August 2012 Volume 8 Number 12

340B Drug Pricing Program Changes under PPACA

By Amanda Swanson, J.D., LL.M., Chicago, IL1

AuthorThe 340B Drug Pricing Program enables eligible Medicaid participating facilities to purchase outpatient drugs at discounted prices, below those typically available to other buyers. This results in significant savings for safety-net providers, generally between 20-50 percent of the drug’s cost.2 In furtherance of its goals of containing rising healthcare costs, the Patient Protection and Affordable Care Act (“PPACA”) expanded the types of facilities eligible to participate in the program, and thereby enabled more providers to take advantage of the discounted drug prices.


Medicaid is an entitlement program which pays for medical services for certain low-income individuals. Federal guidelines specify certain services which states must cover in their Medicaid programs in order to receive federal matching funds, but states are free to cover additional services.3 One of the most often covered optional services is prescription drug coverage; it is covered in the Medicaid programs of all 50 states and the District of Columbia.

For more information related this topic, the Health Law Section is hosting a webinar
How to Structure 340B Contract Pharmacy Arrangements
on September 6, 2012.

The Medicaid drug programs are designed and administered by the states under broad federal guidelines,4 and each state’s Medicaid agency must submit a plan to the Centers for Medicare & Medicaid Services (“CMS”) which describes each agency’s drug program payment methodology.5 Federal regulations limit each state’s reimbursement for a drug to the lower of (1) the drug’s estimated acquisition cost plus a reasonable dispensing fee6 or (2) the pharmacy’s usual and customary charge to the public for the drug.7 Each drug manufacturer must enter into a rebate agreement with the Secretary of the Department of Health and Human Services (“HHS”) for Medicaid to cover of most of the manufacturer’s drugs. Currently, about 600 manufacturers participate in the Medicaid program.8

Program Overview

The Veterans Health Service Act enacted section 340B of the Public Health Service Act implementing the “Limitation on Prices of Drugs Purchased by Covered Entities.”9 This program, known as the 340B Drug Pricing Program, requires participating manufacturers to enter into an additional agreement with HHS which establishes an upper limit on the prices of covered outpatient drugs sold to particular covered entities. The method of calculating the price limit is explained in the statute, and amounts to the average manufacturer price (“AMP”) for the drug in the preceding quarter less a rebate percentage.10 The rebate percentage equals the average total rebate required during the preceding quarter11 divided by the AMP for the drug during the quarter.12

The covered entities eligible to participate in the 340B program are listed in the statute. These include federally qualified health centers,13 disproportionate share hospitals,14 children’s hospitals, and federal grantees under specified programs.15 Covered entities must ensure that the drugs purchased through this program are used for outpatients only; this program does not apply to inpatient drugs. Additionally, covered entities are prohibited from transferring or reselling 340B drugs to individuals who are not patients of the facility, and from seeking a Medicaid rebate for a drug purchased through the 340B program. They are also responsible for implementing systems to prevent these practices and document their compliance.

The program is managed by the Health Resources and Services Administration’s (“HRSA”) Office of Pharmacy Affairs (“OPA”).16 In order to participate in the program, covered entities must first register for the program through the OPA.17 Participation begins on the first day of each quarter (January 1, April 1, July 1, and October 1), and the deadline to register with the OPA is the first of the month preceding each quarter (December 1, March 1, June 1, and September 1, respectively).18

Changes Implemented by PPACA

PPACA expanded the types of entities eligible to participate in this program to include children’s hospitals,19 critical access hospitals, free standing cancer hospitals, rural referral centers, and sole community hospitals.20 The HRSA has estimated that this expansion enables up to 1,500 new facilities to become eligible to participate in the 340B program.21

The existing requirements for participation in the program apply to these newly-eligible entities. However, PPACA also made changes to some of the requirements which apply only to the newly-eligible facilities. Newly-eligible entities must exceed the Disproportionate Share Hospital percentages for their specific type of facility (11.75 percent for children’s hospitals and free standing cancer hospitals; eight percent for rural referral centers and sole community hospitals).22 Additionally, children’s hospitals and freestanding cancer hospitals must meet CMS’s criteria for exclusion from the Medicare Prospective Payment System to be eligible for the 340B discount,23 and neither can obtain covered drugs through a group purchasing organization (although critical access hospitals, sole community hospitals and rural referral centers may continue to do so).24

These expansions to 340B eligibility became effective January 1, 2010. The same quarterly registration deadlines apply to the newly eligible facilities. Furthermore, guidance specific to each type of newly eligible facility is available on the OPA website.25 Manufacturers are not required to provide 340B discounts to newly eligible entities until the entities are fully enrolled in the program and listed in the OPA’s 340B database.

Eligibility of Accountable Care Organizations

PPACA also established a Medicare Shared Savings Program through which groups of doctors, providers, and facilities may join together and collaborate to provide coordinated, high-quality healthcare for certain beneficiaries through Accountable Care Organizations (“ACOs”).26 ACOs aim to ensure that patients receive the proper care at the right time, while also reducing unnecessary care and preventing medical errors through incentivizing the redesign of healthcare processes, investment in improvements in infrastructure, and the promotion of accountability for the care of Medicare beneficiaries. Through the Shared Savings Program, ACOs which are successful in achieving cost savings through their coordinated healthcare delivery can share in the savings experienced by the Medicare program.

For purposes of the 340B program, inclusion of a 340B covered entity as a part of an ACO does not make the entire ACO eligible for participation in the program. Specifically, the statutory text provides: “[i]n the case of a covered entity that is a distinct part of a hospital, the hospital shall not be considered a covered entity [under the 340B program] unless the hospital is otherwise a covered entity under this subsection.”27 The final ACO rules reiterate that the ACO itself is not a 340B covered entity.28 Furthermore, 340B participating providers which are members of an ACO are still obligated to comply with the requirements of ensuring that 340B drugs are not diverted to non-patients (including other ACO member providers and their patients) and that Medicaid rebates are not sought for these drugs.29 In the Final Rule HHS also expressed an intention to consult with the HRSA regarding the risks of fraud and abuse in the 340B program that are posed by ACOs, and to determine if additional monitoring will be needed for ACOs participating in the program.30


The 340B Drug Pricing Program enables many safety net providers across the country to purchase outpatient drugs at discounted prices, facilitating their ability to provide healthcare to low-income and medically underserved populations. As of October 2011, over 16,869 facilities may benefit from these reduced drug prices.31


Amanda Swanson is an Illinois licensed attorney and received her J.D. and LL.M. in health law from Loyola University Chicago School of Law. She can be reached at

2 HRSA, Pharmacy Affairs & 340B Drug Pricing Program: Introduction to 340B Drug Pricing Program, [hereinafter “Intro”].

Jean Hearne, Congressional Research Service, Prescription Drug Coverage Under Medicaid, at 1 (2008), available at




Dep’t Health & Human Services, Office of the Inspector General, A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, Medicare Payment Amounts, and Retail Prices, 1 (2009), available at


Id. Dispensing fees implemented by states have ranged from $2.00 to $5.60 per prescription.


Id. CMS allows states flexibility in defining and determining their estimated acquisition costs for drugs.

8, Medicaid Drug Rebate Program,


Veterans Health Service Act, Pub. L. 102-585, 106 Stat. 4971 (Nov. 4, 1992).


42 U.S.C. §256b(a)(1).

11 The rebate amount for single-source or innovator multiple-source drugs is calculated by multiplying the total number of units paid for with respect to each dosage form and strength of covered outpatient drugs by the greater of either the difference between the AMP and the best price for the dosage and strength of the drug or the minimum rebate percentage of the AMP, a figure set each rebate period. 42 U.S.C.A. § 1396r-8(c)(1)(A). Best price, for a single-source or innovator multiple-source drug, is “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States.” 42 U.S.C.A. § 1396r-8(c)(1)(C)(i). This figure includes any discounts or rebates given to the purchaser. The best price excludes prices charged for drugs charged to the Indian Health Service, the Department of Veteran’s Affairs, federal agencies, and any Medicare Part D prescription drugs plans. Id. For all other covered multiple-source drugs, the rebate is calculated by multiplying the applicable percentage of the AMP (which, for rebates beginning after December 31, 2009, is 13%) by the total number of units of each dosage form and strength of covered outpatient drugs. 42 U.S.C.A. § 1396r-8(c)(3).

42 U.S.C. § 256b(a)(2).


A federally qualified health center is an entity which receives a grant under section 330 of the Public Health Service Act, receives funding through a contract with a recipient of such grant, was determined by the Secretary of HHS to meet the requirements of such grant or be treated as such, or is an outpatient facility or program operated under the Indian Self-Determination Act or receiving certain funds under the Indian Health Care Improvement Act. 42 U.S.C. §1395x(aa)(4).

14 A disproportionate share hospital is defined in two ways: 1) a hospital whose Medicaid inpatient utilization rate is one standard deviation above the average Medicaid inpatient utilization rate of hospitals receiving Medicaid payments; and 2) a hospital with a low-income utilization rate of at least 25 percent. 42 U.S.C. §1396r-4(b). Inpatient utilization rate is calculated by taking the number of inpatient hospitalization days of Medicaid patients divided by the total number of inpatient hospital days during that period. 42 U.S.C. §1396r-4(b)(2). Low-income utilization rate is the percentage reached by adding 1) the figure reached by dividing the total Medicaid revenues paid to and government cash subsidies received by the hospital for patient services by the total amount of revenues of the hospital for patient services and 2) figure reached by dividing the total inpatient charges of the hospital attributable to charity care (less cash subsidies) by the total amount of the hospital’s charges for inpatient services during the period. 42 U.S.C. §1396r-4(b)(3).

42 U.S.C. § 256b(a)(4). The eligible programs include family planning projects, early HIV intervention services, native Hawaiian organization or urban Indian organizations, state-operated AIDS drug assistance programs, black lung clinics, comprehensive hemophilia diagnostic treatment centers, and others. Id.


Intro, supra note 1.


Office of Pharmacy Affairs, HRSA, Register a Covered Entity,


Intro, supra note 1.


Although listed in PPACA, children’s hospitals were already eligible. The Deficit Reduction Act of 2005 first made children's hospitals eligible to participate in the 340B drug pricing program. S. 1932, 109th Cong. § 6004 (2006), available at

20 Patient Protection and Affordable Care Act, Pub. L. 111-148, § 7101 (2010), available at
21 HRSA, 340B Drug Pricing Program Frequently Asked Questions: Affordable Care Act,
22 PPACA, Pub. L. 111-148, § 7101(a). For an explanation of disproportionate share hospital percentages please see note 12, supra.
23 Id.
24 PPACA, Pub. L. 111-148, § 7101(c).
25 HRSA, Affordable Care Act Entities,
26 PPACA, Pub. L. 111-148, § 3022.
27 42 U.S.C. 256b(a)(6).
28 Medicare Program: Medicare Shared Savings Program: Accountable Care Organizations, 76 Fed. Reg. 67802, 67956 (Nov. 2, 2011), available at
29 Id.
30 Id.
31 National Council of State Legislatures, States and the 340B Drug Pricing Program, These facilities provide needed healthcare to over 10 million individuals throughout the United States. Id.

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