Post on 16-Dec-2015
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)
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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
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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
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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
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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: Shrujal.Patel@navigant.comwww.navigant.comDISPUTES & INVESTIGATIONS • ECONOMICS • FINANCIAL ADVISORY • MANAGEMENT CONSULTING