The Federal 340B Program
Facts, Figures, Opportunities, and Pitfalls
Presented By: Shrujal Patel M.S. RPh. MBA
Introduction to 340B and Relevant Trends
SECTION 1
2
340B Timeline
3
Intent of 340B
• What 340B Is…..
– Program designed to provide savings on outpatient
drugs to entities that serve a proportion of vulnerable
patient populations
– Savings are realized by increasing the margin between
reimbursement from commercial payers and actual
acquisition cost
• What 340B Isn’t…..
– A program that provides low cost drugs directly to
indigent patients (although in some instances, this
does occur)
4
Relative Pricing (Brand Name)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
100%
Private Sector Pricing
79%
66%
“Best Price” 63%
64%
58%
53%
51%
Adapted from a slide by Safety Net Hospitals for Pharmaceutical Access
Source: Data derived from Prices for Brand-Name Drugs Under Selected Federal Programs, Congressional Budget Office (June 2005)
49%
42%
5
340B Statistics
• 17,162 OPA Registered Entity Sites
• 12,225 Participants in the 340B Prime Vendor
(73%)
• Over 11,000 OPA Registered Contract Pharmacies
• $6 Billion/year in 340B drug purchases
* 2012 Statistics
6
Entity Types
Hospital Types
Federal Grantees
• Disproportionate Share Hospital
• Federally Qualified Health Center
• Children’s Hospital
• Federally Qualified Health Center Look-Alikes
• Critical Access Hospital
• Title X Family Planning Grantees
• Free-Standing Cancer Hospital
• State Aids Drugs Assistance Programs
• Rural Referral Center
• Ryan White Care Act Grantees (A,B,C,D,F)
• Sole Community Hospital
• Black Lung Clinics
• Hemophilia Treatment Centers
• Native Hawaiian Health Centers
• Urban Indian Organizations
• Sexually Transmitted Disease Grantees
• Tuberculosis Grantees
7
Hospitals; What’s the Difference?
Non Profit or
Government
Contract
DSH %
GPO
Exclusion
Orphan
Drug
Exclusion
DSH Hospital
Yes
>11.75%
Yes
No
Children's Hospitals
Yes
>11.75%
Yes
No
Free-Standing Cancer
Hospital
Yes
>11.75%
Yes
Yes
Rural Referral Center
Yes
≥8%
No
Yes
Sole Community Hospital
Yes
≥8%
No
Yes
Critical Access Hospitals
Yes
N/A
No
Yes
Covered Entity Type
8
340B Compliance
SECTION 2
9
Compliance
Covered Entity is Responsible for Ensuring:
1. Entity Eligibility
2. Patient Eligibility – see “patient definition”
3. Against duplicate discounts
a) Medicaid “carve-in” vs. “carve-out”
4. Adherence to (if applicable):
a) GPO Prohibition
b) Orphan Drug Exclusion
10
Patient Definition
An individual is a patient of a 340B covered entity only if:
• the covered entity has established a relationship with the individual, such that the
covered entity maintains records of the individual's health care; and
• the individual receives health care services from a health care professional who is
either employed by the covered entity or provides health care under contractual
or other arrangements (e.g. referral for consultation) such that responsibility for
the care provided remains with the covered entity; and
• the individual receives a health care service or range of services from the covered
entity which is consistent with the service or range of services for which grant
funding or Federally-qualified health center look-alike status has been provided to
the entity. Disproportionate share hospitals are exempt from this requirement.
An individual will not be considered a patient of the covered entity if the only health
care service received by the individual from the covered entity is the dispensing of a
drug or drugs for subsequent self-administration or administration in the home
setting.
Exception: Individuals registered in a State-operated or funded AIDS Drug Assistance
Program (ADAP) that receives Federal Ryan White funding ARE considered patients of
the participant ADAP if so registered as eligible by the State program.
11
340B Qualified Drug Utilization
• Drug must be administered to a qualified patient (per patient
definition on previous slide)
• 340B is for outpatient use only
• Drugs must be administered in a hospital point of service that
would qualify as a “reimbursable cost center” on a Medicare cost
report
• 100% hospital owned (i.e. joint ventures are not eligible)
• Non-profit (i.e. for profit subsidiaries are not eligible)
• Same tax ID number as the hospital
• Outpatient facilities (Physician clinics, surgery centers, etc.)
• Ownership of inventory
• Proximate relationship
• Employed Physicians
12
340B Virtual Inventory Process
Patient received a drug as part
of an outpatient service at
covered entity
340B drugs are placed into
inventory and can be used
on any patient
Patient billing system is
queried for outpatient drug
charges
Wholesaler ships drugs to
covered entity
CDM to NDC Crosswalk is used
to convert CDM quantities to
packages
Pharmacist uses “available
package list” to reorder drugs
on the 340B account
13
Prohibitions
GPO
• Relevant for DSH,
Children’s, and Cancer
Hospitals
• Requires that outpatient
meds for 340B eligible
outpatients be purchased at
340B, inpatients at GPO,
and 340B ineligible
outpatients at a non-GPO
price; typically WAC
ORPHAN DRUG
• Relevant for Cancer, RRC,
SCH, and CAH
• (PREVIOUSLY) For these
entities, any drug that has a
Orphan Drug indication
(primary, secondary, or
otherwise); the 340B price
cannot be leveraged
• As of 7/24/13 – Only if the
drug is used for the orphan
indication
14
340B Covered Drugs
As defined by SSA 1927(k) – definition of “Covered Outpatient Drugs”
Covered Drugs
Not Covered
Outpatient drugs
Inpatient drugs
OTC’s with a prescription
Vaccines
Drugs that are bundled with a
procedure (not charged/reimbursed
as a line item)
Biologics
Insulin
Clinic administered drugs
15
Tracking and Reporting
All participating hospitals MUST maintain an audit trail for ALL 340B
purchases. Data required for the audit trail includes:
•
•
•
•
340B purchase history
GPO purchase history
Patient billing records including patient classification (IP/OP)
List of eligible points of service and DSH Adjustment factor
calculation
• Specifications used to define outpatient utilization query
• CDM to NDC Crosswalk
• Policies and Procedures
16
Tracking Requirements
• Hospital must be able to prove that the drugs purchased on the
340B account were administered to an outpatient in an eligible
point of service
• Patient level detail
• Identify qualified patients
• Patient Type, Status, and/or Point of Service
• The 340B program must be implemented in all qualified outpatient
points of service
• Both “Mixed” & “Clean” areas
• Two options:
• Separate 340B Inventory
• Retrospective Purchasing
17
Audits
• All 340B enrolled entities agreed to be subject to audits
at the time that they joined the program. Audits can be
requested by the Office of Pharmacy Affairs AND by
pharmaceutical manufacturers.
• 340B has been added to the OIG work plan and the OIG
has issued several memos discussing the need for
additional regulation of the 340B program.
• As a result of ballooning 340B enrollment,
pharmaceutical manufacturers have seen revenue
erosion on many drugs.
18
340B Multiple Contract Pharmacy
SECTION 3
19
What is Contract Pharmacy?
• Any relationship between a pharmacy services provider and another
entity whereby the pharmacy provider is conducting said pharmacy
business on behalf of the other entity in exchange for an agreed upon
contracted rate. Revenues, patient data, and cost of goods belong to
the contracting entity and fees belong to the pharmacy.
Contract Rx Fees
Patient Traffic
Revenue
Cost of Goods Sold
Patient Rx Data
20
How Does it Work?
21
Benefits of 340B Contract Pharmacy
• For the Covered Entity
– Expands the reach of the 340B program, thus
directing more “savings” to the entity to support
care
• For the Pharmacy
– Potential up-tick in profitability (if dispense fee is
calculated correctly
– Profit without drug carrying costs – better cash
flow
22
Contract Rx Growth
23
Contract Pharmacy Relationships
Type
Positives
Negatives
Chain
• High volume
• Large revenues
• High fees
• Arduous terms
Independent
• Better MTM
• Lower fees
• Smaller volumes
• Lower revenues
Mail order
• Potentially high volume
• Not limited
geographically
• Lack of compliance
control
• No visibility of operations
Joint venture/Subsidiary*
• Financial Transparency
• Operational control
• Potentially low volume
• Potentially low revenue
Third Party Administrator
• Limited necessity for
internal controls
• High fees
• Lack of program control
* Not above the line or on the covered entity cost report
24
Third-Party Administrators
• What are they?
– Typically a software or management company
Software Company Examples
Mgmnt. Company Examples
Macro Helix
SunRx
Sentry
Wellpartner
• What do they do?
– Use data and/or analytics to determine eligible claims
– Reconcile finances between pharmacy and CE
– Provide audit reporting
• Risks and Benefits?
25
Due Diligence - Examples
Example Issue
Risk
Dispense Fee
• Dispense fees that are too low can result
in losses to pharmacy; too high can raise
kick-back concerns for the covered entity
Payment Cycle
• Potential for negative cash flow
Slow-movers
• Carrying cost burden to the pharmacy
without the benefit of revenue
Indemnification
• Liability may arise as a result of
negligence on the part of either party
Reconciliation
• Adequate data not provided on a regular
basis
26
Financial Due Diligence
• Pro forma
– Parallel pro-formas are suggested to determine current and future
state earnings
• Margin analysis
– Estimate counterparty margin based on available data (e.g. 10K for
publically traded chain pharmacy)
– Model entity margins using frequency bands (see next section)
• Cash flow analysis
– Use payment terms from supplier and vendor agreement to model
cash flow
• Fee structure optimization
– Functional aspect of financial model; utility for bi-lateral due diligence
– Situation where 340B entity owns both operations or is contracting with a
“friendly” vendor
27
“Dispense Fees”
• Contract Pharmacy Dispense Fee:
– What does the dispense fee represent?
• Represents a “hurdle rate”
• Does not represent operating costs (dispense fees from third party payers
represent operating costs; this is not the same thing
RETAIL PHARMACY
PBM
PHARMACY
Revenue = Reimbursement
Rate + Dispense Fee
340B CONTRACT PHARMACY
PBM
PHARMACY
340B ENTITY
Revenue = Reimbursement Rate + Dispense Fee
340B Dispense Fee
Profit
Profit
=
Revenue
–
=
340B Dispense Fee
(COGS + OPS Cost)
Ops Cost
-
Profit
=
Revenue
(COGS + 340B
Dispense fee)
28
Analyses – Pro-Forma
COVERED ENTITY NAME HERE
"CHAIN PHARMACY" 340B CONTRACT PHARMACY INITIATIVE: Pro forma (Current State)
QUARTER 2011
ANNUALIZED
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
TOTAL
REVENUE
Gross Receipts (by "Chain
Pharmacy" on behalf of CE)
$ 6,641,344.48 $ 26,565,377.92 $ 27,893,646.82 $ 29,288,329.16 $ 30,752,745.62 $ 32,290,382.90 $ 33,904,902.04 $154,130,006.53
Fees
$ (1,469,091.67) $ (5,876,366.69) $ (6,170,185.02) $ (6,478,694.27) $ (6,802,628.99) $ (7,142,760.44) $ (7,499,898.46) $ (34,094,167.18)
Net Revenue
$ 5,172,252.81 $ 20,689,011.23 $ 21,723,461.79 $ 22,809,634.88 $ 23,950,116.63 $ 25,147,622.46 $ 26,405,003.58 $120,035,839.35
OPERATING EXPENSES
Cost of Goods Sold
$ (2,111,211.62) $ (8,444,846.50) $ (8,867,088.82) $ (9,310,443.26) $ (9,775,965.43) $ (10,264,763.70) $ (10,778,001.88) $ (48,996,263.09)
Labor
$
Technology
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Additional Internal Audit
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total Expenses
$ (2,143,711.62) $ (8,574,846.50) $ (8,999,688.82) $ (9,445,695.26) $ (9,913,922.47) $ (10,405,479.88) $ (10,921,532.39) $ (49,686,318.81)
(32,500.00) $
(130,000.00) $
(132,600.00) $
(135,252.00) $
(137,957.04) $
(140,716.18) $
(143,530.50) $
(690,055.73)
OPERATING PROFIT
$ 3,028,541.18 $ 12,114,164.74 $ 12,723,772.97 $ 13,363,939.62 $ 14,036,194.16 $ 14,742,142.58 $ 15,483,471.20 $ 70,349,520.54
Net Proceeds to "Chain Pharmacy"
% of CE True Net
$ 1,469,091.67 $ 5,876,366.69 $ 6,170,185.02 $ 6,478,694.27 $ 6,802,628.99 $
32%
32%
32%
32%
32%
7,142,760.44 $
32%
7,499,898.46 $ 34,094,167.18
32%
32%
29
Analyses – Assumption Tables
Rx Volume
Annually
32976
131904
31526
126104
Auto-populates from raw data
Used for “fee-modeling”
Quarterly
Total # of Rx in Data Set
Total # of Eligible 340B Prescriptions
Fees
Administration Fee
$
15.00
Coordination of Benefit Fee ($)
$
-
Coordination of Benefit Fee (%)
15%
Additional Expenses
Additional FTE (Annually)
Technology Costs
Additional Internal Audit Costs
$ 130,000.00
$
$
-
Growth Rates
Gross Receipts
5%
Cost of goods sold
5%
Labor
Technology
Internal Audit
2%
0%
0%
Estimated "Chain Pharmacy" BATNA
Method 1
Revenue
$
26,565,377.92
COGS (est. by adding back 65% COGS)
$
(24,128,132.85)
Net
$
2,437,245.07
Method 2
Revenue
$
26,565,377.92
Estimated Margin
21%
Net
$
5,578,729.36
BATNA AVG:
$
4,007,987.22
Auto-populates from pro forma
30
Analyses – Distribution & Margin
Primary Analytics
# of Rx
7639
6278
15258
1434
917
% of Rx
24.23%
19.91%
48.40%
4.55%
2.91%
Avg. Revenue
$
34.08
$
73.62
$
194.62
$
661.97
$ 2,181.07
Revenue
Total Revenue
$ 260,324.81
$ 462,203.27
$ 2,969,510.50
$ 949,267.29
$ 2,000,038.61
Avg. COGS
$
6.01
$
17.72
$
59.45
$
208.49
$
815.65
Total COGS
Avg. Margin Before Fees
$
45,917.69
82.36%
$ 111,268.33
75.93%
$ 907,098.38
69.45%
$ 298,971.61
68.51%
$ 747,955.62
62.60%
Frequency Distribution (Revenue)
Revenue ($)
Distribution
$0.01-50.00
$50.01-100.00
$100.01-500.00
$500.01-1000.00
$1000.01-28000.00
917
1434
$1000.01-28000.00
$500.01-1000.00
$100.01-500.00
$50.01-100.00
$0.01-50.00
15258
6278
7639
0
5000
10000
# of Rx
15000
20000
# of Rx
Distribution
$0.01-50.00
$50.01-100.00
$100.01-500.00
$500.01-1000.00
$1000.01-28000.00
# of Rx
22015
5308
3558
366
279
% of Rx
69.83%
16.84%
11.29%
1.16%
0.88%
Avg. COGS
$
15.96
$
69.41
$
189.54
$
708.96
$ 1,640.16
COGS
Total COGS
$ 351,319.35
$ 368,416.63
$ 674,393.19
$ 259,478.08
$ 457,604.38
Avg. Revenue
$
102.89
$
199.31
$
509.04
$ 1,483.12
$ 3,456.25
Total Revenue Avg. Margin Before Fees
$ 2,265,114.78
84.49%
$ 1,057,946.45
65.18%
$ 1,811,168.09
62.76%
$ 542,822.34
52.20%
$ 964,292.82
52.55%
COGS ($)
Frequency Distribution (COGS)
279
366
$1000.01-28000.00
$500.01-1000.00
$100.01-500.00
$50.01-100.00
$0.01-50.00
3558
5308
# of Rx
22015
0
5000 10000 15000 20000 25000
# of Rx
31
Analyses – Cash Flow
Cumulitive Cash Flow
$10,000,000.00
$8M
$8,000,000.00
$6,000,000.00
$4,000,000.00
$2,000,000.00
INFLOWS
$$(2,000,000.00)
$(4,000,000.00)
OUTFLOWS
32
Hot Topics
SECTION 4
33
Hot Topics
• GPO Prohibition
• Definition of “Covered Outpatient Drug”
• Critical Access Hospitals and the Orphan Drug
Exclusion
• Specialty Pharmacy
34
35
Contact Information:
Shrujal V. Patel | Managing Consultant | Healthcare | Navigant Consulting, Inc.
30 S Wacker Drive | Suite 3100 | Chicago, IL 60606
Cell: 516.220.8859|Fax: 312.583.5701|Email: Shrujal.Patel@navigant.com
www.navigant.com
DISPUTES & INVESTIGATIONS • ECONOMICS • FINANCIAL ADVISORY • MANAGEMENT CONSULTING
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