An Overview of The Section 340B Drug Discount Program

Background:

To understand the genesis of the 340B program, one must begin in 1990 when Congress created the Medicaid rebate program to lower the cost of pharmaceuticals reimbursed by state Medicaid agencies.  The Medicaid rebate program requires drug companies to enter into a rebate agreement with the Secretary of the Department of Health and Human Services (HHS) as a precondition for coverage of their drugs by Medicaid.  The rebate agreement specifies that, for each brand name outpatient drug covered under the Medicaid plan, the manufacturer of the drug must pay a rebate to Medicaid based on the manufacturer’s “best price” for that drug.  As a result of the Medicaid rebate law, many pharmaceutical companies had a disincentive to continue giving deep discounts on drugs because they would have to pay larger rebates to Medicaid if they gave deeper discounts in the non-Medicaid market (establishing even better “best prices”).  When manufacturers began raising their prices, the Medicaid savings achieved through the rebate program were offset by increased government spending on drugs purchased by other federal- and state-supported providers.  To correct this situation, Congress, in November 1992, enacted Section 340B of the Public Health Service Act (created under Section 602 of the Veterans Health Care Act of 1992), which requires pharmaceutical manufacturers participating in the Medicaid program to enter into a second agreement—called a pharmaceutical pricing agreement (PPA)—with the Secretary under which the manufacturer agrees to provide front-end discounts on covered outpatient drugs purchased by specified government-supported facilities, called "covered entities," that serve the nation's most vulnerable patient populations.

Who is eligible to participate in the 340B program?

The definition of "covered entities" includes certain hospitals (including large urban hospitals, small urban hospitals, and certain rural hospitals other than critical access hospitals) that are owned or operated by—or under contract with—state or local government and meet other criteria related to the number of Medicaid patients they serve.  The other categories of covered entities are specified federal grantees, including federally qualified health centers (FQHCs), FQHC “look-alikes”, state-operated AIDS drug assistance programs, the Ryan White CARE Act Title I, Title II, and Title III programs, tuberculosis, black lung, family planning and sexually transmitted disease clinics, hemophilia treatment centers, public housing primary care clinics, homeless clinics, Urban Indian clinics, and Native Hawaiian health centers.  In addition, after passage of a recent law that grants covered entity status to certain children’s hospitals that are exempt from the Medicare prospective payment system, the government is evaluating enrollment procedures for such hospitals.  Guidelines regarding children’s hospitals’ enrollment in the program are anticipated within the year.  According to the government, approximately 12,000 participating covered entity sites and 700 pharmaceutical companies participate in the program.

Who administers the 340B program?

The Office of Pharmacy Affairs (OPA), which is located within the Health Resources and Services Administration (HRSA) within HHS, administers the program.  HRSA and OPA are located in Rockville, Maryland, and are responsible for interpreting and implementing Section 340B.  You may contact OPA through its government contractor, the Pharmacy Services Support Center (PSSC), at 1-800-628-6297 or (202) 429-7518.  The office e-mail address is opastaff@hrsa.gov.  The OPA Web site is located at http://www.hrsa.gov/opa.

What is the Pharmacy Services Support Center (PSSC)?

PSSC is a federal contractor that HRSA funds to provide guidance and technical assistance to 340B covered entities and to enhance the staffing resources available to OPA.  PSSC is a non-profit organization based at the American Pharmacists Association (APhA).  PSSC’s Web site is located at http://pssc.aphanet.org and they can be reached at 1-800-628-6297 or by e-mail at pssc@aphanet.org.

How does the Program operate?

Facilities that believe they meet the criteria of a “covered entity” can apply to participate in the 340B program by submitting their applications at least one month in advance of the beginning of the next quarter, which is when OPA updates the list of covered entities on its Web site.  Facilities are enrolled in the program and eligible for 340B discounts as soon as their name and other requested information are posted on the OPA Web site and their listed start dates have passed.  Once admitted into the program, covered entities are entitled to receive 340B discounts on all covered outpatient drugs, regardless of the patient’s payer status and whether the drug is intended for self-administration or administration by a clinician.  The 340B discount is the average manufacturer price (AMP) reduced by a minimum rebate percentage of 15.1 percent for brand name prescription drugs and 11 percent for generic and over-the-counter drugs.  Manufacturers and wholesalers must offer additional discounts on brand name drugs if the manufacturer’s best price for a drug is lower than AMP minus 15.1 percent for that drug and/or the price of the drug has increased faster than the rate of inflation.  (This is also true for innovator, multi-source drugs, i.e., brand name drugs that now have generic competition.)  In addition, covered entities are free to negotiate discounts that are lower than the maximum allowable statutory price.

How do covered entities go about obtaining discounts?

Upon enrollment in the program, a covered entity should contact its wholesaler to set up its 340B account and to request a 340B price list.  The entity also may request a 340B pricing file from a manufacturer.  Manufacturers should check the OPA Web site each quarter to identify the providers that are participating in the program.  The manufacturer may not charge more than the 340B ceiling price to those entities regardless of whether the covered entity purchases pharmaceuticals through a wholesaler or directly from the manufacturer.  If a covered entity suspects that it is not receiving the 340B price for a given outpatient drug, it should immediately notify its wholesaler, the manufacturer and/or OPA.  In many cases, the absence of a 340B price is a result of human error and is resolved when the mistake is identified and, if necessary, brought to OPA’s attention.  HRSA has implemented a provision of Section 340B mandating the creation of a prime vendor program by entering into an agreement with HealthCare Purchasing Partners International (HPPI) to help with negotiating discounts below the mandatory 340B ceiling price.  A covered entity does not have to join the prime vendor program in order to participate in the 340B program and may negotiate subceiling discounts on its own.  Since the prime vendor can negotiate prices for a large volume of pharmaceuticals, it has been able to negotiate favorable prices and develop a national distribution system that may not be possible for some covered entities to obtain individually.  To learn more about the prime vendor program, go to http://www.340Bpvp.com or e-mail 340b_primevendor@340bpvp.com.

To whom may the covered entities dispense the discounted drugs?

Section 340B prohibits the resale or transfer of discounted outpatient drugs to anyone other than a patient of the covered entity.  HRSA has defined a covered entity “patient” for purposes of the program through Federal Register notices available on OPA’s Web site and through informal guidance.  The penalty for failing to comply with the program’s anti-diversion provision is forfeiture of the discounts back to the manufacturer or disqualification from the program.  If an individual intentionally diverts 340B drugs, he or she may be criminally liable under the Prescription Drug Marketing Act.  Manufacturers have the right to audit the records of covered entities to protect against diversion.

Are there billing restrictions?

The law says that a drug purchased under Section 340B shall not be subject to both a 340B discount and a Medicaid rebate.  HRSA has established a mechanism for covered entities to comply with this provision.  In general, participating covered entities may not bill Medicaid more than acquisition cost (plus a dispensing fee) for covered outpatient drugs purchased with 340B discounts.  This rule does not apply, however, if (a) the drug is dispensed to a Medicaid recipient enrolled in a capitated managed care plan and the drug is paid for by Medicaid as part of the capitation rate, (b) the provider and state Medicaid agency agree on a different reimbursement arrangement, (c) the entity elects to purchase its Medicaid outpatient drugs outside the 340B program (often referred to as the Medicaid “carve-out”) or (d) the drug is administered or dispensed by a physician and the state does not request rebates for such drugs.  There are no billing restrictions applicable to drugs dispensed to non-Medicaid patients.

What if a covered entity facility lacks an “in-house” pharmacy?

HRSA has developed guidelines to allow such facilities to contract with a local community pharmacy or other outside pharmacy to act as a dispensing agent.  Under these guidelines, the covered entity is required to purchase the pharmaceuticals, and the contractor provides all pharmacy services.  Covered entities with contract pharmacies should use a "ship to-bill to" procedure in which the covered entities purchase the drugs and manufacturers and wholesalers bill the covered entities but ship the drugs directly to the contract pharmacy.  A contractor must provide its affiliated covered entity quarterly financial statements, a detailed status report of collections, and a summary of receiving and dispensing records.  The contractor also must establish and maintain a tracking system to prevent diversion of drugs to individuals who are not patients of the covered entity.  Under HRSA’s guidelines, covered entities that have multiple sites are entitled to have either an in-house pharmacy or a contract pharmacy at each site, but not both.  HRSA has stated it plans to publish a Federal Register notice shortly seeking comments on a proposal to allow covered entities to contract with multiple pharmacy sites.  Currently, a covered entity may contract with only one pharmacy per site unless it obtains approval from HRSA for the use of multiple contract pharmacies through an alternative methods demonstration project.  OPA accepts applications for AMDPs at any time.

How much do Section 340B participants save in the program?

Pharmaceutical prices available under Section 340B are significantly lower than both retail and wholesale prices.  340B prices are, on average, 51 percent of average wholesale prices (AWP), according to a report released by the Congressional Budget Office (CBO).  Another survey found 340B prices to be 24 percent lower than prices available to group purchasing organizations.  Hospital participants have experienced an average of about $2 million in savings annually.

How do you receive the latest information on the Program?

OPA disseminates information through its Web site to those participating in the program.  This information includes the names of participating covered entities and manufacturers, Federal Register notices and current program guidelines, as well as other 340B program-related information.  To access the site, log on to http://www.hrsa.gov/opa.  Other helpful information is available at the Public Hospital Pharmacy Coalition’s Web site, located at http://www.phpcrx.org, as well as the 340B Prime Vendor Web site, located at http://www.340Bpvp.com and the PSSC Web site at http://pssc.aphanet.org. Each month, the Public Hospital Pharmacy Coalition and the law firm of Powers, Pyles, Sutter, and Verville publish and distribute a newsletter on the 340B program called the Federal Drug Discount and Compliance Monitor, which can be found online at http://www.drugdiscountmonitor.com.


For questions about the Public Hospital Pharmacy Coalition please contact Laurinda Dennis at laurinda.dennis@safetynetrx.org or 202-552-5854.