As the General Assembly wraps up its second week back in session, the Colorado BioScience Association is tracking the development of a policy proposal from legislators that could have significant impacts to Medicaid’s 340B program in the state. CBSA is in the process of gathering details regarding the proposal but state-level policy work in reference to 340B programs has been increasing in recent years across the country. CBSA works to protect timely patient access to needed therapies and technologies. The further expansion of the 340B program has led to increased profits for covered entities, while not increasing access for patients which was the program’s original intent.

Background & History

The Budget Reconciliation Act of 1990 established the Medicaid Drug Rebate Program (MDRP), which requires participating drug manufacturers to provide significant rebates to the federal government and states as a condition of having their outpatient drugs covered by Medicaid. Congress then created the 340B program in 1992 to provide recipients of Health Resources and Services Administration (HRSA) grants and safety-net hospitals access to the voluntary discounts pharmaceutical manufacturers had provided before the enactment of the Medicaid rebate statute. 

Under the program, manufacturers are required to provide covered outpatient drugs at a substantial discount which typically ranges between 23.1% to 50%, going as high as 100% depending on the specific Medicaid rebate. The discounts substantially reduce the burden on covered entities that provide uncompensated or under-compensated care. And covered entities may benefit financially from the difference between the discounted drug cost and the amount reimbursed by the patient’s insurer in most cases. 

Covered entities under the 340B program include hospitals that meet the following criteria: children’s hospitals, critical access hospitals, rural referral centers, free-standing community hospitals, and disproportionate share. Non-hospital covered entities are eligible for the program by receiving one of ten federal grants outlined in the law including: Federally Qualified Health Centers, Ryan White Programs, State-run STD/TB Clinics, and Title X Family Planning. 

In 2010, HRSA issued additional guidance allowing all 340B covered entities, even those with their own outpatient pharmacies, to contract with an unlimited number of third-party pharmacies. This change along with 340B providers expanding sales through new increased hospital outpatient facility “child sites” registrations has opened the doors for all covered entities to generate additional profits on 340B purchased drugs.  

The Issue: Program Expansion 

HRSA’s rule change regarding third-party pharmacies dramatically increased the role of for-profit pharmacies and other third parties benefiting from the program, since 2010 program participation grew by 4,228%. And between 2013 and 2020, over 30,900 locations registered with HRSA’s covered entities database, with 73% of that growth due to child-site registrations. 

The Berkley Research Group (BRG) released a new analysis earlier this year, showing that 50.5% of every dollar spent on brand medicines went to payers, middlemen, providers, and other stakeholders in 2020. The amount hospitals, pharmacies, and other health care providers receive from the sale of brand medicines is also growing. The amount these entities now receive reached $81 billion last year, up from $24.7 billion in 2013. This trend was primarily driven by the growth of the 340B program, the amount hospitals and other 340B entities received from the sale of brand medicines purchased through the 340B program grew by 1,100% between 2013 and 2020.

The evolution of contract pharmacies’ role in the program has fundamentally altered the 340B program and resulted in for-profit entities earning substantial profits through complex profit-sharing agreements with the 340B covered entities. More than half of all profits realized by 340B contract pharmacies are concentrated in just four companies that utilize vertical integration. For example, CVS Health consists of a:

• Health Insurance Plan: Aetna
• PBM: CVS Caremark
• Pharmacy: CVS Caremark
• Third Party 340B Services Firm: Wellpartner

The growing prevalence of these arrangements is taking the 340B program farther away from its original intended goal of helping safety-net entities provide care to vulnerable patients.

Actions Taken in Other States:

States across the country are attempting to statutorily define a 340B “contract pharmacy” even though contract pharmacies fall outside federal statute. Additionally, states are increasing the likelihood that manufacturers would have to pay duplicate Medicaid/340B discounts, which is in violation of the federal statute. 

The movement to enact state-level protections began in 2019, with West Virginia passing a law that banned PBMs from reimbursing 340B entities for pharmacy-dispensed drugs at a rate lower than that paid for the same drug to pharmacies similar in prescription volume that are not 340B entities. That law also prohibited PBMs from assessing any fees, chargebacks, or other adjustments on the basis that the hospital participates in 340B. In 2020, Minnesota, Montana, and South Dakota enacted similar laws as West Virginia.  Arkansas, which enacted a their law in 2021, prohibits a drug company from denying 340B pricing for drugs dispensed by an Arkansas-based community pharmacy under a 340B contract pharmacy arrangement.