solutions for pharmaceutical manufacturers who participate in the Medicaid Drug Rebate Program and pay too much because of 340b duplicate discounts

Drug Pricing: Tech Start-Up Provides Solutions for Drug Manufacturers Subject to 340B Duplicate Discounts

The extent to which 340B covered entities receive duplicate discounts from pharmaceutical manufacturers who take part in the Medicaid Drug Rebate Program (MDRP) is widely documented.

The Medicaid Exclusion File

The Health Resources and Services Administration (HRSA) established the 340B Medicaid Exclusion File (MEF) as The mechanism to aid 340B covered entities and states to prevent duplicate discounts for drugs subject to Medicaid rebates.

But in terms of efficacy, the MEF is insufficient in mitigating duplicate discounts. An estimated $2 billion in improper rebate payments are paid by pharmaceutical manufacturers — and received by 340B covered entities — on an annual basis.An estimated $2 billion in improper rebate payments are made by pharmaceutical manufacturers — and received by 340B covered entities — on an annual basis. Click To Tweet

A 2016 report published by the Office of Inspector General (OIG) also indicates drug manufacturers pay rebates for drugs sold at 340B discounted prices. This is particularly true in Medicaid managed care (MMC). To be clear, this is illegal. Fortunately, a technology start-up is helping drug manufacturers protect their inventory.


The Omnibus Reconciliation Act created the Centers for Medicare & Medicaid Services’  (CMS’) MDRP in 1990. In order to get reimbursed by the federal government, and as a prerequisite to enter the Medicaid and Medicare Part B markets, the Act requires drug manufacturers to offer formula based rebates on outpatient drugs.


  • All 50 states and the District of Columbia cover prescription drugs under the MDRP.
  • The MDRP represents $17.5 billion in annual savings to the states and federal government (Source).
  • Drug manufacturers are required to enter into a national rebate agreement with the Department of Health and Human Services (HHS) Secretary in exchange for state Medicaid coverage of most of their drugs.
    • Click here to view recent changes to the Medicaid National Drug Rebate Agreement (NDRA).
  • When manufacturers market a new (covered) outpatient drug, they must also send product and pricing data about the drug to CMS via the Drug Data Reporting for Medicaid (DDR) System.
  • Manufacturers must report all covered outpatient drugs under their National Drug Codes (NDCs).

How Medicaid Rebates are Paid

  • Manufacturers pay rebates on drugs for which payment is made under the state Medicaid  plan.
  • Manufacturers pay rebates to states quarterly.
  • The states and the federal government share rebate payments to offset the overall cost of prescription drugs under the Medicaid program.
  • The Patient Protection and Affordable Care Act (ACA) amended the Social Security Act (SSA) to allow Medicaid drug rebate eligibility for authorized MMC covered outpatient drugs (Source).

Furthermore, drug manufacturers are required to enter into agreements with two other federal programs to have their drugs covered under Medicaid: (1) a pricing agreement for the 340B Program and (2)  a master agreement with the Secretary of Veterans Affairs for the Federal Supply Schedule.


To mitigate the unintended consequences of the rebate program — a rise in prescription drug costs for safety-net hospitals and other entities that provide health care services to low-income patients — Congress passed the Veterans Health Care Act of 1992 which created Section 340B of the Public Health Service Act. The Act requires pharmaceutical manufacturers to provide point of sale discounts to covered entities.


  • The 340B program represents $12.0 billion in annual revenue received by 340B qualifying  health care providers.
  • HRSA’s Office of Pharmacy Affairs administers the 340B Drug Pricing Program.
  • Manufacturers participating in Medicaid agree to offer outpatient drugs to covered entities at much reduced prices.
  • Participating pharmaceutical manufacturers are prohibited from charging covered entities with prices for covered outpatient drugs that exceed the ceiling price, as specified by statute.
  • Qualifying hospitals and other 340B-covered entities receive discounts from pharmaceutical manufacturers participating in government-sponsored health care programs that have entered into a pharmaceutical pricing agreement with the HHS Secretary.
  • Covered entities give drugs purchased through the 340B program to all eligible patients, regardless of a patient’s payer status and whether the drug is intended for self-administration or administration by a clinician.

More about 340B 

  • Section 2501(c) of the ACA amended the SSA to stipulate outpatient drugs covered by a Medicaid managed care organization (MCO) are not subject to a rebate if also subject to a discount under section 340B of the Public Health Service Act.
  • All covered entities must adhere to all program requirements and accurately report how they bill Medicaid fee-for-service (FFS)  drugs on the MEF.
    • The MEF is a coding mechanism —  a provider-level method to assure 340B program integrity and compliance — put in place by CMS and HRSA as a tool to prevent unlawful duplicate discounts for drugs subject to Medicaid rebates.
    • In a 2014 policy release, HRSA  provides clarification and reporting guidelines for documenting 340B claims in the MEF. The clarification and reporting  guidelines for documenting 340B claims in the MEF are not applicable in MMC.

The takeaway here is: by law, drug manufacturers are protected from providing covered entities with  both a discounted 340B price and a Medicaid drug rebate for the same product ( a duplicate discount).


Medicaid provides health care coverage to about 70 million beneficiaries nationwide. Medicaid expenditures on outpatient prescription drugs exceeded  $31 billion in 2015. Moreover, in  federal fiscal year (FFY) 2016, total state and federal Medicaid spending exceeded $548 billion, 49 percent of which was directed to MMC programs. Of the $269 billion directed toward MMC programs in FFY 2016, 95 percent of expenditures were paid to comprehensive risk-based MCOs.

Click here for more information on the Duplicate Discount Prohibition.

Medicaid Managed Care

As a strategy to contain rising health care costs, state Medicaid agencies pay MCOs a fixed per-member-per-month fee (e.g., capitation rate) to provide Medicaid benefits to qualifying residents. As of March 2018, 39 states and the District of Columbia had entered into comprehensive risk-based payment arrangements with MCOs to offer Medicaid benefits to eligible population groups.

Revisiting the 340B Drug Pricing Program

  • Section 42 USC 256b(a)(5)(A)(i) stipulates drug manufacturers are not required to provide covered entities with a discounted 340B price and a Medicaid drug rebate for the same drug.
  • Covered entities are required to put mechanisms in place to prevent duplicate discounts from occurring.
  • HRSA is responsible for overseeing the duplicate discount prohibition and ensuring accurate reporting in the MEF.
  • HRSA issued a policy-notice which clarifies the MEF is a tool to prevent duplicate discounts in FFS Medicaid.

As stated before, the policy is not applicable in MMC. This is a concern. At least 42 states pay for prescription drugs through Medicaid MCOs.

States’ use of provider-level data  methods may not accurately identify 340B claims for some covered entities. Provider-level methods generally treat all drug claims from a given covered entity in the same way—that is, as either 340B claims or non-340B claims—and do not allow covered entities to differentiate among specific claims. In practice, however, a covered entity may submit both 340B claims and non-340B claims to Medicaid (OIG).

Finally, the shift from FFS Medicaid to MMC causes challenges with regard to timely and accurate data collection, reporting, and program oversight. This is well documented.


Jeremy Docken, Founder and GM of  Kalderos  gave a presentation during Mostly Medicaid’s  October 2017, Medicaid Star Search webinar. Kalderos provides technology solutions to mitigate the challenges plaguing the Medicaid Rebate Program and the 340B Drug Pricing Program.

The only party financially harmed due to 340B duplicate discounts are drug manufacturers.  HRSA and CMS continue to struggle to offer real solutions to protect manufacturers from paying duplicate discounts — Jeremy Docken (Kalderos)

The Kalderos Solution in Action

Kalderos identifies suspected duplicate discounts by using proprietary data and works with covered entities to confirm if 340B drugs have been dispensed. Drug manufacturers receive reports guaranteed to be accepted as valid disputes by  states. Kalderos is  piloting a project in Florida to assist drug manufactures subject to duplicate discounts.

More information is on the Kalderos website.

Key Takeaways

Given the role of MCOs in Medicaid, and given the prevalence of  duplicate discounts, it is clear current mechanisms for ensuring program integrity in the 340B program need revision. Fortunately, technology start-up Kalderos is doing what the government and covered 340B entities have failed to do.

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About the Author

O.W.B Public Affairs Digest Home Image Meet Olivia P. WalkerOlivia P. Walker is a public affairs strategist, campaign consultant, and writer. Most recently, Olivia served as governance consultant for the International Society for Pharmaceutical Engineering. Prior to this role, Olivia worked as government affairs and public policy analyst for WellCare Health Plans, a Fortune 500 managed care provider/insurer. Olivia holds a master’s degree in public administration from the University of South Florida School of Public Affairs.

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In 2016, Olivia was duly initiated into Pi Alpha Alpha, the Global Honor Society for Public Affairs and Administration. She is a member of the American Society for Public Administration and a member of the ASPA Section on Public Law and Administration. Olivia also holds a graduate certificate in globalization Studies. The certificate is a specialized graduate-level credential reflecting knowledge of the most up-to-date research on globalization.

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Olivia P. Walker

I’m an award winning public affairs and digital communications strategist. I am also a fusion bellydancer. Finally, I launched Public Affairs Digest, a current affairs magazine, public affairs blog and edutainment media website.