The Federal 340B Program

Facts, Figures, Opportunities, and Pitfalls

Presented By: Shrujal Patel M.S. RPh. MBA

Introduction to 340B and Relevant Trends

SECTION 1

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340B Timeline

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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)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 79% 66% 64% 58% 53% Private Sector Pricing 51% “Best Price” 63% 49% 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) 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

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Entity Types

Hospital Types

• Disproportionate Share Hospital • Children’s Hospital • Critical Access Hospital • Free-Standing Cancer Hospital • Rural Referral Center • Sole Community Hospital

Federal Grantees

• Federally Qualified Health Center • Federally Qualified Health Center Look-Alikes • Title X Family Planning Grantees • State Aids Drugs Assistance Programs • Ryan White Care Act Grantees (A,B,C,D,F) • Black Lung Clinics • Hemophilia Treatment Centers • Native Hawaiian Health Centers • Urban Indian Organizations • Sexually Transmitted Disease Grantees • Tuberculosis Grantees 7

Hospitals; What’s the Difference?

Covered Entity Type

DSH Hospital Children's Hospitals Free-Standing Cancer Hospital Rural Referral Center Sole Community Hospital Critical Access Hospitals

Non Profit or Government Contract

Yes Yes

DSH %

>11.75% >11.75% Yes Yes >11.75% ≥8% Yes Yes ≥8% N/A

GPO Exclusion

Yes Yes Yes No No No

Orphan Drug Exclusion

No No Yes Yes Yes Yes 8

340B Compliance

SECTION 2

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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.

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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

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 340B drugs are placed into inventory and can be used on any patient Wholesaler ships drugs to covered entity Pharmacist uses “available package list” to reorder drugs on the 340B account

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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

As defined by SSA 1927(k) – definition of “Covered Outpatient Drugs”

Covered Drugs

Outpatient drugs OTC’s with a prescription Biologics

Not Covered

Inpatient drugs Vaccines Drugs that are bundled with a procedure (not charged/reimbursed as a line item) Insulin Clinic administered drugs 15

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.

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340B Multiple Contract Pharmacy

SECTION 3

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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.

Contract Rx Fees Patient Traffic Revenue Cost of Goods Sold Patient Rx Data

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How Does it Work?

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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

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Contract Pharmacy Relationships

Chain

Type

Independent Mail order Joint venture/Subsidiary* Third Party Administrator

Positives

• • High volume Large revenues • • Better MTM Lower fees • Potentially high volume • Not limited geographically • • Financial Transparency Operational control • Limited necessity for internal controls

Negatives

• • High fees Arduous terms • • Smaller volumes Lower revenues • Lack of compliance control • No visibility of operations • • Potentially low volume Potentially low revenue • • High fees Lack of program control

* Not above the line or on the covered entity cost report

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Third-Party Administrators

• •

What are they?

– Typically a software or management company

Software Company Examples Mgmnt. Company Examples

Macro Helix SunRx Sentry Wellpartner

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?

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Due Diligence - Examples

Example Issue

Dispense Fee Payment Cycle Slow-movers Indemnification Reconciliation

Risk

• Dispense fees that are too low can result in losses to pharmacy; too high can raise kick-back concerns for the covered entity • Potential for negative cash flow • Carrying cost burden to the pharmacy without the benefit of revenue • Liability may arise as a result of negligence on the part of either party • Adequate data not provided on a regular basis 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 RETAIL PHARMACY 340B CONTRACT PHARMACY

PBM PHARMACY

Revenue = Reimbursement Rate + Dispense Fee

Profit

= Revenue – (COGS + OPS Cost)

PBM PHARMACY 340B ENTITY

Revenue = Reimbursement Rate + Dispense Fee

Profit

= 340B Dispense Fee Ops Cost 340B Dispense Fee

Profit

= Revenue (COGS + 340B Dispense fee) 28

Analyses – Pro-Forma

COVERED ENTITY NAME HERE "CHAIN PHARMACY" 340B CONTRACT PHARMACY INITIATIVE: Pro forma (Current State)

QUARTER 2011 ANNUALIZED YEAR 1 REVENUE

Gross Receipts (by "Chain Pharmacy" on behalf of CE) Fees

YEAR 2 YEAR 3 YEAR 4 YEAR 5 TOTAL

$ 6,641,344.48

$ 26,565,377.92

$ 27,893,646.82

$ 29,288,329.16

$ 30,752,745.62

$ 32,290,382.90

$ 33,904,902.04

$ (1,469,091.67) $ (5,876,366.69) $ (6,170,185.02) $ (6,478,694.27) $ (6,802,628.99) $ (7,142,760.44) $ (7,499,898.46) $ (34,094,167.18) $ 5,172,252.81

$ 20,689,011.23

$ 21,723,461.79

$ 22,809,634.88

$ 23,950,116.63

$ 25,147,622.46

$ 26,405,003.58

Net Revenue OPERATING EXPENSES

Cost of Goods Sold Labor Technology Additional Internal Audit

Total Expenses OPERATING PROFIT

Net Proceeds to "Chain Pharmacy" % of CE True Net

$ (2,111,211.62) $ (8,444,846.50) $ (8,867,088.82) $ (9,310,443.26) $ (9,775,965.43) $ (10,264,763.70) $ (10,778,001.88) $ (48,996,263.09) $ (32,500.00) $ $ $ (130,000.00) $ $ $ (132,600.00) $ $ $ (135,252.00) $ $ $ (137,957.04) $ $ $ (140,716.18) $ $ $ (143,530.50) $ $ $ (690,055.73) $ $ $ (2,143,711.62) $ (8,574,846.50) $ (8,999,688.82) $ (9,445,695.26) $ (9,913,922.47) $ (10,405,479.88) $ (10,921,532.39) $ (49,686,318.81)

$ 3,028,541.18

$ 12,114,164.74

$ 12,723,772.97

$ 13,363,939.62

$ 14,036,194.16

$ 14,742,142.58

$ 15,483,471.20

$ 70,349,520.54

$ 1,469,091.67

32% $ 5,876,366.69

32% $ 6,170,185.02

32% $ 6,478,694.27

32% $ 6,802,628.99

32% $ 7,142,760.44

32% $ 7,499,898.46

32% $ 34,094,167.18

32%

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Analyses – Assumption Tables

Rx Volume

Total # of Rx in Data Set Total # of Eligible 340B Prescriptions

Fees

Administration Fee Coordination of Benefit Fee ($) Coordination of Benefit Fee (%)

Additional Expenses

Additional FTE (Annually) Technology Costs Additional Internal Audit Costs

Growth Rates

Gross Receipts Cost of goods sold Labor Technology Internal Audit

Quarterly

32976

Annually

131904 31526 126104 $ 15.00

$ 15% $ 130,000.00

$ $ 5% 5% 2% 0% 0%

Estimated "Chain Pharmacy" BATNA

Method 1

Revenue COGS (est. by adding back 65% COGS) Net

Method 2

$ 26,565,377.92

$ (24,128,132.85) $ 2,437,245.07

Revenue $ 26,565,377.92

Estimated Margin Net

BATNA AVG:

$

$

21% 5,578,729.36

4,007,987.22

Auto-populates from pro forma Auto-populates from raw data Used for “fee-modeling” 30

Analyses – Distribution & Margin

Primary Analytics Distribution

$0.01-50.00

$50.01-100.00

$100.01-500.00

$500.01-1000.00

$1000.01-28000.00

# of Rx

Revenue

% of Rx Avg. Revenue Total Revenue

7639 24.23% 6278 19.91% 15258 48.40% 1434 4.55% 917 2.91% $ $ $ $ $ 34.08

73.62

194.62

661.97

2,181.07

$ $ $ $ $ 260,324.81

462,203.27

2,969,510.50

949,267.29

2,000,038.61

Avg. COGS

$ 6.01

$ 17.72

$ 59.45

$ 208.49

$ 815.65

Total COGS

$ 45,917.69

$ 111,268.33

$ 907,098.38

$ 298,971.61

$ 747,955.62

Avg. Margin Before Fees

82.36% 75.93% 69.45% 68.51% 62.60%

Distribution

$0.01-50.00

$50.01-100.00

$100.01-500.00

$500.01-1000.00

$1000.01-28000.00

# of Rx % of Rx

22015 69.83% 5308 16.84% 3558 11.29% 366 1.16% 279 0.88%

Avg. COGS

$ 15.96

$ 69.41

$ 189.54

$ 708.96

$ 1,640.16

COGS

Total COGS

$ 351,319.35

$ 368,416.63

$ 674,393.19

$ 259,478.08

$ 457,604.38

Avg. Revenue Total Revenue

$ 102.89

$ 2,265,114.78

$ 199.31

$ 509.04

$ 1,483.12

$ 3,456.25

$ $ 1,057,946.45

1,811,168.09

$ $ 542,822.34

964,292.82

Avg. Margin Before Fees

84.49% 65.18% 62.76% 52.20% 52.55%

Frequency Distribution (Revenue)

$1000.01-28000.00

$500.01-1000.00

$100.01-500.00

$50.01-100.00

$0.01-50.00

0 917 1434 5000 6278 7639 10000

# of Rx

15258 15000 20000 # of Rx

Frequency Distribution (COGS)

$1000.01-28000.00

$500.01-1000.00

$100.01-500.00

$50.01-100.00

$0.01-50.00

0 279 366 3558 5308 22015 5000 10000 15000 20000 25000

# of Rx

# of Rx 31

Analyses – Cash Flow

Cumulitive Cash Flow

$10,000,000.00 $8,000,000.00 $6,000,000.00 $4,000,000.00 $2,000,000.00 $ $(2,000,000.00) $(4,000,000.00) INFLOWS OUTFLOWS $8M 32

Hot Topics

SECTION 4

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Hot Topics

• • • •

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

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Contact Information: Shrujal V. Patel | Managing Consultant | Healthcare | Navigant Consulting, Inc.

30 S Wacker Drive | Suite 3100 | Chicago, IL 60606 Cell: 516.220.8859|Fax: 312.583.5701|Email: [email protected]

www.navigant.com

DISPUTES & INVESTIGATIONS • ECONOMICS • FINANCIAL ADVISORY • MANAGEMENT CONSULTING

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