The Patient Protection and Affordable Care Act (PPACA) recently increased the number of hospitals that may qualify for the federal 340B drug discount program, which has been in place for several years. Intended to assist certain health care providers serving the nation’s most vulnerable patient populations, this program requires pharmaceutical manufacturers to provide discounts on covered outpatient drugs purchased by qualifying entities, such as certain hospitals, Federally Qualified Health Centers and other outpatient clinics. Providers typically experience cost savings of approximately 25 percent from their group purchasing organization prices on their outpatient drugs, but each individual provider’s experience is unique.

Historically, to participate in this program, hospitals had to meet the following criteria:

• Owned or operated by a state or local government or be a nonprofit hospital that contracts with a state or local government to provide health care services to low-income, uninsured individuals

• Maintain a disproportionate share hospital (DSH) percentage exceeding 11.75 percent on its cost report

• Agree not to purchase covered outpatient drugs through a group purchasing organization

PPACA (H.R. 3590) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) modified the 340B hospital qualifying criteria. Effective with the passage of this legislation, all children’s hospitals and critical access hospitals are automatically eligible for participation. Hospitals designated by the Centers for Medicare & Medicaid Services as rural referral centers or sole community hospitals are now eligible if their DSH percentage exceeds 8 percent, and free-standing cancer hospitals also can qualify if their DSH percentage would exceed 11.75 percent if they were subject to the same DSH calculations as other hospital providers.

H.R. 4872 also included an important provision related to 340B discounts on orphan drugs. Orphan drugs are a special type of drug intended to treat extremely rare diseases, and they are expensive. The provision excludes newly eligible hospitals under H.R. 3590 from receiving 340B discounts on orphan drugs. This provision does not impact hospitals that were eligible to participate based on previously existing requirements.

Many 340B qualifying providers had hoped health care reform legislation would allow discounts to cover inpatient drugs as well as outpatient, but these provisions have not become a reality.

Hospitals previously ineligible for the 340B program should determine if they meet the new criteria. The above provisions are effective January 1, 2010; therefore, the impact for newly eligible hospital is immediate. Hospitals that do not meet the new reduced requirement thresholds should be analyzing their Medicaid days to verify they are being accurately captured and reported. While the focus of health care reform is heavily focused on reimbursement changes, hospitals should not forget the potential impact on the expense side of their operations.

For information about this issue or related matters, contact your BKD advisor.