Drug Discount Monitor

Government Probes 340B Providers’ Billing of Medicaid

By Karin Rives

May 5, 2009 - The Monitor has learned thatthe U.S. Department of Health and Human Services’ Office of Inspector General (OIG) recently launched a study to determine whether pharmacies are billing Medicaid correctly under the 340B drug discount program.

The study will be listed in the agency’s work plan for fiscal 2010 and the probe is led by the OIG’s Office of Inspections and Evaluations based in Chicago, the same office that conducted a series of groundbreaking reports on the 340B program in recent years.

The OIG is also expected to explore whether today’s federal and state regulations sufficiently protect pharmaceutical manufacturers from “duplicate discounts”, situations where manufacturers provide an upfront discount to the 340B provider and then are asked to provide a rebate to the Medicaid program.

In addition, the OIG may look at the innovative partnerships some states have developed to enhance reimbursement to providers as an incentive to participate in the 340B program.

Poor communication, inconsistent follow-up

The OIG study comes on the heels of several state audits of safety-net providers’ Medicaid billing practices. It also follows a lawsuit against Planned Parenthood in Los Angeles over the very same issue and which recently landed in a federal appeals court. The suit, backed by anti-abortion groups, alleges that family planning clinics overbilled Medicaid tens of millions of dollars for contraceptives between 1997 and 2002.

The controversy over Medicaid billing, pharmacy experts say, has to do in part with the fact that state Medicaid agencies and federal regulators don’t always effectively communicate 340B billing policies, and in part with the fact that many pharmacies are too busy or lack the expertise to consistently track reimbursements or reconcile claims. 340B pharmacies also argue that they lose money on every Medicaid patient they serve by being forced to bill at acquisition cost.

They fear that the Medicaid billing scrutiny could ultimately force them to overhaul their claims procedures, resulting in higher administrative costs and a potential loss of Medicaid revenue – in addition to them having to repay unearned discounts.

OIG: “Allegations have surfaced”

In 1993, the Health Resources and Services Administration (HRSA) directed 340B-covered providers to bill for their Medicaid drugs at actual acquisition cost. The Medicaid program, in turn, would remove these prescription drug claims from manufacturer rebate requests, preventing duplicate discounts for the same drugs.

The purpose of HRSA’s billing rule was to compensate states for the loss of rebates on 340B drugs. But right from the start, both states and 340B-covered providers struggled to implement the acquisition cost billing. So in March 2000, HRSA issued another guidance retreating from its initial standard to instead allow states to develop their own billing procedures to avoid the duplicate discount problem.

According to the OIG, “allegations have surfaced that 340B entities may be charging Medicaid higher rates. We will review the Medicaid reimbursement amounts of a sample of 340B entities to determine if these entities were paid at the actual acquisition cost.” The agency did not provide details on how the providers in the study will be chosen, or whether and how they will be notified of the probe.  

The actual-acquisition cost requirement does not apply to drugs used by Medicaid patients in managed-care plans. Nor does it apply in states where Medicaid has adopted alternative billing arrangements, or where a 340B pharmacy has chosen to “carve out,” or exempt, its Medicaid patients from the 340B discounts.

But while many states have chosen to design their own solutions to the duplicate discount problem, there has been a push within Centers for Medicare and Medicaid Services (CMS), the federal agency overseeing the Medicaid program, to implement consistent billing practices. If everybody billed at actual acquisition cost, the CMS thinking goes, it would save taxpayers money.

It would also allay suspicion within the manufacturer community that they sometimes have to pay double discounts.

“Manufacturers are concerned about double-dipping,” confirmed John Shakow, a Washington, D.C.,-based partner in King & Spalding’s FDA/Healthcare team, which represents large drug makers. “They have the right to pursue audits of 340Bs they suspect of violating the prohibition. But manufacturers are very reluctant to instigate invasive and expensive audits themselves.  Really, they hope that the government will exercise responsible oversight of the program.”  

The OIG study is expected to be finished in fiscal 2010, which begins in October of this year.

Gonzalez v. Planned Parenthood of Los Angeles appealed

In the 2005 California lawsuit against Planned Parenthood, a former finance official with the organization claims he was fired after warning his bosses that they were “significantly overbilling” the state for drugs bought at discounted 340B prices. This occurred, he alleges, because they billed at the “usual and customary rate” for drugs, rather than at the lower “at cost” rate mandated by state Medicaid regulations. (See Monitor Oct. 2008)

This led to more than $2 million in annual overcharges by the Los Angeles branch and another $10 million per year by other Planned Parenthood affiliates in the state, Gonzalez claims.

Planned Parenthood attorneys have countered that the billing issue had already been laid to rest because the state’s Medicaid office acknowledged in a 2004 letter that its billing regulations were unclear and that no repayment to the state would therefore be required.

Gonzalez no whistleblower, district judge ruled

A lower court dismissed the lawsuit on a technicality last fall, saying that Gonzalez did not qualify as a whistleblower under federal statute because he was not the source of the information in his lawsuit. Gonzalez appealed to the Ninth Circuit Court of Appeals in San Francisco in January.

Jack Schuler, his attorney, said he’s working on opening briefs for the case at this time and that the initial hearing is still several months away. The appeal will argue that Gonzalez should qualify as a whistleblower and show that he was, in fact, the source of the information against Planned Parenthood, Schuler said. “This is the basis for our appeal,” he said.

Planned Parenthood Affiliates of California says its clinics comply with all laws and regulations having to do with reimbursement for contraceptives, and that the lawsuit is “totally without merit.”

“In fact, the court noted that a number of Gonzalez’s arguments ‘may have been frivolous,’” Lilly Spitz, the organization’s legal counsel, said in a written statement. “Mr. Gonzalez based his allegations on his interpretation of a state regulation regarding billing for contraceptives,” she said. “Unfortunately for Mr. Gonzalez, however, he attached to his own complaint a letter from the California Deputy Director of Medical Care Services, which unequivocally states that the statute was unclear and ambiguous, allowing for multiple interpretations.”

In 2004, the same year that letter was written, Gov. Arnold Schwarzenegger (R) signed legislation sought by Planned Parenthood to bring some clarity. It set health clinics’ Medicaid billing rate for 340B-purchased drugs to the lesser of acquisition cost, plus a dispensing fee of us to $12, or their usual and customary charge to the public.