Understanding the Interplay Between State Medicaid Programs and 340B

Background on the 340B Program

The 340B program was established in 1992 by Section 340B of the federal Public Health Service Act (PHSA). The 340B program requires pharmaceutical manufacturers that participate in Medicaid—essentially all pharmaceutical manufacturers—to sell outpatient drugs at discounted prices to the healthcare providers and healthcare programs set forth in the statute, which are known as covered entities. Outpatient drugs covered by the program are FDA- approved prescription drugs, over-the-counter drugs written on a prescription, biological products that can be dispensed only by prescription (other than vaccines), and insulin approved by the Food and Drug Administration (FDA). The 340B program is overseen by the Office of Pharmacy Affairs (OPA), within the Health Resources and Services Administration (HRSA).

When the 340B statute was enacted in 1992, nine different types of covered entities were eligible to participate:

• Disproportionate share hospitals with a disproportionate share adjustment percentage of >11.75%
• Federally Qualified Health Centers (FQHCs) and FQHC look-alikes
• Family planning projects under Title IX of the PHSA
• Ryan White clinics
• State AIDS drug assistance programs
• Black lung clinics
• Hemophilia treatment centers
• Native Hawaiian health centers and urban Indian organizations
• Federally funded sexually transmitted disease (STD) and tuberculosis clinics

In 2010, the Patient Protection and Affordable Care Act added five more categories of covered entities:

• Critical access hospitals
• Freestanding cancer hospitals with a disproportionate share adjustment percentage of >11.75%
• Children’s hospitals with a disproportionate share adjustment percentage of >11.75%
• Sole community hospitals with a disproportionate share adjustment percentage of >11.75%
• Rural referral centers with a disproportionate share adjustment percentage of >11.75%

One of the key limiting elements of the 340B program is that only individuals who qualify as patients of a covered entity under the definition promulgated by the OPA are eligible for 340B drugs. Under that definition, which was established in 1996 through a Federal Register notice, an individual qualifies as a patient of a covered entity for 340B purposes if the following three requirements are met:

• The covered entity maintains records of the individual’s healthcare.
• The clinician providing services to the individual is an employee of the covered entity or provides healthcare under another arrangement, so that responsibility for the care remains with the covered entity.
• For covered entities other than hospitals, the healthcare services that the individual receives must be services for which federal grant funding (or, in the case of FQHC look-alikes, look-alike status) is provided.

An individual does not qualify as a patient of a covered entity if the only healthcare service the individual receives from the covered entity is the dispensing of drugs for subsequent self-administration or administration in the home setting.

Background on the Medicaid Drug Rebate Program

The Medicaid Drug Rebate Program was established under the Omnibus Budget Reconciliation Act of 1990. It is intended to ensure that state Medicaid programs receive a net price for a drug that is consistent with the lowest or best price for which the manufacturer sells the drug.

Under the Medicaid Drug Rebate Program, drug manufacturers that want states to be able to use federal funding for their products must enter into a Medicaid national drug rebate agreement. Under the agreement, manufacturers pay rebates to states for drugs that are paid for by the Medicaid program. In exchange for the manufacturer rebates, state Medicaid programs (with some exceptions) cover all of a participating manufacturer’s drugs when prescribed for a medically accepted indication. Some state Medicaid programs also negotiate supplemental rebate agreements with drug manufacturers to reduce Medicaid expenditures further.

How the Medicaid Rebate Program Works

Medicaid drug rebates are based on the Average Manufacturer Price (AMP) of a drug, which is the average price paid to the manufacturer for the drug in the United States by:

• Wholesalers for drugs that are distributed to retail community pharmacies, and
• Retail community pharmacies that purchase drugs directly from manufacturers.

To establish and collect Medicaid rebates, CMS calculates a unit rebate amount (URA) for each Medicaid-covered drug, based on the established formula for that type of drug. CMS then provides the URA to the state Medicaid program, which multiplies the URA by the number of units of that drug dispensed to Medicaid patients during the rebate period. The state then submits the request to the manufacturer and collects the rebate amount. The rebate formulas differ for generic vs. brand-name drugs.

The Interplay Between 340B and Medicaid

The 340B statute provides that a drug may not be subject to both a 340B discount and a Medicaid rebate. There are two options for avoiding duplicate discounts. Under one option, the covered entity does not use 340B drugs for Medicaid patients. Under the other option, the covered entity uses 340B drugs for Medicaid patients but the state excludes those drugs from its rebate requests to manufacturers. Under the second option, since the state Medicaid program is forgoing Medicaid drug rebates, the state reimburses the covered entity at the actual acquisition cost for the 340B drug, so that the state Medicaid program gets the benefit of 340B pricing.

The two most common ways for state Medicaid agencies to identify 340B drugs and exclude them from their rebate requests are the following:

• Provider-Level Method: The state determines which covered entities use 340B drugs for Medicaid patients and excludes all drug claims from those covered entities from its rebate requests to manufacturers. To this end, the OPA maintains a Medicaid Exclusion File which lists all covered entities that use 340B drugs for Medicaid fee-for-service beneficiaries.
• Claims-Level Method: 340B covered entities use specific modifiers on their Medicaid claims for drugs that are purchased under the 340B program, and the state excludes those drugs from its rebate requests.

Neither approach is perfect. There have been concerns about the accuracy of the Medicaid Exclusion File, and covered entities that use the claims-level method are not always diligent about including modifiers. Medicaid managed care adds to the complexity.

The Medicaid Exclusion File is only intended to list covered entities that use 340B drugs for Medicaid fee-for-service beneficiaries. It is not intended to list covered entities that use 340B drugs for their managed care patients. Manatt’s 50-state survey indicates some states are using the Medicaid Exclusion File on the managed care side by requiring covered entities that use 340B drugs for fee-for-service patients also to use them for managed care patients. That way, the state knows to carve all claims from the covered entity out of its rebate requests. The survey also indicates, however, that some states may be relying on the Medicaid Exclusion File without requiring covered entities to use 340B drugs for both fee-for-service and managed care patients, potentially creating a duplicate discount issue.

Another alternative, which some states are using, is to require 340B covered entities to notify the state directly if they are using 340B drugs for Medicaid patients, which may be more effective than the use of the Medicaid Exclusion File, assuming there is clear communication of the requirement.

Contract Pharmacies Add Complexity

Contract pharmacies add to the complexity of 340B. Covered entities can dispense 340B drugs to their outpatients through their in-house pharmacies, if they have one. They also can enter into arrangements with outside pharmacies—known as contract pharmacies—to dispense 340B drugs to covered entity patients. In general, under a contact pharmacy arrangement, the contract pharmacy dispenses drugs to the covered entity’s patients and collects payment for the drugs. The contract pharmacy keeps a dispensing/administrative fee and remits the remaining payment to the covered entity. The covered entity purchases 340B drugs that are shipped to the contract pharmacy to replenish the drugs that the pharmacy dispensed to the covered entity’s patients.

In many contract pharmacy arrangements, the contract pharmacy doesn’t know at the time of the dispensing whether a drug is being dispensed to a 340B-eligible patient. Instead, there is a back-end process for reconciling claims data from the contract pharmacy with patient data from the covered entity to determine which prescriptions are 340B eligible. Then there needs to be a mechanism for making the state aware of which claims were 340B drugs, so that the state Medicaid program can carve 340B drugs out of its rebate requests. Accordingly, contract pharmacies add significant challenges from a duplicate discount perspective.

Note: Watch for part two of our summary in the February “Health Update,” sharing information on the 340B program’s growing scope, insights into two of 340B’s long-standing vulnerabilities, key findings from our 50-state 340B survey and a look forward at what’s next. Click here to view our recent webinar on the interplay between the 340B and Medicaid programs free on demand (and earn CLE). Click here to download a free copy of the presentation and a new infographic highlighting key survey findings.