340B Program Basics

340B Program Basics

What is the 340B program?

Congress created the 340B program in 1992 to help certain healthcare “safety net providers” that serve a large number of uninsured or vulnerable patients reduce outpatient prescription drug costs. The 340B program requires prescription drug manufacturers to provide discounts to specified federally-funded clinics and certain hospitals, otherwise known as “covered entities,” as a condition of participation in the Medicaid program.


Who is eligible to receive discounts under the 340B program?

Under the law, a healthcare entity is eligible for the 340B program either by:


·                    receiving one of 10 types of federal grants; or

·                    being one of six types of non-profit hospitals that meet specified program standards.


Federal grantees typically include clinics that offer primary and preventive care to uninsured or vulnerable patients. Requirements for eligibility that apply to hospitals are intended to target those hospitals that offer a higher proportion of care to uninsured or vulnerable patients.  However, there is little federal guidance or oversight to hold participating hospitals accountable to that standard.  Studies have shown that many hospitals in the 340B program provide relatively little charity care (even compared with for-profit hospitals).[1]


What criteria are used to determine if a hospital is eligible to be a covered entity in the 340B program?

A hospital can become a covered entity under current law if:


·                     it has a Medicare disproportionate share hospital (DSH) adjustment percentage above a certain level, which varies depending on the hospital type. The DSH adjustment percentage is a measure relating to the number of Medicaid and low-income Medicare patients treated in a hospital’s inpatient unit.  It does not measure the amount of care provided to uninsured or vulnerable patients. .


·                     it meets one of the following criteria:  (1) it is publicly owned or operated by a unit of state or local government; (2) it is a private nonprofit hospital formally granted governmental powers by a state or local government; or (3) it is a private nonprofit hospital with a contract with a state or local government to provide healthcare services to low-income individuals who are not Medicare or Medicaid eligible. GAO has noted that there has not been sufficient oversight with respect to the third criterion, and that “hospitals with contracts that provide a small amount of car to low-income individuals not eligible for Medicaid or Medicare could claim 340B discounts, which may not be what the agency intended.”[2]


Who is a patient of a 340b entity?

Though there is no statutory definition for a “340B patient,” individuals to whom 340B drugs are dispensed must currently be “patients” of a 340B eligible participating covered entity.  However, lack of clarity regarding the definition of a 340B eligible “patient” has raised concerns by numerous stakeholders.  In an effort to address these concerns, HRSA proposed a revised definition for “patient” in draft guidance released in August 2015.[3]  If the guidance is finalized, six requirements would need to be met in order for someone to be considered a “patient” of a covered entity, and those requirements would need to be met on a prescription-to-prescription basis.[4]


Other than eligibility standards, what requirements or laws govern the 340B program?

Several important laws apply, including:

·                     Under the 340B law, covered entities are prohibited from re-selling or otherwise transferring discounted drugs purchased under 340B to anyone but qualifying patients, a practice known as “diversion.”  Notwithstanding this statutory prohibition, questions have been raised about how the program has been used for insured individuals and individuals who don’t have a genuine treatment relationship with the 340B provider.  In its recent draft guidance, HRSA proposes to address this concern by requiring that services beyond the dispensing or infusing of drugs to an individual by a covered entity must be provided in order for an individual to be considered a qualifying “patient.”[5]

·                     Under the 340B law, “duplicate discounts” are prohibited. Specifically, manufacturers cannot be invoiced by states for Medicaid rebates for drugs that have been purchased at a 340B discount.  Still, both the General Accountability Office (GAO) and the HHS Office of Inspector General (OIG) have found that there are not adequate safeguards to prevent duplicate discounting.[6]

·                     The 340B law provides that covered entities must permit HRSA and manufacturers to audit records directly relevant to the above two provisions. However, manufacturers’ ability to conduct audits for diversion –guaranteed under the 340B law itself – has been severely hampered by HRSA guidance which creates significant barriers to conducting such audits. Moreover, when HRSA began to audit hospitals in 2012 – for the first time since the program began in 1992 – it found that more than half of the entities audited showed adverse findings, including violations of the duplicate discount provision, diversion of medications to non-eligible recipients, and non-compliant recordkeeping.[7]


What requirements exist for how revenue generated from the 340B entity can be used?

Most 340B hospitals face no limitations on the way they can use 340B program revenue. Grantee covered entities, by contrast, may be required to use 340B revenue in accordance with their federal grant requirements.  Covered entities purchase 340B drugs at deep discounts, but they (as well as the contract pharmacies with whom they have business relationships) generally can bill patients (or patients’ insurers) without reference to any discount the covered entity has received (unless inconsistent with grant requirements for the subset of covered entities eligible based on their grantee status).


Where are 340B drugs dispensed?

·                     Covered entities typically purchase and dispense 340B drugs through pharmacies, and can structure their programs in different ways.  Covered entities may have an in-house pharmacy, i.e., the pharmacy is located within the covered entity.  Based on sub-regulatory guidance published by HRSA — as opposed to provisions of the law passed by Congress — covered entities also may establish a contract pharmacy model, in which the covered entity contracts with one or more outside pharmacies to dispense drugs on their behalf, under a “bill-to, ship-to” arrangement. Or, a covered entity may employ both options.  Previously, only covered entities that did not have an in-house pharmacy were allowed to contract with an outside pharmacy to provide services, and such covered entities were limited to contracting with a single pharmacy (as opposed to an unlimited number of pharmacies).

·                     In March 2010, HRSA issued sub-regulatory guidance permitting all covered entities to contract with multiple outside pharmacies.[8]   This change led to a dramatic growth in the number of contract pharmacy arrangements – a 1,245 percent increase from 2010 to mid-2013.[9]). This growth was noted as a potential diversion concern in a recent GAO report, which stated that, “[i]ncreased use of the 340B program by contract pharmacies and hospitals may result in a greater risk of drug diversion, further heightening concerns about HRSA’s reliance on participants’ self-policing to oversee the program. Operating the 340B program in contract pharmacies creates more opportunities for drug diversion compared to in-house pharmacies.”[10]


How big is the 340B program?

Currently, about 45% of all Medicare acute care hospitals participate in the 340B program.[11] Beyond the growth in the number of hospitals that qualify for 340B, there has also been a dramatic increase in the number of 340B “child sites.” The total number of participating sites including all child sites has more than quadrupled from 7,859 to 34,480 from 2011 to 2016, though some of this growth is attributable to changes in guidelines for registering child sites. These sites include the hospitals themselves as well as outpatient clinics purchased by 340B hospitals.  These outpatient clinics may be located far from the hospital itself and research as shown that these clinics are often in wealthier areas than the 340B hospitals.[12]  Covered entities’ spending on 340B drug purchases are estimated to be about $7 billion annually.[13]


Is the 340B program likely to get smaller with the expansion in insurance coverage under the Affordable Care Act (ACA)?

While one might expect that as more Americans obtain health insurance, the 340B program, which was designed to aid uninsured and indigent patients in obtaining access to prescription drugs at a lower cost, would contract in size.  However, HRSA expects 340B enrollment to continue to grow.  Paradoxically, as more individuals become eligible for Medicaid through the expansion in the ACA, more hospitals will become eligible for 340B due to their DSH percentage increasing as more patients enroll in Medicaid.


What changes did HRSA propose in the draft omnibus guidance?

The draft guidance addresses a number of key issues, one of which relates to the lack of clarity surrounding the definition of a 340B-eligible patient.  However, the draft guidance does not make changes to certain other key components of the program, including hospital eligibility, contract pharmacies, or the eligibility of outpatient clinics purchased by hospitals.


Regarding the patient definition, the proposed guidance revises eligibility guidelines and proposes that eligibility be determined on a prescription-by-prescription basis, more clearly defining the link between the individual receiving services and the 340B covered entity providing those services. The newly proposed conditions mean that:


·                    simply providing a referral from a covered entity to an outside provider is insufficient to qualify the drugs prescribed by the outside provider for a 340B discount;

·                    the dispensing or infusion of outpatient drugs to an individual at a covered entity must be accompanied by an auditable accounting of the health services provided that resulted in the dispensing of the drug;

·                    employees of a covered entity are not considered to be 340B patients unless they otherwise meet the patient definition; and

·                    a provider merely having privileges or credentials at a covered entity would not be enough to demonstrate that a patient treated by that provider is a patient of the covered entity.


The draft guidance also takes important initial steps to develop better metrics for oversight and accountability; however, it does not adequately address a number of issues that are critical to ensuring the long-term sustainability of the 340B program. Among the matters not addressed by the guidance are the dramatic growth of contract pharmacy arrangements between 340B entities and for-profit pharmacies, the absence of needed safeguards to address the increased acquisition of community-based outpatient treatment facilities by 340B hospitals, whether the current hospital eligibility criteria are appropriately targeting the program to true safety net hospitals, and the short time period within which 340B eligible entities that have violated 340B program rules would be allowed back into the program.

[1]General Accountability Office, Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals, July 2015;Alliance for Integrity and Reform of 340B (AIR 340B) (2014). Unfulfilled Expectations: An analysis of charity care provided at 340B hospitals. Available at:  http://bit.ly/1EliMnz;

[2]ManufacturerDiscounts inthe 340 Program Offer Benefits, but FederalOversightNeeds Improvement,GAO-11-836 (Sept.2011).

[3]80 Fed. Reg. 53200 (Aug. 28, 2015).

[4]80 Fed. Reg. 53306.

[5]Id. at 52307.

[6]ManufacturerDiscounts inthe 340 Program Offer Benefits, but FederalOversightNeeds Improvement,GAO-11-836 (Sept.2011); HHS Office of the Inspector General, Memorandum Report; Contract Pharmacy Arrangements in the 340B Program, OEI-05-00431 Feb. 2014 (hereafter the OIG Report).

[7]Health Resources and Services Administration Audits of 340B Covered Entities: http://www.hrsa.gov/opa/programintegrity/auditresults/fy12results.html

[8]NoticeRegarding 340BDrug Pricing Program– Contract Pharmacy Services, 75Fed. Reg.10272 (March 5,2010).

[9]The OIG Report at 2.

[10]ManufacturerDiscounts inthe 340 Program Offer Benefits, but FederalOversightNeeds Improvement,GAO-11-836 (Sept.2011) (emphasis added).

[11]Medicare Payment Advisory Commission, Report to the Congress: Overview of the 340B Drug Pricing Program (May 2015).

[12]RM Conti and PB Bach, The 340B Drug Discount Program: Hospitals Generate Profits By Expanding To Reach More Affluent Communities, Health Affairs, October 2014 vol. 33 no. 10.

[13]Medicare Payment Advisory Commission, Report to the Congress: Overview of the 340B Drug Pricing Program (May 2015).