The Federal 340B Program Facts, Figures, Opportunities, and Pitfalls Presented By: Shrujal Patel M.S. RPh. MBA.

The Federal 340B Program

Facts, Figures, Opportunities, and Pitfalls

Presented By: Shrujal Patel M.S. RPh. MBA

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SECTION 1Introduction to 340B and Relevant Trends

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340B Timeline

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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)

5

Relative Pricing (Brand Name)

AWP

AMP

GPO

Med

icai

d Reb

ate

Canad

ian

FSS34

0B

Big F

our

VA ave

rage

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% 100%

79%

66% 64%

58%53% 51% 49%

“Best Price” 63%

42%

Adapted from a slide by Safety Net Hospitals for Pharmaceutical AccessSource: Data derived from Prices for Brand-Name Drugs Under Selected Federal Programs, Congressional Budget Office (June 2005)

Private Sector Pricing

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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

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Entity TypesHospital Types Federal Grantees

• Disproportionate Share Hospital

• Children’s Hospital

• Critical Access Hospital

• Free-Standing Cancer Hospital

• Rural Referral Center

• Sole Community Hospital

• Federally Qualified Health Center

• Federally Qualified Health Center Look-Alikes

• Title X Family Planning Grantees

• State Aids Drugs Assistance Programs

• Ryan White Care Act Grantees (A,B,C,D,F)

• Black Lung Clinics

• Hemophilia Treatment Centers

• Native Hawaiian Health Centers

• Urban Indian Organizations

• Sexually Transmitted Disease Grantees

• Tuberculosis Grantees

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Hospitals; What’s the Difference?

Covered Entity TypeNon Profit or Government

ContractDSH % GPO

ExclusionOrphan

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

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SECTION 2340B Compliance

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Compliance

Covered Entity is Responsible for Ensuring:

1. Entity Eligibility

2. Patient Eligibility – see “patient definition”

3. Against duplicate discountsa) Medicaid “carve-in” vs. “carve-out”

4. Adherence to (if applicable):a) GPO Prohibitionb) Orphan Drug Exclusion

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Patient DefinitionAn 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.

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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

13

340B Virtual Inventory Process

Pharmacist uses “available package list” to reorder drugs on the 340B account

Pharmacist uses “available package list” to reorder drugs on the 340B account

Patient received a drug as part of an outpatient service at covered entity

Patient received a drug as part of an outpatient service at covered entity

Patient billing system is queried for outpatient drug charges

Patient billing system is queried for outpatient drug charges

CDM to NDC Crosswalk is used to convert CDM quantities to packages

CDM to NDC Crosswalk is used to convert CDM quantities to packages

Wholesaler ships drugs to covered entityWholesaler ships drugs to covered entity

340B drugs are placed into inventory and can be used on any patient

340B drugs are placed into inventory and can be used on any patient

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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

15

340B Covered Drugs

Covered Drugs Not CoveredOutpatient drugs Inpatient drugsOTC’s with a prescription Vaccines

BiologicsDrugs that are bundled with a procedure (not charged/reimbursed as a line item)

InsulinClinic administered drugs

As defined by SSA 1927(k) – definition of “Covered Outpatient Drugs”

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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

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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

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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.

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SECTION 3340B Multiple Contract Pharmacy

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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.

Patient Traffic

Contract Rx Fees

Revenue

Cost of Goods Sold

Patient Rx Data

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How Does it Work?

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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

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Contract Rx Growth

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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

25

Third-Party Administrators

• What are they?– Typically a software or management company

• 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?

Software Company Examples Mgmnt. Company Examples

Macro Helix SunRx

Sentry Wellpartner

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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

Due Diligence - Examples

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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

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“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

PBM PHARMACY PBM PHARMACY 340B ENTITY

RETAIL PHARMACY 340B CONTRACT PHARMACY

Revenue = Reimbursement Rate + Dispense Fee

Profit =

Revenue –

(COGS + OPS Cost)

Revenue = Reimbursement Rate + Dispense Fee

Profit =

340B Dispense Fee

-Ops Cost

Profit =

Revenue-

(COGS + 340B Dispense fee)

340B Dispense Fee

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Analyses – Pro-Forma

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 (32,500.00)$ (130,000.00)$ (132,600.00)$ (135,252.00)$ (137,957.04)$ (140,716.18)$ (143,530.50)$ (690,055.73)$

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)$

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" 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$

% of CE True Net 32% 32% 32% 32% 32% 32% 32% 32%

COVERED ENTITY NAME HERE

"CHAIN PHARMACY" 340B CONTRACT PHARMACY INITIATIVE: Pro forma (Current State)

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Analyses – Assumption Tables

Quarterly AnnuallyTotal # of Rx in Data Set 32976 131904Total # of Eligible 340B Prescriptions 31526 126104

Rx Volume

Administration Fee 15.00$

Coordination of Benefit Fee ($) -$

Coordination of Benefit Fee (%) 15%

Fees

Gross Receipts 5%

Cost of goods sold 5%

Labor 2%Technology 0%Internal Audit 0%

Growth Rates

Additional FTE (Annually) 130,000.00$ Technology Costs -$ Additional Internal Audit Costs -$

Additional Expenses

Auto-populates from raw data

Auto-populates from pro forma

Used for “fee-modeling”

RevenueCOGS (est. by adding back 65% COGS)Net

RevenueEstimated MarginNet BATNA AVG:

Estimated "Chain Pharmacy" BATNA

21%5,578,729.36$ 4,007,987.22$

Method 126,565,377.92$

(24,128,132.85)$ 2,437,245.07$

Method 226,565,377.92$

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Analyses – Distribution & Margin

Primary Analytics

Distribution # of Rx % of Rx Avg. Revenue Total Revenue Avg. COGS Total COGS Avg. Margin Before Fees$0.01-50.00 7639 24.23% 34.08$ 260,324.81$ 6.01$ 45,917.69$ 82.36%$50.01-100.00 6278 19.91% 73.62$ 462,203.27$ 17.72$ 111,268.33$ 75.93%$100.01-500.00 15258 48.40% 194.62$ 2,969,510.50$ 59.45$ 907,098.38$ 69.45%$500.01-1000.00 1434 4.55% 661.97$ 949,267.29$ 208.49$ 298,971.61$ 68.51%$1000.01-28000.00 917 2.91% 2,181.07$ 2,000,038.61$ 815.65$ 747,955.62$ 62.60%

Revenue

0 5000 10000 15000 20000

$0.01-50.00$50.01-100.00

$100.01-500.00$500.01-1000.00

$1000.01-28000.00

76396278

152581434

917

# of Rx

Reve

nue

($)

Frequency Distribution (Revenue)

# of Rx

Distribution # of Rx % of Rx Avg. COGS Total COGS Avg. Revenue Total Revenue Avg. Margin Before Fees$0.01-50.00 22015 69.83% 15.96$ 351,319.35$ 102.89$ 2,265,114.78$ 84.49%$50.01-100.00 5308 16.84% 69.41$ 368,416.63$ 199.31$ 1,057,946.45$ 65.18%$100.01-500.00 3558 11.29% 189.54$ 674,393.19$ 509.04$ 1,811,168.09$ 62.76%$500.01-1000.00 366 1.16% 708.96$ 259,478.08$ 1,483.12$ 542,822.34$ 52.20%$1000.01-28000.00 279 0.88% 1,640.16$ 457,604.38$ 3,456.25$ 964,292.82$ 52.55%

COGS

0 5000 10000 15000 20000 25000

$0.01-50.00$50.01-100.00

$100.01-500.00$500.01-1000.00

$1000.01-28000.00

220155308

3558366279

# of Rx

COG

S ($

)

Frequency Distribution (COGS)

# of Rx

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Analyses – Cash Flow

OUTFLOWS

INFLOWS

$(4,000,000.00)

$(2,000,000.00)

$-

$2,000,000.00

$4,000,000.00

$6,000,000.00

$8,000,000.00

$10,000,000.00

Cumulitive Cash Flow

$8M

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SECTION 4Hot Topics

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Hot Topics

• GPO Prohibition• Definition of “Covered Outpatient Drug”• Critical Access Hospitals and the Orphan Drug

Exclusion• Specialty Pharmacy

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Contact Information:

Shrujal V. Patel | Managing Consultant | Healthcare | Navigant Consulting, Inc.30 S Wacker Drive | Suite 3100 | Chicago, IL 60606Cell: 516.220.8859|Fax: 312.583.5701|Email: [email protected] & INVESTIGATIONS • ECONOMICS • FINANCIAL ADVISORY • MANAGEMENT CONSULTING