Under Section 602 of the Veterans Health Care Act of 1992 (VHCA), Congress created a federal drug discount program established under Section 340B of the Public Health Service Act (PHSA). Section 340B requires pharmaceutical manufacturers that participate in the Medicaid and Medicare Part B programs to enter into a contract with the Secretary of Health and Human Services (HHS) requiring them, among other things, to give specified discounts on covered outpatient drugs purchased by certain “covered entities.”1 The definition of covered entities includes certain disproportionate share hospitals; children’s hospitals; rural hospitals, including critical access hospitals (CAHs), rural referral centers (RRCs) and sole community hospitals (SCHs); and free-standing cancer hospitals. Covered entities also include eleven other categories of providers, including federally qualified health centers (FQHCs), FQHC look-alikes, AIDS and tuberculosis clinics, and other outpatient clinics funded under the PHSA. The 340B program is administered by the Office of Pharmacy Affairs within the Health Resources and Services Administration (HRSA).
For hospitals to qualify for the 340B program, they must meet three requirements.2 The first requirement, known as the government ownership or government control requirement, mandates that the qualifying hospital —
“[be] owned or operated by a unit of state or local government, [be] a public or private non-profit corporation which has been formally granted governmental powers by a unit of state or local government, or [be] a private non-profit hospital with a contract with a state or local government to provide health care services to low-income individuals who are not entitled to benefits under [Medicare or Medicaid].”3
The second criterion requires that the hospital have a sufficient Medicare disproportionate share hospital (DSH) adjustment percentage. DSH hospitals must have an adjustment percentage greater than 11.75 percent for the most recent cost reporting period ending before the calendar quarter involved.4 SCHs and RRCs must have an adjustment percentage of greater than 8 percent. Although free-standing children’s hospitals and free-standing cancer hospitals do not receive DSH adjustment payments, they must have a payer mix that would give them a DSH percentage of greater than 11.75 percent. CAHs do not have a DSH adjustment percentage requirement. The magnitude of a hospital’s DSH adjustment depends on the number of inpatient days of its Medicaid and Supplemental Security Income (SSI) patients.
Third, DSH hospitals, children’s hospitals and free-standing cancer hospitals that meet the first two criteria are eligible to participate in the 340B program if they sign a written certification stating that they will not obtain covered outpatient drugs through a group purchasing organization (GPO) or other group purchasing arrangement in compliance with the third criterion. Hospitals that participate in 340B as CAHs, RRCs, and SCHs are not subject to the GPO prohibition. If a hospital meets the above tests and elects to participate in the 340B program, any pharmacy located at the hospital’s main address and reimbursable on the hospital’s Medicare cost report may purchase and dispense the discounted drugs for outpatient use. The hospital may use 340B-discounted drugs by dispensing them through an outpatient pharmacy or by administering them directly to patients during a clinic visit in the emergency room as part of a same-day surgery or chemotherapy, or in any other outpatient setting. With respect to a hospital pharmacy located at a different geographic address, 340B eligibility may extend to those offsite pharmacies if they are located in facilities that meet a regulatory test adopted by HRSA. It is HRSA’s policy that an offsite facility is eligible to participate in the 340B program if its costs are reimbursable on the hospital’s most recently filed Medicare cost report.5 Off-site hospital facilities that do not meet this Medicare cost report test are not eligible to participate unless they qualify in their own right under one of the other covered entity definitions (e.g. as an FQHC or FQHC look-alike, AIDS clinic, etc.).
After determining which hospital outpatient facilities and pharmacies may participate in the 340B program, the final issue is to identify the kinds of patients to whom these pharmacies may dispense the 340B-priced drugs. In this regard, all covered entities are subject to an important restriction. Namely, under the anti-diversion provision of 340B, discounted outpatient drugs purchased through the 340B program may not be resold or otherwise transferred to a person who is not “a patient of the entity.”6 Covered entities that divert discounted outpatient drugs to individuals who are not their own patients may be required to pay back their discounts or lose their status as a covered entity. HRSA has issued guidelines clarifying which individuals should be considered a patient of a covered entity and which should not. Under the guidelines, the hospital must maintain records of healthcare services furnished to the patient in question and the healthcare professional providing the services must be employed by, under contract with, or in a referral relationship to the hospital.7 If these two conditions are met, the individual may be considered a patient of the covered entity and eligible to receive discounted outpatient drugs. HRSA has provided further guidance in correspondence to 340B Health, so we recommend contacting 340B Health if your hospital has questions regarding specific applications of the 340B patient definition. You may also find 340B Health’s principles on how to comply with the prohibition on diversion here.
If you have any questions about membership in 340B Health, please contact Shane Kelley at 202-552-5864 or firstname.lastname@example.org. If you have legal questions, please contact Amanda Nagrotsky, Legal Counsel at (202) 552-5866 or email@example.com.
(3) PHSA §340(B)(a)(4)(L)(i); 42 U.S.C. §256b(4)(L)(i). With respect to private non-profit hospitals under contract with state or local government, HRSA requires that the indigent care services provided by the hospital be either unreimbursed or reimbursed at substantially reduced rates, and that the amount of indigent care provided be significant.
(4) Also qualifying under this criterion are hospitals qualifying for Medicare disproportionate share payments by virtue of their large uninsured population. These hospitals are often referred to as “Pickle” hospitals in recognition of Congressman J.J. Pickle who sponsored the amendment to include this group of hospitals. Under the so-called “Pickle” amendment, large urban hospitals can qualify for DSH payment adjustments by demonstrating that they receive state and local funding that exceeds a statutory threshold. Specifically, the Medicare statute provides for a disproportionate share adjustment for any hospital that is located in an urban area, has 100 or more beds, and can demonstrate that its net inpatient care revenues (excluding any of such revenues attributable to Medicare or Medicaid) for indigent care from state and local government resources exceed 30 percent of its total of such net inpatient care revenues during the cost reporting period in which the discharges (to which the DSH payment applies) occurred. There has been litigation relating to whether both the numerator and the denominator should exclude Medicare and Medicaid revenues, or whether only the numerator should exclude those revenues.