October 21, 2010—Newly eligible rural, children’s and free-standing cancer hospitals that enroll in the 340B drug discount program are ineligible for retroactive rebates on purchases dating back to the start of this year, the Health Resources and Services Administration (HRSA) says on its Web site despite the Affordable Care Act’s (ACA) Jan. 1, 2010 effective date for the hospitals’ eligibility.
The decision, which HRSA announced on Sept. 20 in the form of an update to its frequently asked questions Web page, surprised at least one major drug company and improved its financial outlook for the year. In an Oct. 21 telephone conference call to report third quarter earnings, officials at Eli Lilly and Co. said HRSA’s announcement, which they described as unexpected, allowed them to return $40 million in revenues to the company’s balance sheet for 2010. It remains to be seen whether other drug manufacturers will disclose similar true-ups to their financial statements due to HRSA’s policy decision as they report their quarterly earnings in coming days.
Apparent Policy Reversal
HRSA’s position on the availability of retroactive discounts appears to run counter to those it took in guidelines shortly after 340B was created in 1992 and again when children’s hospitals were added to the program in 2009. In both instances, HRSA permitted health care providers new to the program to seek discounts from drug manufacturers retroactive to the date of their eligibility.
In its new Web posting, HRSA now says that “as a general rule, the Office of Pharmacy Affairs (OPA) does not consider any entity eligible for 340B pricing until the entity is fully enrolled, assigned a 340B identification number and listed in the 340B database.”
“A newly enrolled covered entity’s benefit,” it continues, “starts the day the covered entity is listed on the database as eligible.”
Congress, however, gave Section 7101 of ACA, which extended 340B eligibility to the rural, children’s and cancer hospitals, an effective date of Jan. 1 and explicitly stated that the program’s expansion “shall apply to drugs purchased on or after” that date. HRSA did not explain the apparent discrepancy, stating only that “the law indicated that it applies to drugs purchased on or after” Jan. 1.
Lack of Retroactive Discounts Would Compound Losses
Rural and children’s hospitals stand to lose a presumably significant amount of money if HRSA formalizes its position on retroactivity in guidelines or regulations. As of Oct. 6, 333 critical access hospitals, rural referral centers and sole community hospitals had enrolled in 340B as provided for under ACA. Ten children’s hospitals have likewise enrolled under health care reform and no cancer hospitals have enrolled as of yet.
The new covered entities are already unable to access 340B discounts on high-priced orphan drugs. Congress is considering legislation to lift the prohibition for children’s hospitals, about two dozen of which had enrolled in the program since the fall of 2009 and had their ability to buy the drugs at a discount taken away by ACA.
In a telephone call with financial reporters, Derica W. Rice, Lilly’s chief financial officer and executive vice president, said the company had previously estimated that health care reform would reduce its revenues between $350 million and $400 million this year, but that it was revising that estimate downward to between $225 million and $275 million.
The “significant” reason for the change, Rice explained, was “about $40 million associated with the timing of the 340B expansion.”
“We had been assuming that it would be retroactive back to Jan. 1 of this year and in fact it’s only going to take effect as the hospitals take on that declaration,” he said. “So that was the cause of the $40 million reversal.”
Precedent for Retroactivity
HRSA’s first 340B guidance in early May 1993 and follow-up one year later provided for retroactive relief. HRSA adopted a similar stance in September 2009 when it issued final guidelines for the inclusion of children’s hospitals in 340B under the Deficit Reduction Act (DRA) of 2005. In that document, the agency rejected a commenter’s request that it “remove [hospitals’] ability to receive retroactive discounts,” stating that “although we agree that the statute can be complex, we disagree that … unilaterally disallowing any ‘retroactive’ discounts is appropriate.” The final guidelines listed six conditions that children’s hospitals needed to satisfy to be able to obtain such discounts for drug purchases dating back to Feb. 8, 2006, DRA’s effective date.
One of those conditions was that the hospitals must not have bought any drugs through a group purchasing organization (GPO) during the relevant timeframe. As a result, children’s hospitals have had little or no success in obtaining retroactive discounts. Rural hospitals new to 340B, however, are not required to opt out of their GPO as a condition of enrollment and thus would presumably have a stronger case for retroactive rebates from manufacturers.