on any other NDC or 
discounts provided on the same NDC on other transactions, orders, or 
purchases.
    (4) An instance of overcharging may occur at the time of initial 
purchase or when subsequent ceiling price recalculations due to pricing 
data submitted to CMS or new drug price estimations as defined in Sec.  
10.10(c) result in a covered entity paying more than the ceiling price 
due to failure or refusal to refund or credit a covered entity.

[FR Doc. 2016-31935 Filed 1-4-17; 8:45 am]
 BILLING CODE 4165-15-P