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H H S Department of Health and Human Services
Health Resources and Services Administration
HIV/AIDS Programs

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ADAP Manual - 2003 Version

VII.  Section 340B Drug Discount Program

2.  The Point of Purchase Discount, ADAP Rebate Option, and the Prime Vendor Program

Chapter Summary
Introduction

  1. Point of Purchase Discount
  2. ADAP Section 340B Rebate Option
  3. References
  4. Attachments

 Chapter Summary  TOP

The 340B point of purchase discount is designed to allow AIDS Drug Assistance Programs (ADAPs) that are centrally administered and operate a central drug purchase and dispensing system to purchase a covered drug from a manufacturer at or below the Section 340B ceiling price. The Section 340B rebate option is an alternative method for ADAPs to access the 340B Drug Discount Program. The Prime Vendor Program is designed to maximize the benefi ts of the Prescription Drug Program to clients and State ADAPs. This chapter describes both 340B systems and the benefits of participating in each. It includes four attachments:

Attachment A: State-by-State Chart of Purchasing Systems, 2002
Attachment B: Questions and Answers about the Section 340B ADAP Rebate Option
Attachment C: Conditions for Participation in the Section 340B ADAP Rebate Option
Attachment D: Section 340B Program Enrollment Form

 Introduction  TOP

AIDS Drug Assistance Programs (ADAPs) have three methods for accessing the Section 340B Drug Discount Program: the point of purchase discount, the rebate option, and the Prime Vendor Program. The next segment describes these mechanisms and the dispensing systems utilized by ADAPs under each method.

 Point of Purchase Discount TOP

Under the point of purchase discount system, ADAPs pay a discounted price for each drug at the point of sale. Participation in the point of purchase discount system is easiest for States that centrally purchase and dispense medications. Currently, 22 ADAPs purchase medications through the point of purchase discount. The Health Services and Resources Administration's (HRSA) Office of Pharmacy Affairs (OPA) guidelines require that these ADAPs purchase drugs directly from manufacturers, wholesalers, or through a purchasing agent and dispense drugs either through their own pharmacy or through a single contract pharmacy service provider. In all cases, the ADAP must take ownership of the drugs.

 For States accessing the point of purchase discount, dispensing fees charged by the contracted pharmacy and other administrative costs impact the final cost of the drug. These costs may be combined or may be accounted for within different units of the State health department's budget.[1] For example, a separate unit may be responsible for the ADAP's data management system, or the State/county pharmacy may not be able to apportion overhead costs related to the ADAP, even though staff pharmacists are ordering and dispensing ADAP prescriptions to ADAP clients. In addition, States or State pharmacies that purchase and take possession of medications incur facility/warehousing costs. Consequently, it may appear that ADAPs participating in the Section 340B point of purchase discount enjoy significant savings on the purchase price of drugs; however, it is important to consider the cost-effectiveness of the entire drug purchasing, dispensing, and administrative system used by the ADAP.

How The Point of Purchase Discount System Works

Dispensing Systems Used Under the Point of Purchase Discount

State ADAPs that directly purchase drugs usually have a centralized mechanism for dispensing drugs to clients. Of the 22 ADAPs that use the Section 340B point of purchase discount system, 11 ADAPs purchase and dispense drugs through a Central State pharmacy; five ADAPs purchase and dispense through another 340B covered entity such as a disproportionate share hospital or a Ryan White Title III community clinic; and the remaining six purchase and distribute using a contract pharmacy services mechanism. Many ADAPs have built on existing State pharmaceutical purchasing and dispensing infrastructures to achieve their current mode of operation.

Central State Pharmacy

For those ADAPs that use a central State pharmacy, the State health department generally maintains a centralized pharmacy and then either dispenses drugs by mail-order to individual clients or distributes drugs through a system that will ship the product in bulk to a pharmacy for dispensing on-site to clients (e.g., a community health center, a local public health jurisdiction, a county public health unit). This system allows the ADAP to retain centralized reporting and inventory control mechanisms. For States that dispense via mail-order, system strengths include client confidentiality and client convenience. Through either mechanism, States should continually monitor the time that it takes the client to receive their medications.

 Contracted Pharmacy Service Providers

ADAPs can choose to participate in the Section 340B Drug Discount Program by establishing a contract pharmacy services agreement. Guidelines on the use of contract pharmacy services were published in the Federal Register on August 23, 1996. This mechanism is designed to facilitate Section 340B program participation for those eligible covered entities that do not have access to appropriate "in-house" pharmacy services. The guidelines create a system in which an ADAP (or other covered entity) may contract with a pharmacy to dispense drugs purchased at 340B discount prices, provided the ADAP contracts with only one dispensing pharmacy that may in turn dispense from a single pharmacy site.[2] For example, some ADAPs contract with university medical centers or hospitals. The guidelines clearly state that the ADAP must purchase and retain ownership of drugs procured at 340B discount prices. In the comment section, the guidelines explain that a contract pharmacy may in fact order drugs on behalf of a covered entity as long as the ADAP is billed for the drugs.[3] The ADAP may also use a purchasing agent as long as the drugs are shipped to the dispensing/contract pharmacy and the ADAP is billed for the purchased drugs. In addition, the guidelines outline the steps that the ADAP should take to ensure that the 340B requirements for preventing drug diversion and avoiding double discounts/rebates are met by the contract pharmacy.

How The Contract Pharmacy Services Mechanism Works

Because of the requirement that the contractual relationship is with a single pharmacy, ADAPs usually contract with a mail-order pharmacy. Therefore, system strengths are the same as those of a central State pharmacy, including client confidentiality and the client's convenience of filling prescriptions. Again, the time that it takes the client to receive their medications should be continually monitored.

WHAT ARE THE DIFFERENCES BETWEEN THE POINT OF PURCHASE SYSTEM AND THE ADAP SECTION 340B REBATE OPTION?

The 340B point of purchase discount allows centrally-administered ADAPs that operate a central drug purchasing and dispensing system to receive an up-front discount by purchasing a covered drug from a manufacturer at or below the Section 340B ceiling price. In contrast, the ADAP Section 340B rebate option is designed to allow ADAPs that reimburse a network of local pharmacies for clients’ medications to achieve cost savings on the medications dispensed to clients that are close (but not equivalent) to the savings received by the point of purchase system. This is accomplished by the ADAP submitting rebate claims through the Section 340B Drug Discount Program to drug manufacturers.

ADAPs using the point of purchase discount receive immediate cost-savings by directly purchasing drugs at the discounted price. Additional operating costs are incurred through:

  • dispensing fees paid to contracted pharmacies, or
  • overhead (e.g., personnel, storage, shipping), if the ADAP has its own distribution/dispensing system.

ADAPs using the rebate option must recoup their savings after they have reimbursed the pharmacy for the prescription. They are encouraged to negotiate with their pharmacy network to reduce the initial cost of the prescription to help bring their total drug cost more in-line with the 340B discount. This is accomplished by negotiating a reduction in the cost of the drug (e.g., AWP - 15 percent) and a reduced dispensing fee.

Monies received as a result of participating in the ADAP Section 340B rebate option
must be returned to the operating budget of the ADAP program. ADAPs must comply with State legislation concerning program income. If State laws allow the return of program income to the ADAP, then States should return income generated from the rebate option to the ADAP’s operating budget. However, if State legislation is in conflict with 340B requirements, ADAPs must work with the OPA to develop an acceptable means of ensuring that rebate dollars are returned to the Title II ADAP.

 ADAP Section 340B Rebate Option TOP

On June 29, 1998, a Federal Register notice was published recognizing a rebate option for ADAPs as an alternative method of accessing the Section 340B Drug Discount Program. The rebate option is designed to allow ADAPs currently using a reimbursement model (reimbursing a local network of pharmacies) to achieve cost savings that are closer to the savings received through the point of purchase system. As of July 2001, 28 State ADAPs participate in the ADAP 340B rebate option. Under the rebate option, ADAPs have the ability to obtain rebates on all covered outpatient drugs on the ADAP formulary. The ADAP Section 340B rebate option differs from voluntary manufacturers' rebates in that it provides ADAPs with potentially long-term arrangements. Because most major manufacturers signed an agreement with the Secretary of the Department of Health and Human Services (HHS), they are required to participate in the 340B program. Other benefits of participating in the ADAP 340B rebate include:

  • better rebates than are offered by most voluntary manufacturers rebate programs;
  • ability to obtain rebates on all covered outpatient drugs on the ADAP formulary;
  • access to all manufacturers who have signed a pharmaceutical pricing agreement with the Secretary of HHS which produce drugs on the ADAP's formulary;
  • standardized format to request drug rebates from manufacturers;
  • establishment of an ongoing relationship that cannot be terminated unilaterally by a manufacturer; and
  • available assistance with dispute resolution issues from OPA.

Although previous Federal Register notices were written to provide guidance for covered entities receiving 340B point of purchase discounts, they do furnish relevant information to ADAPs seeking to use the rebate option. Specifically, the notices that address duplicate discounts, audits and disputes, and the definition of a patient should be reviewed by these ADAPs.

How The ADAP 340B Rebate Option Works

Implementing the ADAP 340B Rebate Option

In cooperation with HRSA's HIV/AIDS Bureau's (HAB) Division of Service Systems' (DSS) ADAP Branch, the National Association of State and Territorial AIDS Directors (NASTAD) developed uniform Conditions of Participation for ADAPs to use when implementing and utilizing the ADAP 340B rebate option. A group of ADAP grantees also participated in the development of the Conditions of Participation. The OPA reviewed the Conditions and deemed them as acceptable methods for ADAPs to access 340B rebates.

NASTAD informed the principal manufacturers of AIDS drugs that the Conditions apply to claims submitted by ADAPs for 340B rebates. All ADAPs should refer to the Conditions of Participation when establishing 340B rebate relationships with drug manufacturers. (See Attachment C at the end of this chapter for a copy of the Conditions of Participation.)

Submitting 340B Rebate Claims

The Federal Register notice that implemented the 340B ADAP rebate option became effective on July 29, 1998. Prescription purchases made on or after that date are eligible for rebates. The Federal Register notice states that an ADAP posted on OPA's EDRS beginning October 1, 1998, can claim rebates based on covered outpatient drugs purchased as of July 29, 1998. After October 1, 1998, ADAP 340B rebates can be claimed beginning the effective quarter of enrollment (January 1, April 1, July 1, October 1). Prescription reimbursements become eligible for submission by the ADAP based on the date that the ADAP paid for the drugs.

The Federal Register notice allows the ADAP to determine how many drugs it will submit for a rebate. An ADAP may work with as many manufacturers as possible to generate the largest amount of cost savings. However, it is recognized that for low-volume/low-cost drugs, the time and costs necessary to collect and format data to submit claims to all manufacturers may outweigh the rebate benefit. In a low volume situation, an ADAP may choose to consolidate rebate claims data for more than one quarter.

Aggregate Data

To submit a rebate to a manufacturer, the Conditions of Participation specify that the ADAP should give aggregate data with the following data elements: the National Drug Code (NDC) number, drug name, number of prescriptions, total reimbursement amount per NDC, total units reimbursed, unit rebate amount (URA) when available and total rebate amount claimed. Most of these data should be available in the system used to manage the ADAP. If the ADAP had been submitting claims for voluntary rebates, the transition to 340B rebates claims should not be difficult.

Supporting Records

ADAPs need to keep supporting records for all submitted aggregate claims. The Conditions of Participation state that the ADAP will maintain the following data for 3 years and make them available to the manufacturer, if necessary to resolve disputes:

  • name and address of dispensing pharmacy;
  • prescription number;
  • units dispensed;
  • date dispensed or paid; and
  • amount reimbursed.

The Pharmaceutical Pricing Agreement, which the manufacturer signs with the Secretary of HHS to initiate their participation in the Section 340B program, also requires covered entities (i.e., participating ADAPs) to retain records of covered outpatient drug purchases for a period of not less than 3 years. This is critical documentation in the event of a manufacturer or HHS audit.

Business Relations with Manufacturers

After an ADAP submits a claim to the manufacturer, the Conditions of Participation state that manufacturers are to pay claims from ADAPs within 90 days of receipt. This is the same process used in most manufacturers' voluntary rebate agreements. Therefore, it is financially advantageous for the ADAPs to submit their claims as quickly as possible after the close of the quarter.

Dispute Resolution

Due to the complexity of the rebate submissions and claims process, it is likely that manufacturers will raise questions about certain rebates being requested. The Conditions of Participation require an ADAP to respond and attempt to resolve any questions raised by a manufacturer within 30 days of the manufacturer's request. The ADAP may amend its rebate claim to correct any agreed upon errors. If a serious, protracted dispute occurs, it may be necessary to use the OPA informal dispute resolution process, specified in a separate Federal Register notice (61 FR 65406). In this situation, Section 340B permits a participating drug manufacturer to audit (at its own expense) an ADAP's records that pertain to 340B rebated, covered drugs that may have generated a Medicaid rebate or may have been diverted to an individual who was not a client of the ADAP. These audits may only be performed within the guidelines developed by HRSA (for example, manufacturer documentation demonstrating reasonable cause to believe that the ADAP has violated these prohibitions). Any ADAP requiring more information about the dispute resolution process should contact the OPA.

If the manufacturer is late in its payment to the ADAP, it is recommended that any initial or minor problems be resolved using normal business procedures to collect overdue bills. OPA assistance with dispute resolution is available at any time during a rebate dispute with a manufacturer.

The Conditions of Participation state that a manufacturer may withhold rebate payments beyond 90 days only for the specific disputed amounts, under one of two conditions:

1. if an ADAP has failed to respond to a manufacturer's request for additional information within 30 days, or

2. if a request has been filed with the Office of Pharmacy Affairs for a dispute resolution review or audit.

If a major problem of nonpayment or late payment develops, an ADAP should request assistance from OPA to resolve the problem. Persistent nonpayment could be grounds for terminating the manufacturer's 340B and Medicaid agreement with the Secretary of HHS.

Distribution Systems Used Under the ADAP Section 340B Rebate Option

State ADAPs that make medications available through a network of retail pharmacies often do so for a variety of reasons. Some of these include:

  • the use of multiple, convenient pharmacies for improved client access;
  • the ability of clients to have immediate access to pharmacy services;
  • the utilization of an existing network of pharmacies that have contracted with and are certified through the State Medicaid program or other State-sponsored pharmacy program (e.g., benefits program for the elderly); and/or
  • the opportunity to provide ADAP clients with access a face-to-face pharmacist/patient relationship (e.g., patient counseling services).

As of 2001, 30 ADAPs make medications available under a reimbursement model. Of these ADAPs, 29 participate in the ADAP Section 340B rebate option (one State accesses both the rebate option and the point of purchase discount), and one ADAP receives State-mandated rebates. In general, these 30 ADAPs have formal agreements with either a network of retail pharmacies, a mail-order pharmacy (or some combination of the two), a pharmacy benefits manager, or utilize a State Medicaid or other State-sponsored pharmacy network.

 ADAPs that reimburse pharmacies can reduce the final cost of the drug by (1) submitting rebates through the 340B program or a voluntary agreement with the manufacturer, and (2) directly negotiating with the dispensing pharmacies for a discount on the drug price at the point of sale. Some ADAPs have negotiated a contractual purchase price based on the State's Medicaid price (i.e., average wholesale price (AWP) less 10 percent to 15 percent). Other ADAPs have negotiated a discount percentage of the AWP based on their program characteristics and purchasing volume. The AWP is significantly higher than the Average Manufacturers' Price (AMP).[4] The 340B rebate amount and voluntary manufacturer rebates are based on a percentage of the AMP and not on the cost of the drug to the ADAP (AWP or some percentage thereof).

 In addition to lowering the purchase price of the drug, the ADAP can attempt to negotiate a favorable dispensing fee on each prescription.[5] Therefore, the final cost of a drug to the ADAP is impacted by the negotiated purchase price of the drug, the dispensing fee, and any rebate that the ADAP receives on the drug.

As this example demonstrates, negotiating a lower purchase price for the drug is an important cost-containment strategy for ADAPs that purchase through a pharmacy network. In practice, ADAPs that utilize the State Medicaid program or other State-sponsored pharmacy network generally receive the benefit of the pricing structure and dispensing fee that has been negotiated by these programs. In addition, these ADAPs may be able to take advantage of the point of sale data system that other State programs utilize. This allows the ADAP to know in "real time" when drugs are dispensed. Moreover, the ease of submitting rebate claims is greatly enhanced by having all client dispensing information in a digital format.

For ADAPS that distribute through a network of retail pharmacies, two factors can help an ADAP negotiate a favorable discount and dispensing fee.

1. A sufficiently high drug purchasing volume will increase an ADAP's leverage when negotiating with pharmacies, based on the large amount of money that the ADAP will be spending on medications.

2. If an ADAP knows the geographic distribution of its clients and can project the amount of business that will be funneled through particular pharmacies, then the same purchasing volume strategy can be used by the ADAP.

Consider the Following Hypothetical Scenario

The AMP for fifty (50) unites of a particular drug is $100. The AWP cost for 50 units of this drug is $120. A reimbursement model ADAP purchases this drug through a retail pharmacy under an agreement whereby the ADPA pays AWP minus 10 percent for each drug. The ADAP's up-front drug cost is $108 (10 percent of $120 is $12; $120 minus $12 is $108). The ADAP will pay an additional dispensing fee.

If this ADAP also participates in the ADAP Section 340B rebate option, the ADAP will receive a rebate on the 50 units of the drug that it purchased. If the unit rebate amount (URA) is $0.30 per unit, then the State will receive a rebate check for $15 (URA of $0.30 multiplied by 50 units dispensed). The final cost of the drug, after rebate, is $93 ($108 minus $15) plus the dispensing fee.

If the ADAP receives voluntary manufacturer rebates instead of participating in the Section 340B rebate option, then the rebate amount is based on a negotiation with each drug manufacturer.

Pharmacy Benefits Management

For other ADAPs, distribution activities are coordinated through a pharmacy benefits management (PBM) company that has its own contracted network of retail pharmacies and often has a mail order component. Because the ADAP is one of several customers of the PBM, the company can secure significant discounts for pharmacy services and drug prices.

 PBM Administrative Functions

In addition to a PBM's combined purchasing power, it can provide a wide-range of administrative and drug utilization services that can benefit an ADAP. Administrative functions routinely include:[6]

  • Establishing and maintaining a network of providers (recruit pharmacies; negotiate prices and payment terms and contract with pharmacies, monitor/audit performance);
  • Centrally processing claims (online adjudication, record keeping and reports to clients, payment to providers and fiscal intermediary duties);
  • Benefit design (covered drugs, exclusions, limits cost-sharing provisions [differential co-payments for generic or preferred drugs], mail-order dispensing);
  • Information management (risk assessment, profiling); and
  • Pharmacoeconomic studies.

 Drug Use Control Functions

In addition, PBMs perform a variety of drug utilization functions. These services generally involve "managing" drug utilization to reduce costs and maintain or improve quality. These functions include policies and programs to affect prescribing and dispensing patterns and are targeted towards pharmacists, patients, and prescribers. The range of drug utilization functions that a PBM can offer include:[7]

  • Formulary and formulary related activities (provider incentives, patient incentives rebate management, prior authorization therapeutic interchange);
  • Drug use review (retrospective-drug utilization review (DUR), prospective-DUR [some PBMs use the term "concurrent-DUR"], DUR interventions, "academic detailing," provider education);
  • Disease management (therapeutic outcomes management);
  • Patient compliance (patient education, e.g., newsletters; phone reminders).

Administrative Fees

PBMs will charge an administrative fee, depending on the number and extent of services that they are contracted to perform. The more services performed by the PBM, the higher the administrative fee. As such, ADAPs that contract with a PBM pay for the cost of the drug, the basic dispensing fee, and an additional per claim administrative fee. In some cases, the administrative fee is rolled into the dispensing fee charged per prescription.

 References TOP

Sources Used for This Chapter

"ADRP Drug Distribution Mechanisms." ADRP Report. Volume 3, No. 2, 1995.

"Contract Pharmacy Services." Federal Register notice. Vol. 61, No. 165, August 23, 1996.

The Drug Pricing Program Established by Section 340B of the Public Health Service Act. A Report to the House and Senate Appropriations Committees, 1998.

"Entity Guidelines." Federal Register notice. Vol. 59, No. 92, May 13, 1994.

HRSA, HIV/AIDS Bureau, Division of Service Systems. ADAP and the Section 340B Drug Discount Program. Rockville, MD: U.S. Department of Health and Human Services, 1999.

HRSA, HIV/AIDS Bureau, Division of Service Systems. Drug Pricing, Purchasing, and Distribution Systems. Rockville, MD: U.S. Department of Health and Human Services, 1997.

National Technical Information Service. "Assessment of the Impact of Pharmacy Benefits Manager." Washington, DC: U.S. Department of Commerce, September 1996.

October 17, 1996 letter from DSS to grantees re: Expectations and Recommendations about the Administration of State ADAPs supported with Ryan White CARE Act funds.

The Section 340B Discount Program: ADAPs and the Rebate Option. A Ryan White ADAP Technical Assistance Conference Call Report, August 26, 1998.

The Veterans' Health Care Act of 1992 (Public Law 102-585). Statutes at Large, 1992.

For Further Discussion of Topics in This Chapter:

For additional information about the Section 340B Drug Discount Program, see the Office of Pharmacy Affairs.

Notes

[1]  In some States, the dispensing fee mirrors the fee for dispensing medications to Medicaid recipients. In addition, there often are different dispensing fees at different points of sale for brand/single source drugs and generic/multi-source drugs. Variations in dispensing fee amounts may also refl ect the relative cost of doing business in different States or regions of the country. For example, dispensing fees in 1998 for States accessing the direct purchase discount ranged from a low of $2.00 to a high of $13.21, with the average being $6.25 per prescription.

[2] The OPA will review proposals for allowing covered entities that utilize contract pharmacy services to dispense drugs from multiple pharmacy sites. ADAPs interested in dispensing from multiple pharmacy sites under a contract pharmacy services agreement should contact OPA with their proposal.

[3] There is some inherent fl exibility in the contract pharmacy services guidelines as they relate to the establishment of such a mechanism at the covered entity/contract pharmacy level. The guidelines provide a suggested format for an agreement between a covered entity and a contract pharmacy. Issues addressed include: a billing/shipping provision; report contents from the contract pharmacy to the covered entity; a suggested system to ensure an adequate drug tracking system; and a method to ensure patient eligibility.

[4] Again, the AWP is basically the wholesale cost of a given drug. A wholesaler, which usually acts as a distribution arm of the manufacturer, sells the drug to retail pharmacies or other entities (that purchase directly from the wholesaler) for a price higher than the AMP but lower than the AWP. This price is negotiable depending on the buying power of the consumer and other factors.

[5] In some States, the dispensing fee mirrors the fee for dispensing medications to Medicaid recipients. Variations in dispensing fee amounts may also refl ect differences in the relative cost of doing business in different States or regions of the country. For example, dispensing fees in 1998 for reimbursement model ADAPs ranged from a low of $1.50 to a high of $6.50, with the average being $3.76 per prescription.

[6] National Technical Information Service, “Assessment of the Impact of Pharmacy Benefi ts Managers,” U.S. Department of Commerce, September 1996

[7] Ibid. 

 Attachments TOP

Attachment A: State-by-State Chart of Purchasing Systems, 2002

Attachment B: Questions and Answers about the Section 340B ADAP Rebate Option

Attachment C: Conditions for Participation in the Section 340B ADAP Rebate Option

Attachment D: Section 340B Program Enrollment Form