OIG Report

DEPARTMENT OF HEALTH & HUMAN SERVICES

Office of Inspector General
Washington, D.C. 20201

JUN 1 7 2003
TO :

Betty James Duke, Ph.D.
Administrator
Health Resources and Services Administration

FROM:

Dennis J. Duquette
Deputy Inspector Gene
for Audit Services

I

SUBJECT: Review of Hemophilia Treatment Centers' Disposition of Program Income
and Patient Choice for Factor Provider for Calendar Year 2000
(A-03-01-00350)
Attached is a copy of our final report providing the results of our review of the

disposition of program income by Hemophilia Treatment Centers, which was requested

by the Health Resources and Services Administration (HRSA).

In written comments, HRSA concurred with our recommendations and agreed to take

corrective actions. The HRSA comments are included as an appendix to our report.

In accordance with the principles of the Freedom of Information Act, 5 United States

Code 552, as amended by Public Law 104-231, Office of Inspector General, Office of

Audit Services reports are made available to members of the public to the extent

information contained therein is not subject to exemptions in the Act.

(See 45 CFR Part 5 ) .

Please send us your final management decision, including any action plan, as appropriate,

within 60 days. If you have any questions or comments about this report, please do not

hesitate to call me or Donald L. Dille, Assistant Inspector General for Grants and Internal

Activities, at (202) 619-1 175, or e-mail at ddille@,oig.hhs.gov.

To facilitate identification, please refer to report number A-03-01-00350 in all

correspondence relating to this report.

Attachment

Department of Health and Human Services

OFFICE OF

INSPECTOR GENERAL

REVIEW OF HEMOPHILIA

TREATMENT
CENTERS’
DISPOSITION

OF PROGRAM INCOME AND PATIENT
PROVIDER FOR
CHOICE FOR FACTOR

CALENDAR
YEAR2000

4

I
Y

June 2003
A-03-0 1-00350

EXECUTIVE SUMMARY

BACKGROUND
The Health Resources and Services Administration (HRSA) requested the Office of
Inspector General (OIG) to review Hemophilia Treatment Centers’ (HTCs) disposition of
program income and their patient choice policies during the calendar year 2000. The
HTCs earn program income when they purchase blood-clotting factor (factor) and related
drugs at discount prices pursuant to participation in the 340B program and resell them to
HTC patients. The 340B program is administered by HRSA’s Office of Pharmacy Affairs
(OPA).
OBJECTIVES
The objectives of our review were to:
• Assess the disposition of program income earned on sales of factor at prices in
excess of the 340B acquisition price;
•

Determine how HTCs billed Medicaid for reimbursement;

•

Evaluate the adequacy of patient choice policies; and

•

Determine pharmacy costs and bad debt expense.

To accomplish our objectives, we made site visits to six HTCs that participated in the
340B program.
RESULTS OF REVIEW
The HTCs generally used program income for patient care and related activities, and had
choice policies in place that allowed patients to obtain the factor they needed from
providers of their choice. At one of the six HTCs we visited, however, we identified the
following problems:
•

Inappropriate use of program income; and

•

Inappropriate Medicaid billing practices, resulting in overbilling of $613,000.

We believe these problems might have been prevented by improved monitoring by
HRSA’s Maternal and Child Health Bureau (MCHB), which oversees the HTCs.

i

RECOMMENDATIONS
We recommend that HRSA:
1. Develop program guidelines, which, at a minimum, include the disposition of
program funds and conflicts of interest provisions.
2. Continue to monitor HTCs participating in the 340B program, and increase the
areas of monitoring to include the conditions described in this report as a means
of ensuring that program funds are used for their intended purpose and in
accordance with applicable regulations and cost principles.
3. Emphasize to grantees that HTCs need to adhere to federal regulations limiting
Medicaid reimbursement to the acquisition cost of factor plus a reasonable
dispensing fee established by the state Medicaid agency.
4. Work with the Centers for Medicaid and Medicare Services (CMS) to ensure that
the Medicaid overpayment of approximately $613,000 identified in this report is
refunded to the respective state Medicaid program.
In its March 25, 2003 comments to our draft report, HRSA generally agreed with our
findings and recommendations. In its response, HRSA stated that it (1) is coordinating
efforts to include our recommendations as conditions of grant awards for the June 1, 2003
hemophilia continuation program funding cycle; (2) prepared a draft manual to clarify
policy and provide program guidance to HTCs; and (3) will obtain information from
HTCs for monitoring. The HRSA also suggested that we clarify language in the report to
demonstrate that the method used to claim reimbursement from Medicaid resulted in an
overpayment, a clarification that we have made. We have included HRSA’s response as
an Appendix to this report. We have also summarized its response along with our
comments after the Conclusions and Recommendations section of this report.

ii

TABLE OF CONTENTS

PAGE
EXECUTIVE SUMMARY ............................................................................................... i

INTRODUCTION..............................................................................................................1

Background..............................................................................................................1

Objective, Scope and Methodology.........................................................................1

RESULTS OF REVIEW ...................................................................................................2

Inappropriate Use of Program Income.....................................................................3

Inappropriate Medicaid Billing Practices ...............................................................6

Patient Choice Policies ............................................................................................6

OTHER MATTERS ..........................................................................................................7

CONCLUSIONS AND RECOMMENDATIONS...........................................................9

APPENDIX - HRSA RESPONSE

iii

INTRODUCTION
BACKGROUND
Section 602 of the Veterans Health Care Act of 1992 (Public Law 102-585) established
section 340B of the Public Health Service Act, Limitation on Prices of Drugs Purchased
by Covered Entities. The Congress enacted section 340B to establish price controls to
effectively limit the cost of drugs to certain federal grantees (covered entities), including
HTCs. As a condition of participation in federal programs such as Medicaid,
manufacturers of covered drugs are required to sell drugs at discount prices to covered
entities. The HRSA implemented section 340B by establishing the 340B program in
OPA.
At the time of our review, 48 out of 143 HTCs nationwide participated in the 340B
program. The HRSA’s OPA is responsible for overseeing the 340B Program; HRSA’s
MCHB is responsible for overseeing the HTC program, including establishing overall
program objectives, providing funding, and monitoring HTC performance.
The HRSA requested our review of a selection of HTCs that receive funding from
MCHB and participate in the 340B Program. The HRSA had received several complaints
about HTCs and asked OIG to perform this review focusing on specific areas such as
disposition of program income, billing procedures, and patient choice.
The HTCs provide diagnosis and treatment services for their patients. Hemophilia is a
disorder in which one or more of the plasma proteins needed to form blood clots is
missing or deficient. The medications used to stop bleeding are referred to as factors.
These medications are infused into the person’s vein through a needle to increase the
missing factor so that the person can form a normal clot.
We did not disclose the identities of the HTCs visited in this report because some of the
data presented in this report could be considered proprietary. Accordingly, when we
refer to specific HTCs, we use letter designations for each (A through F) rather than the
actual names of the individual HTCs. We did provide the names of the HTCs to HRSA.
OBJECTIVES, SCOPE, AND METHODOLOGY
The objectives of our review were to:
• Assess the disposition of program income earned on sales of factor at prices in
excess of the 340B acquisition price;
•

Determine how HTCs billed Medicaid for reimbursement;

•

Evaluate the adequacy of patient choice policies; and

•

Determine pharmacy costs and bad debt expense.

1

To accomplish our objectives, we judgmentally selected six of the larger HTCs and
performed the following procedures:
• Met with various HRSA program officials including individuals from OPA and
MCHB.
• Reviewed applicable laws, regulations, guidelines, and grant files pertaining to
HTCs’ use of program income and patient choice policies.
• Reviewed the HTCs’ disposition of program income and assessed whether
program income was used for patient care and related activities.
• Reviewed the HTCs’ billing processes and practices, particularly Medicaid
billings, pharmacy costs, and bad debts.
• Reviewed patient choice policies and assessed whether those policies were
adequately designed and fully implemented.
We conducted our review in accordance with generally accepted government auditing
standards. Our review was limited in scope and primarily focused on performing
procedures necessary to achieve our objectives. Our review, which covered CY 2000,
was not intended to be a full scope internal control assessment of the HTCs and was more
limited than that which would be necessary to express an opinion on the adequacy of the
HTCs operations taken as a whole. The objectives of our review did not require an
understanding or an assessment of the overall internal control structure at the HTCs. We
performed our review at HRSA in Rockville, Maryland and visited six HTCs in six
different states.

RESULTS OF REVIEW
The HTCs generally used program income for patient care and related activities, and had
patient choice policies in place that allowed patients to obtain the factor they needed from
providers of their choice. At one of the six HTCs we visited, however, we identified the
following problems:
•

Inappropriate use of program income; and

•

Inappropriate Medicaid billing practices, resulting in overbilling of $613,000.

We believe these problems might have been prevented by improved monitoring by
HRSA’s MCHB.
The following table summarizes the number of factor units sold, acquisition costs, total
revenues, program income, total patients served, and the total patients who received
factor at the 340B discount prices.

2

CY 2000 Factor Revenue Summary

HTC
A
B
C
D
E
F

Factor
Acquisition
Units Sold
Costs
14,631,288 $7,995,120
8,910,126
5,549,852
14,966,321
9,239,608
19,994,241 11,852,217
5,870,536
3,587,402
15,826,417 10,114,657

Total
Total
Total
Factor
Program Patients Pharmacy
Revenue
Income
Served
Clients*
$9,662,710 $1,667,590
271
101
7,604,424 2,054,572
806
108
11,972,643 2,733,035
460
132
13,671,668 1,819,451
403
161
5,011,324 1,423,922
148
104
12,382,139 2,267,482
793
223

*The total number of pharmacy clients is different than total number of patients served because not all
patients receive their factor from an HTC affiliated pharmacy at the 340B discount prices.
INAPPROPRIATE USE OF PROGRAM INCOME
Contrary to MCHB guidance, one of the HTCs we visited, HTC C, inappropriately used
program income for items such as carrying costs, inflated pharmacy costs, and corporate
overhead. This occurred because MCHB did not have sufficient control over grantees
and subgrantees. When HTCs inappropriately use program income, they reduce the
funds available to provide services to patients.
Guidance for Use of Program Income
The MCHB requires HTCs to use program income for eligible costs as defined by
governing statutes, program regulations, applicable cost principles, and the terms and
conditions of the award. The Department of Health and Human Services (HHS) Grants
Policy Directive Part 3.03 states:
“It is HHS policy that grantees be encouraged to earn program income and to
maximize such income, consistent with the purpose and nature of the grant or
activities carried out under the grant.”
The policy also identifies three general alternatives for the disposition of program
income, including the additive method. The MCHB directs that HTCs use the additive
method, which requires that program income be added back to program funds and used to
further program objectives. The policy also states that regardless of the method applied,
program income may be used only for eligible costs, in accordance with the governing
statute, any program regulations, the applicable cost principles, and the terms and
conditions of the award.
Use of Program Income for Costs Unrelated to Patient Care
Our review of the program income generated from factor sales showed that at one of the
six HTCs we visited, program income was used for inappropriate cost. The HTC C was
part of a teaching hospital owned and managed by a large health care network that
operated both tax-exempt and taxable entities. The parent company at HTC C controlled
3

the disposition of program income. Following are examples of inappropriate uses of
program income at this HTC:
Carrying Costs
The parent company of HTC C inappropriately added a 16.5 percent cost to the average
value of accounts receivable and inventory as carrying costs. The carrying costs included
the following components:
Average rate of inflation

Technology improvements

Expansion of market or demand

Alteration of services

Economic and political contingencies

Cost of debt

Total

4.00%
2.00%
2.00%
3.00%
2.00%
3.50%
16.50%

We do not consider the costs described above to be carrying costs because they do not
relate to buying, holding, or dispensing factor products. Carrying costs typically include
costs such as rent, insurance, utilities, shrinkage, and warehousing. These costs are part
of the pharmacy overhead, which is a separate line item cost. In addition, hemophilia
factor sales are characterized by a high turnover rate and limited supply that would make
the impact of inflation negligible. The HTC management explained that they categorized
the above costs as carrying costs because they believed they were entitled to a reasonable
return on their working capital.
The parent company of HTC C charged $740,807 in accounts receivable carrying costs
and $438,997 in inventory carrying costs during the period of our review. The accounts
receivable carrying costs were calculated by multiplying the 16.5 percent by the average
accounts receivable outstanding balance of $4,489,700, and the inventory carrying costs
were calculated by multiplying 16.5 percent by the average inventory balance of
$2,660,587. We believe these funds should have been available to further program
objectives.
Inappropriate Allocation Method
The HTC C’s parent company inappropriately used gross patient revenues as a basis to
allocate corporate overhead costs to various departments and programs. A 12.4 percent
ratio (total factor revenue of $11,972,643 divided by gross patient revenue of
$96,277,424) was used to allocate the outpatient pharmacy department and corporate
overhead costs. We believe that using gross patient revenue as a basis to allocate
administrative costs is inequitable and unfair because this allocation method shifts costs
disproportionately to high cost drugs such as factor. Furthermore, the cost of a drug does
not drive the administrative costs of operating a pharmacy. For example, the cost to fill a
$100 prescription and a $100,000 prescription may not be significantly different, but
HTC C’s allocation method distributes 99.9 percent of the administrative cost to the high

4

cost drug. We believe that using the number of prescription orders filled or full-time
equivalents would have been a more appropriate allocation method.
Inflated Pharmacy Cost, $668,073
The HTC C’s parent company inappropriately allocated $668,073 in pharmacy
administrative costs to the factor program. The amount allocated to the factor program
was calculated by multiplying a 12.4 percent ratio by the outpatient pharmacy department
overhead cost of $5,387,682. The overhead cost represented the outpatient pharmacy
department administrative costs including management, marketing, accounting, human
resources, training, and information systems costs. The $668,073 included about
$100,000 in bonuses for management and about $52,000 in marketing and advertising
costs. The management of the parent company conceded that the bonuses were not
appropriate when asked for justification, and indicated that they would credit the amount
charged back to the program. Corporate marketing and advertising are not allowable
under Office of Management and Budget Circular A-122, Cost Principles for Non-Profit
Organizations.
Corporate Overhead, $619,196
The parent company of HTC C inappropriately allocated $619,196 in corporate overhead
costs to the factor program. The overhead cost was calculated by multiplying a 12.4
percent ratio by the parent company’s overhead cost of $4,993,516. The parent
company’s overhead cost represented corporate-wide overhead cost allocated to the
outpatient pharmacy department and included interest payments, data processing,
material management, and general corporate services. The outpatient pharmacy
department further allocated a portion of the corporate overhead cost to various
departments and programs including the factor program.
Inadequate Program Monitoring
Our review showed that MCHB did not have sufficient controls over the grantees that
subcontract with HTCs to ensure program funds are used for their intended purposes and
to further program objectives. As part of our review, we assessed MCHB’s program
controls over the HTCs. The MCHB provides limited monitoring such as requiring the
submission of annual financial data, budget projections, and patient statistics; however, it
did not receive sufficient information on the relationship between HTCs and related
organizations or functions to evaluate their impact on costs. Although the relationships
between grantees and subgrantees make monitoring more difficult, subgrantees are
subject to the same regulations as grantees.
Funds available for Patient Services are Reduced
Lack of adequate monitoring creates an environment in which operating costs can
increase, thereby reducing the funds available for patient services. Because MCHB did

5

not adequately monitor grantees and/or subgrantees, it was not aware of HTC C’s
inappropriate use of program funds.
APPROPRIATE MEDICAID BILLING PRACTICES
HRSA Guidelines for billing Medicaid Beneficiaries Who Receive Drugs Purchased
at 340B Discount Prices
A Federal Register Notice dated May 13, 1994, Final Notice regarding Section 602 of the
Veterans Health Care Act of 1992, states:
“If a drug is purchased by or on behalf of a Medicaid beneficiary, the amount billed
may not exceed the entity’s actual acquisition cost for the drug, as charged by the
manufacturer at the price consistent with the Veterans Health Care Act of 1992, plus
a reasonable dispensing fee established by the State Medicaid agency.”
This Act does not specifically require HTCs to purchase the drugs for Medicaid
beneficiaries through the 340B discount program, and some HTCs elected not to
purchase drugs for Medicaid beneficiaries.
One HTC Overbilled Medicaid $613,000
The HTC C overbilled Medicaid $613,000 by basing the charge on a fee for each unit
sold. Covered entities have two ways to avoid exposing manufacturers to duplicate price
reductions. One is for the entities to purchase all of their outpatient drugs, including
factor, at 340B prices. If an entity follows this practice, it must give OPA its Medicaid
provider number, and it is required to bill Medicaid at actual acquisition price plus the
state prescribed dispensing fee. The other alternative is for the entity to “carve out” the
outpatient drugs purchased for Medicaid patients and buy these drugs at market prices. If
an entity follows this procedure, it could bill the Medicaid state agency at the state
defined estimated acquisition cost plus the dispensing fee.
The HTC C purchased factor for Medicaid beneficiaries at 340B prices and billed the
State Medicaid program the acquisition cost plus $.23 per unit, or a 37 percent markup.
According to the Federal guidelines, this HTC should have billed Medicaid only the
acquisition cost plus the reasonable dispensing fee established by the State Medicaid
agency. The dispensing fee for HTC C’s State is $3.65 per prescription. For the period
under review, the difference between the per unit mark up and the allowable dispensing
fee was $613,000.
PATIENT CHOICE POLICIES
All six HTCs had formal written patient choice policies in place informing patients of
their right to purchase factor from providers of their choice. The policies for some HTCs
were better developed than others and included information such as product quality,
prices, and general criteria for selecting a vendor.

6

We found that most HTCs were following their patient choice policies. We reviewed
selected patient files for evidence that patient choice policies were fully implemented. At
five HTCs, choice policies were documented in the patient files. One HTC, however, had
a policy to ensure patients had a choice to purchase factor from providers of their choice,
but 46 percent (7 of 15 cases) of patient files selected for review did not contain evidence
that the patient was informed of the policy.

OTHER MATTERS
The HRSA requested that we provide information on pharmacy costs and bad debt
expenses incurred by the audited HTCs. We found that pharmacy costs varied and were
lowest for two of the three HTCs that had in-house pharmacies, and four of the HTCs
reported bad debts on their general ledger accounts. The HTCs that successfully
controlled pharmacy costs had more funds available for patient care and necessary
administrative and support services than they would otherwise have had.
In addition, we found two additional matters that we believe may impact the volume of
services that HTCs provide to patients. First, HRSA did not clearly define program
income, which may have resulted in some HTCs retaining program income as fund
balances. Second, we identified potential conflicts of interest at one HTC that could
increase operating costs. More detailed information on these matters is presented below.
Pharmacy Costs
The two HTCs with the lowest per patient pharmacy costs had in-house pharmacies that
enabled them to better control pharmacy costs. Pharmacy cost per client varied between
$1,850 and $7,721. The HTCs that most successfully controlled pharmacy costs had
more funds available for patient care and necessary administrative and support services
than they would otherwise have had.
We determined that pharmacy costs, except for the actual costs of factor, were the most
significant costs associated with the factor program. The HTCs with 340B programs
needed pharmacy services to manage the distribution of factor to their clients. The
services generally included purchasing factor, filling prescriptions, packaging, delivery to
clients, and managing inventory. We found pharmacy costs varied widely from one HTC
to another. The following table summarizes the pharmacy costs and bad debts (arising
from passing on the costs of providing factor to indigent patients) for those HTCs.

7

Schedule of Pharmacy Costs and Bad Debt Expense for CY 2000
Type of
Pharmacy
Pharmacy
HTC Pharmacy
Costs
Clients
$779,847
101
A
Contract
534,608
108
B
Contract
668,073
132
C
In- house
297,773
161
D
In- house
547,097
104
E
Contract
525,832
223
F
In- house
* These HTCs did not report any bad debt.

Cost Per Bad
Client
Debt
$7,721
*
4,950 $176,591
5,061 412,674
1,850
*
5,261 159,290
2,358
33,350

The pharmacy costs shown above did not include the same cost categories. For example,
the pharmacy cost for HTC B included factor-billing services. The pharmacy cost for
HTC C included parent company overhead costs allocated to the program. The pharmacy
cost for HTC F reflected both 340B and non-340B costs. The pharmacy costs for HTCs
A, B, and E were based on the number of factor units sold. The HTC D was able to
successfully contain its pharmacy costs for several reasons, including establishing an inhouse pharmacy, hiring a pharmacist for the factor program, lower overhead cost, and
sharing resources with another HTC.
Bad Debt Expense
As illustrated in the chart above, four of the HTCs reported bad debts on their general
ledger accounts. Bad debts represent unpaid balances for factor receivables that were not
collected after billing and subsequent collection efforts were exhausted.
Fund Balances
We found that some program income may have been retained by HTCs as fund balances.
Four of the six HTCs had identified fund balances at the close of their fiscal years for
2000, and three of those had increases in the fund balances during the year. A fund
balance represents the residual equities and excess income of an organization as shown
below.
Schedule of Fund Balances for CY 2000
HTC
A
B
C
D
E
F

Fund Balances ($)
N/A
789,077
N/A
435,532
2,768,811
7,920,899

Fund Balance Increases ($)*
N/A
453,547
N/A
0
52,337
809,529

* Fund balance increases from prior year were based on the most recent available financial statements at
the time of our review. Actual year-end dates varied by HTC. N/A means no fund balance existed.

8

Although factor revenue represented 79 percent to 98 percent of the total revenue, HTCs
had other sources of revenue, such as grants, clinic billings, donations, and fund raising.
Therefore, the sources for fund balances were not all necessarily from factor sales.
Potential Conflicts of Interest
Because MCHB does not closely monitor grantees, it may be unaware of conflicts of
interest that could increase operating costs. For example, we found that HTC B had the
following potential conflicts of interest that were undetected: (1) HTC B’s board of
directors included the president of the pharmacy; (2) HTC B borrowed money, cosigned
for by related parties; and (3) HTC B employed personnel who also worked for the
pharmacy, including a physician who received her salary from the pharmacy. Although
these relationships are only potential conflicts of interest, MCHB should be aware of their
existence, so it can take appropriate and timely action if necessary.

CONCLUSIONS AND RECOMMENDATIONS
The HTCs generally used program income for patient care and related activities, and had
patient choice policies in place that allowed patients to obtain the factor they needed from
providers of their choice. At one HTC, however, we found problems that we believe are
the result of inadequate oversight from HRSA. We recommend that HRSA:
1. Develop program guidelines, which, at a minimum, include the disposition of
program funds and conflicts of interest provisions.
2. Continue to monitor HTCs participating in the 340B program, and increase the areas
of monitoring to include the conditions described in this report as a means of ensuring
that program funds are used for their intended purpose and in accordance with
applicable regulations and cost principles.
3. Emphasize to grantees that HTCs need to adhere to federal regulations limiting
Medicaid reimbursement to the acquisition cost of factor plus a reasonable dispensing
fee established by the state Medicaid agency.
4. Work with the Centers for Medicaid and Medicare Services to ensure that the
Medicaid overpayment of approximately $613,000 identified in this report is
refunded to the respective state Medicaid program.

9

HRSA Responses and OIG Comments
Recommendation 1:
HRSA Response
“The MCHB has developed a first draft of a 340B Program Manual for HTCs that further
clarifies policy with 340B program guidelines and includes suggested procedures and
model practices for implementation. Topic areas included major elements of the Public
Health Service Drug Pricing Program; Guidance for HTCs and Appendices including a
Compilation of HRSA Guidelines, Section 340B of the Public Health Service Act, and
grants management documents regarding program income. The manual is meant to be an
adjunct to, but not a replacement for, the existing policies of HRSA Grants Management
and the Office of Pharmacy (OPA).”
OIG Comments
The completion and distribution to HTCs of a comprehensive program manual should
improve HTC operations and compliance with government regulations.
Recommendation 2:
HRSA Response
“The MCHB is drafting a 340B Program Factor Replacement Product Data Sheet for
HTCs to provide information useful for monitoring of 340B program implementation.”
OIG Comment
Periodic preparation and reporting to HRSA of this information should provide a valuable
tool for monitoring HTC activities with respect to program income to ensure maximum
profits benefit hemophilia patients.
Recommendation 3:
HRSA Response
In response to recommendation (1), HRSA acknowledged the development of a first draft
of a 340B Program Manual for HTCs. Part of that response included major elements of
the 340B Drug Pricing Program.

10

OIG Comment
The inclusion of drug pricing policies on billing Medicaid for drugs purchased within the
340B program should satisfy the intent of the recommendation.
Recommendation 4:
HRSA Response
The HRSA’s response stated that covered entities, such as HTCs, who are reselling factor
purchased at 340B prices, “must bill Medicaid at actual acquisition cost (the 340B price)
plus the state prescribed dispensing fee.” The MCHB indicated that it would work with
CMS to resolve the OIG recommendations.
OIG Comment
We believe HRSA’s intention to coordinate with CMS to obtain refunds for any factor
dispensing fees paid in excess of established OPA regulations should satisfy the intent of
the recommendation. In its response, HRSA questioned whether conditions were met for
an overpayment and described an alternative scenario that would lead to a different
conclusion. To clarify our position on this matter, we changed the report to state
unequivocally that the conditions for an overpayment were met and an overpayment
resulted.

11

APPENDIX

A PP Eli DIX
P a g e 1 of 3

DEPARTMENT OF HEALTH & HUMAN SERVICES

Health Resources and Services Adminiitration

Rochlle, Maryland 20857

TO:

Dennis Duquette
Deputy Inspector General
Audit Services

FROM:

Administrator

SUBJECT: Office of Inspector General’sDraft Report: “Review of Hemophilia
Treatment Centers’ Disposition of Program Income and Patient Choice for
Factor Provider for Calendar Year 2000” (A-0341-00350)

Thank you for the opportunity to provide comments on the subject report. Please find
those comments attached.

Questions may be referred to John Gallicchio in HRSA’s Office of Financial Policy and
Oversight at (301) 443-3099.

Betty James Duke

Attachment

b

APPENDIX
Page 2 of 3

Heal1 Resources ant Services Administration’s Comments on the Office of
Inspector General’s Draft Report: “Review of Hemophilia Treatment Centers’
Disposition of Program Income and Patient Choice for Factor Provider for FY 2000.
The Health Resources and Services Administration (HRSA) thanks the Office of
Inspector General for the opportunity to provide comments on the above draft report. We
acknowledge the importance of the report findings and recommendations and look
forward to working with the Centers for Medicare and Medicaid Services (CMS) in
response to OIG’s recommendations.

Backwound
This report is a review based on site visits to 6 hemophilia treatment centers @lTCs),
which are covered entities in the 340B Drug Pricing Program. The review was
undertaken in 2001 in response to a request from HRSA’s Administrator in 2000.
The report makes the following four recommendations:
1. Develop program guidelines, which, at a minimum, include the disposition of program

funds and conflict of interest provisions.
2. Continue to monitor HTC’s participating in the 340B Program, and increase the areas
of monitoring to include the conditions described in this report as a means of ensuring
that program funds are used for their intended purpose and in accordance with
applicable regulations and cost principles.

3. Emphasize to grantees that HTCs need to adhere to federal regulations limiting
Medicaid reimbursement to the acquisition cost of factor plus a reasonable dispensing
fee established by the state Medicaid agency.
4. Work with the Centers for Medicare and Medicaid Services to be sure that the

Medicaid overpayment of approximately $613,000 identified in this report is refunded
to the respective state Medicaid agency.

General Comments
The following are examples of how HRSA’s Maternal Child Health Bureau (MCHB)
program staff have begun to address the report’s findings and recommendations.
The MCHB is workmg closely with HRSA’s Office of Financial Policy and
Oversight (OFPO) on plans to incorporate OIG recommendations as conditions in
the notices of grant awards for the June 1,2003 hemophilia continuation program
funding cycle.

APPENDIX
Page 3 of 3

0

0

The MCHB has developed a first draft of a 340B Program Manual for Hemophilia
Treatment Centers that further clarifies policy on how to comply with 340B
program guidelines and includes suggested procedures and model practices for
implementation. Topic areas include major elements of the Public Health Service
Drug Pricing Program; Guidance for HTCs; and Appendices including a
Compilation of HRSA Guidelines, Section 340B of the Public Health Service Act,
and grants management documents regarding program income. The manual is
meant to be an adjunct to, but not a replacement for, the existing policies of
HRSA Grants Management and the Office of Pharmacy Affairs (OPA).
The MCHB is drafting a 340B Program Factor Replacement Product Data Sheet
for HTCs to provide information useful for monitoring of 340B program
implementation.

The OIG report should clearly state that covered entities have two ways to avoid causing
manufacturers to be exposed to duplicate price reductions. (1) If covered entities
purchase all of their outpatient drugs at 340B prices, they must give OPA their Medicaid
provider numbers when they register as covered entities and bill Medicaid at actual
acquisition cost (the 340B price) plus the state prescribed dispensing fee. OPA then
supplies this information to the affected state agencies so that these transactions can be
excluded from agencies’ claims for Medicaid rebates. (2) Covered entities may choose to
“carve out” the outpatient drugs purchased for Medicaid patients. They would buy these
drugs at market prices. They should not give their Medicaid provider numbers to OPA,
and must bill Medicaid at the state defined estimated acquisition cost plus the dispensing
fee. In this case, the state agencies submit rebate claims for these transactions.
The report implies, but does not clearly state, that the overpayment from the state
Medicaid agency to the HTC identified as “C” is in reimbursements for factor purchased
at 340B prices. However, if the HTC is using the option to purchase drugs at normal
market prices for its Medicaid patients and is following the state agency’s estimated cost
guideline, there is no over billing and the HTC is not operating contrary to HRSA’s 340B
guidance including the clarification re Medcaid billing published on March 15,2000.

The report would be much stronger if it provided this detail and clearly stated the
situation with HTC C.

This report was prepared under the direction of Stephen Virbitsky, Regional Inspector General

for Audit Services. Other principal Office of Audit Services staff who contributed include:

Regional Staff

Michael Walsh, Audit Manager

Yusef Kheire, Senior Auditor

Wayne Good, Auditor

Jim Rhein, Auditor

Richard Polen, Auditor

Headquarters Staff

Carol Lessans, Director, Grants and Internal Activities

Diann Johnson, Senior Auditor, Grants and Internal Activities

Robert W. Goranson, Senior Auditor, Grants and Internal Activities