The 340B Drug Program: Opportunity and Risk

May 1, 2020

Two female professionals working on a laptop

As the healthcare market continues to evolve and operating margins get squeezed for a variety of reasons, hospitals need to capture all opportunities available to increase revenue and lower operating costs. One opportunity that presents the possibility of achieving both goals, but also comes with high compliance risk, is the 340B drug program.


The 340B drug program can lead to substantial cost savings by offering eligible providers the opportunity to purchase drugs at a substantial discount. The program allows eligible hospitals to establish contract pharmacy networks, resulting in increased revenue for the eligible provider. However, it is also very data intensive and can expose eligible providers to increased compliance risk if they do not administer it properly. The program, which the Veterans Health Care Act of 1992 established, requires drug manufacturers to provide discounted drugs that are distributed to outpatients at specific covered entities.

The following hospital types are eligible:

  1. Children’s Hospitals
  2. Critical Access Hospitals
  3. Disproportionate Share Hospitals
  4. Free Standing Cancer Hospitals
  5. Rural Referral Centers
  6. Sole Community Hospitals

The 340B program is administered by the Health Resources and Services Administration (HRSA), which is part of the US Department of Health and Human Services. Specifically, within the HRSA, the Office of Pharmacy Affairs is responsible for program oversight.


Recently, there has been a substantial increase in the number of compliance audits that the HRSA has been performing, increasing from 51 audits in federal fiscal year 2012 to approximately 194 audits in federal fiscal year 2018. It is very important for hospitals that participate in the 340B drug program to have an effective and comprehensive compliance program that can withstand an HRSA audit. In addition, for hospitals that have contract pharmacy networks in place, they must meet the requirement, as published by the Office of Pharmacy Affairs that, “All covered entities are… expected to conduct annual audits of contract pharmacies that an independent outside auditor performs as a way to fulfill their ongoing obligation of compliance.”

Initially, a hospital must have a complete set of policies and procedures in place detailing specifically how the entity is handling various aspects of the 340B program. HRSA auditors will typically review all 340B-related policies. Some, but not all, of the aspects that the policies and procedures need to cover include:

    • The definition of an eligible drug

    • The definition of an eligible patient

    • How the eligible provider list is maintained

    • Who is responsible for maintaining the correct information in the Office of Pharmacy Affairs database

However, having policies and procedures in place that adequately address these issues is not all that a 340B provider needs to be properly prepared for a potential audit.


One of the essential program requirements that an HRSA auditor will review is ensuring that the entity does not provide drugs that were purchased under the 340B program to patients who are not eligible to receive these drugs. This activity is called diversion. An eligible patient is one receiving outpatient services with whom the entity has established a relationship and maintains records of the healthcare services provided to that individual. The patient must also receive services from a qualified health provider. While this might seem straight-forward, there are several areas and issues that must be addressed to satisfy an audit requirement.

During an audit, the entity must be able to produce the medical record on the eligible patient, validating that the patient received services and that the drug prescribed, which was replenished using drugs with 340B pricing, was consistent with the services rendered. In addition, the entity must be able to document that the healthcare professional that prescribed the drug was either employed by the entity or provided the healthcare services under a contractual agreement or other arrangement (e.g., referral for consultation) with the entity. Regardless of the arrangement’s structure between the entity and the healthcare provider, it is critical that the ultimate responsibility for the care provided to the patient remains with the entity. This is consistent with the requirements of a prescription that a contracted pharmacy fills. It is the covered entity’s responsibility to be able to show that the patient is an eligible patient, that the prescriber is an eligible prescriber, that the department where the prescription was written is an eligible department and that the payer was an eligible payer. Typically, contract pharmacy agreements will carve out Medicaid patients. Therefore, any prescription for a Medicaid patient would not be 340B eligible.

A second high-risk issue that HRSA auditors will review is the possibility of duplicate discounts being issued on the same drug. This affects drugs that were distributed to Medicaid patients. When registering for the program, an entity has the option to either carve in or carve out Medicaid patients. If an entity has selected to carve in their Medicaid patients, then the entity can use drugs that were purchased under the 340B program for their Medicaid patients. However, they must report this to HRSA and their relevant state Medicaid office so that a Medicaid rebate is not also requested from the manufacturer for these drugs. In essence, the auditors will want to make sure that, if the entity is a carve-in provider, the drug that was distributed was a 340B drug and that no Medicaid rebate was also claimed for the drug.

A third likely area reviewed by an HRSA auditor is the method used for the tracking and reporting of 340B transactions. Many hospitals will have third-party software installed used to accumulate, track and report on all 340B activity. Typically, an auditor will select a sample of transactions that were completed using 340B-priced drugs. The entity will then need to be able to track these transactions through the software system and then must be able to produce the related source documentation. Validating the drug that was dispensed was an eligible drug, that it was then replenished using 340B drug pricing, that the healthcare provider who prescribed the drug was eligible, that the medical record for the patient shows that services were rendered and that the drug prescribed was related to those services will be critical.

Although not required as part of an HRSA audit, hospitals with established contract pharmacy networks will also want to evaluate recent cash transfer/reconciliation activities. In a contract pharmacy agreement between a hospital and a pharmacy, requirements will typically be defined regarding how and when pharmacies will receive funds for their activities. Hospitals will need to assess how dollar amounts are being transferred, how amounts owed but not yet transferred are being tracked and are any reconciliation amounts from prior periods being handled properly. Also, there should be a reconciliation between these amounts and actual activities and prescriptions being filled.


The 340B drug program can be a financial windfall for a hospital eligible to participate. Drug manufacturers are required to provide substantial discounts on eligible outpatient prescription drugs distributed by an entity. However, there are a multitude of issues and data points involved in the administration of the program. All these issues and data points are subject to increased scrutiny and audit. Compliance departments of participating hospitals need to be intimately familiar with the program and provide oversight and guidance from a regulatory-compliance perspective. Ensuring that policies and procedures are in place, conducting mock audits and educating staff are all important and vital to taking advantage of the 340B drug program opportunities.

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