The Corporation for Public Broadcasting: Federal Funding and Issues

Summary: The Corporation for Public Broadcasting (CPB) receives its funding through federal appropriations; overall, about 15% of public television and 10% of radio broadcasting funding comes from the federal appropriations that CPB distributes. CPB's appropriation is allocated through a distribution formula established in its authorizing legislation and has historically received two-year advanced appropriations. Congressional policymakers are increasingly interested in the federal role in supporting CPB due to concerns over the federal debt, the role of the federal government funding for public radio and television, and whether public broadcasting provides a balanced and nuanced approach to covering news of national interest.

Summary: It is also important to note that many congressional policymakers defend the federal role of funding public broadcasting. They contend that it provides news and information to large segments of the population that seek to understand complex policy issues in depth, and in particular for children's television broadcasting, has a significant and positive impact on early learning and education for children.

Summary: On June 20, 2012, the Corporation for Public Broadcasting released a report, Alternative Sources of Funding for Public Broadcasting Stations. The report was undertaken in response to the conference report accompanying the Military Construction and Veterans Affairs and Related Appropriations Act of 2012 (incorporated into the Consolidated Appropriations Act, FY2012, H.R. 2055, P.L. 112-74). The CPB engaged the consulting firm of Booz & Company to explore possible alternatives to the federal appropriation to CPB. Among its findings, the report stated that ending federal funding for public broadcasting would severely diminish, if not destroy, public broadcasting service in the United States.

Summary: The two-year advanced appropriations process for CPB means that in any given year congressional policymakers are considering what the CPB appropriations will be two years from that time. So as Congress continues to consider funding for the FY2017 fiscal year, that deliberation would include CPB funding for FY2019. On June 9, 2016, the Senate Appropriations Committee voted 29-1 to approve S.Rept. 114-274, the FY2017 Labor-HHS-Education Appropriations bill. Included in this report is $445 million for CPB in FY2019. On May 5, 2017, President Trump signed P.L. 115-31, the Consolidated Appropriations Act of 2017, which maintained FY2017 funding for CPB through the rest of the fiscal year. On May 23, 2017, the Trump Administration released its FY2018 budget request. It calls for the elimination of federal funding for CPB for FY2018 and beyond; however, $30 million is requested for the orderly closeout of federal funding for CPB in FY2018.

The Corporation for Public Broadcasting (CPB) was incorporated in 1967 as a private nonprofit corporation under the authority of the Public Broadcasting Act of 1967 (P.L. 90-129). CPB funding promotes public television and radio stations and their programs. These CPB-funded stations reach virtually every household in the United States. CPB is the largest single source of funding for public television and radio programming.

Most CPB-funded television programs are distributed through the Public Broadcasting Service (PBS), created in 1969 by CPB. CPB-funded radio programs are distributed primarily through National Public Radio (NPR), created in 1970 by CPB. Both PBS and NPR are private, not-for-profit corporations.

The number of radio and television public broadcasting stations supported by CPB increased from 270 in 1969 to 1,495 in 2016, of which 364 are television stations. Public broadcasting stations are run by universities, nonprofit community associations, state government agencies, and local school boards, all of which are licensed by the FCC.

CPB is a nonprofit private corporation and is guided by a nine-member board of directors. These directors are appointed by the President with the advice and consent of the Senate. The directors serve for staggered six-year terms. The current chairman is Lori Gilbert, reappointed by President Obama and confirmed by the Senate in August 2013. CPB's principal function is to receive and distribute the federal appropriation in accordance with the Public Broadcasting Act, supporting qualified public radio and television stations and funding national content. Seventy percent of the federal appropriation is used to provide Community Service Grants (or CSGs) to stations that meet specified eligibility criteria. CPB exercises minimum control of program content and other activities of local stations, and is prohibited from owning or operating any of the primary facilities used in broadcasting. In addition, it may not produce, disseminate, or schedule programs. The current president and CEO of CPB is Patricia de Stacy Harrison, appointed by the board of directors in June 2005.

Approximately 15% of public television and 10% of radio broadcasting funding comes from the federal appropriations that CPB distributes. However, among individual public broadcasting stations, the amount of federal dollars that contributes to a station's annual budget depends on the funds it receives from nonfederal sources; the number and extent of broadcast transmitters required to service its coverage area; the extent to which a station is serving rural areas and minority audiences; and whether or not it is a television or radio station.

While federal funding for CPB primarily comes from the Departments of Labor-Health and Human Services-Education appropriations bill as a separate entry under the "Related Agencies" section of that bill, it may receive other sources of funding from the federal government. For example, on September 8, 2015, CPB and PBS received a five-year Ready to Learn (RTL) grant from the Department of Education's Office of Innovation and Improvement, which supports the development of educational television and digital media targeted at preschool and early elementary school children. According to the CPB, for the last year data are available, the RTL grant was funded for FY2016 at $25.741 million. The CPB received approximately $18 million, and Twin Cities Public Television received the rest of the grant. Under RTL, CPB receives the grant money and then partners with PBS for RTL content production.

PBS was created by CPB in 1969 to operate and manage a nationwide (now satellite) program distribution system interconnecting all the local public television stations, and to provide a distribution channel for national programs to those public television stations. Although PBS does not produce programs for its members, it aggregates funding for the creation and acquisition of programs by and for the stations, and distributes programs through its satellite distribution system. Paula Kerger became the sixth and current president and CEO of PBS in March 2006.

For radio, a different division of responsibilities was established. CPB created National Public Radio (NPR) in 1970 as a news-gathering, production, and program-distribution company governed by its member public radio stations. Unlike its public television counterpart, NPR is authorized to produce radio programs for its members as well as to provide, acquire, and distribute radio programming through its satellite program distribution system. NPR Inc., located in Washington, DC, provides these administrative operations. On July 2014, Jarl Mohn became the current president and CEO of NPR.

After the firing of Juan Williams, a news analyst for NPR, in October 2010, NPR Inc. announced that its board of directors had accepted several recommendations to provide greater clarity and transparency for its code of ethics regarding NPR employees. These include reviewing and updating of policies and training with respect to the role of NPR journalists appearing on other media outlets, reviewing and defining their roles (including those of news analysts) in a changing news environment, and encouraging a broad range of viewpoints to reflect the diversity of NPR's national audiences. At the same time these recommendations were announced, Ellen Weiss, vice president of news for NPR, resigned; it was also announced that Vivian Schiller, then president and chief executive at NPR, would not receive a bonus for 2010. On March 9, 2011, Ms. Schiller resigned, over continued scrutiny and criticism over NPR's handling of an incident regarding Ronald Schiller (no relation) in a taped interview. These incidents brought intense scrutiny to NPR from public policymakers.

NPR currently employs 828 people, and has an operating budget of $193 million. There are 1,076 stations broadcasting NPR programming; of these 116 are non-NPR members. Approximately 42 million people listen to NPR stations weekly; 3.7 million users download NPR podcasts weekly.

The Obama Administration requested a $445 million appropriation for CPB submitted in its FY2017 budget request. The vehicle that is used to provide appropriations to CPB is the Departments of Labor-Health and Human Services-Education bill. On June 9, 2016, the Senate Appropriations Committee approved, 29-1, S.Rept. 114-274 , the FY2017 Labor-HHS-Education Appropriations bill. Among its provisions is $445 million for CPB in 2019. On May 5, 2017, President Trump signed P.L. 115-31 , the Consolidated Appropriations Act of 2017, which maintained FY2017 funding for CPB through the rest of the fiscal year. On May 23, 2017, the Trump Administration released its FY2018 budget request. It calls for the elimination of federal funding for CPB for FY2018 and beyond; however, $30 million is requested for the orderly closeout of federal funding for CPB in FY2018. (For funding levels, see Table 1 .)

From the last year of available information, the U.S. public broadcasting system—comprised of the national public radio and television stations—reported total revenue of $3.05 billion in FY2015. According to CPB, for public broadcasting revenue by source, CPB funds made up 14.6% of the total; another 1.2% came from federal grants and contracts. The remaining 84.3% was raised from nonfederal sources (including individuals, businesses, foundations, state and local governments, and educational institutions). The largest single income source (31.0% in FY2015) came from membership.

Federal appropriations which go through CPB to the individual public radio and television stations generally are designated as unrestricted federal funds. CPB distributed $69.31 million in FY2014 funding to public radio stations that qualify for its Community Service Grant program. However, member stations also pay NPR fees for content and programming; some contend that federal grant money is supporting part of the revenue streams back to NPR Inc.

A history of CPB appropriations is presented in Table 1 . Additional information on both NPR and PBS funding may be obtained at their respective websites ( http://www.npr.org and http://www.pbs.org , respectively).

Legislative History: 111th-114th Congresses

There was significant legislative interest and activity regarding federal funding for CPB from the end of the 111 th Congress through the 112 th Congress. During the 111 th Congress, Representative Lamborn (CO) introduced H.R. 5538 , a bill that would have eliminated federal funding for CPB after FY2012. This bill was referred to the House Committee on Energy and Commerce. During the "lame duck" period of the 111 th Congress in November 2010, Representative Lamborn sought to have his bill considered for floor action in the House, but this action was defeated by a vote of 239-171. In response, Representative Earl Blumenauer (OR) defended public broadcasting by stating that "National Public Radio is one of the few areas where the American public can actually get balanced information."

On January 5, 2011, Representative Lamborn introduced H.R. 68 (To amend the Communications Act of 1934 to prohibit Federal funding for the Corporation of Public Broadcasting after FY2013) and H.R. 69 (To prohibit Federal funding of certain public radio programming, to provide for the transfer of certain public debt, and for other purposes). The first bill, like its predecessor H.R. 5538 , would have eliminated federal appropriations for CPB when its two-year advanced funding ends. The second bill would have prohibited federal funding to organizations incorporated for specified purposes related to (1) broadcasting, transmitting, and programming over noncommercial educational radio broadcast stations, networks, and systems; (2) cooperating with foreign broadcasting systems and networks in international radio programming and broadcasting; (3) assisting and supporting such noncommercial educational radio broadcasting pursuant to the Public Broadcasting Act of 1967; or (4) acquiring radio programs from such organizations. In effect, it would have prohibited any individual public radio station from using federal funding to engage in transactions with NPR Inc. Both bills were referred to the House Committee on Energy and Commerce.

On January 11, 2011, NPR Inc. responded to the two bills by stating, in part: "The proposal to prohibit public radio stations from using CPB grants to purchase NPR programming interjects federal authority into local station program decision-making. Furthermore, restrictions on the authority of CPB—a Congressionally chartered, independent, nonprofit organization—to make competitive grants to NPR, or any other public broadcasting entity, is misguided."

Other legislation was introduced addressing federal support for public broadcasting. On January 7, 2011, Representative Kevin Brady introduced H.R. 235 (Cut Unsustainable and Top-Heavy Spending Act of 2011 or the CUTS ACT), which provided that all unobligated balances held by the CPB that consist of federal funds be rescinded and no federal funds appropriated hereinafter shall be obligated or expended.

On January 24, 2011, Representative Jim Jordan introduced H.R. 408 (Spending Reduction Act of 2011), which would have reduced federal spending by $2.5 trillion through FY2021 in part by eliminating the CPB.

On March 15, 2011, Representative Lamborn introduced H.R. 1076 , a bill to prohibit the funding of National Public Radio and restrict the use of federal funds for member stations to acquire NPR broadcasting content. The House Rules Committee passed H.Res. 174 , which permitted H.R. 1076 to go directly to the floor and, without any points of order or amendments, be open to one hour of debate before a full vote in the House of Representatives. H.R. 1076 passed the House 228-192, and was referred to the Senate. No further action was taken on this bill.

Other proposals in the 112 th Congress addressed federal funding for public broadcasting. On January 20, 2011, the Republican Study Group, a conservative caucus comprised of 100 Members of Congress, released its list of proposed budget cuts, including elimination of CPB's appropriations starting in FY2012. At the same time, Representative Ryan (WI), the chairman of the House Committee on the Budget for the 112 th Congress, proposed a new continuing resolution that would have set the rest of the FY2011 budget at FY2008 levels (excluding defense, homeland security, and veterans' programs).

In the 113 th Congress, several bills were introduced addressing the Corporation for Public Broadcasting, National Public Radio, the Public Broadcasting System, and issues related to these institutions and their funding. H.R. 2597 , a bill To Prohibit Federal Funding of National Public Radio and the Use of Federal Funds to Acquire Radio Content (Lamborn), was introduced on July 5, 2013, and was referred to the House Subcommittee on Communications and Technology of the Energy and Commerce Committee. As the title indicates, this bill would have eliminated all direct federal funding for NPR as well as federal funding to sell or acquire NPR-based programming content. H.R. 2647 , the Emergency Information Improvement Act of 2013 (Higgins), was introduced on July 10, 2013, and referred to the House Subcommittee on Economic Development, Committee on Public Buildings and Emergency Management. The bill would have revised disaster relief law to include public broadcasting facilities, among other provisions. On July 11, 2013, S. 1284 , the Departments of Labor, Health and Human Services, and Education and Related Agencies Appropriations Act, 2014 (Harkin), was introduced and placed on the Senate Legislative calendar. In this bill, the congressional request for CPB in FY2016—the forward two-year appropriation—was $45 million. This bill was incorporated into H.R. 3547 , the Consolidated Appropriations Act of 2014, and signed into law on January 17, 2014 ( P.L. 113-76 ).

FY2019 appropriations for CPB were addressed in both the House and Senate FY2017 Labor-HHS-Education bills ( S. 3040 , H.R. 5926 ); both the House and the Senate approved a $445 million funding level for CPB. However, there is a Continuing Resolution for FY2017, P.L. 114-254 , which was signed into law by President Obama on December 9, 2016. The Trump Administration has requested zero funding for CPB in FY2018.

On January 30, 2017, Representative Lamborn introduced H.R. 726 (A Bill To Prohibit Federal Funding of National Public Radio and the Use of Federal Funds to Acquire Radio Content) and H.R. 727 (To Amend the Communications Act of 1934 to Prohibit Federal Funding for the Corporation for Public Broadcasting After Fiscal Year 2019). Both bills were referred to the House Energy and Commerce Committee's subcommittee on Communications and Technology .

In an age of multiple cable channel options, digital radio, and computerized digital streaming, some ask whether there is a need for federal appropriations to support public broadcasting. The array of commercial all-news radio and radio talk shows, many of which are also streamed on the Internet, provides various sources of news and opinion. Supporters of public broadcasting argue that public radio and television broadcasters, free of commercial interruption, provide perhaps the last bastion of balanced and objective information, news, children's education, and entertainment in an era of a changing media landscape. Still others contend that public broadcasting has lost much of its early impact since the media choices have grown so much over the last several decades and that the federal role in public broadcasting should be reevaluated as well.

Supporters of public broadcasting contend that public radio and public television provide education and news to many underserved parts of the American population. Public broadcasters may provide this service to an underserved and less commercially attractive population that commercial broadcasters do not address. For example, PBS broadcasting for children includes lessons in reading, counting, and spelling, subjects not normally found on commercial broadcasts. According to NPR Inc., approximately 90% of public radio stations provide local newscasts, airing both newscast and non-newscast content (primarily in weekday drive times and especially during morning drive time). About half of all public radio stations carry local news during the weekends, says NPR, and 74% of stations are producing and inserting stories into their programming.

On June 20, 2012, the CPB released a report, Alternative Sources of Funding for Public Broadcasting Stations. The report was undertaken in response to language in the Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2012 directing the CPB to provide a report to congressional appropriations committees on alternative sources of federal funding for public broadcasting stations. ( H.R. 2055 , P.L. 112-74 ). The report, undertaken by the consulting firm of Booz & Company, provides several alternative or new funding options for public broadcasting stations, with possible benefits as well as liabilities for each option. Five options considered by Booz & Company are television advertising, radio advertising, retransmission consent fees, paid digital subscriptions, and digital game publishing. In addition, 14 current sources of revenue streams already employed by public broadcasting, ranging from merchandise licensing to mobile device applications, were also analyzed as options to replace federal funding for public broadcasting. Booz & Company found "there is simply no substitute for the federal investment" in public broadcasting and that "Ending federal funding for public broadcasting would severely diminish, if not destroy, public broadcasting service in the United States." The report concludes that if the existing public broadcasting structure were commercialized, the new revenue streams would not offset the loss of federal funding, and that many public broadcasters would have to deviate from their statutory service mission or compete for advertising with established commercial broadcasters in a difficult economic environment.

Still, some critics contend that the report substantiates criticisms of the public broadcasting model: required to compete with commercial television and radio broadcasters that also provide news and entertainment, many public broadcasters could not adapt to a changing media world that provides multiple sources of information and entertainment. For these critics, if many public broadcasters struggle to operate with budget deficits even with federal funding available, what does that say about the need and viability of these stations in a multimedia world, or the ability of their audiences to sustain this business model going forward?

Several important issues are facing congressional policymakers as they address federal appropriations for all forms of public broadcasting. On the most fundamental level, many question the 1967 law that created the national public broadcasting system and whether the federal government should be in the "business" of providing general appropriations to CPB every year since 1969. They ask: is this still a relevant and appropriate role of the federal government? On a second level, some may contend that in an era of spiraling federal deficits, in which many (if not all) federal expenditures are being reexamined, appropriations for CPB should be reduced if not eliminated. Underlying this position are concerns that the federal role, once so clear in 1967, has been eclipsed in a multimedia Internet age; concerns that the size and scope of the federal government budget deficit requires significant cutbacks in many areas; and allegations that public broadcasting is not objective, balanced, or free of an ideological slant.

These questions revolve around whether federal funding for public broadcasting should be continued at its current level; whether the funding should be modified or reduced; whether the arrangement between the federal funding process and public broadcasting should be changed; or whether federal funding for public broadcasting should be eliminated.

Public broadcasting retains its strong supporters. Most federal appropriations go through CPB to directly support member stations of NPR, PBS, and other independent affiliates. Since, according to NPR, federal funding to supplement administrative functions amounts to less than 2% of its annual budget, some may question whether such a small amount is worthy of congressional action to eliminate federal funding. As indicated in Table 1 , CPB has consistently received increasing federal appropriations since 1969. Some would contend that this demonstrates a general consensus among congressional policymakers that there is a federal role in public broadcasting. In addition, public support of public radio and television broadcasting generally has been consistent as well. Supporters of a public broadcasting network system contend that local programming content is not determined by NPR Inc., or PBS, and that most content is local, serving community needs. Balanced against concerns about the role of the federal government in public broadcasting, as well as strong pressure to reduce federal spending, these issues will likely continue to be of interest to federal policymakers.

Question: Why did the Corporation for Public Broadcasting release a report about alternative sources of funding for public broadcasting stations?

Answer: The report was undertaken in response to the conference report accompanying the Military Construction and Veterans Affairs and Related Appropriations Act of 2012 (incorporated into the Consolidated Appropriations Act, FY2012, H.R. 2055, P.L. 112-74).

Question: Why did the CPB engage Booz & Company in this report?

Answer: The CPB engaged the consulting firm of Booz & Company to explore possible alternatives to the federal appropriation to CPB.

Question: How would ending federal funding for public broadcasting affect the public broadcasting service in the United States?

Answer: Among its findings, the report stated that ending federal funding for public broadcasting would severely diminish, if not destroy, public broadcasting service in the United States.


WTO Compliance Status of the Conservation Security Program (CSP) and the Conservation Reserve Program (CRP)

Summary: Under the auspices of the Uruguay Round's Agreement on Agriculture (AA), members of the World Trade Organization (WTO) agreed to limit and reduce their most distortive domestic support subsidies. Several types of domestic subsidies were identified as causing minimal distortion to agricultural production and trade, as identified in Annex II (the so-called Green Box) of the AA, and were provided exemption from WTO disciplines. Potential "Green Box" policies include outlays for conservation activities such as the Conservation Security Program and long-term land retirement programs such as the Conservation Reserve Program. Yet, certain aspects of both programs potentially are ambiguous or fall into "gray" zones concerning their compliance with WTO rules. This report is not a legal opinion, but describes both the CSP and CRP programs, the WTO Annex II provisions that govern compliance, and the potential issues involved in evaluating the compliance status of the two programs.

Summary: The Conservation Security Program (CSP) makes payments to participating landowners who advance conservation and improvement of natural resources on tribal and private working lands. Payments are determined by the level (or tier) of participation, conservation activities completed, and acres enrolled. In FY2006, USDA spent $259 million supporting 19,375 CSP contracts covering 15.8 million acres. Federal outlays for CSP activities have yet to be notified to the WTO; however, it is likely that CSP payments will be notified as Green Box-compliant environmental program payments under paragraph 12 of Annex II. Inclusion under paragraph 12 hinges on the payments being limited to the cost of expenses incurred or income forgone in implementing conservation practices. CSP cost-share payments fit this requirement. However, other CSP payments either made in excess of costs incurred or income forgone, or made in the nature of bonus or incentive payments to induce participation, are more difficult to classify.

Summary: The Conservation Reserve Program (CRP) compensates producers for removing environmentally sensitive, privately owned land from production for 10 years or more to conserve soil and water resources. The CRP is the federal government's largest conservation and private land retirement program. In FY2006, CRP outlays totaled $1.8 billion and covered almost 37 million enrolled acres. CRP payments for the period 1996 through 2001 have been notified to the WTO as Green Box-compliant long-term resource retirement payments under paragraph 10 of Annex II. Inclusion under paragraph 10 hinges on the payments being used to retire land from marketable agricultural production for at least three years. Use of CRP land for agricultural production (e.g., cutting hay, grazing, or biomass production) potentially could disqualify the land from Green Box eligibility for that particular year; and potentially for all years of a long-term retirement contract if the productive activity is engaged in more frequently than once every four years. A potential alternative would be to reclassify the productive use of CRP land as a type of environmental program where payments would be subject to the criteria discussed under the CSP program. This report will be updated as events warrant.

This report provides a discussion of how well the Conservation Security Program (CSP) and the Conservation Reserve Program (CRP) comply with WTO Green Box rules. Specifically, some market watchers have questioned whether the current USDA implementation rules for CSP are consistent with paragraph 12 of Annex II of the Agriculture Agreement (AA). Also, questions have been raised about whether the allowance of harvesting hay and grazing on CRP land, as well as the proposed use of CRP land for biomass production, would be consistent with a reading of paragraph 10 of Annex II of the AA.

Both CSP and the CRP are likely to remain important policy tools in the next farm bill. Yet certain aspects of both programs potentially are ambiguous or fall into "gray" zones concerning their compliance with WTO rules. This report is not a legal opinion, but describes both the CSP and CRP programs, the WTO Annex II (so-called Green Box) provisions that govern compliance, and the potential issues involved in evaluating the compliance status of the two programs.

Conservation Security Program (CSP) Payments

The Conservation Security Program, authorized in the 2002 farm bill ( P.L. 107-171 ), is a voluntary program that provides financial and technical assistance to promote conservation and improvement of natural resources on tribal and private working lands within selected watersheds. CSP is administered by USDA's Natural Resources Conservation Service (NRCS). Unlike the Conservation Reserve Program and some other NRCS programs, CSP provides payments for conservation on land that remains in production. NRCS implements CSP on a watershed basis in order to focus funding on high-priority areas that offer the greatest environmental impact per dollar spent. In FY2006, USDA spent $259 million supporting 19,375 new and existing CSP contracts (4,400 new CSP contracts were added in FY2006) covering 15.8 million acres (an average outlay of about $16.40 per acre).

Based on a review (done with technical support from NRCS) of a producer's environmental resources and current conservation practices, each participating producer prepares a CSP contract including a stewardship plan that details the conservation activities that exist and/or are to be implemented. Contracts extend from 5 to 10 years. By statute (Section 2001 of the 2002 farm bill, P.L. 107-171 ), CSP participants qualify for one of three levels (or tiers) of participation, with each successive tier obligating the producer to meet a higher degree of resource management standards. Depending on the stewardship plan described in a CSP contract, participating producers may be eligible for four types of payments—stewardship or base payments; cost-share payments on existing practices; one-time new practice cost-share payments; and enhanced payments. These are defined as follows.

This is a payment tied to the number of acres enrolled in CSP. It is calculated separately for each land use by multiplying (1) the stewardship payment rate established for the watershed (based on 2001 national rental rates by land use category), times (2) the number of acres, times (3) the tier factor, times (4) the tier reduction factor (see Table 1 ). The reduction factor was not part of the authorizing legislation, but was implemented by USDA to provide a broader distribution of limited funding toward targeted activities and conservation benefits. In addition to the reduction factor, the stewardship payment is subject to an annual cap by tier.

Annual Cost-Share Payments for Existing Practices; One-Time Cost-Share Payment for New Practices

USDA and the participating producer each share a portion of the specific costs incurred or income forgone in meeting a particular tier's contract obligations. The farm bill restricts payments for new and existing practices to not more than 75% of the practice cost (this rises to 90% for beginning farmers and ranchers). However, in practice, USDA has restricted payments to a substantially smaller share of implementation costs in an attempt to facilitate their calculation and minimize producer paperwork. For example, under FY2006 contracts, existing practice payments were calculated at a flat rate of 25% of the stewardship payment, and new practice payments were made at not more than 50% of the cost-share rate.

Supplemental payments, called enhancement payments, are available for exceptional conservation effort and additional conservation practices or activities that provide increased resource benefits beyond those prescribed in the CSP contract. NRCS has stated that it seeks to base its enhancement payments on an objective measure of either adoption cost or environmental benefit; however, NRCS recognizes that it is not always possible to quantify and monetize the benefits generated by environmental activities. For FY2006, the enhancement payment was calculated with a variable payment rate for activities that were part of the benchmark inventory.

The total of the stewardship, existing/new cost-share, and enhancement payments cannot exceed the following percentages of the unadjusted stewardship payment (which is based on average land rental rates): 15% for Tier I; 25% for Tier II; and 40% for Tier III. In addition to the percentage restriction, the total combined payment for a participant is subject to an annual dollar limit by tier.

Since its authorization in the 2002 farm bill, $505.4 million of funding has been provided for CSP during the FY2003-FY2006 period. USDA has announced that it has no funding for new contracts in FY2007. As a result, CSP outlays in FY2007 will be limited to support for existing contracts and will likely be about the same as in FY2006. Most CSP spending is for cost-share payments. In FY2006, of the $259 million in outlays, $7.1 million was for stewardship payments and $2.6 million was for enhancement payments, with the remainder for cost-share payments.

Relevant WTO Provisions for CSP Payments

The relevant language for notifying CSP payments as an environmental program in the WTO's AA, Annex II is paragraph 12.

WTO, Agreement on Agriculture, Annex II, Paragraph 12

General Discussion of CSP Payments and WTO Rules

To the extent that CSP payments are in the form of reimbursement for a cost incurred or income forgone as described in paragraph 12(b) above, they clearly comply with WTO Green Box criteria. If, however, CSP payments are made in the form of bonus or incentive payments that exceed the costs incurred or income forgone of implementing a particular conservation activity, then the "Green Box" compliance status of such payments could be called into question. Based on the way CSP payments are made, it appears that:

cost-share payments fit "cleanly" into the paragraph 12(b) criteria of reimbursing for the extra costs or loss of income involved in complying with the CSP program; stewardship payments appear (at first glance) to have a "bonus or incentive" aspect in that they are simply based on participation (i.e., the number of acres enrolled and the level of participation by tier), thus making them questionable for the Green Box as environmental cost-share payments; and enhancement payments also fall into more of a gray zone in that they are described as sort of a "bonus" for exceeding contract practices, while it is unclear if they are limited in value to the often-difficult-to-measure added cost of implementing a higher level of environmental practice than otherwise called for in the contract.

However, two considerations are noteworthy. First, the combined effect of the both the tier and reduction factors as applied to the stewardship payments is to reduce them to a minor share of the 2001 average rental rate used—1.25% for Tier I; 5% for Tier II; and 11.25% for Tier III. Since cost-share payments are limited to 75% of the practice cost (in actuality a much lower share is applied, as mentioned earlier), it appears unlikely that the combined value of the payments exceeds 100% of the WTO permissible cost-share value. Second, even the "bonus-like" nature of stewardship and enhancement payments could still be classified as Green Box eligible direct payments (rather than environmental payments) under the terms of paragraph 5 of Annex II, which allows for existing or new types of direct payments to be Green Box-eligible (i.e., to be exempt from amber box limits), provided they conform to criteria (b) through (e) in paragraph 6 in addition to the general criteria set out in paragraph 1, all of which are reprinted below.

WTO, Agreement on Agriculture, Annex II, Paragraphs 1, 5, and 6

Since stewardship payments are linked to the number of acres enrolled in the CSP, they would appear, at first glance, to violate paragraph 6(d)—which states that payments may not be based on or related to a factor of production, such as land, currently in use. However, stewardship payments are essentially fixed at sign-up since both enrolled area and payment rate do not vary during the life of the contract—enrollment in a CSP contract is derived from production activities on previously farmed acres, and thus a base for participation is established (and fixed) at sign-up, while the payment rate is based on average 2001 land rental rates. As a result, stewardship payments could arguably be described as direct payments that fit paragraph 6(b)-(e).

Various policy analysts from both the European Union and United States have argued the merits of bonus-type conservation payments, suggesting that some incentive payment should be made WTO-legal since conservation activities have bona fide public good aspects and only minimally (if at all) distort trade, and without such bonus payments participation in conservation activities may be low. The WTO's Framework Agreement of August 2004 called for Doha Round negotiations to "review and clarify" the existing Green Box criteria. However, little discussion of Green Box criteria has taken place during the current Doha Round of WTO trade negotiations, and none of the Doha Round proposals includes any such provision to permit conservation bonus-type payments. It is unlikely that the Green Box will play a major part in a final Doha Round agreement should ongoing negotiations reach a successful conclusion.

The vulnerability to WTO challenge of such ambiguous bonus-type payments is probably highly correlated with the value of subsidy outlays. USDA programs in general tend to attract more attention and are subject to more international scrutiny when subsidy payments are large and arguably market-distorting. By traditional U.S. commodity program standards, CSP funding has been relatively small. During FY2000-FY2006, USDA's Commodity Credit Corporation net outlays for total farm support programs (including commodity and conservation progams) averaged nearly $20 billion per year. In comparison, CSP funding during FY2003-FY2006 totaled $505.4 million. Furthermore, because CSP payments are explicitly targeted to conservation practices, they are fairly benign in terms of their market effects; that is, they likely are minimally trade-distorting if at all. However, if CSP funding levels were to expand greatly to several billion dollars per year they could attract greater critical scrutiny. In its March 2007 baseline projections of USDA outlays, the Congressional Budget Office (CBO) projected CSP program outlays to increase steadily from $259 million in FY2006 to $769 million by FY2013.

The Administration's farm bill proposal (released January 31, 2007) attempts to remove the payment ambiguity from the CSP program and make it fully WTO-compatible. USDA points out that some of the CSP payments, as currently structured, may be considered trade-distorting under WTO guidelines. To specifically address the WTO status issue, the Administration proposes removing the stewardship and cost-share payments, and replacing them with a single "enhancement payment," but basing the calculation of these enhancement payments "on factors such as income forgone by the producer and costs incurred by the producer to implement the ... conservation practices" as stated in its proposed legislative language:

" (1) CRITERIA FOR DETERMINING AMOUNT OF PAYMENTS.-

" (A) IN GENERAL.-The amount of a payment a producer would receive for performing either the progressive tier or master tier level of conservation practices shall be determined by the Secretary through rulemaking.

" (B) COSTS OF PRACTICES.-The Secretary shall establish the criteria for determining payment amounts under subparagraph (A) based on factors such as income forgone by the producer and costs incurred by the producer to implement the progressive tier or master tier level of conservation practices. "

Conservation Reserve Program (CRP) Land Use Issues

The Conservation Reserve Program, enacted in 1985, provides payments to farmers to take highly erodible or environmentally sensitive cropland out of production for ten years or more to conserve soil and water resources. It is the federal government's largest private land retirement program. In FY2006, CRP outlays totaled $1.8 billion and covered almost 37 million enrolled acres (this amounts to about $48.65 per acre on somewhat less than 10% of the nation's cropland). The program is administered by USDA's Farm Service Agency, with technical assistance provided by USDA's Natural Resources Conservation Service.

USDA has notified the WTO of CRP outlays for the years 1996 through 2001 as Green Box-compliant under paragraph 10 of Annex II, which refers to long-term resource retirement programs. Inclusion of CRP payments under paragraph 10 hinges on payments being used to retire land from marketable agricultural production for at least three years. Use of the land for agricultural production would potentially disqualify the land from Green Box eligibility for that particular year; and potentially for all years of a CRP contract if the productive activity is engaged in more frequently than once every four years.

WTO, Agreement on Agriculture, Annex II, Paragraph 10

Section 2101 of the 2002 farm bill ( P.L. 107-171 ) allows the Secretary of Agriculture to modify or waive a CRP contract in order to permit all or part of the land under contract to be used for the production of an agricultural commodity during a crop year:

Since its inception, two types of agricultural production activity have been permitted on CRP land under certain conditions—harvesting hay and livestock grazing. Hunting privileges on CRP land also have been sold, but such action has not been treated as an agricultural production activity. In recent years, policymakers have eyed CRP land as a potential source for production of biomass feedstock for use in the production of bioenergy, such as biofuels or for the installation of wind turbines for the generation of electrical energy.

Harvesting hay and grazing have been permitted by the Secretary of Agriculture on CRP lands during periods of severe drought when commercial hay supplies have been either unavailable or prohibitively expense and livestock managers have experienced extreme hardship maintaining their herds. While such productive activity might be interpreted as violating the conditions specified in AA, Annex II, paragraph 10, USDA has notified the entirety of its CRP subsidy outlays as Green Box resource retirement program payments during the 1996-2001 period. Section 2101 of the 2002 farm bill appears to have formalized the use of CRP land for harvesting hay and grazing during periods of drought and to offer a further possible exemption for harvesting of biomass or installation of wind turbines on CRP land by stating that a CRP participant shall agree to:

" (7) " not conduct any harvesting or grazing, nor otherwise make commercial use of the forage on land that is subject to the contract... except that the Secretary (of Agriculture) may permit, consistent with the conservation of soil, water quality, and wildlife habitat—

(A) managed harvesting and grazing (including harvesting of biomass), except that in permitting managed harvesting and grazing, the Secretary—

" (i) shall, in coordination with the State technical committee—

" (I) develop appropriate vegetation management requirements; and

" (II) identify periods during which harvesting and grazing under this paragraph may be conducted;

" (ii) may permit harvesting and grazing or other commercial use of the forage on the land that is subject to the contract in response to a drought or other emergency; and

" (iii) shall, in the case of routine managed harvesting or grazing or harvesting or grazing conducted in response to a drought or other emergency, reduce the rental payment otherwise payable under the contract by an amount commensurate with the economic value of the activity;

" (B) the installation of wind turbines, except that in permitting the installation of wind turbines, the Secretary shall determine the number and location of wind turbines that may be installed, taking into account—

" (i) the location, size, and other physical characteristics of the land;

" (ii) the extent to which the land contains wildlife and wildlife habitat; and

" (iii) the purposes of the conservation reserve program under this subchapter; ...

WTO rules (paragraph 10, Annex II, AA) allow for no exception to the eligibility requirement that the land be removed from marketable agricultural production. As a result, the 2002 farm bill exception for harvesting hay and grazing on CRP land could be seen as violating paragraph 10.

Generation of electric energy by wind turbines (whether installed on CRP land or not) is not regarded as an agricultural production activity by either USDA or the WTO. However, future commercial biomass harvesting on CRP land is likely to be considered an agricultural production activity. Recent strong interest in cellulosic ethanol production has spurred policymakers to consider the potential of the vast midwestern prairies (much of which is enrolled in the CRP) as a base for producing cellulosic biomass feedstock such as switchgrass or other native prairie grasses. Biomass harvesting is likely to attract critical comment if it is done extensively (i.e., on a significant portion of CRP acreage) and if large subsidies support such activity. The high profile of such activity would only be enhanced if the result were to encourage either significant exports of U.S. biofuels or the continued use of a $0.54 per gallon tariff import barrier on foreign biofuels.

A potential alternative classification for use of CRP land for an agricultural production activity (e.g., harvesting hay, grazing, or biomass production) would be to reclassify the program activity from a long-term retirement program to an environmental program, where payments would be subject to the criteria of AA, Annex II, paragraph 12 as discussed under the CSP program.

Congress will be revisiting U.S. farm legislation this year and could potentially address the ambiguities concerning notification of CSP payments and agricultural uses on CRP land to the WTO. Such a tactic could potentially avoid or minimize the likelihood of future WTO challenges against U.S. conservation programs.

Question: What was the response of the WTO to Uruguay Round's Agreement on Agriculture?

Answer: Under the auspices of the Uruguay Round's Agreement on Agriculture (AA), members of the World Trade Organization (WTO) agreed to limit and reduce their most distortive domestic support subsidies.

Question: Why were some types of domestic subsidies exempted from WTO disciplines?

Answer: Several types of domestic subsidies were identified as causing minimal distortion to agricultural production and trade, as identified in Annex II (the so-called Green Box) of the AA, and were provided exemption from WTO disciplines.

Question: What would "Green Box" policies be defined as?

Answer: Potential "Green Box" policies include outlays for conservation activities such as the Conservation Security Program and long-term land retirement programs such as the Conservation Reserve Program.

Question: Why is there doubt about these programs' compliance with WTO rules?

Answer: Yet, certain aspects of both programs potentially are ambiguous or fall into "gray" zones concerning their compliance with WTO rules.

Question: What is the purpose of this report?

Answer: This report is not a legal opinion, but describes both the CSP and CRP programs, the WTO Annex II provisions that govern compliance, and the potential issues involved in evaluating the compliance status of the two programs.

Conservation Security Program (CSP) Payments

Question: How does the Conservation Security Program (CSP) award landowners who participate in conservation activities?

Answer: The Conservation Security Program (CSP) makes payments to participating landowners who advance conservation and improvement of natural resources on tribal and private working lands.

Question: How are the payments determined?

Answer: Payments are determined by the level (or tier) of participation, conservation activities completed, and acres enrolled.

Question: What is the response of the WTO to the activities of the CSP?

Answer: Federal outlays for CSP activities have yet to be notified to the WTO; however, it is likely that CSP payments will be notified as Green Box-compliant environmental program payments under paragraph 12 of Annex II.

Question: How would paragraph 12 induce the WTO to notify CSP payments as Green Box-compliant environmental program payments?

Answer: Inclusion under paragraph 12 hinges on the payments being limited to the cost of expenses incurred or income forgone in implementing conservation practices. CSP cost-share payments fit this requirement.

Question: What makes some CSP payments difficult to classify?

Answer: However, other CSP payments either made in excess of costs incurred or income forgone, or made in the nature of bonus or incentive payments to induce participation, are more difficult to classify.

Relevant WTO Provisions for CSP Payments

Question: What does the Conservation Reserve Program do for certain producers?

Answer: The Conservation Reserve Program (CRP) compensates producers for removing environmentally sensitive, privately owned land from production for 10 years or more to conserve soil and water resources.

Question: What is the CRP?

Answer: The CRP is the federal government's largest conservation and private land retirement program.

Question: What has the CRP done in the past?

Answer: In FY2006, CRP outlays totaled $1.8 billion and covered almost 37 million enrolled acres. CRP payments for the period 1996 through 2001 have been notified to the WTO as Green Box-compliant long-term resource retirement payments under paragraph 10 of Annex II.

Question: What does it mean to be included under paragraph 10?

Answer: Inclusion under paragraph 10 hinges on the payments being used to retire land from marketable agricultural production for at least three years. Use of CRP land for agricultural production (e.g., cutting hay, grazing, or biomass production) potentially could disqualify the land from Green Box eligibility for that particular year; and potentially for all years of a long-term retirement contract if the productive activity is engaged in more frequently than once every four years.

Question: What would be a potential alternative to the use of CRP land?

Answer: A potential alternative would be to reclassify the productive use of CRP land as a type of environmental program where payments would be subject to the criteria discussed under the CSP program.


Drug Discount Program: Update on Agency Efforts to Improve 340B Program Oversight

According to HRSA, the purpose of the 340B Program, which was created in 1992, is to enable covered entities to stretch scarce federal resources to reach more eligible patients, and provide more comprehensive services. Covered entities can provide 340B drugs to patients regardless of income or insurance status and generate revenue by receiving reimbursement from patients insurance. The program does not specify how this revenue is to be used or whether discounts are to be passed on to patients. The number of participating covered entity sites—currently about 38,000—has almost doubled in the past 5 years and the number of contract pharmacies increased from about 1,300 in 2010 to around 18,700 in 2017. In recent years, questions have been raised regarding oversight of the 340B Program, particularly given the program's growth over time.

In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B program and made recommendations for improvement. This statement describes (1) HRSA actions in response to GAO recommendations to improve its program oversight, and (2) ongoing GAO work regarding the 340B program and HRSA oversight.

For this statement, GAO obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement the 2011 GAO recommendations. More detailed information on the objectives, scope, and methodology can be found in GAO's September 2011 report.

The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to covered entities—eligible clinics, hospitals, and others—to have their drugs covered by Medicaid. Covered entities are only allowed to provide 340B drugs to certain eligible patients. Entities dispense 340B drugs through in-house pharmacies or contract pharmacies, which are outside pharmacies entities contract with to dispense drugs on their behalf. The number of contract pharmacies has increased significantly in recent years.

In its September 2011 report, GAO found that the Health Resources and Services Administration's (HRSA) oversight of the 340B program was inadequate to ensure compliance with program rules, and GAO recommended actions that HRSA should take to improve program integrity, particularly given significant growth in the program in recent years. HRSA has taken steps to address two of GAO's four recommendations:

HRSA initiated audits of covered entities . GAO found that HRSA's oversight of the 340B Program was weak because it primarily relied on covered entities and manufacturers to ensure their own compliance with program requirements and HRSA engaged in few oversight activities. GAO recommended that HRSA conduct audits of covered entities and in fiscal year 2012, HRSA implemented a systematic approach to conducting annual audits of covered entities. HRSA now conducts 200 audits a year, which have identified instances of non-compliance with program requirements, including the dispensing of drugs to ineligible patients.

HRSA clarified guidance for manufacturers. GAO found a lack of specificity in guidance for manufacturers for handling cases in which distribution of drugs is restricted, such as when there is a shortage in drug supply. GAO recommended that HRSA refine its guidance. In May 2012, HRSA clarified its policy for when manufacturers restricted distribution of a drug and provided additional detail on the type of information manufacturers should include in their restricted distribution plans.

HRSA has not clarified guidance on two issues. GAO also found that HRSA guidance on (1) the definition of an eligible patient and (2) hospital eligibility criteria for program participation lacked specificity and recommended that HRSA clarify its guidance. HRSA agreed that clearer guidance was necessary and, in 2015, released proposed guidance that addressed both issues. However, earlier this year, the agency withdrew that guidance in accordance with recent directives to freeze, withdraw, or postpone pending federal guidance.

Given particular concerns that the significant escalation in the number of contract pharmacies poses a potential risk to the integrity of the 340B Program, GAO was asked to examine this issue and expects to issue a future report, in which it plans to address the extent to which covered entities use contract pharmacies; financial arrangements between covered entities and pharmacies; the provision of discounts on drugs dispensed by contract pharmacies to low-income, uninsured patients; and how covered entities and HRSA ensure compliance with 340B program requirements at contract pharmacies.

I am pleased to be here today as you examine the 340B Drug Pricing  Program (340B Program), including issues concerning its oversight. The  program, created in 1992 and named for the statutory provision  authorizing it in the Public Health Service Act (PHSA), requires drug  manufacturers to sell outpatient drugs at discounted prices to eligible  clinics, hospitals, and other entities—commonly referred to as covered  entities—in order to have their drugs covered by Medicaid. According to  the Health Resources and Services Administration (HRSA), the agency  within the Department of Health and Human Services (HHS) responsible  for administering and overseeing the 340B Program, the purpose of the  program is to enable covered entities to stretch scarce federal resources  to reach more eligible patients, and provide more comprehensive  services. In recent years, questions have been raised regarding HRSA’s  oversight of the 340B Program, particularly given growth in the program  over time. According to HRSA, as of January 2017, covered entities had  more than 38,000 sites participating in the 340B Program—almost double  the number reported just 5 years earlier.

Participation in the 340B Program is voluntary for both covered entities  and drug manufacturers, but there are strong incentives to participate:

Covered entities can realize substantial savings through 340B price  discounts—an estimated 20 to 50 percent of the cost of the drugs,  according to HRSA. In addition, covered entities can generate 340B  revenue. For example, they can purchase drugs at 340B prices for all  eligible patients regardless of the patients’ income or insurance status  and generate revenue, such as by receiving reimbursement from a  patient’s insurance that may exceed the 340B price paid for the drugs.  The 340B Program does not dictate how covered entities should use  this revenue or require that discounts on the drugs be passed on to  patients.

Incentives for participation by drug manufacturers also are strong  because they must participate in the 340B Program to receive  Medicaid reimbursement for their drugs. According to HRSA, most  manufacturers that produce outpatient drugs have participated in the  program since its inception.

HRSA also requires program participants to meet certain conditions set  forth both in law and agency guidance. For example, covered entities are  prohibited from diverting 340B drugs—that is, transferring 340B drugs to  individuals who are not eligible patients of the entities. Similarly, to help  ensure covered entities receive discounts to which they are entitled,  HRSA has issued guidance (referred to as “HRSA’s nondiscrimination  guidance” throughout this statement) prohibiting drug manufacturers from  distributing drugs in ways that would discriminate against covered entities  compared to non-340B health care providers, such as by imposing  minimum purchase requirements or other restrictive conditions.

In a September 2011 report, we identified inadequacies in HRSA’s  oversight of this program and recommended actions that should be taken  to improve oversight and ensure appropriate use of the program. Since  then, we have been monitoring HRSA’s progress in addressing our  recommendations, including at a March 24, 2015, hearing before your  Subcommittee on Health. My statement today will describe HRSA  actions in response to GAO recommendations to address (1) weaknesses  in oversight of the 340B program and (2) the lack of clarity in program  guidance. The statement will also (3) describe ongoing GAO work  regarding the 340B program and HRSA oversight.

For this statement, we obtained information and documentation from  HRSA officials about any significant program updates, and steps they  have taken to implement our 2011 recommendations. More detailed  information on the objectives, scope, and methodology for our 2011  report can be found in that report. We conducted our work for the 2011  report from September 2010 to September 2011, and updated this work  in February and March 2015 and again in June and July 2017. The work  upon which this statement is based was conducted in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.

The 340B Program was created following the enactment of the Medicaid  Drug Rebate Program and gives 340B covered entities discounts on  outpatient drugs comparable to those made available to state Medicaid  agencies. HRSA is responsible for administering and overseeing the  340B Program.

Eligibility for the 340B Program, which is defined in the PHSA, has  expanded over time, most recently through the Patient Protection and  Affordable Care Act, which extended eligibility to additional types of  hospitals. Entities generally become eligible by receiving certain federal  grants or by being one of six hospital types. Eligible grantees include  clinics that offer primary and preventive care services, such as Federally  Qualified Health Centers, clinics that target specific conditions or  diseases that raise public health concerns or are expensive to treat, and  state-operated AIDS Drug Assistance Programs, which serve as a “payer  of last resort” to cover the cost of providing HIV-related medications to  certain low-income individuals. Eligible hospitals include certain children’s  hospitals, free-standing cancer hospitals, rural referral centers, sole  community hospitals, critical access hospitals, and general acute care  hospitals that serve a disproportionate number of low-income patients,  referred to as disproportionate share hospitals (DSH). To become a  covered entity and participate in the program, eligible entities must  register with HRSA and be approved. Entity participation in the 340B  program has grown over time to include more than 38,000 entity sites,  including more than 21,000 hospital sites and nearly 17,000 federal  grantee sites (see fig. 1).

To be eligible for the 340B Program hospitals must meet certain  requirements intended to ensure that they perform a government function  to provide care to the medically underserved. First, hospitals generally  must meet specified DSH adjustment percentages to qualify.  Additionally, they must be (1) owned or operated by a state or local  government, (2) a public or private nonprofit corporation that is formally  delegated governmental powers by a unit of state or local government, or  (3) a private, nonprofit hospital under contract with a state or local  government to provide health care services to low-income individuals who  are not eligible for Medicaid or Medicare.

All drug manufacturers that supply outpatient drugs are eligible to  participate in the 340B Program and must participate in order to have  their drugs covered by Medicaid. To participate, manufacturers are  required to sign a pharmaceutical pricing agreement with HHS in which  both parties agree to certain terms and conditions.

Program Structure, Operation, and Key Requirements

The 340B price for a drug—often referred to as the 340B ceiling price—is  based on a statutory formula and represents the highest price a  participating drug manufacturer may charge covered entities. Covered  entities must follow certain requirements as a condition of participating in  the 340B Program. For example  covered entities are prohibited from subjecting manufacturers to  “duplicate discounts” in which drugs prescribed to Medicaid  beneficiaries are subject to both the 340B price and a rebate through  the Medicaid Drug Rebate Program.  covered entities are also prohibited from diverting any drug purchased  at the 340B price to an individual who does not meet HRSA’s  definition of a patient. This definition, issued in 1996, outlines three  criteria that generally state that diversion occurs when 340B  discounted drugs are given to individuals who are not receiving health  care services from covered entities or are only receiving non-covered  services, such as inpatient hospital services. (See table 1 for more  information on HRSA’s definition of an eligible patient.) Covered  entities are permitted to use drugs purchased at the 340B price for all  individuals who meet the 340B Program definition of a patient  regardless of whether they are low-income, uninsured, or  underinsured.

A covered entity typically purchases and dispenses 340B drugs through  pharmacies—either through an in-house pharmacy, or through the use of  a contract pharmacy arrangement, in which the covered entity contracts  with an outside pharmacy to dispense drugs on its behalf. The adoption  and use of contract pharmacies is governed by HRSA guidance. HRSA’s  original guidance permitting the use of contract pharmacies limited their  use to covered entities that did not have in-house pharmacies and  allowed each covered entity to contract with only one outside pharmacy.  However, March 2010 guidance lifted the restriction on the number of  pharmacies with which a covered entity could contract. Since that time,  the number of unique contract pharmacies has increased significantly,  from about 1,300 at the beginning of 2010 to around 18,700 in 2017 (see  fig. 2); and, according to HRSA data, in 2017, there were more than  46,000 contract pharmacy arrangements. HRSA guidance requires a  written contract between the covered entity and each contract pharmacy.  Covered entities are responsible for overseeing contract pharmacies to  ensure compliance with prohibitions of drug diversion and duplicate  discounts. HRSA guidance indicates that covered entities are “expected”  to conduct annual independent audits of contract pharmacies, leaving the  exact method of ensuring compliance up to the covered entity.

Drug manufacturers also must follow certain 340B Program requirements.  For example, HRSA’s nondiscrimination guidance prohibits  manufacturers from distributing drugs in ways that discriminate against  covered entities compared to other providers. This includes ensuring that  drugs are made available to covered entities through the same channels  that they are made available to non-340B providers, and not conditioning  the sale of drugs to covered entities on restrictive conditions, which would  have the effect of discouraging participation in the program.

HRSA Has Implemented GAO’s Recommendation to Improve Its Oversight of the 340B Program by Conducting Audits

In our September 2011 report, we found that HRSA’s oversight of the  340B Program was weak because it primarily relied on covered entities  and manufacturers to police themselves and ensure their own compliance  with program requirements. Upon enrollment into the program, HRSA  requires participants to self-certify that they will comply with applicable  340B Program requirements and any accompanying agency guidance,  and expects participants to develop the procedures necessary to ensure  and document compliance, informing HRSA if violations occur. HRSA  officials told us that covered entities and manufacturers could also  monitor each other’s compliance with program requirements, but we  found that, in practice, participants could face limitations to such an  approach.

Beyond relying on participants’ self-policing, we also found that HRSA  engaged in few activities to oversee the 340B Program and ensure its  integrity, which agency officials said was primarily due to funding  constraints. Further, although HRSA had the authority to conduct audits  of program participants to determine whether program violations had  occurred, at the time of our 2011 report, the agency had never conducted  such an audit.

In our 2011 report, we concluded that changes in the settings where the  340B Program was used may have heightened the concerns about the  inadequate oversight we identified. In the years leading up to our report,  the settings where the 340B Program was used had shifted to more  contract pharmacies and hospitals than in the past, and that trend has  continued in recent years. We concluded that increased use of the 340B  Program by contract pharmacies and hospitals may have resulted in a  greater risk of drug diversion to ineligible patients, in part because these  facilities were more likely to serve patients that did not meet the definition  of a patient of the program.

To address these oversight weaknesses, we recommended that the  Secretary of HHS instruct the administrator of HRSA to conduct selective  audits of covered entities to deter potential diversion. In response to that  recommendation, in fiscal year (FY) 2012, HRSA implemented a  systematic approach to conducting annual audits of covered entities that  is outlined on its website. Now numbering 200 per year, HRSA audits  include entities that are randomly selected based on risk-based criteria  (approximately 90 percent of the audits conducted each year), and  entities that are targeted based on information from stakeholders (10  percent of the audits conducted). (See table 2 for the number of audits  conducted by HRSA from FY 2012-2017.)

As a result of the audits already conducted, HRSA has identified  instances of non-compliance with program requirements, including  violations related to drug diversion and the potential for duplicate  discounts. The agency has developed a process to address non- compliance through corrective action plans. The results of each year’s  audits are available on HRSA’s website.

HRSA Implemented One of Three GAO Recommendations to Clarify Program Guidance

In our 2011 report, we found that HRSA’s guidance on three key program  requirements lacked the necessary level of specificity to provide clear  direction, making it difficult for participants to self-police or monitor others’  compliance, and raising concerns that the guidance could be interpreted  in ways that were inconsistent with its intent.

First, we found that HRSA’s nondiscrimination guidance was not  sufficiently specific in detailing practices manufacturers should follow to  ensure that drugs were equitably distributed to covered entities and non- 340B providers when distribution was restricted. Some stakeholders we  interviewed for the 2011 report, such as covered entities, raised concerns  about the way certain manufacturers interpreted and complied with the  guidance in these cases. We recommended that HRSA further clarify its  nondiscrimination guidance for cases in which distribution of drugs is  restricted and require reviews of manufacturers’ plans to restrict  distribution of drugs at 340B prices in such cases. In response, HRSA  issued a program notice in May 2012 that clarified HRSA’s policy for  manufacturers that intend to restrict distribution of a drug and provided  additional detail on the type of information manufacturers should include  in such restricted distribution plans.

In addition, we found a lack of specificity in HRSA’s guidance on two  other issues—the definition of an eligible patient and hospital eligibility for  program participation. Specifically, we found that

HRSA’s guidance on the definition of an eligible patient lacked the  necessary specificity to clearly define the various situations under  which an individual was considered eligible for discounted drugs  through the 340B Program. As a result, covered entities could  interpret the definition either too broadly or too narrowly. At the time of  our report, agency officials told us they recognized the need to  provide additional clarity around the definition of an eligible patient, in  part because of concerns that some covered entities may have  interpreted the definition too broadly to include non-eligible  individuals, such as those seen by providers who were only loosely  affiliated with a covered entity.

HRSA had not issued guidance specifying the criteria under which  hospitals that were not publicly owned or operated could qualify for  the 340B Program. For example, we found HRSA guidance lacking  on one of the ways hospitals could qualify for the program, namely by  executing a contract with a state or local government to provide  services to low-income individuals who are not eligible for Medicaid or  Medicare. Specifically, we found that HRSA did not outline any criteria  that must be included in such contracts, such as the amount of care a  hospital must provide to these low-income individuals, and did not  require the hospitals to submit their contracts for review by HRSA.  As a result, hospitals with contracts that provided a small amount of  care to low-income individuals not eligible for Medicaid or Medicare  could claim 340B discounts, which may not have been what the  agency intended.

Given the lack of specificity in these areas, we recommended that HRSA  (1) finalize new, more specific guidance on the definition of an eligible  patient, and (2) issue guidance to further specify the criteria that hospitals  not publicly owned or operated must meet to be eligible for the 340B  program. HRSA agreed with these recommendations and had planned to  address them in a comprehensive 340B Program regulation that it  submitted to the Office of Management and Budget for review in April  2014. However, HRSA withdrew this proposed regulation in November  2014 following a May 2014 federal district court ruling that the agency had  not been granted broad rulemaking authority to carry out all the provisions  of the 340B program. After this ruling, the agency issued a proposed  omnibus guidance in August 2015 to interpret statutory requirements for  the 340B program in areas where it did not have explicit rulemaking  authority, including further specificity on the definition of a patient of a  covered entity and hospital eligibility for 340B program participation.  However, in January 2017, the agency withdrew the guidance following  the administration’s January 20 memorandum directing agencies to  withdraw or postpone regulations and guidance that had not yet taken  effect. In July 2017, HRSA indicated that it was working with HHS to  determine next steps regarding the proposed Omnibus Guidance, which  included the patient definition, but that it was unable to further clarify  guidance on hospital eligibility without additional authority.

GAO Has Ongoing Work Examining HRSA Oversight of 340B Contract Pharmacies

Given the increase in the number of contract pharmacies in the 340B  Program and concerns that contract pharmacy arrangements present an  increased risk to the integrity of the program, we were asked to review  contract pharmacy use under the 340B Program. For this review, we are  planning to address the following four questions.

To what extent do the various types of covered entities use contract  pharmacies and where are the pharmacies located?

What, if any, financial arrangements do covered entities have with  contract pharmacies and third-party administrators related to the  administration and dispensing of 340B drugs, and how, if at all, this  varies by entity type?

To what extent do covered entities provide low-income, uninsured  patients with discounts on drugs dispensed by contract pharmacies?

How, if at all, do covered entities and HRSA ensure compliance with  340B program requirements at contract pharmacies?

We are in the early stages of this work, and we expect to issue a future  report on 340B contract pharmacies.

Chairman Murphy, Ranking Member DeGette, and Members of the  Committee, this concludes my statement. I would be pleased to respond  to any questions you may have.

For further information about this statement, please contact Debra A.  Draper at (202) 512-7114 or draperd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this testimony. Key contributors to this statement were  Michelle Rosenberg, Assistant Director; Rotimi Adebonojo, Jennie Apter;  and Amanda Cherrin.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Under the 340B Drug Pricing Program, if drug manufacturers want Medicaid to cover their drugs, they are required to sell outpatient drugs at discounted prices to covered entities—such as eligible clinics and hospitals.

Our 2011 report found weaknesses in the Health Resources & Services Administration's (HRSA) oversight of the 340B program.

This testimony describes HRSA’s progress in addressing our recommendations: it now audits entities to ensure they comply with program rules, and clarified its guidance on equitable distribution of drugs to 340B entities. Two other recommendations on clarifying eligibility guidance have not been addressed.

Question: What is the purpose of the 340B Drug Pricing Program?

Answer: The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to covered entities—eligible clinics, hospitals, and others—to have their drugs covered by Medicaid.

Question: What limitations does the 340B Drug Pricing Program place on covered entities?

Answer: Covered entities are only allowed to provide 340B drugs to certain eligible patients.

Question: How do covered entities operate?

Answer: Covered entities are only allowed to provide 340B drugs to certain eligible patients. Entities dispense 340B drugs through in-house pharmacies or contract pharmacies, which are outside pharmacies entities contract with to dispense drugs on their behalf.

Question: How has the 340B Drug Pricing Program affected contract pharmacies?

Answer: The number of contract pharmacies has increased significantly in recent years.

Question: Why was the HRSA's oversight of the 340B Program weak?

Answer: GAO found that HRSA's oversight of the 340B Program was weak because it primarily relied on covered entities and manufacturers to ensure their own compliance with program requirements and HRSA engaged in few oversight activities.

Question: How did the GAO recommend the HRSA fix its weakness?

Answer: GAO recommended that HRSA conduct audits of covered entities and in fiscal year 2012, HRSA implemented a systematic approach to conducting annual audits of covered entities.

Question: How has the HRSA improved its oversight of the 340B PRogram?

Answer: HRSA now conducts 200 audits a year, which have identified instances of non-compliance with program requirements, including the dispensing of drugs to ineligible patients.

Question: What did the HRSA do for manufacturers?

Answer: HRSA clarified guidance for manufacturers.

Question: What error did the GAO find in the guidance for manufacturers?

Answer: GAO found a lack of specificity in guidance for manufacturers for handling cases in which distribution of drugs is restricted, such as when there is a shortage in drug supply.

Question: How did the HRSA fix this problem?

Answer: In May 2012, HRSA clarified its policy for when manufacturers restricted distribution of a drug and provided additional detail on the type of information manufacturers should include in their restricted distribution plans.

Question: What issues do the HRSA still have to clarify?

Answer: HRSA has not clarified guidance on two issues. GAO also found that HRSA guidance on (1) the definition of an eligible patient and (2) hospital eligibility criteria for program participation lacked specificity and recommended that HRSA clarify its guidance.

Question: How did the HRSA react to this information?

Answer: HRSA agreed that clearer guidance was necessary and, in 2015, released proposed guidance that addressed both issues.

Question: What happened to reverse this decision?

Answer: However, earlier this year, the agency withdrew that guidance in accordance with recent directives to freeze, withdraw, or postpone pending federal guidance.

Question: What was the purpose of the 340B Program?

Answer: According to HRSA, the purpose of the 340B Program, which was created in 1992, is to enable covered entities to stretch scarce federal resources to reach more eligible patients, and provide more comprehensive services.

Question: How can covered entities provide drugs to patients regardless of income or insurance status?

Answer: Covered entities can provide 340B drugs to patients regardless of income or insurance status and generate revenue by receiving reimbursement from patients insurance. The program does not specify how this revenue is to be used or whether discounts are to be passed on to patients.

Question: How has the 340B Program grown in recent years?

Answer: The number of participating covered entity sites—currently about 38,000—has almost doubled in the past 5 years and the number of contract pharmacies increased from about 1,300 in 2010 to around 18,700 in 2017.

Question: What concerns has this growth raised?

Answer: In recent years, questions have been raised regarding oversight of the 340B Program, particularly given the program's growth over time.