The two pieces of health care reform legislation officially titled the Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (together, "the Act") expand the federal discount drug program known as the "340B Program." The 340B Program requires drug manufacturers to extend deep discounts on covered outpatient drugs to entities that traditionally serve indigent patient populations.

New Covered Entities

The 340B Program discount drug benefits extend only to health care providers that qualify as "covered entities." Prior to passage of the Act, "covered entity" was defined to include such health care providers as Federally Qualified Health Centers and certain disproportionate share hospitals. The Act extends the definition of covered entity to include the following providers not previously covered:

PPS exempt Children's Hospital                 (w/ disproportionate Medicaid share > 11.75%)

PPS exempt Critical Access Hospital        (w/ disproportionate Medicaid share > 11.75%)

Rural referral center                                      (w/ disproportionate Medicaid share > 8%)

Sole community hospital                              (w/ disproportionate Medicaid share > 8%)

These new covered entities must also fall into one of the following three categories: (1) be owned or operated by a unit of state or local government; (2) be a public or private nonprofit entity formally granted governmental powers; or (3) be a private entity which has a contract with local or state government to provide services to low income individuals who are not eligible for Medicare or Medicaid.

In order to establish status as a covered entity entitled to 340B drug discounts, each covered entity must register with the Health Resource Service Agency ("HRSA") of HHS.

Exclusion of Orphan Drugs

For the new covered entities listed above, the Act specifically excludes from the 340B Program discounts for drugs that the Secretary of HHS has designated as being for a "rare disease or condition." Such drugs are commonly known as "orphan drugs." This orphan drug exclusion does not apply to other types of covered entities.

Improvements to 340B Program Integrity

The Act requires HHS to develop and implement a number of measures designed to improve the integrity of the 340B Program. These measures include a system to confirm that manufacturers are only charging covered entities the maximum 340B drug prices ("ceiling prices"), ceiling price audits, publishing ceiling prices on the HRSA website, procedures for refunds by manufacturers to covered entities (and vice versa) when incorrect prices are charged (or paid), civil money penalties for overcharging by manufacturers or improper transfers by covered entities, improved covered entity registration and a standardized, single system for identifying covered entities. The Act also requires HHS to develop and implement an administrative dispute resolution system to address conflicts between drug manufacturers and covered entities.

Effective Date

The Act's amendments to the 340B statute are effective as of January 1, 2010, and apply to all 340B drugs purchased after January 1, 2010.

Also New - Covered Entity Hospitals May Use Multiple Contract Pharmacies

The 340B program previously permitted a covered entity to use only one community pharmacy (known as a "contract pharmacy") in addition to any pharmacy it may operate, to fill prescriptions for covered entity patients. Covered entities who wished to use multiple contract pharmacies had to go through a lengthy and complicated demonstration project process in order to get permission from HRSA to do so. In March, HHS issued final guidelines which permit covered entities to use multiple contract pharmacies in order to serve the needs of covered entity patients more effectively. The guidelines contain specific requirements for written agreements between covered entities and contract pharmacies, specify certain billing, shipping and purchasing requirements, and establish a process for the parties to register their relationship with HRSA. These guidelines, which wholly separate from the Act, went into effect on March 5, 2010.