Word of the Month: 340B covered entity

What is a 340B covered entity?

Unlike other government programs designed to provide insurance coverage, patients do not enroll in the 340B program. Instead, providers like certain hospitals or clinics that meet certain criteria under the law are eligible to join the program and are then referred to as a “covered entity.” As a covered entity in 340B, hospitals or clinics may claim steep discounts – averaging 59% – on outpatient medicines dispensed to their qualifying patients, including those with private insurance. Sometimes medicines sold to these covered entities are discounted down to as little as one penny.

How do hospitals and clinics qualify as a 340B covered entity?

The 340B statute expressly states the types of providers that can apply for participation in the program. This includes six types of hospitals: children’s, critical access, disproportionate share, free standing cancer, rural referral and sole community. Additionally, it includes federally qualified health centers, Ryan White HIV/AIDS program grantees and five types of specialized clinics – these are collectively referred to as “340B grantees” because they qualify largely based on the receipt of a federal grant from HHS.

Congress intended the 340B program to be a safety net but the 340B eligibility criteria are not reflective of safety net providers, nor the patients who should be helped by the program. Most hospitals, for example, qualify in part based on how many low-income Medicare and Medicaid patients they admit. This is known as the Disproportionate Share Hospital (“DSH”) metric and is considered an inpatient metric since it measures patients admitted. The problem is 340B is an outpatient medicine program. Recent research has shown that hospitals treat very different populations inpatient than they do outpatient, highlighting the disconnect with using the inpatient DSH metric for the outpatient 340B program. Certain private DSH hospitals are also supposed to meet additional contract requirements to provide care to low-income patients, but government watchdogs have found that these requirements are often not enforced. Due to this lax enforcement and flaws in the eligibility criteria, now more than half of all hospitals in the United States qualify for 340B.

Similarly, there are no reporting requirements as part of the 340B program that ensure hospitals are using the revenue they generate through the program to help vulnerable patients. The newest data show hospitals make up nearly 90% of sales in the program, yet it is concerning there is no transparency into how they are using the money. Especially, considering we’ve seen little to no evidence patients are benefiting from the program. Instead, hospitals have co-opted 340B – a program meant to help patients – and turned it into a profit center.

How do contract pharmacies fit in?

Contract pharmacies are pharmacies that have expanded the reach of 340B but they subvert the system because they aren’t part of the program as set up by the statute. They are not listed as a covered entity. Instead, covered entities partner with outside pharmacies to dispense their prescriptions, and because there is little oversight, we have seen an explosion of business relationships between covered entities and contract pharmacies with little to no patient benefit. And remember, these pharmacies can receive a fee or portion of the 340B discount on medicines as part of their agreements with covered entities, but don’t actually have to pass along any of the savings to patients. Covered entities can contract with seemingly unlimited numbers of pharmacies and in turn generate billions of dollars in revenue with no requirements that patients directly benefit.

What are potential solutions?

First and foremost, the program needs to put patients first. Understanding what a covered entity is and their role in the program is a fundamental shift that needs to occur if we want the program to work as intended. Patients should know they are visiting a 340B covered entity and more directly benefit from the discounts covered entities get.

Learn more at PhRMA.org/340B.

PhRMA’s Word of the Month series looks at issues important to the biopharmaceutical ecosystem and spotlights opportunities to create a better health care system that helps patients make appropriate decisions about their health. Check out the full series here.