The Federal 340B Program Facts, Figures, Opportunities, and Pitfalls Presented By: Shrujal Patel M.S. RPh. MBA

SECTION 1 Introduction to 340B and Relevant Trends 2

340B Timeline 3

Intent of 340B What 340B Is….. – Program designed to provide savings on outpatient drugs to entities that serve a proportion of vulnerable patient populations – Savings are realized by increasing the margin between reimbursement from commercial payers and actual acquisition cost What 340B Isn’t….. – A program that provides low cost drugs directly to indigent patients (although in some instances, this does occur) 4

Relative Pricing (Brand Name) “Best Price” 63% 42% Adapted from a slide by Safety Net Hospitals for Pharmaceutical Access Source: Data derived from Prices for Brand-Name Drugs Under Selected Federal Programs, Congressional Budget Office (June 2005) Private Sector Pricing 5

340B Statistics 17,162 OPA Registered Entity Sites 12,225 Participants in the 340B Prime Vendor (73%) Over 11,000 OPA Registered Contract Pharmacies $6 Billion/year in 340B drug purchases * 2012 Statistics 6

Entity Types 7

Hospitals; What’s the Difference? Covered Entity Type Non Profit or Government Contract DSH % GPO Exclusion Orphan Drug Exclusion DSH HospitalYes>11.75%YesNo Children's HospitalsYes>11.75%YesNo Free-Standing Cancer HospitalYes>11.75%Yes Rural Referral CenterYes≥8%NoYes Sole Community HospitalYes≥8%NoYes Critical Access HospitalsYesN/ANoYes 8

SECTION 2 340B Compliance 9

Compliance Covered Entity is Responsible for Ensuring: 1.Entity Eligibility 2.Patient Eligibility – see “patient definition” 3.Against duplicate discounts a)Medicaid “carve-in” vs. “carve-out” 4.Adherence to (if applicable): a)GPO Prohibition b)Orphan Drug Exclusion 10

Patient Definition An individual is a patient of a 340B covered entity only if: the covered entity has established a relationship with the individual, such that the covered entity maintains records of the individual's health care; and the individual receives health care services from a health care professional who is either employed by the covered entity or provides health care under contractual or other arrangements (e.g. referral for consultation) such that responsibility for the care provided remains with the covered entity; and the individual receives a health care service or range of services from the covered entity which is consistent with the service or range of services for which grant funding or Federally-qualified health center look-alike status has been provided to the entity. Disproportionate share hospitals are exempt from this requirement. An individual will not be considered a patient of the covered entity if the only health care service received by the individual from the covered entity is the dispensing of a drug or drugs for subsequent self-administration or administration in the home setting. Exception: Individuals registered in a State-operated or funded AIDS Drug Assistance Program (ADAP) that receives Federal Ryan White funding ARE considered patients of the participant ADAP if so registered as eligible by the State program. 11

340B Qualified Drug Utilization Drug must be administered to a qualified patient (per patient definition on previous slide) 340B is for outpatient use only Drugs must be administered in a hospital point of service that would qualify as a “reimbursable cost center” on a Medicare cost report 100% hospital owned (i.e. joint ventures are not eligible) Non-profit (i.e. for profit subsidiaries are not eligible) Same tax ID number as the hospital Outpatient facilities (Physician clinics, surgery centers, etc.) Ownership of inventory Proximate relationship Employed Physicians 12

340B Virtual Inventory Process Pharmacist uses “available package list” to reorder drugs on the 340B account Patient received a drug as part of an outpatient service at covered entity Patient billing system is queried for outpatient drug charges CDM to NDC Crosswalk is used to convert CDM quantities to packages Wholesaler ships drugs to covered entity 340B drugs are placed into inventory and can be used on any patient 13

Prohibitions GPO Relevant for DSH, Children’s, and Cancer Hospitals Requires that outpatient meds for 340B eligible outpatients be purchased at 340B, inpatients at GPO, and 340B ineligible outpatients at a non-GPO price; typically WAC ORPHAN DRUG Relevant for Cancer, RRC, SCH, and CAH (PREVIOUSLY) For these entities, any drug that has a Orphan Drug indication (primary, secondary, or otherwise); the 340B price cannot be leveraged As of 7/24/13 – Only if the drug is used for the orphan indication 14

340B Covered Drugs Covered DrugsNot Covered Outpatient drugsInpatient drugs OTC’s with a prescriptionVaccines Biologics Drugs that are bundled with a procedure (not charged/reimbursed as a line item) Insulin Clinic administered drugs 15 As defined by SSA 1927(k) – definition of “Covered Outpatient Drugs”

Tracking and Reporting All participating hospitals MUST maintain an audit trail for ALL 340B purchases. Data required for the audit trail includes: 340B purchase history GPO purchase history Patient billing records including patient classification (IP/OP) List of eligible points of service and DSH Adjustment factor calculation Specifications used to define outpatient utilization query CDM to NDC Crosswalk Policies and Procedures 16

Tracking Requirements Hospital must be able to prove that the drugs purchased on the 340B account were administered to an outpatient in an eligible point of service Patient level detail Identify qualified patients Patient Type, Status, and/or Point of Service The 340B program must be implemented in all qualified outpatient points of service Both “Mixed” & “Clean” areas Two options: Separate 340B Inventory Retrospective Purchasing 17

Audits All 340B enrolled entities agreed to be subject to audits at the time that they joined the program. Audits can be requested by the Office of Pharmacy Affairs AND by pharmaceutical manufacturers. 340B has been added to the OIG work plan and the OIG has issued several memos discussing the need for additional regulation of the 340B program. As a result of ballooning 340B enrollment, pharmaceutical manufacturers have seen revenue erosion on many drugs. 18

SECTION 3 340B Multiple Contract Pharmacy 19

What is Contract Pharmacy? Any relationship between a pharmacy services provider and another entity whereby the pharmacy provider is conducting said pharmacy business on behalf of the other entity in exchange for an agreed upon contracted rate. Revenues, patient data, and cost of goods belong to the contracting entity and fees belong to the pharmacy. Patient Traffic Contract Rx Fees Revenue Cost of Goods Sold Patient Rx Data 20

How Does it Work? 21

Benefits of 340B Contract Pharmacy For the Covered Entity – Expands the reach of the 340B program, thus directing more “savings” to the entity to support care For the Pharmacy – Potential up-tick in profitability (if dispense fee is calculated correctly – Profit without drug carrying costs – better cash flow 22

Contract Rx Growth 23

Contract Pharmacy Relationships * Not above the line or on the covered entity cost report 24

Third-Party Administrators What are they? – Typically a software or management company What do they do? – Use data and/or analytics to determine eligible claims – Reconcile finances between pharmacy and CE – Provide audit reporting Risks and Benefits? Software Company ExamplesMgmnt. Company Examples Macro HelixSunRx SentryWellpartner 25

Example IssueRisk Dispense Fee Dispense fees that are too low can result in losses to pharmacy; too high can raise kick-back concerns for the covered entity Payment Cycle Potential for negative cash flow Slow-movers Carrying cost burden to the pharmacy without the benefit of revenue Indemnification Liability may arise as a result of negligence on the part of either party Reconciliation Adequate data not provided on a regular basis Due Diligence - Examples 26

Financial Due Diligence Pro forma – Parallel pro-formas are suggested to determine current and future state earnings Margin analysis – Estimate counterparty margin based on available data (e.g. 10K for publically traded chain pharmacy) – Model entity margins using frequency bands (see next section) Cash flow analysis – Use payment terms from supplier and vendor agreement to model cash flow Fee structure optimization – Functional aspect of financial model; utility for bi-lateral due diligence – Situation where 340B entity owns both operations or is contracting with a “friendly” vendor 27

“Dispense Fees” Contract Pharmacy Dispense Fee: – What does the dispense fee represent? Represents a “hurdle rate” Does not represent operating costs (dispense fees from third party payers represent operating costs; this is not the same thing PBMPHARMACY PBMPHARMACY340B ENTITY RETAIL PHARMACY 340B CONTRACT PHARMACY Revenue = Reimbursement Rate + Dispense Fee Profit = Revenue – (COGS + OPS Cost) Revenue = Reimbursement Rate + Dispense Fee Profit = 340B Dispense Fee - Ops Cost Profit = Revenue - (COGS + 340B Dispense fee) 340B Dispense Fee 28

Analyses – Pro-Forma 29

Analyses – Assumption Tables Auto-populates from raw data Auto-populates from pro forma Used for “fee-modeling” 30

Analyses – Distribution & Margin 31

Analyses – Cash Flow 32

SECTION 4 Hot Topics 33

Hot Topics GPO Prohibition Definition of “Covered Outpatient Drug” Critical Access Hospitals and the Orphan Drug Exclusion Specialty Pharmacy 34

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Contact Information: 36 Shrujal V. Patel | Managing Consultant | Healthcare | Navigant Consulting, Inc. 30 S Wacker Drive | Suite 3100 | Chicago, IL Cell: |Fax: | DISPUTES & INVESTIGATIONS ECONOMICS FINANCIAL ADVISORY MANAGEMENT CONSULTING

Program further expanded to Free- standing Cancer Hospitals, Rural Referral Centers, Sole Community Hospitals, and Critical Access Hospitals throught the Affordable Care Act 2010 Free-standing Children's Hospitals are included by way of the Federal Deficit Reduction Act (DRA) 2005 Congress enacts a law that allows more rural and small urban hospitals to become eligible by meeting certain DSH thresholds 2003 HRSA clarified which hospital outpatient facilites may use 340B (reimburseable cost centers) 1994 P.L , the Veterans Care Act of 1992, codified as Section 340B of the Public Health Services Act (Under Section 602 of the VHCA) was enacted 1992 Medicaid Drug Rebate Program Created 11/5/