Important News for Critical Access Hospitals and Other Providers: Health Care Reform Legislation Expands Access to Section 340B Drug Pricing Program

20 April 2010 Publication
Authors: Kevin J. Egan C. Frederick Geilfuss II

Legal News Alert: Health Care

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA), which was subsequently amended by the Health Care and Education Reconciliation Act of 2010 (signed by President Obama on March 30, 2010). Among other important changes, the PPACA expands access to the Section 340B Drug Pricing Program (340B Program) to certain critical access hospitals, freestanding cancer hospitals, rural referral centers, sole community hospitals, and children’s hospitals. The changes permit newly eligible entities to access significant discounts on drugs purchased through the 340B Program.

This Legal News Alert provides a brief description of the 340B Program, including an overview of eligible entities and the enrollment process. Given the cost savings available to 340B Program participants, newly eligible entities are strongly encouraged to explore participation in the 340B Program.

What Is the Section 340B Drug Pricing Program?
The 340B Program is a federally mandated drug pricing program that requires pharmaceutical manufacturers participating in the Medicaid program to provide front-end discounts on covered outpatient drugs purchased by certain “covered entities.” The 340B Program resulted from the enactment of two federal laws:

  • Section 340B of the Public Health Service Act (42 U.S.C. § 256b) (PHSA), which was created under Section 602 of Public Law 102-585, the Veterans Health Care Act of 1992, and contains many of the requirements applicable to covered entities
  • Section 1927(a) of the Social Security Act (SSA), which primarily contains the requirements applicable to manufacturers

Through the 340B Program, covered entities enjoy substantial discounts on covered outpatient drugs. The 340B price is at least as low as the price that state Medicaid agencies pay. In addition, while the 340B Program sets a ceiling or cap on the price manufacturers can charge, covered entities may be able to negotiate additional discounts. Surveys of 340B Program participants indicate high satisfaction with the 340B Program, and participants frequently report paying 30 percent less than the covered entity otherwise would have paid for covered pharmaceuticals. Other studies have reported that the 340B Program price for pharmaceuticals may be 25 percent to 50 percent less than the average wholesale price (AWP).

The 340B Program is administered by the Office of Pharmacy Affairs (OPA), which is part of the HHS Health Resources and Services Administration (HRSA) and is supported by its government contractor, the Pharmacy Services Support Center (PSSC).

What Types of Entities Are Eligible to Participate?
Only those entities that qualify as covered entities under the PHSA or SSA are eligible to participate in the 340B Program. Prior to the PPACA, eligible covered entities included (among others):

  • Federally qualified health centers (FQHCs), including FQHC-lookalikes
  • Ryan White/HIV clinics
  • Black lung clinics
  • Title X family planning clinics
  • State-operated AIDS drug assistance programs
  • Disproportionate share hospitals
  • Certain children’s hospitals

The PPACA expands the PHSA definition of eligible covered entities to include certain:

  • Critical access hospitals
  • Freestanding cancer hospitals
  • Rural referral centers
  • Sole community hospitals
  • Children’s hospitals (Certain children’s hospitals became eligible to participate in the 340B Program following enactment of Section 6004 of the Deficit Reduction Act of 2005, which amended the SSA but did not amend the PHSA. The PPACA takes the additional step of amending the PHSA definition of covered entities to include certain children’s hospitals. The language regarding children’s hospitals in the SSA differs from the newly added provision in the PHSA. It is somewhat unclear whether both provisions will apply. At the time of publication of this alert, the PSSC stated that it is currently unable to provide clarification.)

How Do Eligible Entities Enroll in the 340B Program?
An eligible covered entity must notify the OPA of its intent to participate in the 340B Program. The process and type of information that must be submitted differs based upon the type of entity seeking to participate. In order to allow sufficient time for verification and processing of registration information, covered entities must submit required information at least one month before the quarter during which the covered entity wishes to commence participation (prior to the first of December, March, June, or September).

Once the OPA receives, verifies, and processes the registration information, the covered entity is eligible to purchase pharmaceuticals at the 340B price commencing at the start of the next calendar quarter (the first of January, April, July, or August). Each covered entity then determines how it will order and receive the discounted drugs. A covered entity may do so by contacting drug manufacturers directly, working with a wholesaler, or participating in the Prime Vendor Program (PVP) described below.

Eligible covered entities may refer to the PSSC Web site at for detailed registration information. Guidance for enrollment by children’s hospitals is available at For other newly eligible entities, at the time of publication of this alert, the PSSC had not yet identified the recommended registration form. Although the changes to the PHSA became effective January 1, 2010 and apply to drugs purchased on or after January 1, 2010, the PSSC is currently unable to provide guidance regarding the enrollment process for newly eligible entities other than children’s hospitals.

What Is the Prime Vendor Program (PVP)?
The PHSA contained a special requirement mandating the development of the PVP. The PVP is a voluntary supplementary program for entities covered by Section 340B and is intended to benefit 340B Program participants by:

  • Negotiating sub-340B pricing on pharmaceuticals
  • Establishing distribution solutions and networks that improve access to affordable medications
  • Providing other value-added products and services 

In addition, the PVP provides “the only legal means for eligible hospitals to conduct group purchasing and leverage their outpatient drug purchases to secure sub-340B discounts” (see The PVP is currently managed by Apexus under contract with the HRSA. Covered entities that seek to participate in the PVP must first be actively registered in the 340B Program (see above). Once eligible to purchase drugs through the 340B Program, the covered entity must submit a separate participation agreement to Apexus. There are no costs associated with enrollment in the PVP; the PVP is funded through fees charged to pharmaceutical distributors and suppliers.

Are There Other Issues That Newly Eligible Entities Need to Consider?
Entities that participate in the 340B Program must familiarize themselves with applicable requirements and prohibitions. This section provides a brief overview of some important aspects of the 340B Program, but should not be considered a comprehensive description of applicable requirements.

  • Limitation on Use for Covered Entity Outpatients; Prohibition on Resale: Covered entities are prohibited from selling (or otherwise transferring) prescription or over-the-counter drugs purchased through the 340B Program to any person who is not a covered entity patient receiving outpatient health services (except in certain circumstances). HRSA has published specific criteria for determining whether an individual is considered a ‘‘patient’’ of a covered entity. For example, the covered entity must have an established responsibility for the outpatient health care services it provides to the individual, such that the covered entity maintains records of the individual’s health care. Manufacturers and the OPA have the right to audit the records of the covered entities to protect against diversion.
  • Prohibition on Duplicate Discounts or Rebates: State Medicaid programs typically receive rebates on drugs purchased for patients. The rebates are dollar amounts paid by the manufacturers to Medicaid after the sale of the drug, thereby resulting in a lower drug price for the Medicaid agency. Under the 340B Program, a drug purchased through the 340B Program may not be subject to both a 340B discount and a Medicaid rebate. Thus, the statute provides that a covered entity is prohibited from requesting payment from Medicaid for a drug purchased with a 340B discount, if the drug also is subject to a Medicaid rebate. However, guidance from PSSC provides that the covered entity may bill Medicaid for 340B outpatient drugs used for Medicaid patients, but may only bill the 340B drugs at the acquisition price plus a dispensing fee established by the state Medicaid agency. Some entities elect to purchase drugs for Medicaid patients outside the 340B Program. The PPACA requires the secretary of HHS to develop more detailed guidance describing the methods and options available to covered entities for billing state Medicaid agencies.
  • Contracting With Outside Pharmacies: A covered entity does not need to have an outpatient pharmacy to participate in the 340B Program and may contract with external retail pharmacies to dispense 340B drugs for the covered entity’s outpatients. In the past, covered entities were limited to one pharmacy per site and covered entities could either operate an in-house pharmacy or contract with only one external pharmacy. Covered entities seeking to use other types of pharmacy arrangements, or to implement both of the allowable methods of providing pharmacy services, were required to apply to OPA for an Alternative Method Demonstration Project (AMDP). However, on March 5, 2010, the OPA published a Federal Register Notice (75 FR 10272) to finalize guidelines permitting a covered entity to use more than one pharmacy. The new guidelines now incorporate multiple pharmacies as a standard option for 340B-covered entities and will be effective April 5, 2010.
  • Record and Audit Requirements: Covered entities (and any contract pharmacy) must maintain accurate records documenting compliance with 340B Program requirements. Records maintained by the covered entity and any contract pharmacy pertaining to compliance with the 340B Program requirements are subject to audit by a participating manufacturer and/or the OPA.
  • Group Purchasing Organization Exclusion: Certain hospitals participating in the 340B Program are not permitted to purchase outpatient drugs through the 340B Program and a group purchasing organization or other group processing arrangement (unless the group purchase is made through an arrangement with the PVP).
  • Penalties for Non-Compliance: In order to prevent diversion and violations of the duplicate discount requirement, the PPACA directs HHS to improve covered entity compliance with 340B Program requirements. Formerly, the penalty for failing to comply with 340B Program requirements was forfeiture of the discounts back to the manufacturer and/or possible disqualification from the 340B Program. To promote and improve compliance, the PPACA directs the secretary of HHS to implement new sanctions against covered entities that fail to comply with 340B Program requirements, including the repayment of discounts and applicable interest, disqualification and prohibited re-entry into the 340B Program, and possible referral to the HHS Office of the Inspector General or other federal agencies for further review. 

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Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following members of our Critical Access Hospital and Rural Provider Team:

Kevin J. Egan
Chicago, Illinois

C. Frederick Geilfuss II
Milwaukee, Wisconsin

Maureen F. Kwiecinski
Milwaukee, Wisconsin

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