What is the 340B program for a pharmacy?

A 340B program arrangement allows an eligible health care organization to purchase certain outpatient drugs at statutorily limited prices and dispense them to eligible patients, often through the organization’s own pharmacy or a contract pharmacy. The pharmacy generally acts as the dispensing and operational partner; it is not independently entitled to 340B pricing merely because it is a pharmacy.

What the 340B program is

Section 340B of the Public Health Service Act requires participating pharmaceutical manufacturers to offer covered outpatient drugs to eligible health care organizations, called covered entities, at or below a statutory “ceiling price.”[2]

“The Secretary shall enter into an agreement with each manufacturer of covered outpatient drugs” under which the amount paid for covered outpatient drugs purchased by a covered entity does not exceed the applicable ceiling price.[5]

The program is intended to enable safety-net providers to stretch limited federal resources and serve more eligible patients. Covered entities include, among others:

• Federally qualified health centers;
• Ryan White HIV/AIDS clinics;
• Certain public and nonprofit hospitals;
• Children’s hospitals;
• Critical access hospitals;
• Rural referral centers;
• Sole community hospitals; and
• Other statutorily specified providers.[5]

A pharmacy usually participates because it has a contractual relationship with one of those covered entities.

How a pharmacy participates

A pharmacy may participate in one of two principal ways:

For a contract-pharmacy arrangement, the covered entity and pharmacy must execute a written contract identifying the relevant pharmacy and covered-entity locations. The pharmacy must also be registered and listed as active in HRSA’s 340B Office of Pharmacy Affairs Information System before dispensing 340B drugs for the covered entity. [1]

HRSA describes the basic structure this way:

“A 340B covered entity may sign a written contract with one or more pharmacies to provide pharmacy services and 340B drugs to authorized patients.” [1]

The covered entity remains responsible for ensuring that the arrangement complies with the 340B statute and program requirements. [1]

How the economics generally work

In a typical contract-pharmacy model:

1. The covered entity establishes its eligibility and enrolls in the 340B program.
2. The covered entity purchases or causes the purchase of the drug at the 340B price.
3. The pharmacy dispenses the drug to an authorized patient.
4. The pharmacy submits the claim to the patient’s insurer, if applicable.
5. The covered entity and pharmacy reconcile the transaction and allocate the resulting reimbursement and administrative fees under their contract.

The 340B price is generally calculated using the manufacturer’s average manufacturer price from the preceding quarter, reduced by the applicable Medicaid rebate amount.[3] The pharmacy’s reimbursement from a commercial insurer, Medicare, or another payer may therefore exceed the acquisition cost of the drug. The resulting margin is commonly used by the covered entity to support its patient-care programs, although the statute does not require a particular use of the difference.

The exact financial arrangement varies. A contract may provide for:

• A dispensing fee;
• A percentage of the 340B savings;
• A flat administrative fee;
• Reimbursement of inventory, technology, or compliance expenses; or
• A combination of these methods.

The contract should clearly address who owns the inventory, who bears payment risk, how reversals and returns are handled, and how patient eligibility is determined.

The pharmacy is not the covered entity

This distinction is important. The eligible hospital, clinic, or other provider is the covered entity. The pharmacy is generally only the covered entity’s dispensing agent or service provider.

Consequently:

• The pharmacy ordinarily cannot participate in 340B on its own;
• The pharmacy cannot use the covered entity’s 340B pricing for unrelated patients or customers;
• The pharmacy must dispense only pursuant to the covered entity’s authorized arrangement;
• The pharmacy must maintain records supporting the transactions; and
• The covered entity remains responsible for oversight of the pharmacy.

The governing regulation defines a covered entity as an organization that falls within the statutory categories, satisfies the applicable requirements, and is registered in the 340B database.[3]

Patient requirements and prohibited uses

A 340B drug must be dispensed to a patient of the covered entity. The statute prohibits resale or transfer of a covered outpatient drug to a person who is not a patient of the entity:

“A covered entity shall not resell or otherwise transfer the drug to a person who is not a patient of the entity.”[5]

The pharmacy therefore needs a reliable process to confirm that:

• The patient received services from the covered entity;
• The prescription is attributable to that covered entity;
• The dispensing occurred within the scope of the contract; and
• The transaction satisfies the covered entity’s patient-definition policy.

A pharmacy generally should not assume that every prescription written by a covered-entity provider qualifies. The arrangement must be evaluated under the covered entity’s policies and applicable 340B requirements.

Duplicate discounts and Medicaid

A central compliance issue is the prohibition against duplicate discounts. A manufacturer should not provide both:

1. A 340B discount to the covered entity; and
2. A Medicaid rebate to the state for the same drug.

The statute provides:

“A covered entity shall not request payment under title XIX … with respect to a drug that is subject to an agreement under this section if the drug is subject to the payment of a rebate to the State.”[5]

For that reason, contract pharmacies generally must carve out Medicaid, meaning they do not dispense 340B drugs for Medicaid claims, unless the covered entity and state Medicaid agency have an approved arrangement that prevents duplicate rebates. HRSA states that contract pharmacies must carve out Medicaid unless the covered entity has an arrangement with the state Medicaid agency to prevent duplicate discounts. [1]

A pharmacy’s contract and billing procedures should therefore specify:

• Whether Medicaid claims are carved out;
• Which Medicaid identifier or billing arrangement applies;
• Who is responsible for payer determination;
• How Medicaid managed-care claims are treated;
• How reversals and rebills are handled; and
• How duplicate-discount errors are identified and corrected.

Inventory models

A pharmacy may use different operational models, including:

• Physical inventory model: 340B and non-340B drugs are physically separated or otherwise separately tracked.
• Virtual inventory model: The pharmacy maintains a common physical inventory but uses transaction-level records to replenish or allocate 340B inventory.
• Hybrid model: Different drugs, payers, or locations are handled under different inventory procedures.

Regardless of the model, the pharmacy needs auditable records linking:

• The covered entity;
• The patient;
• The prescription;
• The drug and National Drug Code;
• The payer;
• The purchase or replenishment transaction;
• The dispensing date;
• The claim status; and
• Any reversal, return, credit, or correction.

Pharmacy compliance responsibilities

A contract pharmacy should expect to assist the covered entity with the following:

• Maintaining accurate transaction records;
• Applying the covered entity’s patient-eligibility rules;
• Preventing diversion to nonpatients;
• Preventing duplicate discounts;
• Separating or accurately tracking 340B and non-340B transactions;
• Supporting manufacturer, covered-entity, and HRSA audits;
• Cooperating with reconciliation and corrective-action procedures; and
• Reporting material discrepancies promptly.

HRSA specifically states that covered entities must provide oversight of contract pharmacies, conduct an independent audit at least annually, maintain auditable records, and report noncompliance with plans to address it. [1]

The covered entity must also permit audits of records that directly pertain to compliance with the duplicate-discount and diversion prohibitions.[5]

A significant legal limitation concerning delivery restrictions

The sources found for this question include a precedential Third Circuit decision holding that Section 340B does not require manufacturers to deliver discounted drugs to an unlimited number of contract pharmacies.[4]

The court reasoned that the statute does not expressly address contract-pharmacy delivery arrangements and concluded that the manufacturers’ restrictions in that case did not violate Section 340B. [4] That decision is binding in the Third Circuit, not in Utah or the Tenth Circuit. HRSA’s current materials nevertheless continue to describe contract-pharmacy arrangements as permissible when properly documented, registered, and operated in compliance with program requirements. [1]

Accordingly, a Utah pharmacy should distinguish between:

• Whether it may participate in a covered entity’s contract-pharmacy arrangement;
• Whether the pharmacy is properly registered in HRSA’s system;
• Whether a particular manufacturer will honor the covered entity’s purchasing and distribution structure; and
• Whether the arrangement complies with current HRSA requirements and applicable litigation or agency developments.

Practical example

Assume a federally qualified health center contracts with an independent Utah pharmacy:

1. The health center is the covered entity.
2. The pharmacy is registered as the health center’s contract pharmacy.
3. An eligible patient receives services from the health center.
4. The health center’s prescription is filled at the contract pharmacy.
5. The transaction is identified as 340B-eligible.
6. The pharmacy dispenses the drug and submits the appropriate claim.
7. The parties reconcile the claim, dispensing fee, reimbursement, and 340B acquisition cost.
8. The transaction is excluded from Medicaid billing or handled under an approved carve-in arrangement.
9. The records remain available for audit.

If the patient was not a patient of the health center, or if the same transaction generated both a 340B discount and an impermissible Medicaid rebate, the transaction could create a diversion or duplicate-discount violation.

Bottom line for a pharmacy

For a pharmacy, a 340B arrangement is best understood as a regulated dispensing and purchasing relationship with an eligible health care provider. The principal benefits are access to discounted drug acquisition and a contract-based dispensing opportunity. The principal risks are:

• Dispensing to an ineligible patient;
• Using 340B inventory for nonqualifying prescriptions;
• Duplicate Medicaid discounts;
• Inadequate transaction records;
• Failure to follow the written contract;
• Incorrect HRSA registration; and
• Insufficient audit and reconciliation procedures.

The pharmacy’s written agreement should allocate responsibility expressly for eligibility determinations, inventory, billing, Medicaid carve-out rules, audits, data retention, indemnification, refunds, manufacturer disputes, and termination.