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Federal Drug Discount Program Proves Tricky for Hospitals to Navigate

Cheryl A. Thompson

On the surface, the idea seems noble: Let organizations providing care for outpatients who cannot afford their medications buy these products at greatly discounted prices, courtesy of the federal government. But the rules instituted for this drug discount program, called "340B" in reference to the section of federal law on which it is based, are so difficult for pharmacists and their administrators to fathom that many eligible hospitals decline to participate rather than risk violating the government's rules and facing the punishment.

The devil is in the details. The addition of Section 340B to the Public Health Service (PHS) Act in 1992 gave the Department of Health and Human Services (HHS) a bargaining chip for increasing outpatients' access to pharmaceuticals: Section 340B requires drug companies to offer certain health care organizations discounts on prices for drugs used by outpatients in order for the companies' products to be covered by Medicaid. Specifically, a company must price its drug product at or below the "average manufacturer price...reduced by the [Medicaid] rebate percentage." The discount can be large, particularly for a hospital that lacks the bargaining power to secure deep discounts on its own. But one criterion for access to this discount program is that a hospital cannot use a group purchasing organization to buy drugs for outpatients. The other criteria for participating hospitals are that they have recently received a "disproportionate-share adjustment percentage" for Medicare reimbursements of at least 11.75% and that they carry out a state or local government's health care programs.

Other "safety-net" health care organizations specified by the PHS Act, including community health centers and hemophilia treatment centers, can participate in the 340B program without meeting the criteria for hospitals. Organizations that do not own pharmacies may contract for pharmacy services but must follow strict rules, such as using only one site to dispense medications.

Keeping the drug discount program true to its intent is the responsibility of the Health Resources and Services Administration (HRSA), part of HHS. HRSA and the pharmaceutical companies worry about duplicate discounts between the 340B program and the Medicaid rebate program; drug diversion to hospital inpatients, people not considered patients of the health care organization, and people receiving care in a part of the facility not listed on the Medicare cost report; and ineligible people and health care organizations. One reason the rules can seem unworkable is that the program defines "patient" more narrowly than many pharmacies might (see box), partly to ensure that organizations receiving the discount do not use it for people who have prescription benefits.

When is a person a patient?

Under the rules of the 340B program, a person is a patient of a disproportionate-share hospital if

  • The hospital maintains records of the person's health care; and   
  • The person receives health care services from a hospital employee, a health care professional under contract with the hospital, or a health care professional to whom the person has been referred for consultation and the hospital continues to be responsible for the person's health care.

A person is not a patient of a disproportionate-share hospital if drug dispensing is the only service obtained from the hospital.

To prevent duplicate discounts, HRSA requires that participating hospitals report their Medicaid provider numbers to the Office of Pharmacy Affairs (OPA), which manages the 340B program. State Medicaid agencies use these provider numbers to exclude claims submitted by hospitals in the 340B program from the rebate-request files that the agencies send to pharmaceutical companies. (Hospitals that choose not to buy their drugs for Medicaid outpatients through the 340B program should not report their Medicaid provider numbers to OPA.)

Contrary to popular belief, "we do not require you have physically separated inventories" of drugs purchased through the 340B program and outpatient drugs purchased otherwise, OPA's Robert "Butch" Staley told attendees at the 2000 annual conference of the 340B Coalition, which represents health care organizations participating in the drug discount program.

A pharmaceutical company that suspects a health care organization of misusing the 340B-related discount can ask OPA for permission to audit the organization's records. But according to HRSA, OPA has not received a request from a pharmaceutical company for an audit, nor have a company and a health care organization had a dispute that reached the level of needing resolution by OPA.

University of Kentucky researcher Barbara Brandt said pharmacists attending focus groups on the 340B program in 1999 seemed unnerved by anything written in legal language. Speaking at the 340B Coalition conference in July 2000, Brandt said people could not differentiate a federal regulation, which carries the force of law, from a guideline, from a recommendation.

Focus group participants told Brandt that the program's definition of patient did not match the realities of a complex hospital environment, in which health care may be delivered at sites not listed on the hospital's Medicare cost report. Participants also said that the definition of patient made their chief financial officers nervous about the consequences of a government investigation, which could lead to civil or criminal penalties for the disproportionate-share hospital.

Mistrust abounds. Not only are pharmaceutical companies wary of giving discounts to undeserving people and organizations, hospitals participating in the 340B program—and thus not using a group purchasing organization for outpatient drugs—fear not receiving as great a discount as the law requires.

At the 340B Coalition's conference, the Public Hospital Pharmacy Coalition (PHPC) shared preliminary results of its survey of member pharmacies during one calendar quarter for certain 340B-covered drug products. PHPC, a member of the 340B Coalition, asked 7 of the 110 hospital pharmacies in the 340B program to report the prices paid for these facilities' top 50 outpatient drugs. Once four quarters worth of pricing data have been collected, PHPC will send the list to OPA and ask whether the pharmaceutical companies charged more than the law permits.

Section 340B mandated the selection of a primary vendor for the program. Six years later, in 1999, PHS selected Bergen Brunswig Corporation. Since signing the agreement, the company has worked on securing discounts beyond the ones required by Section 340B.

Although the law does not require that hospitals use Bergen Brunswig as their primary wholesaler for outpatient drugs, OPA's Staley said, "We're really pushing the use of the prime vendor."

In October, OPA started posting on its Web site a list of the top 200-some drugs purchased under the 340B prime vendor program. OPA Director Jimmy R. Mitchell, a pharmacist, said the selling prices posted on the Web site should mimic the ceiling prices negotiated confidentially with the pharmaceutical companies. The Web posting will indicate for which products Bergen Brunswig has negotiated additional discounts, Mitchell said. To buy at these special prices, health care organizations must contact the prime vendor. Mitchell said he expects his office to offer further guidance on dealing with the prime vendor program.

Tips for discount buyers. Securing access to lower prices does not mean the pharmacy's job is finished. The well-informed 340B buyer, regardless of the type of health care organization, must scout for bargains as if shopping for the family.

When Leon Wilde became pharmacy director in 1994 at La Clinica de la Raza, the Oakland, California, facility bought drugs for its 20,000 clients at the wholesale acquisition cost. Extension of the 340B program to federally qualified health centers like La Clinica opened the door for Wilde to buy in a more advantageous manner.

In the 340B program, "Some drugs are deeply discounted," Wilde said. For example, a four-week supply of Norinyl 1/35, an oral contraceptive by Searle (now Pharmacia), could be bought for a penny, he said. So Wilde bought two years worth of oral contraceptives for La Clinica "for virtually nothing." The urinary anti-infective Macrodantin, by Procter & Gamble, cost the clinic about 1 cent per capsule through the program, he said.

In Wilde's fifth and final year at La Clinica, 60-tablet bottles of Mevacor 10 mg, from Merck, could be bought for about $14 apiece, or 23 cents a tablet, through the 340B program. He bought 150,000 tablets, or 2,500 bottles.

Christopher A. Hatwig, associate pharmacy director at Parkland Health and Hospital System in Dallas, takes a more aggressive approach than Wilde did. Not only does Hatwig save his disproportionate-share hospital, with its $58 million drug budget, money through the 340B program, he works to optimize the savings.

Parkland developed its own database in which the pharmacy records the pricing information listed in contracts and on invoices from the pharmaceutical companies, Hatwig said. Whenever the pharmacy discovers a discrepancy between the invoice amount for a drug product and the price that the department expects to see—whether through the 340B program or separate negotiation—the pharmacy questions the pharmaceutical company.

Hatwig said he does not trust his wholesaler and the pharmaceutical companies to provide the correct data. "We recovered over a million dollars in overcharges this last year," he said.

Parkland uses its negotiating power as a university teaching hospital, where medical residents can grow accustomed to prescribing certain drug products, to obtain prices lower than the 340B program can provide. "We negotiate below PHS pricing because we move market share within therapeutic classes,"  Hatwig said, generating $4 million to $5 million in additional savings a year. He said he hesitates to sign up Parkland for the prime vendor program because the hospital does such a good job of obtaining discounts on its own.

Similar to the strategy Wilde used at La Clinica, Parkland purchases drugs in bulk but follows a cyclical pattern. The 340B program's price for Aventis's Allegra, for example, plummets in the second quarter, said Hatwig, so Parkland saves a lot of money by buying a year's worth during that quarter and storing most of the shipment in a warehouse until needed.

Technically, Parkland's surgery patients who do not stay the night are outpatients, Hatwig said. Every month the pharmacy checks the hospital's records to see which surgical outpatients qualified for drugs bought at 340B program prices. Through detailed paperwork, not separate inventories, Parkland matches its uninsured outpatients with drugs purchased at prices provided by the 340B program.

Requests for program changes. PHPC's Ted Slafsky said the 340B program "has made the difference between keeping outpatient pharmacies open and not," but more help is needed. The government must define "patient" in a way that does not require hospitals to maintain an elaborate information system to substantiate the relationship, he said, and permit hospitals to use a group purchasing organization to buy certain outpatient drugs, such as intravenous immunoglobulin, not covered by the 340B program. William von Oehsen, a PHPC founder and attorney, said that a hospital using an integrated information system (with a common medical record) and having an integrated medical staff has  sufficient proof that it meets the program's definition of patient.

Congress tried unsuccessfully this past session to enable rural hospitals that do not have at least two obstetricians who treat Medicaid patients to be designated as disproportionate-share hospitals, with the potential to join the 340B program. Representative Jack Kingston (R-GA) and 40 cosponsors introduced "Medicaid Relief for Rural Hospitals," but the bill did not progress further than a subcommittee.