PHS Act Section 340B

Sec. 340B PUBLIC HEALTH SERVICE ACT
LIMITATION ON PRICES OF DRUGS PURCHASED BY COVERED ENTITIES
(a) REQUIREMENTS FOR AGREEMENT WITH SECRETARY.
(1) IN GENERAL.—The Secretary shall enter into an agreement with each manufacturer of covered
outpatient drugs under which the amount required to be paid (taking into account any rebate or discount,
as provided by the Secretary) to the manufacturer for covered outpatient drugs (other than drugs described
in paragraph (3)) purchased by a covered entity on or after the first day of the first month that begins after
the date of the enactment of this section, does not exceed an amount equal to the average manufacturer
price for the drug under title XIX of the Social Security Act in the preceding calendar quarter, reduced by
the rebate percentage described in paragraph (2). Each such agreement shall require that the manufacturer
furnish the Secretary with reports, on a quarterly basis, of the price for each covered outpatient drug
subject to the agreement that, according to the manufacturer, represents the maximum price that covered
entities may permissibly be required to pay for the drug (referred to in this section as the ‘ceiling price’),
and shall require that the manufacturer 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.
(2) REBATE PERCENTAGE DEFINED.
(A) IN GENERAL.—For a covered outpatient drug purchased in a calendar quarter, the
‘‘rebate percentage’’ is the amount (expressed as a percentage) equal to—
(i) the average total rebate required under section 1927(c) of the Social Security Act
with respect to the drug (for a unit of the dosage form and strength involved) during
the preceding calendar quarter; divided by
(ii) the average manufacturer price for such a unit of the drug during such quarter.
(B) OVER THE COUNTER DRUGS.—
(i) IN GENERAL.—For purposes of subparagraph (A), in the case of over the counter
drugs, the ‘‘rebate percentage’’ shall be determined as if the rebate required under
section 1927(c) of the Social Security Act is based on the applicable percentage
provided under section 1927(c)(3) of such Act.
(ii) DEFINITION.—The term ‘‘over the counter drug’’ means a drug that may be sold
without a prescription and which is prescribed by a physician (or other persons
authorized to prescribe such drug under State law).
(3) DRUGS PROVIDED UNDER STATE MEDICAID PLANS.
Drugs described in this paragraph are drugs purchased by the entity for which payment is made by the
State under the State plan for medical assistance under title XIX of the Social Security Act.
(4) COVERED ENTITY DEFINED.
In this section, the term ‘‘covered entity’’ means an entity that meets the requirements described in
paragraph (5) and is one of the following:
(A) A Federally-qualified health center (as defined in section 1905(l)(2)(B) of the Social
Security Act).
(B) An entity receiving a grant under section 340A.

(C) A family planning project receiving a grant or contract under section 1001.
(D) An entity receiving a grant under subpart II of part C of title XXVI (relating to categorical
grants for outpatient early intervention services for HIV disease).
(E) A State-operated AIDS drug purchasing assistance program receiving financial assistance
under title XXVI.
(F) A black lung clinic receiving funds under section 427(a) of the Black Lung Benefits Act.
(G) A comprehensive hemophilia diagnostic treatment center receiving a grant under section
501(a)(2) of the Social Security Act.
(H) A Native Hawaiian Health Center receiving funds under the Native Hawaiian Health Care
Act of 1988.
(I) An urban Indian organization receiving funds under title V of the Indian Health Care
Improvement Act.
(J) Any entity receiving assistance under title XXVI (other than a State or unit of local
government or an entity described in subparagraph (D)), but only if the entity is certified by
the Secretary pursuant to paragraph (7).
(K) An entity receiving funds under section 318 (relating to treatment of sexually transmitted
diseases) or section 317(j)(2) (relating to treatment of tuberculosis) through a State or unit of
local government, but only if the entity is certified by the Secretary pursuant to paragraph (7).
(L) A subsection (d) hospital (as defined in section 1886(d)(1)(B) of the Social Security Act)
that—
(i) is owned or operated by a unit of State or local government, is a public or private
non-profit corporation which is formally granted governmental powers by a unit of
State or local government, or is a private non-profit hospital which has a contract with
a State or local government to provide health care services to low income individuals
who are not entitled to benefits under title XVIII of the Social Security Act or eligible
for assistance under the State plan under this title;
(ii) for the most recent cost reporting period that ended before the calendar quarter
involved, had a disproportionate share adjustment percentage (as determined under
section 1886(d)(5)(F) of the Social Security Act) greater than 11.75 percent or was
described in section 1886(d)(5)(F)(i)(II) of such Act; and
(iii) does not obtain covered outpatient drugs through a group purchasing organization
or other group purchasing arrangement.
(M) A children’s hospital excluded from the Medicare prospective payment system pursuant
to section 1886(d)(1)(B)(iii) of the Social Security Act, or a free-standing cancer hospital
excluded from the Medicare prospective payment system pursuant to section 1886(d)(1)(B)(v)

of the Social Security Act, that would meet the requirements of subparagraph (L), including
the disproportionate share adjustment percentage requirement under clause (ii) of such
subparagraph, if the hospital were a subsection (d) hospital as defined by section
1886(d)(1)(B) of the Social Security Act.
(N) An entity that is a critical access hospital (as determined under section 1820(c)(2) of the
Social Security Act), and that meets the requirements of subparagraph (L)(i).
(O) An entity that is a rural referral center, as defined by section 1886(d)(5)(C)(i) of the
Social Security Act, or a sole community hospital, as defined by section 1886(d)(5)(C)(iii) of
such Act, and that both meets the requirements of subparagraph (L)(i) and has a
disproportionate share adjustment percentage equal to or greater than 8 percent.
(5) REQUIREMENTS FOR COVERED ENTITIES.
(A) PROHIBITING DUPLICATE DISCOUNTS OR REBATES.—
(i) IN GENERAL.—A covered entity shall not request payment under title XIX of the
Social Security Act for medical assistance described in section 1905(a)(12) of such
Act with respect to a drug that is subject to an agreement under this section if the drug
is subject to the payment of a rebate to the State under section 1927 of such Act.
(ii) ESTABLISHMENT OF MECHANISM.—The Secretary shall establish a
mechanism to ensure that covered entities comply with clause (i). If the Secretary does
not establish a mechanism within 12 months under the previous sentence, the
requirements of section 1927(a)(5)(C) of the Social Security Act shall apply.
(B) PROHIBITING RESALE OF DRUGS.—With respect to any covered outpatient drug that is
subject to an agreement under this subsection, a covered entity shall not resell or otherwise transfer
the drug to a person who is not a patient of the entity.
(C) AUDITING.—A covered entity shall permit the Secretary and the manufacturer of a covered
outpatient drug that is subject to an agreement under this subsection with the entity (acting in
accordance with procedures established by the Secretary relating to the number, duration, and scope
of audits) to audit at the Secretary’s or the manufacturer’s expense the records of the entity that
directly pertain to the entity’s compliance with the requirements described in subparagraphs (A) or
(B) with respect to drugs of the manufacturer.
(D) ADDITIONAL SANCTION FOR NONCOMPLIANCE.—If the Secretary finds, after audit as
described in subparagraph (C) and after notice and hearing, that a covered entity is in violation of a
requirement described in subparagraphs (A) or (B), the covered entity shall be liable to the
manufacturer of the covered outpatient drug that is the subject of the violation in an amount equal to
the reduction in the price of the drug (as described in subparagraph (A)) provided under the
agreement between the entity and the manufacturer under this paragraph.
(6) TREATMENT OF DISTINCT UNITS OF HOSPITALS.
In the case of a covered entity that is a distinct part of a hospital, the hospital shall not be considered a
covered entity under this paragraph unless the hospital is otherwise a covered entity under this
subsection.

(7) CERTIFICATION OF CERTAIN COVERED ENTITIES.
(A) DEVELOPMENT OF PROCESS.—Not later than 60 days after the date of enactment of
this subsection, the Secretary shall develop and implement a process for the certification of
entities described in subparagraphs (J) and (K) of paragraph (4).
(B) INCLUSION OF PURCHASE INFORMATION.—The process developed under
subparagraph (A) shall include a requirement that an entity applying for certification under
this paragraph submit information to the Secretary concerning the amount such entity
expended for covered outpatient drugs in the preceding year so as to assist the Secretary in
evaluating the validity of the entity’s subsequent purchases of covered outpatient drugs at
discounted prices.
(C) CRITERIA.—The Secretary shall make available to all manufacturers of covered
outpatient drugs a description of the criteria for certification under this paragraph.
(D) LIST OF PURCHASERS AND DISPENSERS.—The certification process developed by
the Secretary under subparagraph (A) shall include procedures under which each State shall,
not later than 30 days after the submission of the descriptions under subparagraph (C), prepare
and submit a report to the Secretary that contains a list of entities described in subparagraphs
(J) and (K) of paragraph (4) that are located in the State.
(E) RECERTIFICATION.—The Secretary shall require the recertification of entities certified
pursuant to this paragraph on a not more frequent than annual basis, and shall require that such
entities submit information to the Secretary to permit the Secretary to evaluate the validity of
subsequent purchases by such entities in the same manner as that required under subparagraph
(B).
(8) DEVELOPMENT OF PRIME VENDOR PROGRAM.
The Secretary shall establish a prime vendor program under which covered entities may enter into
contracts with prime vendors for the distribution of covered outpatient drugs. If a covered entity
obtains drugs directly from a manufacturer, the manufacturer shall be responsible for the costs of
distribution.
(9) NOTICE TO MANUFACTURERS.
The Secretary shall notify manufacturers of covered outpatient drugs and single State agencies under
section 1902(a)(5) of the Social Security Act of the identities of covered entities under this paragraph,
and of entities that no longer meet the requirements of paragraph (5) or that are no longer certified
pursuant to paragraph (7).
(10) NO PROHIBITION ON LARGER DISCOUNT.
Nothing in this subsection shall prohibit a manufacturer from charging a price for a drug that is lower
than the maximum price that may be charged under paragraph (1).
(b) OTHER DEFINITIONS.

(1) IN GENERAL.—In this section, the terms ‘‘average manufacturer price’’, ‘‘covered outpatient
drug’’, and ‘‘manufacturer’’ have the meaning given such terms in section 1927(k) of the Social
Security Act.
(2) COVERED DRUG.—In this section, the term ‘covered drug’—
(A) means a covered outpatient drug (as defined in section 1927(k)(2) of the Social Security
Act); and
(B) includes, notwithstanding paragraph (3)(A) of section 1927(k) of such Act, a drug used in
connection with an inpatient or outpatient service provided by a hospital described in
subparagraph (L), (M), (N), or (O) of subsection (a)(4) that is enrolled to participate in the
drug discount program under this section.

(d) IMPROVEMENTS IN PROGRAM INTEGRITY.
(1) MANUFACTURER COMPLIANCE.—
(A) IN GENERAL.—From amounts appropriated under paragraph (4), the Secretary shall
provide for improvements in compliance by manufacturers with the requirements of this
section in order to prevent overcharges and other violations of the discounted pricing
requirements specified in this section.
(B) IMPROVEMENTS.—The improvements described in subparagraph (A) shall include the
following:
(i) The development of a system to enable the Secretary to verify the accuracy of
ceiling prices calculated by manufacturers under subsection (a)(1) and charged to
covered entities, which shall include the following:
(I) Developing and publishing through an appropriate policy or regulatory
issuance, precisely defined standards and methodology for the calculation of
ceiling prices under such subsection.
(II) Comparing regularly the ceiling prices calculated by the Secretary with the
quarterly pricing data that is reported by manufacturers to the Secretary.
(III) Performing spot checks of sales transactions by covered entities.
(IV) Inquiring into the cause of any pricing discrepancies that may be
identified and either taking, or requiring manufacturers to take, such corrective
action as is appropriate in response to such price discrepancies.
(ii) The establishment of procedures for manufacturers to issue refunds to covered
entities in the event that there is an overcharge by the manufacturers, including the
following:
(I) Providing the Secretary with an explanation of why and how the overcharge
occurred, how the refunds will be calculated, and to whom the refunds will be
issued.
(II) Oversight by the Secretary to ensure that the refunds are issued accurately
and within a reasonable period of time, both in routine instances of retroactive

adjustment to relevant pricing data and exceptional circumstances such as
erroneous or intentional overcharging for covered outpatient drugs.
(iii) The provision of access through the Internet website of the Department of Health
and Human Services to the applicable ceiling prices for covered outpatient drugs as
calculated and verified by the Secretary in accordance with this section, in a manner
(such as through the use of password protection) that limits such access to covered
entities and adequately assures security and protection of privileged pricing data from
unauthorized re-disclosure.
(iv) The development of a mechanism by which—
(I) rebates and other discounts provided by manufacturers to other purchasers
subsequent to the sale of covered outpatient drugs to covered entities are
reported to the Secretary; and
(II) appropriate credits and refunds are issued to covered entities if such
discounts or rebates have the effect of lowering the applicable ceiling price for
the relevant quarter for the drugs involved.
(v) Selective auditing of manufacturers and wholesalers to ensure the integrity of the
drug discount program under this section.
(vi) 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 not later than 180 days after the date of
enactment of the Patient Protection and Affordable Care Act;
(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 this section that
knowingly and intentionally charges a covered entity a price for purchase of a
drug that exceeds the maximum applicable price under subsection (a)(1).
(2) COVERED ENTITY COMPLIANCE.
(A) IN GENERAL.—From amounts appropriated under paragraph (4), the Secretary shall
provide for improvements in compliance by covered entities with the requirements of this
section in order to prevent diversion and violations of the duplicate discount provision and
other requirements specified under subsection (a)(5).
(B) IMPROVEMENTS.—The improvements described in subparagraph (A) shall include the
following:
(i) The development of procedures to enable and require covered entities to regularly
update (at least annually) the information on the Internet website of the Department of
Health and Human Services relating to this section.
(ii) The development of a system for the Secretary to verify the accuracy of
information regarding covered entities that is listed on the website described in clause
(i).
(iii) The development of more detailed guidance describing methodologies and options
available to covered entities for billing covered outpatient drugs to State Medicaid
agencies in a manner that avoids duplicate discounts pursuant to subsection (a)(5)(A).
(iv) The establishment of a single, universal, and standardized identification system by
which each covered entity site can be identified by manufacturers, distributors,

covered entities, and the Secretary for purposes of facilitating the ordering, purchasing,
and delivery of covered outpatient drugs under this section, including the processing of
chargebacks for such drugs.
(v) The imposition of sanctions, in appropriate cases as determined by the Secretary,
additional to those to which covered entities are subject under subsection (a)(5)(D),
through one or more of the following actions:
(I) Where a covered entity knowingly and intentionally violates subsection
(a)(5)(B), the covered entity shall be required to pay a monetary penalty to a
manufacturer or manufacturers in the form of interest on sums for which the
covered entity is found liable under subsection (a)(5)(D), such interest to be
compounded monthly and equal to the current short term interest rate as
determined by the Federal Reserve for the time period for which the covered entity
is liable.
(II) Where the Secretary determines a violation of subsection (a)(5)(B) was
systematic and egregious as well as knowing and intentional, removing the
covered entity from the drug discount program under this section and disqualifying
the entity from re-entry into such program for a reasonable period of time to be
determined by the Secretary.
(III) Referring matters to appropriate Federal authorities within the Food and Drug
Administration, the Office of Inspector General of Department of Health and
Human Services, or other Federal agencies for consideration of appropriate action
under other Federal statutes, such as the Prescription Drug Marketing Act (21
U.S.C. 353).
(3) ADMINISTRATIVE DISPUTE RESOLUTION PROCESS.
(A) IN GENERAL.—Not later than 180 days after the date of enactment of the Patient
Protection and Affordable Care Act, the Secretary shall promulgate regulations to establish
and implement an administrative process for the resolution of claims by covered entities that
they have been overcharged for drugs purchased under this section, and claims by
manufacturers, after the conduct of audits as authorized by subsection (a)(5)(C), of violations
of subsections (a)(5)(A) or (a)(5)(B), including appropriate procedures for the provision of
remedies and enforcement of determinations made pursuant to such process through
mechanisms and sanctions described in paragraphs (1)(B) and (2)(B).
(B) DEADLINES AND PROCEDURES.—Regulations promulgated by the Secretary under
subparagraph (A) shall—
(i) designate or establish a decision making official or decision-making body within
the Department of Health and Human Services to be responsible for reviewing and
finally resolving claims by covered entities that they have been charged prices for
covered outpatient drugs in excess of the ceiling price described in subsection (a)(1),
and claims by manufacturers that violations of subsection (a)(5)(A) or (a)(5)(B) have
occurred;
(ii) establish such deadlines and procedures as may be necessary to ensure that claims
shall be resolved fairly, efficiently, and expeditiously;
(iii) establish procedures by which a covered entity may discover and obtain such
information and documents from manufacturers and third parties as may be relevant to

demonstrate the merits of a claim that charges for a manufacturer’s product have
exceeded the applicable ceiling price under this section, and may submit such
documents and information to the administrative official or body responsible for
adjudicating such claim;
(iv) require that a manufacturer conduct an audit of a covered entity pursuant to
subsection (a)(5)(C) as a prerequisite to initiating administrative dispute resolution
proceedings against a covered entity;
(v) permit the official or body designated under clause (i), at the request of a
manufacturer or manufacturers, to consolidate claims brought by more than one
manufacturer against the same covered entity where, in the judgment of such official
or body, consolidation is appropriate and consistent with the goals of fairness and
economy of resources; and
(vi) include provisions and procedures to permit multiple covered entities to jointly
assert claims of overcharges by the same manufacturer for the same drug or drugs in
one administrative proceeding, and permit such claims to be asserted on behalf of
covered entities by associations or organizations representing the interests of such
covered entities and of which the covered entities are members.
(C) FINALITY OF ADMINISTRATIVE RESOLUTION.—The administrative resolution of a
claim or claims under the regulations promulgated under subparagraph (A) shall be a final
agency decision and shall be binding upon the parties involved, unless invalidated by an order
of a court of competent jurisdiction.
(4) AUTHORIZATION OF APPROPRIATIONS.
There are authorized to be appropriated to carry out this subsection, such sums as may be
necessary for fiscal year 2010 and each succeeding fiscal year.
(e) Exclusion of Orphan Drugs for Certain Covered Entities
For covered entities described in subparagraph (M) (other than a children’s hospital described in
subparagraph (M)), (N), or (O) of subsection (a)(4), the term ‘covered outpatient drug’ shall not
include a drug designated by the Secretary under section 526 of the Federal Food, Drug, and
Cosmetic Act for a rare disease or condition.

**Sec. 340B of the Public Health Service Act (Pub. L. 102-585), as amended by the Patient
Protection and Affordable Care Act (Pub. L. 111-148), Health Care and Education
Reconciliation Act (Pub. L. 111-152) and Medicare and Medicaid Extenders Act of 2010 (Pub.
L. 111-309)