The second criterion requires that the hospital have a Medicare disproportionate share adjustment percentage greater than 11.75 percent for the most recent cost reporting period ending before the calendar quarter involved. ⁽⁴⁾ The magnitude of a hospital’s DSH adjustment depends on the number of inpatient days of its Medicaid and Supplemental Security Income (SSI) patients. Hospitals that meet the first two criteria are eligible to participate in the 340B program if they sign a written certification stating that they will not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement in compliance with the third criterion.

If a hospital meets the above three tests and elects to participate in the 340B program, any pharmacy located at the hospital’s main address may purchase and dispense the discounted drugs for outpatient use. The hospital may use 340B-discounted drugs by dispensing them through an outpatient pharmacy or by administering them directly to patients during a clinic visit in the emergency room as part of a same-day surgery or chemotherapy, or in any other outpatient setting. With respect to a hospital pharmacy located at a different geographic address, 340B eligibility may extend to those off-site pharmacies if they are located in facilities that meet a regulatory test adopted by HRSA. According to these HRSA outpatient facility guidelines, an off-site facility is eligible to participate in the 340B program if its costs are reimbursable on the hospital’s Medicare cost report. ⁽⁵⁾ Off-site hospital facilities that do not meet this Medicare cost report test are not eligible to participate unless they qualify in their own right under one of the other covered entity definitions, e.g. as an FQHC or FQHC look-alike, AIDS clinic, etc.

After determining which hospital outpatient facilities and pharmacies may participate in the 340B program, the final issue is to identify the kinds of patients to whom these pharmacies may dispense the 340B-priced drugs. In this regard, all covered entities are subject to an important restriction. Namely, under the anti-diversion provision of 340B, discounted outpatient drugs purchased through the 340B program may not be resold or otherwise transferred to a person who is not “a patient of the entity.” ⁽⁶⁾ Covered entities that divert discounted outpatient drugs to individuals who are not their own patients may be required to pay back their discounts or lose their status as a covered entity. HRSA has issued guidelines clarifying which individuals should be considered a patient of a covered entity and which should not. Under the guidelines, the hospital must maintain records of healthcare services furnished to the patient in question and the healthcare professional providing the services must be employed by, under contract with, or in a referral relationship to the hospital. ⁽⁷⁾ If these two conditions are met, the individual may be considered a patient of the covered entity and eligible to receive discounted outpatient drugs. HRSA has provided further guidance in correspondence to Safety Net Hospitals for Pharmaceutical Access (SNHPA), so we recommend contacting SNHPA if your hospital has questions regarding specific applications of the 340B patient definition.

In general, participating disproportionate share hospitals may not bill Medicaid more than acquisition cost (plus a dispensing fee) for covered outpatient drugs purchased at the 340B-discounted levels. This rule does not apply, however, if the drug is dispensed to a capitated Medicaid recipient enrolled in a managed care plan, if the hospital and state Medicaid agency agree on a different reimbursement arrangement, if the hospital elects to purchase and bill its outpatient Medicaid drugs outside the 340B program, or if the drug is administered in a clinic setting and the state does not request rebates for such drugs. When billing payors other than Medicaid, hospitals are not subject to billing limitations under 340B. 340B discounts are, on average, 25 percent lower than discounts obtained through group purchasing organizations and other discounting programs. If you have any questions about membership in SNHPA, please contact Laurinda Dennis (laurinda.dennis@safetynetrx.org or 202-552-5854). If you have legal questions, please contact SNHPA President and General Counsel Bill von Oehsen at 202-872-6770.