DSH and 340B Fraud

In 1992, the Drug Pricing Program was enacted in section 340B of the Public Health Service Act. The 340B drug discount program allows Disproportionate Share Hospitals (“DSH”) and federal-grant-funded clinics to purchase covered outpatient drugs at prices substantially lower than market value. DSHs serve a significantly disproportionate number of indigent patients and therefore receive special funding from the government. Section 7101 of the Patient Protection and Affordable Care Act added certain children’s hospitals, rural referral centers, and sole community hospitals to the list of facilities entitled to discounted pharmaceuticals. The 340B program, like the Medicaid Rebate Program, uses a form contract in which pharmaceutical manufacturers may opt in.

A hospital is classified as a “disproportionate share” hospital under any of the following circumstances:

  • The hospital's disproportionate patient percentage, as determined under paragraph (b)(5) of this section, is at least equal to one of the following:
  • 15 percent, if the hospital is located in an urban area, and has 100 or more beds, or is located in a rural area and has 500 or more beds.
  • 30 percent for discharges occurring before April 1, 2001, and 15 percent for discharges occurring on or after April 1, 2001, if the hospital is located in a rural area and either has more than 100 beds and fewer than 500 beds or is classified as a sole community hospital under § 412.92 .
  • 40 percent for discharges before April 1, 2001, and 15 percent for discharges occurring on or after April 1, 2001, if the hospital is located in an urban area and has fewer than 100 beds.
  • 45 percent for discharges before April 1, 2001, and 15 percent for discharges occurring on or after April 1, 2001, if the hospital is located in a rural area and has 100 or fewer beds.
  • The hospital is located in an urban area, has 100 or more beds, and can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to indigent patients.

According to section 340B, manufacturers must provide DSH hospitals certain drugs at the same best price offered to the government. If pharmaceutical companies overcharge DSH hospitals for 340B drugs, they may be liable under the False Claims Act. Hospitals themselves can also be liable under the False Claims Act if they falsely claim to be public hospitals and thereby receive DSH program funds from the states.

Example

In 2010, a Georgia hospital agreed to pay $13.9 million to resolve Medicaid False Claims Act allegations. From November 2002 to July 2008, Archbold Memorial Hospital made false representations to the Georgia Department of Community Health that it was a public hospital. As a result, the state increased the amount of Medicaid funds to the hospital. Under Medicaid rules, only public hospitals can receive DSH program funds. Archbold Memorial was a private hospital and thus illegally received millions of dollars. The whistleblower in that case received $695,151 from the settlement amount.

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