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How 340B Works, How It Can Hurt Commercial Employers, and How to Avoid Falling for Schemes.

Navigating the intricate world of healthcare economics often feels like traversing a labyrinth of regulations, incentives, and potential pitfalls. One such area of complexity is the 340B program, a government initiative designed to provide discounted drug pricing to specific healthcare entities. However, what appears to be a straightforward cost-saving opportunity on the surface can quickly turn into a maze of challenges for commercial employers and plan sponsors. In this blog, we will delve into the nuances of how the 340B program operates, its potential impacts on commercial entities, and crucial strategies to avoid falling victim to misleading schemes that promise elusive benefits. Strap in as we unravel the mysteries of 340B and equip you with the knowledge needed to safeguard your organization’s healthcare expenditures in a complex and ever-evolving landscape.

What is 340B?

340B is a government program that allows some covered entities to purchase drugs at a significant discount to market prices.  The program is highly controversial for reasons I will explain.  In fact, I will walk you through exactly how the program should be taken advantage of.  However, its critical to know that 340B is often whispered about by consultants or promoters of schemes as a mythical weapon that plan sponsors can access to reduce their benefit costs.  While not impossible, this is unfortunately far more difficult and unlikely than most people understand.  Unless you are a qualifying covered entity like some non-profit hospitals and critical access hospitals, it is extraordinarily difficult to leverage 340B as a tool against a commercial plan sponsors drug spend.  In fact, it’s far more likely you will be fighting against 340B drugs driving up your costs.  If, however, you have a client that is a qualifying covered entity – well….I’ll walk you through how that covered entity can drive revenue.  To get there, we need to cover how 340B programs work, how Hospitals and other covered entities can leverage them, and how plan sponsors can fend against false promises and leaky contracts created by the program.  This is not a comprehensive overview – this is a complex space and if you wish to explore more deeply –  you should engage with experts in the space.

What is 340B Pricing?

If you read the Health Resources & Services Administration (HRSA) website, the government entity responsible for administering 340B, the program “enables covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services”.  A little more of a sales pitch than an answer.  Effectively, drug manufacturers who participate in Medicaid are required to offer drugs to qualifying entities at a significantly discounted price – this price is incredibly complicated.  It is calculated as the Average Manufacturer Price minus a Unit Rebate Amount which is at a minimum of 23.1% but can be significantly greater.  Each of those terms has its own complex calculation (I told you this was a complicated space).  So how good is this pricing schedule?  Consider that the price point can be driven down as low as $.01 for extremely expensive specialty medications such as Humira which have an AWP of closer to $9,000 for a 30-day supply.  So…pretty good.

Who Gets 340B Pricing?

The reason that trying to capture 340B pricing as a commercial plan sponsor is nearly impossible is that only “covered entities” are eligible for this schedule of pricing and there is a complex web of other requirements before a claim can qualify for this pricing.  Covered entities include Federally Qualified Health Centers (FQHCs), Ryan White HIV/Aids Centers, Hospitals such as Children’s Hospitals, Critical Access Hospitals, Disproportionate Share Hospitals, and certain specialized clinics. 

Not only does the covered entity need to qualify under the 340B eligibility requirements, but the specific location at which the patient is seen needs to be qualified and registered, the patient needs to be considered a qualifying patient, there must be documentation of the encounter at the registered site and the patient must fill the prescription at a covered entity owned or contracted pharmacy.  This web can make it very challenging for a covered entity to receive a qualifying claim. However, the potential of one Humira patient driving upwards of $75,000 per year in profitability to the covered entity makes it well worth the effort.  I know what most of you creative people are thinking:  why can’t I just tell my employer to send their patients to a 340B covered entity and access this wonderful pricing differential?

No, You Cannot Just Send Patients To A Covered Entities Pharmacy and Get 340B Pricing

Aside from needing to make sure that the patient has had an encounter with a provider who is affiliated with the covered entity and that the encounter is properly documented – there is one big reason that you will not be able to access 340B pricing at a covered entity.  340B drugs allow the covered entity to “replenish” their inventory at a 340B price.  This means the covered entity actually buys the drug from their wholesaler at the 340B scheduled price.  Here is a simple flow of how this takes place:  The covered entity would fill a Humira script that they bought at its normal acquisition cost to a qualifying patient.  They would be reimbursed market rates from whatever PBM was covering that patient.  However, when the covered entity went to order a Humira prescription from their wholesaler to replace the one they just sold – they would be allowed to replenish their inventory at the lower price point.  This means, they may have bought the drug initially for $7,500, sold it for $7,700 (as an example), and then bought the replacement for $.01.  They will still fill that next prescription to any patient (not necessarily a qualifying patient) and be reimbursed market rates ($7,700 in my example). This leads to $7,699.99 of profit for the covered entity.  Again, profit for the covered entity.  A plan sponsor whose patient filled their prescription at the covered entity still paid market rates for the claim. 

How Contract Pharmacy Relationships Work

How many of you have filled a prescription at a hospital?  It’s not uncommon, but typically a patient only fills their first prescription at a hospital pharmacy, and they do not fill any additional prescriptions there.  The 340B regulations allow a covered entity to resolve this challenge by setting up a “contract pharmacy” relationship in the community.  These contract pharmacies are allowed to benefit from the 340B covered entities status and this improves the “capture rate” for the covered entity.  The contract pharmacy is allowed to replenish its inventory at the 340B price, and the covered entity is paid by the contract pharmacy for using its eligibility under the program.  The administration of tracking qualifying claimants and reimbursements is extremely complex and there are 340B TPA’s like MacroHelix and Wellpartner (owned by CVS) that administer this function.  This process of determining a prescription qualifies under 340B pricing can take months to play out and occurs well after the prescription has been adjudicated adding to the challenges of a commercial employer benefiting from this arrangement. 

A couple of quick grounds rules: 

  1.  The most profitable 340B drugs for a covered entity are specialty medications. 

  2. Most Health Plans today have Exclusive Specialty arrangements that require patients to fill specialty medications at the PBM-owned specialty pharmacy.

The combination of these two facts means that most of the highly profitable specialty claims do not become qualifying claims.  To get around this, covered entities set up contract pharmacy relationships with specialty pharmacies like Optum Specialty, ESI’s Accredo, or Walgreen’s Specialty.  Further, in a bit of brilliance (which is currently in litigation with the US attorney’s office) CVS requires covered entities to use their 340B TPA, Wellpartner, in order to set up a contract relationship with CVS Specialty or retail CVS stores.

These contract relationships can be very profitable for a covered entity and the contract pharmacy.  Adam Fein at Drug Channels Institute has excellent tracking of the profitability being driven to pharmacy chains and PBMs through these relationships and it’s scary to see the growth.  FYI, this is one of the reasons these programs are so controversial – the covered entity is supposed to be the beneficiary but most of the gains are accruing to the contract pharmacies.

How Covered Entities Maximize 340B

If you have a client that is a qualifying covered entity – this is a brilliant strategy to employ.  You identify the specialty pharmacy of your PBM, or the PBM with the most market share in the community and you set them up as a contract pharmacy.  This will drive significant revenue back to the covered entity.  But it’s detrimental to the plan sponsors in the community.

The most common type of qualifying covered entity is a disproportionate share hospital.  These are entities that serve a particular percentage of patients that are low-income and receive payments from CMS to cover the costs of providing uninsured patients.  The disproportionate share percentage is 11.75%.  These covered entities can be very large.

The strategy to maximize 340B has evolved to targeting highly profitable specialty programs and medications and buying up those specialty practices.  For example, Dermatology, Rheumatology, and Oncology can be extremely profitable specialty practices because these entities prescribe drugs for rheumatoid arthritis, psoriasis, and other conditions that have high profitability through 340B program pricing.  Covered entities will purchase specialty practices to drive up prescribing patterns and purchase other low-income practices to maintain their disproportionate share percentages to ensure they maintain eligibility in the program.

Unfortunately, this is a significant conflict of interest for a provider.  The best 340B priced drugs from a profitability standpoint are those with the highest gross-to-net spread, meaning a high list price but a high rebate.  So, the providers that are prescribing medications become incentivized to prescribe high gross-cost drugs and the hospital formulary may reflect that incentive.  This has a negative effect across the healthcare spectrum as providers don’t know who a qualifying patient at the time of dispensing will be and so the providers are incentivized to prescribe high-cost/high-rebate drugs to everyone. 

Again, the large amount of DSH-qualifying covered entities is controversial.  The benefits of this program are accruing to those who can best navigate and manipulate the program and lead to administrative bloat and negative prescribing patterns.  Those that are most in need, Critical Access Hospitals and Rural Hospitals tend to not accrue much in the way of gains because they do not own specialist providers, or there are no specialist providers in their communities.  They still benefit from the program, but not nearly to the degree of large urban enterprises.

How 340B Programs Can Hurt Plan Sponsors

Due to the deep discounts offered by the 340B program, the government included a provision Prohibiting covered entities from receiving duplicate discounts or rebates.  The short version is –  covered entities aren’t allowed to also receive a rebate from the manufacturer for these drugs.  While I am not privy to direct GPO and Manufacturer contracts, there is a general consensus that manufacturers exclude 340B qualifying claims from eligibility under their rebate agreements with these GPOs.

This means that if a covered entity has a qualifying claim, the PBM will not pay a rebate on that claim.  In the case of Humira, that could mean an employer whose patient is a qualifying patient for a covered entity could be generating $75,000 in profit for the covered entity while the plan sponsor is ineligible to receive rebates from the PBM for these claims.

What’s worse, this is an area of ambiguity.  The complexity of the 340B program and post-adjudication identification of a qualifying claim means that you do not have any way of identifying if a claim is a 340B claim.  This puts you in a position where you have to “trust” the PBM when they tell you a claim is ineligible for rebates because it is a 340B claim.  And virtually every contract I see has an exclusion for 340B medications from rebate guarantees.

Fixing The Leaky Contract

The problem of ambiguity is one you need to address in your contract.  Ideally, you would remove the 340B exclusion from your contract.  While 340B covered entities are prohibited from double dipping, this is misread to apply to commercial employers or even covered entities’ commercial health plans.  The duplicate discount prohibition applies to Medicaid duplicate discounts.  Further, the PBM is not providing you with the actual “rebate”, they are giving you flat, statutory payments that are “reflective” of the rebate.  The PBM may be prohibited from receiving a rebate from the manufacturer.  But as a plan sponsor, you are certainly not prohibited from receiving a payment from a PBM that is “reflective” of average rebates received by that PBM from manufacturers.  You will receive a lower average guarantee for this type of contract amendment, but it may protect you from ambiguity.

Not having a definition or having a loose definition of a 340B drug is the risk we’re trying to manage.  Other ways that a PBM may defined 340B may be by using NCPDP definitions.  NCPDP is the National Council for Prescription Drug Programs and has created standard claim submission forms for the industry as well as a database of pharmacies. 

In these databases if a pharmacy has determined a claim is a 340B claim they can use a pharmacy submission code of 20 when processing the claim.

Pharmacies also have a classification code where they can identify the level of 340B services they provide:

  • 36       Site has no 340B relationships.

  • 37       Site is not owned by a 340B covered entity but acts as a contract pharmacy.

  •  38       Site is owned by a participating 340B covered entity but serves other patients.

  • 39       Site is owned by a participating 340B covered entity and serves only eligible patients.


Type 20 submission codes and type 39 pharmacies are acceptable and auditable exclusions.  Type 38 pharmacies are sometimes included as well – and you should be wary of this classification, particularly if you are dealing with a hospital that is a covered entity.  If the hospital’s own pharmacies are type 38 pharmacies, you may have all of your on-site claims excluded from rebate guarantees. 

An ideal 340B definition would be “claims with submission clarification code of 20 or pharmacy class code of 39”.  You may have PBMs ask for a 38 which may be okay, but it is best to check your claims and see how many claims are being filled at a type 38 pharmacy. 

Protecting Yourself from Unscrupulous Characters

This is, admittedly, a crash course for consultants in a highly complex world.  But it intends to protect you against false promises.  As Virgil said – “I fear the Greeks even when bearing gifts”.  When a PBM or other intermediary promotes the idea of leveraging 340B programs to reduce your client costs, I hope this article provides you with some great questions to ask on how they plan to overcome some of the obvious obstacles:

  • What covered entity are you going to send my patient to?

  • How will you ensure the patient has a documented encounter at the covered entity and is a patient being served by the covered entity?

  • How will you help the plan sponsor benefit from the qualifying claim and not the covered entity?

  •  Will I lose rebates on the claim by sending my patient to a contract pharmacy?

  • What is the net benefit to the plan after lost rebates?


In conclusion, navigating the complexities of the 340B program requires a deep understanding of its intricacies and potential pitfalls. While the program offers significant cost savings opportunities for qualifying covered entities, such as certain hospitals and clinics, it poses challenges and limited benefits for commercial employers and plan sponsors. The core issue lies in the eligibility criteria, documentation requirements, and the intricate processes involved in securing 340B pricing for medications. Attempting to leverage 340B as a tool for cost reduction without meeting the stringent qualifications is fraught with difficulties and unlikely to yield the desired results. Moreover, the ambiguity surrounding rebate exclusions and contract terms further complicates matters for plan sponsors. Therefore, it is crucial to approach 340B programs with caution, seek expert guidance, and ensure contractual clarity to protect against potential financial risks and misleading promises. By staying informed and asking the right questions, businesses can safeguard their interests and make informed decisions regarding healthcare expenditures in the ever-evolving landscape of the healthcare industry.

Written by Jason Wenzke

President, Ringmaster Rx

Ringmaster Technologies