The Tenets of 340B Compliance

July 2012 - Vol.9 No. 7 - Page #2
Category: 340B Software

The 340B Drug Pricing Program was a result of the Veterans Health Care Act of 1992, which is codified as Section 340B of the Public Health Service Act. This program is managed by the Health Resources and Services Administration’s (HRSA) Office of Pharmacy Affairs (OPA). Section 340B limits the purchase and use of covered outpatient drugs to certain federal grantees, federally qualified health centers (FQHC) and look-alikes, and qualified hospitals referred to as covered entities (CE). The primary benefit of 340B participation is significant savings—estimated to be 20 to 50 percent of the average wholesale price (AWP)—on the cost of pharmaceuticals. The intended purpose of the 340B program is to enable these entities to use those savings to stretch scarce resources, reach more eligible patients, and provide more comprehensive services.1

San Mateo Medical Center (SMMC), a 509-bed public hospital and clinic system fully accredited by TJC, operates outpatient clinics throughout San Mateo County, an acute-care disproportionate share hospital (DSH), as well as long-term care facilities in San Mateo and Burlingame, California. All of these entities are included as reimbursable on the hospital’s Medicare cost report. The acute hospital, long-term care facility, and skilled nursing facility are included in the hospital’s license.

SMMC has participated in the 340B program since 2002. From 2002 until 2008, that participation was limited to medications dispensed to patients of the clinics and emergency department. Since late 2008, SMMC has expanded the use of 340B purchased drugs to the outpatient areas of the acute hospital.

Program Compliance Obligations
When it comes to 340B compliance, it is important to keep in mind that the CE is responsible for all compliance obligations; however, that responsibility is usually delegated to the pharmacy. Therefore, the pharmacy director (or program director) should learn and understand all regulations, compliance elements, and prohibitions of the 340B program, which includes pharmaceutical purchasing and dispensing records. In addition, if the pharmacy fills prescriptions for hospital outpatients, pharmacy staff must understand which patients are eligible. An individual is considered a patient of a CE (with the exception of State-operated or funded AIDS drug purchasing assistance programs) only if:

  1. The CE has established a relationship with the individual, such that the CE maintains records of the individual’s health care; and
  2. The individual receives health care services from a health care professional who is either employed by the CE or provides health care under contractual or other arrangements (eg, referral or consultation) such that responsibility for the care provided remains with the CE; and
  3. The individual receives a health care service or range of services from the CE, which is consistent with the service or range of services for which grant funding or FQHC look-alike status has been provided to the entity. (Disproportionate share hospitals are exempt from this requirement.)2

SMMC operates clinics—so-called child sites of the DSH—that do not operate an in-house pharmacy but contract with pharmacies to provide comprehensive pharmacy services. For these CEs and other types of clinics funded by federal grants, the pharmacy owner, manager, and pharmacist-in-charge should learn and understand the regulations, compliance elements, and prohibitions of the 340B program as well. If not, the pharmacy could violate the integrity of the program and put the CE at risk.

Inventory Management
As our central pharmacy is the pharmacy of record for the CE (SMMC), we segregate drug inventory that is used by the outpatient dispensing pharmacy from the inventory intended for use in the acute hospital. In our mixed-use settings, (ie, emergency or surgical departments) we employ a replenishment method that works quite well. Using drugs purchased through the GPO contract for outpatients violates the GPO exclusion aspect of the 340B program. Simply stated, as a 340B CE, most hospitals shall not use any drugs purchased through any group purchasing arrangement for use on outpatients. This includes wholesalers’ generic source contract pricing as well as the traditional GPO. Therefore, you will have to open another account with your wholesalers and purchase those drugs unavailable at 340B pricing at wholesaler acquisition cost (WAC). We use this model to purchase drugs from our 340B account to replenish medications administered to outpatients.

Some of our contract pharmacies use a virtual inventory and some use a separate inventory. Commingling 340B drugs owned by the CE and inventory owned by the contract pharmacy requires the use of a virtual inventory. In this model, the pharmacy information system keeps a perpetual inventory for both and purchasing and dispensing records are maintained separately. Conversely, separate inventory is simply the process of maintaining two separated inventories—one for regular drugs, one for 340B. Both of these methods present similar challenges if the pharmacy must use it’s own inventory to dispense a 340B prescription, but fails to order through the 340B program for replacement.

We perform periodic internal audits and have found small variances, such as having drugs (identified via NDC) dispensed with no purchasing history and specific drugs purchased with no attendant dispensing history. This usually happens when the pharmacy has had to dispense a medication from its own inventory and was unable to replace the product with the exact 11 digit NDC. Also, the separate inventory method invariably ties up a lot of dollars in inventory costs. Because of this, we will soon be contracting with a third party administrator and moving to a replenishment model to eliminate the inventory. The replenishment model for contract pharmacies works the same as for our mixed-use settings in the hospital. See Figure 1 for a basic flow diagram of how a contract pharmacy operation works. 

Billing and Collection Functions
Fortunately, to date we have not experienced any billing or collection issues with our contract pharmacies. From an operational standpoint, the pharmacies submit an invoice and a copy of the 340B prescription transaction log for the past month. After review, payment is approved. Currently, we are not using a third party administrator to handle replenishment and billing services; however, we have reviewed several proposals and have selected a vendor. The contract is under review by our legal department and we expect to have the system in place in the fourth quarter of this year. 

Regardless, HRSA-run audits of 340B program participation compliance do take place, and although the pharmacy itself is not the target of the audit, the CE will be. Accordingly, and depending on what is requested by the auditors, the CE may in turn request additional records from the pharmacy to substantiate an audit. In fact, upon recommendations in a recent Office of Inspector General report, OPA is now conducting targeted and random audits. I recommend all 340B-participating CEs, especially those for which responsibility has been delegated to pharmacy, check with the OPA Website for a summary description of the audit procedures (see Figure 2). The purpose of the audits is to ensure compliance with program requirements, ensure that no 340B-purchased drugs have been diverted to non-eligible patients, and to review a CE’s policies and procedures (P&P) with respect to the program. As long as the 340B-related drug purchasing, dispensing, and inventory records are in order, there should be no real issues discovered upon audit. While SMMC has not been audited, nor have we been notified of an audit, it is wise to review this document and develop a self-audit plan, as we have.

Ensuring the Integrity of a 340B Program
The integrity of the 340B program at SMMC is among our highest priorities. Without the 340B program, we would have to cut services to patients who depend on us for all of their medical care. As with many critical aspects of hospital pharmacy operations, the success of a 340B program relies heavily on developing and following P&Ps for all aspects of the program. The crux of this is ensuring education of all applicable staff on these P&Ps. If you are new to the 340B program it is wise to perform self-audits every month or quarter to be certain the program is running as designed and intended. Reviewing and revising P&Ps is an ongoing process, so it is best to include 340B P&Ps for initial and annual orientation, as well as competency assessments for members of your pharmacy staff.

Since drug prices are subject to change quarterly, we also have adopted therapeutic interchange policies within our medical center that allow us to change products whenever necessary to take advantage of the least expensive therapeutic equivalent. Some quarters, a brand name product will actually be less expensive than its generic equivalent, so we monitor for those instances as well. Another strategy is to take advantage of penny-buy drugs whenever possible (see Figure 3). 

In looking at this from a more concrete perspective, SMMC realizes savings of over $5 million each year through the use of the 340B program. Additionally, we use pharmaceutical patient assistance programs for more than $1 million in savings to our drug budget. Such savings clearly cast the pharmacy in a very positive light. Much of these savings typically come from high-cost biologics and chemotherapeutic agents, but institutional bulk programs for brand name drugs also reap significant savings. For those programs, we often will use name brand drugs at zero cost vs paying anything at all for the generic equivalents, and we pass 100% of those savings to our patients.

Due to their proven track record, we plan to continue these practices to manage the 340B program. This is particularly relevant during these tough financial times, as we are servicing an increasing number of at-risk patients in our community. The savings that we realize through the 340B program are critical for us to be able to provide more cost-effective clinical pharmacy services to our patients.

At this point, the program requirements are quite sufficient to allow us to remain in compliance, but as with many programs, proper oversight and guidance makes it easier to be compliant. Often, however, when too many people attempt to tinker with a program and operate in the gray areas of the requirements, unnecessary regulations and rules can be put into place that only serve to hinder the process. Therefore, I am concerned that future changes would make it more difficult or time-consuming to reap significant financial savings, at the cost of optimal patient care for our communities. Therefore, we all are quite anxious to see what will be revealed by the current auditing process.


  1. US Department of Health and Human Services. Health Resources and Services Administration (HRSA). Pharmacy Affairs & 340B Drug Pricing June 7, 2012.
  2. HRSA Federal Register Notice. Final Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and Entity Eligibility (Definition of a Patient). October 24, 1996 (Vol. 61, No. 207, pp. 55156-55158). June, 15 2012.

Gary Horne, RPh, MHSA, has served as director of pharmacy at San Mateo Medical Center in San Mateo, California since April, 2006. In this capacity he manages and oversees the inpatient hospital pharmacy and the onsite ambulatory care pharmacy. He also coordinates all aspects of the 340B pricing program with five contract pharmacies throughout San Mateo County. Gary is a regional consultant with the Pharmacy Services Support Center and has worked with several covered entities on the implementation of 340B. In this role, he has presented on topics including contract pharmacy arrangements, Medicare Part D, and other aspects of the 340B program at various meetings, including several 340B Coalition Conferences, ASHP Midyear Clinical Meetings, and the CSHP Annual Meeting.







HRSA Random and Targeted Audits*
Using an audit protocol specific to the 340B Program, the HRSA random and targeted audits will involve more in-depth review and include a more focused audit of covered entities’ 340B Program operations and compliance. The audit protocol will be made publicly available in order to assist covered entities in preparation for an audit. The random audits will first include covered entities randomly chosen from program types determined to be at higher program risk due to volume of purchases, increased complexity of program administration, and use of contract pharmacies. Later random audits will include entities randomly chosen from program types determined to be at lesser risk. Targeted audits may be triggered by allegations of violations of 340B requirements and are not limited to those made by whistleblowers, manufacturers, or self reporting by covered entities themselves. Selective and targeted audits will include a more thorough investigation of policies and procedures, review of auditable records, and system compliance to prevent diversion and duplicate discounts. The findings from these audits may be used to refer matters to the Office of Inspector General (OIG) or Department of Justice (DOJ).









What is a Penny-Buy Drug?
The 340B ceiling price of a drug is set by CMS and is calculated by deducting from the average manufacturer’s price of that drug an amount that is a function of the Medicaid rebate for the drug. The main role of the function is to take into account increases in the manufacturer’s average price relative to increases in inflation. Therefore, drugs with a 340 ceiling price of less than a penny (rounded off to a penny) for a unit of issuance occasionally become available. This can provide a significant benefit to 340B-covered entities looking to enhance the savings for their program.



Effects of Shortages on 340B Pricing 
By regulation, drug shortage allocations are to be applied regardless of price, whether it be GPO, WAC, or 340B; however, some pharmacy directors have reported that on occasion, they are able to order certain drugs at non-340B prices but cannot order those same drugs at 340B prices. Nonetheless, drug shortages negatively affect all patients whether we are purchasing at 340B prices or not.


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