1. Section 340B Drug Discount Program Overview
This chapter presents an in-depth discussion about the Section 340B Drug Discount Program and describes how State AIDS Drug Assistance Programs (ADAPs) can access this cost-saving program.
In November 1992, Public Law 102-585, the Veterans' Health Care Act (VHCA) of 1992, was enacted. This legislation was designed to establish price controls to limit the cost of drugs to Federal purchasers and to certain Federal grantees. It was also a follow up to the Medicaid Drug Rebate Program, enacted as part of the Omnibus Budget Reconciliation Act of 1990 (OBRA90). Title IV of the VHCA contains three sections—all of which deal with drug pricing issues. However, only Section 602 deals with drug pricing issues related to Ryan White grantees.
Section 602 of the VHCA enacted Section 340B of the Public Health Service (PHS) Act. Section 340B provides discounts on covered outpatient drugs for eligible entities, including certain Department of Health and Human Services (DHHS) grant programs and disproportionate share hospitals. The Health Resources and Services Administration's (HRSA) Office of Pharmacy Affairs (OPA) administers Section 340B of the PHS Act. The Section 340B program has been referred to as: the (Section) 602 program, the Public Health Service (PHS) drug pricing program, and the Office of Pharmacy Affairs program. For consistency with other HRSA's HIV/AIDS Bureau's (HAB) Division of Service Systems' (DSS) communications to Title I and Title II grantees, this Federal drug discount program will be referred to as the Section 340B Drug Discount Program.
Section 340B Drug Discount Program TOP
The Section 340B Drug Discount Program requires an understanding of basic concepts of drug pricing and procurement. This chapter includes a description of the main provisions of the Section 340B Drug Discount Program and a discussion of the impact of these guidelines on State ADAPs participating in the program.
Agreements with Manufacturers
As a condition for continued participation in Medicaid, drug manufacturers must sign an agreement with the Secretary of HHS requiring that their sales to covered entities are at or below the ceiling prices established by a statutory formula in Section 340B. Failure to sell drugs at these prices could result in a manufacturer's drugs being excluded from reimbursement by Medicaid. There are approximately 600 drug manufacturers participating in the Section 340B Drug Discount Program. All manufacturers of HIV antiretroviral medications have signed this agreement; some producers of generics have not. A list of these manufacturers is available on the Office of Pharmacy Affairs website.
For single source or innovator (brand name) multiple source drugs, the 340B ceiling price is the average manufacturer price (AMP) reduced by the Medicaid rebate percentage. This is generally 15.1 percent. For over-the-counter and generic drugs, the 340B ceiling price is generally 11 percent below the AMP.
The AMP and BP are terms developed by the Medicaid Drug Rebate Program and are defined in Section 1927 of the Social Security Act. (These definitions are provided in the glossary, Section I, Chapter 1, of this manual.) In general, the AMP is based on the weighted average of prices paid by wholesalers for a specific drug distributed to retail pharmacies. It excludes sales to Federal health care systems and to Section 340B covered entities. The BP is the lowest price paid for a drug by a non-Federal customer.
It is important to note that nothing in Section 340B legislation prohibits a manufacturer from charging a price for a drug below the ceiling price.
Section 340B of the PHS Act established the following list of entities eligible to purchase drugs through the 340B Drug Discount Program:
The law defines two types of non-grantees as eligible covered entities:
Requirements for Covered Entities
A covered entity must comply with the following statutory requirements to access 340B prices:
HRSA chose to publish guidelines in the Federal Register rather than regulations to administer the Section 340B program. Guidelines are the quickest and most flexible way to convey to all concerned parties how HRSA interprets the Section 340B requirements. Guidelines are also used to disseminate procedures that are acceptable under the statute. To ensure that the guidelines were as appropriate and responsive as possible to the legitimate concerns of the covered entities and manufacturers, comments were solicited on all of the guidelines before HRSA published them in a final notice. Guidelines for the Section 340B program cover the following topics:
Impact of These Guidelines on State ADAPs TOP
The Section 340B Drug Discount Program allows many different types of covered entities to access discounted prices. These entities vary significantly in terms of their structure and the services they provide to patients. These differences can make it difficult to comprehend the Section 340B program guidelines because not all of the procedures are pertinent to each covered entity seeking to participate in the program. The guidelines that are directly applicable to State ADAPs provide a relatively simple set of principles for ADAPs to follow. These are outlined below.
Manufacturers' Agreement with the Secretary of HHS
As previously described, drug manufacturers must sign an agreement with the Secretary of HHS requiring that their sales to covered entities be at or below the ceiling prices mandated by Section 340B. This agreement is necessary for the manufacturer's continued participation in Medicaid. Failure to sell drugs at these prices to covered entities could result in a manufacturer being prohibited from selling its products through the Medicaid program. The agreement stipulates that the manufacturer may not charge covered entities a price for a specific drug that is more than the cost as determined by the Section 340B statutory formula.
Definition of Patient
The manufacturers have a vested interest in assuring that their drugs purchased at deeply discounted rates by State ADAPs or drugs that are subject to an ADAP Section 340B rebate are utilized only by "patients" of the ADAP. The Section 340B guidelines state that an individual registered in the ADAP "...will be considered a 'patient' of the covered entity for purposes of this definition if so registered as eligible by the State program." As such, individuals that meet the ADAP's financial and medical eligibility criteria and who are enrolled as active ADAP clients are deemed "patients" of the ADAP for the purposes of the Section 340B guidelines.
ADAPs participating in the Section 340B drug discount program must have mechanisms in place to prevent the diversion of drugs to non-patients (i.e., to individuals who are not enrolled as qualified ADAP clients). Both the OPA and pharmaceutical manufacturers may audit participating ADAPs to ensure that drug diversion has not occurred. ADAPs can avoid drug diversion to non-eligible patients by implementing simple administrative controls that carefully track drug purchases and inventory as well as ones that provide records of when and to whom drugs are dispensed. In addition, ADAPs should carefully manage the program's eligibility requirements and monitor clients as they enroll. These tracking mechanisms will assist the ADAP with 340B guideline compliance. It is important to note that the more decentralized the drug dispensing system, the more complex these tracking systems may need to be.
Definition of Covered Outpatient Drugs
The drugs that may be purchased under the Section 340B program are referred to as "covered outpatient drugs." The term "covered outpatient drugs" generally includes:
A covered outpatient drug does not include any drug or product that is used when there is no medically accepted indication. Most drugs available on an ADAP formulary meet the definition of a covered outpatient drug.
Statutory Price = Ceiling Price
Nothing in the Section 340B legislation or guidelines prohibits ADAPs from negotiating a price for a specific drug that is below the statutory price. Therefore, ADAPs participating in the Section 340B program may negotiate directly with the manufacturer, or through a purchasing agent for discounts below the Section 340B price on any covered drug. Viewed from this perspective, the Section 340B statutory price for a given drug may be considered the upper limit, or ceiling price that a manufacturer may charge a covered entity for a drug.
For a State ADAP to actually purchase covered drugs through the Section 340B program, it must "activate" its covered entity status by contacting both DSS and OPA. DSS verifies that the ADAP is a recipient of CARE Act Title II funding  and collects information concerning the amount the ADAP expended for outpatient drugs in the preceding fiscal year. DSS then provides this information to OPA.
The ADAP must also notify OPA of its intent to participate in the Section 340B Drug Discount Program and also must provide its Medicaid pharmaceutical billing status to OPA. This information is necessary to ensure that a drug purchased under the drug discount program is not subject to both a Section 340B discount or rebate and a Medicaid rebate under Section 1927 of the Social Security Act. This is only an issue for ADAPs that retroactively bill Medicaid. If this does not apply to a particular ADAP, it needs to notify OPA that the ADAP does not retroactively bill Medicaid.
The State Medicaid agency creates an exclusion file so that transactions with ADAP's Medicaid provider number are excluded from the agency's rebate claims submitted to drug manufacturers. The ADAP's Medicaid pharmaceutical billing status will fall into one of three categories:
1. The ADAP bills Medicaid on a cost basis (separately by prescription) for drug purchases. If this is the case, the entity must provide OPA with a pharmacy Medicaid number (the number that the entity uses to bill Medicaid for medications).
2. The ADAP bills Medicaid at an all-inclusive rate (either per encounter or visit). If this is the case, the entity must provide OPA with its all-inclusive Medicaid number (e.g., "FQ" number) to OPA.
3. The ADAP does not bill Medicaid. Even if this is the case, the ADAP must contact OPA and provide them with this information.
Sources Used for This Chapter
The Drug Pricing Program Established by Section 340B of the Public Health Service Act. A Report to the House and Senate Appropriations Committees, 1998.
"Entity Guidelines." Federal Register notice. Vol. 59, No. 92, May 13, 1994.
HRSA, HIV/AIDS Bureau, Division of Service Systems. ADAP and the Section 340B Drug Discount Program. Rockville, MD: U.S. Department of Health and Human Services, 1999.
HRSA, HIV/AIDS Bureau, Division of Service Systems. Drug Pricing, Purchasing, and Distribution Systems. Rockville, MD: U.S. Department of Health and Human Services, 1997.
Letter from DSS to grantees re: Expectations and Recommendations about the Administration of State ADAPs supported with Ryan White CARE Act funds, October 1996.
The Veterans' Health Care Act of 1992 (Public Law 102-585). Statutes at Large, 1992.
For Further Discussion of Topics in This Chapter
For additional information about the Section 340B Drug Discount Program, see the Office of Pharmacy Affairs.
 Title I and Title II-funded grantees administering local pharmacy assistance programs may also participate in the Section 340B program if the contractor for the service qualifies as a covered entity. Title I and Title II grantees and/or contractors must also activate their covered entity status by contacting DSS for verification that they are recipients of Title I or Title II funds and OPA to provide their Medicaid billing status.