Las Vegas—If your hospital or pharmacy is involved in the federal 340B Drug Pricing Program, you’re probably spending a lot of time checking the Health Resources and Services Administration (HRSA) website.

Sometime within the next six to eight weeks, the HRSA is expected to issue the highly anticipated “Megarule” or “Megareg,” which the agency says will clarify such notoriously murky matters as the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria and eligibility of off-site facilities.

Who Are 340B Hospitals?
About half are urban; half are rural.
864 (41.6%) are critical access hospitals (CAHs).
Located in 1,476 or 46% of all U.S. counties

340B has long been a remarkably “unregulated” program. There have been guidelines, policy statements and frequently asked questions, but with the exception of last year’s Orphan Drug Exclusion Rule, none of the oversight of the program has risen to the level of a formal, Federal Register–published regulation.

But in the wake of the Affordable Care Act’s (ACA) expansion of the program to include a much larger pool of covered entities that can receive discounts on covered outpatient drugs, the 340B program has mushroomed. The number of participants has also been spurred by a guidance that permits covered entities to use an unlimited number of contracted pharmacies to provide 340B drugs.

“In the first year after the ACA was passed, there was a 161% increase in the number of contracted pharmacies under 340B,” said David Coury, PharmD, the vice president of business development at Acro Pharmaceutical Services (which has a 340B drug program), at the spring Armada Specialty Pharmacy Summit. “Within the past three years, there’s been an almost 300% increase. Now, nearly 14,000 pharmacies act as contract pharmacies for a 340B-covered entity, including more than 20% of total U.S. retail, mail and specialty pharmacies.”

As of February 2014, he noted, 2,048 hospitals and health systems are participating as covered entities under 340B—approximately one-third of all hospitals in the country. Their 340B spending accounts for 62% of all hospital outpatient drug spending in the United States.

That’s only likely to increase with the expansion of Medicaid as the ACA reaches full implementation. The Berkeley Research Group has estimated that by the end of this year, 342 additional hospitals will become eligible because of Medicaid expansion, representing an estimated $1.2 billion in additional 340B sales.

Scathing Reports

This growing pool of 340B discount dollars has proved to be an incentive for program abuses. In February, the U.S. Department of Health and Human Services (HHS) Office of Inspector General issued a report finding significant problems with many 340B contract pharmacy arrangements. The report studied 30 covered entities—15 community health centers and 15 disproportionate share hospitals (DSHs)—which had arrangements with 199 unique contract pharmacies. Among the HHS’s findings:

  • There is a great deal of inconsistency about the definition of “eligible patient” in the contract arrangements between covered entities and pharmacies.


  • Eight of the 30 entities reviewed—or about 30%—did not offer the discounted 340B price to uninsured patients through their contract pharmacies. Although that is not, technically, required by HRSA for 340B participation, it appears obviously contrary to the intent of the program, critics contend.


  • Most of the covered entities do not conduct all of the oversight activities recommended by HRSA.


  • Many contract pharmacies struggle to prevent double discounting on 340B drugs through manufacturer’s rebates.


    These findings echo other recent indictments of the program’s effectiveness and oversight. An analysis of 2011 data conducted by Avalere and released this Spring (​OX7lyO) found that one-fifth of 340B hospitals administer 80% of the total charity care provided by covered entities. For 45% of all 340B entities, charity care represented only 1% to 3.3% of their patient load.

    “A law like this was meant for charity,” said David Galardi, PharmD, the worldwide managing director of the consultancy Apogenics, in Dallas. “The intent was to improve indigent patient access to prescription drugs by helping covered entities purchase outpatient drugs at discounted prices, and to help entities stretch scarce federal resources as far as possible—enabling treatment with more comprehensive services. It wasn’t meant to fund hospital growth, but that’s how it’s being used.”

    Chris Hatwig, MS, RPh, the president of Apexus, Irving, Texas, which manages HRSA’s 340B Prime Vendor Program, argues that abuses of the program represent the exception rather than the rule. “Most entities with which we have worked are trying extremely hard to best serve their patients, many of whom are unable to pay for needed medications,” he said. “In my experience, as the former director of pharmacy at Parkland Health and Hospital System, a major safety net hospital serving north Texas, we provided medications to patients regardless of their ability to pay. When a hospital or clinic enrolls in the 340B program, it cannot be limited to using the program for only the uninsured—that is essentially an unworkable model. No organization is going to take on the cost burden of caring for this patient population and Medicaid patients at cost or less without some means of making up these losses or subsidized care with some insured patients to offset the losses.”

    It also has been argued that 340B is unintentionally driving up the cost of care, by incentivizing treatment in more costly hospital outpatient centers rather than infusion clinics or physicians’ offices. “Patients want to be treated in the most convenient location possible, and normally, without an economic incentive, physicians oblige them. But when you have these 340B incentives, patients miraculously move to settings that drive up enormous drug-related profit,” Dr. Galardi said.

    Unintended Consequences

    These “unintended consequences” of 340B have been a double-edged sword for community oncology, said Ted Okon, executive director of the Community Oncology Alliance, Washington, D.C. “It’s an extremely important program, because more than ever—particularly in oncology—having a safety net is critical for patients in need.”

    But he argued that 340B incentives have helped to contribute to at least some of the recent spate of acquisitions of community oncology practices by hospitals and health systems, a trend that many have argued is driving up pharmacy costs by shifting patients to more expensive sites of care.

    “The average oncologist, depending on the type of cancer they treat, uses anywhere from $2 million to $4 million in drugs per year,” he said. “If you take between 30% and 50% in discounts on that, you can see that it’s a very valuable revenue stream. No wonder there’s pressure on 340B hospitals to make these acquisitions.”

    But Mr. Hatwig said there are two sides to this coin. Declining government reimbursement “has resulted in patients being turned away by private oncologists. They tell patients to go to the local safety net hospital to get care, or the patients are required to do so as a last resource.” For uninsured or underinsured Americans, the private oncology practices may turn them away, “yet the safety net providers will still accept them,” he added. And without 340B, Mr. Hatwig said, safety net providers could not continue to do that.

    In a recent op-ed in Crain’s Chicago Business, Alan Channing, the president and CEO of Sinai Health System, Chicago, enumerated how 340B benefits his system. The program saves Sinai about $2 million a year, which in 2013, Mr. Channing wrote, helped the system to supply $930,000 in free and discounted medications to patients in need. The system also has used 340B savings to launch a specialty clinic for muscle spasm patients and to hire eight new disease management specialists who work with certain chronic disease patients on hospital-to-home transitions—a program that has lowered the group’s readmission rate by 45%.

    340B also has proven to be a lifeline for small rural hospitals, noted Raymond Christensen, MD, a family practitioner at Mercy Hospital in Moose Lake, Minn., and the president of the National Rural Health Association. “It’s part of a complex array of programs that helps keep access in rural areas.” He cited, as examples, hospitals such as Cass County Memorial in Atlantic, Iowa, which gives patients in need a full year of outpatient medication for free, and supplies no-cost medication vouchers for emergency physicians to give to qualified patients. His own hospital has not participated in 340B in the past, Dr. Christensen said, but he plans to recommend to an incoming administrator that they explore the possibility.

    Audit Expectations

    As of March, HRSA had audited 40 340B-covered entities, compared with 94 for all of 2013. Audits may speed up even more after the “Megarule” is issued—which Dr. Galardi also predicted will give drug manufacturers more audit authority. So far, the audit program—which began in 2012—has identified inappropriate use of a group purchasing organization (GPO) as the most common violation for hospitals. Three types of covered entities—DSHs, children’s hospitals and freestanding cancer hospitals—are forbidden by statute from using a GPO for 340B-covered outpatient drugs. In 2012, the audit found, 42% of hospitals subject to the prohibition used a GPO in violation of the rule.

    Mr. Hatwig said the audit program, which began in 2012, is already significantly improving compliance among 340B-covered entities. He pointed to a May 9 memo to such entities from Krista Pedley, who directs HRSA’s Office of Pharmacy Affairs, about the audits. “The ‘sentinel effect’ of these audits has been remarkable,” she wrote. “We have seen many more covered entities prioritizing compliance, seeking technical assistance and taking steps to rectify violations.”

    “More audits on the way” hardly seems like the kind of headline to inspire more participation in a program. But Dr. Galardi said that going forward, non-340B pharmacies will be at a significant disadvantage. “With the enormous cost pressures payors are under due to the ACA, one way they’re trying to cope is by reducing reimbursements. For some pharmacies, it may be time to try and become a contracted pharmacy in order to stay financially viable.”

    Drs. Coury and Christensen and Mr. Hatwig reported no relevant financial conflicts of interest. Dr. Galardi disclosed that he regularly consults with the pharmaceutical industry regarding 340B. His clients include manufacturers/sponsors, service organizations and specialty pharmacy/distribution companies.

    Audit Prep 101

    Everyone’s hoping that the “Megarule” will make some of the gray areas of 340B compliance a little less hazy. But its issuance also may come with a potential downside, at least for some hospitals: more audits. So if you’re a covered entity or a contracted pharmacy, it’s time to consider what you can do to prepare for your 340B program coming under review. Douglas Wong, PharmD, the vice president of pharmacy practice at AmerisourceBergen’s Pharmacy Healthcare Solutions, offered a few key insights:

    1. Break out the 340B dictionary. More specifically, have policies and procedures in place that clearly define “provider,” “patient” and “covered outpatient drug.” This can get complicated, Dr. Wong said. “It’s been stated that if a person is only coming to you for the purpose of getting a drug at a 340B discount, they don’t qualify as an eligible patient under the program. Consider, for example, a patient who comes to the hospital to get chemo, but a private physician is providing their follow-up. The definition of ‘patient’ says that the provider must be either contracted by, or employed by, the covered entity.”
    2. Know about referral relationships. “Let’s say you have a medical practice that’s part of the covered entity, but doesn’t have a particular provider on site—such as a podiatrist,” he said. “The primary care doctor sends the patient to a podiatrist for an ingrown toenail, and he gives the patient a prescription for antibiotics. That could be considered eligible, because it’s a referral from the entity to a nonemployed provider that is not available within the entity.”
    3. Check your OPA online data. Ensure that your information on the Office of Pharmacy Affairs (OPA) website is complete and accurate. “Auditors will compare the information you have listed with OPA with the information you have on site, such as the Medicare cost report and the chart of accounts listed in that cost report,” Dr. Wong said. “Locations outside the four walls of the covered entity have to be individually listed. Two hospitals, even if they’re under one Medicare provider number, have to identify a primary site. Any locations or departments outside of that primary site must be listed on the OPA website if you’re going to provide 340B drugs through those sites.”
    4. Audit yourself. “Not only should you be commissioning third-party audits of your own, you should be doing self-audits, not just of contracted pharmacies, but the entire program,” Dr. Wong said. “For example, contract pharmacies that are using software to identify eligibility should be audited to confirm that those patients are, in fact, eligible.”
    5. Be vigilant about double dipping. “In the eyes of the OPA, the entity has responsibility to make sure that state Medicaid requirements are met to ensure that duplicate discounts are prevented,” Dr. Wong said. “It’s up to the covered entity to reach out to the state—not the other way around—to determine if the state has specific requirements about modifiers on claims submitted that have already had a 340B discount. And no seeking rebates from the manufacturer on 340B drugs!”
    6. Take advantage of Apexus’ 340B resources. They include its Apexus 340B university educational program (the next session is in July in Washington, DC), and its national call center, Apexus Answers. Find out more at

    Going forward, there will be much more emphasis on accountability and integrity for 340B, Dr. Wong predicted. “If you’re running a finely tuned program, there should not be any issues with an audit. The organizations that have not done any self-auditing are the ones who will be in trouble.”