340B: Program Critical to FQHCs Under Fire

The 340B Program has become an important source of revenue for many Federally Qualified Health Centers. Many fear that, without 340B, their programs will not survive. With a draft Mega Guidance under consideration by HRSA and new CMS rules governing Medicaid reimbursement, 340B is going to change. The extent to which this will affect FQHCs is currently a matter of speculation. Meanwhile, in order to understand where this crucial program is likely headed, it is important to know where we are now, and how we got here.

Besides not dying young, one of the advantages of being around for a long time is that you gain perspective. In the mid-1980s, when I was just a young Health Center CFO, our pharmacy was a money-losing proposition. However, if we sent our patients home with no medications, the odds were good that they wouldn't get them at all. Our options were few. Due to our limited formulary, we sent Medicaid patients to the local private pharmacy. Nearly all of the insured patients we saw were our employees. Faced with mounting losses, we were fortunate to work out an arrangement to receive special pricing through the VA. The pharmacy still lost money, but much less than before.

The birth of the Medicaid Drug Rebate program in 1990 forced manufacturers to discontinue many other discount programs, since discounted pricing would significantly increase the size of the rebates they would be forced to pay to the states. That left us worse off than before, but luckily in 1992, Congress gave us 340B. The statute's stated intent was "to enable entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services." Although not explicitly required by the law, most FQHCs used the cost savings as we did: to make the pharmacy program self-sustaining, and to offer uninsured patients a wider range of prescriptions at prices they could afford.

Over the next 18 years, 340B expanded to cover a few more types of providers such as: Family Planning Centers, Rural Hospitals and Children's Hospitals. Beginning in 1996, each 340B covered entity was allowed to utilize a single contract pharmacy. The program sparked little protest beyond an occasional groan from a drug company, or some local pharmacy complaining about unfair competition. This would all change in 2010, with the passage of the Affordable Care Act.

The ACA added many more types of covered entities, mostly hospitals. It also allowed covered entities to utilize multiple contract pharmacies for the first time. 340B took off! Unfortunately, as the program has grown, so has opposition from the drug companies. Although FQHCs are generally not the target of Big Pharma's wrath, we are caught in the crossfire. Although we don't expect the program to go away any time soon, it is certain to continue to undergo significant changes.

Currently 340B is being squeezed from two major directions: HRSA and CMS. We have previously addressed the Draft HRSA 340B Mega Guidance in a blog post and with submitted comments. Most recently, on February 1, 2016, CMS released the final Covered Outpatient Drug rule for Medicaid, aka the AMP Regulation. Although referred to as AMP because it defines the methodology for setting the Average Manufacturer Price, this 189 page document significantly affects Medicaid reimbursement for 340B covered entities such as FQHCs.

In a nutshell, the rule requires state Medicaid agencies to reimburse pharmacy providers based on their Actual Acquisition Cost (AAC) rather than the Estimated Acquisition Cost (EAC), as previously allowed. The EAC is generally based on the Average Wholesale Price (AWP), which is widely believed to inflate the price state Medicaid programs pay for drugs. 

The rule addresses the cost associated with dispensing these drugs by allowing for increased "professional dispensing fees," which are expected to reflect the true cost of dispensing medications. The good news is that the AAC transitions apply only to Medicaid Fee for Service (FFS) plans. Medicaid managed care plans retain the flexibility to reimburse "at the levels necessary to achieve adequate access to a network of providers."  

We are working with clients to address the changing 340B environment by assisting to:

  • Design and perform ongoing audits of 340B (both internal and contract pharmacies) in order to assure compliance with statutory and regulatory requirements;
  • Evaluate potential and existing 340B pharmacy programs for maximum efficiency and profitability under existing and proposed operating environments;
  • Assist with reimbursement negotiations with payers, including managed care plans;
  • Assess operational and financial strategy and performance beyond pharmacy, in order to identify potential revenue streams to replace any expected reduction in 340B revenue due to program changes.

The takeaway from all this is that, even in an environment that provides our FQHC programs with some significant competitive advantages, we should not become overly reliant on any single benefit to the exclusion of all else. At the end of the day, there is no substitute for a well-managed, lean and productive FQHC that produces favorable outcomes in a patient-friendly manner.   


Steve Weinman is a Principal at FQHC Associates, a health care consulting firm specializing in the needs of established, new and potential Federally Qualified Health Centers (FQHCs).

Read more about Steve here.

To contact Steve, email him at sdweinman@fqhc.org.

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