December 1, Maryland Department of Health and Mental Hygiene. Prepared by:

Report in Response to Legislative Request to the Maryland Department of Health and Mental Hygiene to Study the Feasibility of Purchasing Prescription Drugs through Federally Qualified Health Centers and Local Health Departments Maryland House Bill 6, Section 8, 2001 Legislative Session December 1, 2001 Maryland Department of Health and Mental Hygiene Prepared by: Center for Health Program Development and Management University of Maryland, Baltimore County

Report on the Feasibility of Purchasing Prescription Drugs through Federally Qualified Health Centers and Local Health Departments Table of Contents Introduction 1 I. Background 1 II. Description of the Federal 340B Drug Pricing Program 3 A. Eligibility 3 B. Restrictions 4 C. Available Savings 5 Potential Savings 5 Federal Legislative Intent 5 How a Covered Entity Experiences Savings 6 D. Models of Implementation 6 III. Maryland Perspective 7 A. Community Health Centers 7 Factors Influencing the Ability of a Covered Entity to Participate 7 B. Local Health Departments 10 C. Population That Can Be Served by the 340B Program 11 IV. Activity in Other States Regarding 340B and FQHCs 12 V. Maryland Recommendations 13 A. The State Should Explore Purchasing More Eligible Drugs at 340B Prices 14 B. Other Covered Entities Should Consider Participating in the 340B Program 14 References 16 Attachment A: Estimated Price Compared to Average Wholesale Price (AWP) for Medicaid and 340B Drug Pricing Program Attachment B: Model of 340B Program With a Contracted Pharmacy

Introduction On April 20, 2001, Gov. Parris N. Glendening signed into law HB 6, the Senior Prescription Drug Relief Act. Among other things, the bill requires the Department of Health and Mental Hygiene to study and report upon the feasibility of purchasing prescription drugs through federally qualified health centers and local health departments in Maryland to maximize the number of people who can benefit from the purchasing power of these entities. The bill also asks for recommendations about whether to pursue a method for accessing prescription drug pricing programs through these types of entities, and what options would be best for doing so. Recommendations for appropriate outreach methods were also requested. This report is organized into five sections: Section One provides background information about prescription drug costs. Section Two describes the 340B Drug Pricing Program to which federally qualified health centers and local health departments have access, including existing restrictions, available savings, and models of implementation. Section Three presents information about the current use of the 340B Program in Maryland and the populations served. Section Four briefly reviews recent legislation in other states concerning the 340B Program. Section Five makes recommendations regarding expansion of the 340B Program in Maryland and reviews the participation options available to eligible entities. I. Background Prescription drugs represent one of the fastest growing components of health care expenses. The Maryland Health Care Commission found that the percentage of the health care dollar being spent on prescription drugs increased from 8.7 percent in 1997 to 9.3 percent in 1998, faster than any other category of medical expenditure (Maryland Health Care Commission, 2000). Such growth is also evident on a national basis. Between 1995 and 1998, prescription drug expenditures increased by almost 50 percent, while physician services expenditures increased by 14 percent and hospital expenditures increased by 10 percent (Kaiser, 2000). In Maryland, fee-for-service Medicaid spending on prescription drugs increased by $42 million from FY 2000 to 2001, or 21 percent. Similar increases have been reported in the HealthChoice program. The Kaiser Family Foundation estimates that the growth in prescription drug expenditures can be broken down into three primary components: 1) utilization, or the number of prescriptions dispensed, 2) changes in the types of prescription drugs used (newer, more costly drugs replacing older ones), and 3) changes in manufacturer prices. Increases in manufacturer prices actually had 1

the smallest impact (18 percent) on the increase in expenditures, with utilization contributing to 43 percent of the increase, and changes in the types of drugs prescribed contributing to 39 percent (2000). These changes are evident in retail drug prices. The average retail price of a prescription increased by nearly 60 percent from 1991 to 1998. This increase reflects both price increases for existing drugs and changes in the types of drugs prescribed. On an annual basis over this period, the average increase in retail prescription prices was 6.7 percent, greater than the average change in the Consumer Price Index (CPI) (+2.6 percent) and the average change in the CPI for medical care (+4.6 percent). Not surprisingly, the growth in the average price for brand name drugs exceeded the growth in prices for generic drugs (Kaiser, 2000). These price increases obviously have an effect on purchasers. Government programs, insurance companies, and cash customers are all struggling to absorb these price changes. The impact of these increases may be even more significant for individuals without prescription drug coverage (cash customers). A study by the U.S. Department of Health and Human Services (DHHS) found that in 1999, the average cash customer 1 paid almost 15 percent more for prescriptions than third party insurance companies (U.S. DHHS, 2000). Pharmaceuticals play an increasingly important role in health care, and the inability to obtain needed prescription drugs may compromise an individual s health status. The lack of prescription drug coverage can pose a significant financial barrier to individuals who need prescriptions filled. It is difficult to provide an estimate of the number of Maryland residents who do not have drug coverage. Any estimate would be based on national survey data and would assume that the patterns of income distribution and insurance status in Maryland were similar to the national average. Some low-income individuals access prescription drug coverage through Medical Assistance or the Maryland Pharmacy Assistance Program (MPAP). The MPAP is a State-funded program that helps low income Maryland residents (with incomes less than 116 percent of the federal poverty level for an individual) to pay for specific maintenance medications and anti-infectives. The Short Term Prescription Drug Subsidy Plan offers a prescription drug benefit to Medicare eligible residents with incomes up to nearly $26,000 for an individual. Even with existing programs, there are still gaps in coverage leaving some Maryland residents with no assistance. In an effort to address existing disparities in drug coverage and drug pricing, government officials at all levels are searching for ways to ensure affordable access to prescription drugs for all citizens. HB 6 required the Department to examine opportunities for maximizing the use of the federal 340B 1 For the purposes of this study, cash customers included individuals without prescription insurance coverage and people with indemnity coverage who paid for their prescriptions out of pocket and were later reimbursed by their insurer. 2

Program in Maryland as one possible method of increasing access to lower cost prescription drugs for some uninsured residents. II. Description of the Federal 340B Drug Pricing Program A. Eligibility The 340B Drug Pricing Program was established with the Veterans Health Care Act of 1992. The program, administered by the Office of Pharmacy Affairs in the Health Resources and Services Administration (HRSA), allows a group of Public Health Service (PHS) grantees, called covered entities, to purchase outpatient prescription drugs at the same price as state Medicaid programs. 2 Entities are permitted to negotiate lower prices with manufacturers, but the legislation established the Medicaid best price as the price ceiling. Eligible entities may then sell those prescription drugs to their patients at lower than retail prices. It is important to note that the 340B price is the price that the covered entity pays for the drug and not necessarily the price that the end user or patient pays. Eligible covered entities for the 340B Program include: Federally qualified health centers (FQHCs) and FQHC look-alikes 3 Migrant health centers Homeless and public housing clinics Ryan White grantees Disproportionate share hospitals Black lung clinics State AIDS drug assistance programs Hemophilia treatment centers Native Hawaiian health centers Urban Indian health clinics Title X family planning clinics Sexually transmitted disease (STD) and Tuberculosis (TB) clinics Additional organizations, such as local health departments (a specific area that the HB 6 study was requested to examine) or Planned Parenthood clinics, may be eligible for 340B pricing, but they are not specifically named as covered entities. These organizations are eligible only because of the targeted grant funding that they receive from PHS and may only purchase at 340B prices those 2 According to federal law, state Medicaid programs receive a rebate for outpatient drug purchases. For brand-name drugs, the rebate is equal to 15.1 percent of the average manufacturer s price (AMP) or the difference between the AMP and the manufacturer s lowest or best price, whichever is greater. The best price is effectively the lowest price offered to any domestic purchaser, other than Medicaid programs, state pharmacy assistance programs, and certain federal agencies and grantees. An adjustment is provided for prices that increase at a rate greater than inflation. Rebates for generic drugs equal 11 percent of the AMP. 3 FQHC look-alikes are community health centers that meet the qualifications needed for FQHC designation, but do not receive a federal grant under Section 330 of the Public Health Service Act to support the provision of required primary health care services. 3

drugs that are related to the scope of the services funded by the grant. Disproportionate share hospitals may participate in the 340B Program as long as they do not currently belong to a group purchasing organization for their outpatient drug purchases. Inpatient drugs are not covered under this program. B. Restrictions There are two important federal restrictions to the 340B Program. The first restriction is commonly called drug diversion and has a significant impact on the potential use of the program. The federal regulations specify that drugs purchased at 340B prices can only be dispensed to patients of a covered entity. With the exception of the state AIDS Drug Assistance Programs (ADAPs), an individual is considered a patient of a covered entity if the following three conditions have been met: 1) The covered entity has a relationship with the individual and maintains that person s health care records. 2) The individual receives care from a provider who is employed by the covered entity or who provides health care services to the covered entity s patients under a contractual arrangement. 3) The health care services received by the patient are consistent with the scope of services funded by the PHS grant or are covered under FQHC look-alike guidelines. An individual who is registered as eligible for the state ADAP is considered a patient for the purposes of the 340B Program. This constraint limits the potential expansion opportunities for the federal 340B Program in Maryland. The only method of increasing access to lower cost prescription drugs purchased through the 340B Program is through participating covered entities, and the end user must be a patient of that entity. Moreover, as discussed in the next section more fully, there is no requirement that the savings experienced by the covered entity be passed on to the patient. The second federal program restriction prohibits states from collecting a Medicaid rebate on drugs that are purchased at the 340B price. Under Medicaid law, states receive manufacturers rebates on drugs sold through the Medicaid program, which brings the net drug price to legislated levels. Through the 340B Program, covered entities are permitted to purchase drugs at 340B prices for their Medicaid patients, as well as their uninsured patients. However, as a result of this second restriction, a covered entity cannot purchase a drug for a Medicaid patient at the 340B price (which is already at least as low as the Medicaid price) and then expect a manufacturer to subsequently pay a discount in the form of a rebate to the state Medicaid program. 4

C. Available Savings Potential Savings The actual amount of the discounts that 340B covered entities are able to secure is difficult to estimate given the proprietary nature of pharmaceutical pricing, but discounts below the Medicaid best price ceiling are widely cited. One study compared the 340B prices to the average wholesale price (AWP) 4 for 171 commonly used drugs and found the 340B prices to be 49 percent of AWP, well below the legislated mandate (von Oehsen, 2001). (See Attachment A for graph). A group purchasing organization composed of 220 340B eligible entities cites its ability to negotiate prices ranging from 2 40 percent below the 340B ceiling price. From a nationwide survey of 340B Program participants, Mathematica Policy Research, Inc. reported that the weighted average percent saved by participants ranged from 19.2-22.7 (Mathematica, 1999). Because this report provided no data about the discounts received by covered entities prior to enrollment in the program, and did not compare the prices to any benchmark, such as AWP, it is difficult to make a direct comparison with other figures. It is not possible to identify the exact amount of potential savings available to covered entities under the 340B Program. We are only able to conclude that the legislation does provide for a discount, that it establishes a price ceiling, and that discounts below the ceiling may be available to program participants. In fact, the federal Office of Pharmacy Affairs has implemented a Prime Vendor Program with the intent of using group purchasing power to negotiate prices below the 340B ceiling. New and existing program participants are strongly encouraged by HRSA to use the prime vendor in order to increase business volume and improve the discounts that may be provided. Federal Legislative Intent As noted earlier, the 340B price is the legislated price ceiling offered to the covered entity as the purchaser of the drug. The language in House Bill 6 suggests that the authors were looking for a method of increasing access to low cost pharmaceuticals for Maryland residents, and that the measure of success would be the discounted price that an uninsured patient would pay for the drug. It is important to remember that there is no requirement within the federal 340B Program that the price discount received by the covered entity be passed along to the patient. In fact, a U.S. House Commerce Committee Report from 1992 indicates that the intent of the legislation was actually to help covered entities use their federal grant dollars to provide additional services to more people. In giving these covered entities access to price reductions, the Committee intends 4 The average wholesale price (AWP) is the average list price that a manufacturer suggests a wholesaler charge to a pharmacy. AWP is commonly referred to as a sticker price because it is not the actual price that most pharmacies pay. 5

to enable these entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services (H.R. 102-384). Although there is no requirement to pass along the savings to the patients at the time of final sale, many covered entities do. However, there is no uniform formula used by all covered entities to determine the final price that is charged to end users. It is up to each covered entity to set the final drug price that will be charged to its patients. How a Covered Entity Experiences Savings There are several ways in which a covered entity may experience savings under the 340B Program. One example is when a covered entity uses grant funding to purchase prescription drugs for its uninsured patients but charges them a percentage of the cost of the drug and a dispensing fee. The federal 340B Program reduces the cost of the drug to the covered entity allowing the entity to increase the discount provided to the patient. In this example, the savings, in effect, are passed on to the patient. Another example is when a covered entity uses grant funding to purchase prescription drugs for its uninsured patients at full retail prices and gives them to those patients free of charge. By taking advantage of the 340B Program, however, that entity would be able to reduce the cost of the prescription drugs and re-budget those grant dollars. The savings may be used to purchase additional drugs for more patients, or to expand services in other grant supported areas. Finally, a covered entity can purchase prescription drugs for commercially insured patients under the 340B Program but bill the insurance company at full reimbursement. The covered entity can use the profit for several purposes: 1) to cover the cost of 340B Program expenses, 2) to reduce the price charged to the uninsured patients using the 340B Program, or 3) to support other services provided by the covered entity. All of these examples are consistent with the intent of the legislation. D. Models of Implementation The federal regulations allow for two basic models of implementation. In the first model, the covered entity owns the pharmacy and purchases and dispenses the drugs itself. In the second model, a covered entity contracts with a retail pharmacy to dispense the drugs. The contracted pharmacy may be located at the same site as the covered entity or may be a free-standing retail pharmacy located elsewhere in the community. Federal program regulations specify that the covered entity itself must own the 340B drugs, even if they are shipped to a retail pharmacy for dispensing. This is commonly referred to as the bill to, ship to provision. (See Attachment B for flow chart.) The drugs are billed to the covered entity for payment, but shipped to the contract pharmacy for dispensing. With 6

both models, the federal Office of Pharmacy Affairs insists that safeguards be established to ensure that pharmaceuticals purchased at the 340B price are only dispensed to individuals who are considered patients of the covered entity. Pharmacies must ensure an audit trail illustrating that there is a separate inventory for the 340B drugs, even if that inventory is maintained electronically. The 340B Program regulations, as originally written, allowed for only one pharmacy per covered entity site. A community health center with four clinical sites, for example, could have contracts with up to four different pharmacies. In June 2001, the federal Office of Pharmacy Affairs formally announced its willingness to accept proposals for alternative delivery systems under this program. Three alternative models were suggested. The first model allows for a network of covered entities to use a single purchasing and dispensing system. The second model allows a single covered entity to have contracts with multiple retail pharmacies. The final alternative model allows a covered entity to supplement its in-house pharmacy with a contracted retail pharmacy. The last two options allow for increased access points for patients. For example, a covered entity in a rural area may offer an in-house pharmacy but may wish to have a contract with a retail pharmacy in a town 40 miles away so that its patients who live there may get their refills without having to travel back to the center. HRSA is reviewing applications for alternative delivery systems to ensure program compliance, and is approving them on an individual basis. They expect to announce the first few approved delivery systems before the end of calendar year 2001. III. Maryland Perspective In an effort to collect information about the level of participation in the federal 340B Program among the covered entities in Maryland as specified in the legislation, several community health centers and local health departments were contacted. In September 2001, a survey was mailed to members of the Mid- Atlantic Association of Community Health Centers (MACHC) and was followed up by a group meeting to gather additional data. A. Community Health Centers Of the 12 potentially eligible community health centers in Maryland, 5 currently participate in the 340B Program and 2 are expected to start during the fall of 2001. Of these seven, two of the centers manage their own pharmacies, and the remaining five contract with community pharmacies. At least two of the five remaining non-participants are actively engaged in the planning process. Factors Influencing the Ability of a Covered Entity to Participate Discussions with health center executives revealed a number of factors that influence their participation in the 340B Program. Some factors represent barriers that an organization must overcome in order to participate, while others 7

impact the most appropriate model for implementation. The factors that influence the ability of a covered entity to participate in the program are: Access to capital Wholesaler contract terms Technical assistance needs Pharmacy relationships Wholesaler loyalty Patient mix Complexity of multiple pharmacy agreements Access to Capital. Health centers cited access to capital for start up costs as one of the most common barriers to participation. In order to participate, health centers must be able to purchase the inventory to sell to patients. Even under the contracted pharmacy model, the health center must pay for and own the drugs that are shipped to the retail pharmacy for dispensing. In an effort to decrease the initial inventory burden, federal guidelines do permit health centers to begin participation by selling drugs that are originally purchased by the contracted pharmacy at retail prices, and replace them with drugs purchased at the 340B price. Building renovation costs are an additional expense incurred by health centers that wish to house a pharmacy on-site in order to improve access for their patients. When addressing the issue of capital costs, a health center must consider whether the funds needed to participate would come out of an existing pharmacy budget or whether new money is needed to support the program expenses. If a center is already supporting the prescription costs at retail prices for some of its patients, it will experience savings from purchasing at 340B prices and be able to expand services elsewhere (e.g., purchase prescription drugs for more patients or increase the discount to the patient.) For a center that has a nominal pharmacy budget to start, the initial financial hurdle is greater. Wholesaler Contract Terms. There are two common contract terms imposed by many wholesalers that can impact a health center s pharmacy program: payment terms and minimum drug order levels. Wholesalers reportedly require an inventory payment from pharmacies every 15 days, and charge a 2 percent fee for late payments. This requirement can cause a cash flow problem for a health center that has to pay for the drugs before it receives reimbursement for the sale of those drugs. This effect is even more pronounced when the health center is billing commercial payers for reimbursement. The second contract term often imposed by wholesalers relates to minimum drug order levels. Some health centers have faced problems meeting the minimum order levels required by wholesalers and have incurred additional delivery fees as a result. These fees may represent significant costs to a small pharmacy program whose normal order is below the minimum or one that tries to fill a prescription outside of the established delivery schedule for a drug that is not routinely stocked by the pharmacy. 8

This barrier can impact a health center s pharmacy program from two different angles. A small health center can decrease the impact of the cash flow burden by only purchasing drugs for its uninsured patients. Because the patient would be required to pay for the drug in full at the time of delivery, there would be no lag in billing. The lag in billing only becomes an issue if the center bills a third party insurance program for reimbursement. While excluding drugs for commercially insured patients might eliminate the lag in billing issue, however, the center may not meet the minimum drug order requirements set by the wholesaler if it is only purchasing drugs for the uninsured patients. As a result, that center might face greater program costs due to the additional delivery fees. In addition, by excluding commercially insured patients, the center would not be able to capitalize on the opportunity to profit from the commercial insurance business to cover the program costs and increase discounts for the uninsured. Technical Assistance Needs. Most of the non-participating health centers we spoke with were familiar with the 340B Program but lacked information about how to implement it. The process of collecting data for this report and speaking with health centers directly allowed an opportunity for disseminating information about the program requirements, technical assistance opportunities, and changes or clarifications in program guidelines that have occurred since its inception. During this process, at least one center was able to react to information about changes in program guidelines and to initiate the necessary steps to begin participation. Among centers that are not currently participating, many have questions about the process for contracting with a retail pharmacy and designing a sustainable program. Pharmacy Relationships. One critical issue was the importance of health center relationships with individual community pharmacies. Many health centers have developed relationships with community pharmacies over the years to accept vouchers from patients for prescription costs to be supported by the health center, or to provide delivery services to health center patients. The health center executives made it clear that any potential 340B Program design would need to be acceptable to their community pharmacist in order for them to consider participating. They clearly have respect for their existing business relationships and are not willing to risk them unnecessarily. Wholesaler Loyalty. Wholesaler loyalty is another factor affecting the decision of some health centers to participate in the program, as well as which model they would employ. Performance appears to be as important as price when it comes to selecting a wholesaler, and most health centers said that they and their community pharmacists were unwilling to change wholesalers absent significant compelling evidence that the new relationship would be worth the effort to change. 9

Wholesalers play an important role in the provision of pharmaceuticals. They purchase large quantities of drugs from multiple manufacturers and then coordinate delivery of the drugs to individual pharmacy sites as they are ordered. As pharmacies are in a business with a rapid movement of inventory, they rely heavily upon their wholesalers to ensure that they have the supplies they need to fill prescriptions as they are presented. The effect of wholesaler loyalty should not prevent any individual center from participating in the program, as all manufacturers who participate in the Medicaid program must honor 340B prices, and the wholesalers must honor the discount. The impediment experienced would only limit the potential design of a program. For example, a center might need to decide whether to change wholesalers in order to join an existing group purchasing program using 340B pricing, or remain with their existing wholesaler and participate individually. Patient Mix. For some health centers, the ratio of insured to uninsured patients would determine the extent of participation and the appropriate program model. As mentioned earlier, centers are able to purchase prescription drugs at 340B prices for commercial patients and bill the commercial insurance at regular rates. The profit may be used to support program expenses for the uninsured patients and extend the discounts available to them. A center with a small pharmacy budget and a large percentage of uninsured patients may not be able to support a pharmacy program on the profits from the insured patients. Some centers do not participate because they believe that their patients cannot even afford the discounted prices that might be available to them under the 340B Program, and they do not have large enough pharmacy budgets to support the full cost of the pharmaceuticals for those patients. Complexity of Multiple Pharmacy Agreements. A common method of participation in the program is through a contract arrangement with a retail pharmacy. Health centers incur an administrative cost with each individual pharmacy agreement that they manage. Centers whose patients patronize a large number of individual pharmacies in significant numbers may wish to establish several contracts. A center with a limited administrative infrastructure may find that the complexity of the program administration creates a barrier to participation. Additionally, some centers may find it difficult to identify pharmacies that are willing to participate. Contracting with a covered entity requires the pharmacy to maintain a separate inventory in order to prevent drug diversion to non-patients, which opens the pharmacy up to the possibility of an audit. B. Local Health Departments The local health departments we spoke with indicated that the quantity of prescription drugs they purchase is relatively small. Many of the local health departments in Maryland receive grants from the Public Health Service for TB and STD services. The prescription drugs purchased under those grants are generally purchased through the state procurement system. Maryland 10

participates in a group purchasing program called the Minnesota Multi-State Contracting Alliance for Pharmacy. Through this program, governmental agencies from 37 states pool their purchasing power to negotiate discounted prices on pharmaceuticals. The State is currently accessing 340B pricing on some, but not all, of the eligible drugs purchased through the contract. Additional savings may be attainable by purchasing all eligible drugs at 340B prices. C. Population That Can Be Served by the 340B Program The legislation specifically requested information about the number and demographic characteristics of the individuals eligible to utilize the 340B drug pricing program. However, as discussed earlier, 340B Program eligibility is at the level of the covered entity, not the level of the individual, as it would be for an entitlement program. Therefore, it is difficult to document the characteristics of the potential population to be served. The only requirement of the end user is that the individual meets the definition of a patient of a covered entity, as described in Section Two of this report. At the federal level, the 340B Program places no restrictions on covered entities as it relates to the income or insured status of an individual who may purchase drugs obtained at 340B prices. Covered entities may, in fact, purchase drugs at 340B prices for patients who are commercially insured, and still receive full reimbursement from the insurance company. As intended by Congress, the savings may be used to further stretch grant dollars to increase other services provided by the entity. In practice, the community health centers in Maryland provide a sliding fee scale to their patients based on insurance status and income level, and many of the participating health centers use such a guideline in determining an individual s eligibility for purchasing prescription drugs at discounted prices. In an effort to provide some data about the potential population who may benefit from an expansion of the federal 340B program in community health centers and local health departments (those covered entities that were specifically mentioned in the legislation), we conducted a survey of the health centers activity. With 83 percent of the potential 340B eligible community health centers in the state responding, the following information was provided. Community health centers are located in Baltimore City and 11 counties throughout the state. They serve residents from all areas of the state, including Western Maryland, the Eastern Shore, Southern Maryland, the Washington D.C. suburbs, and the Greater Baltimore area. The percentage of patients without prescription drug coverage varies significantly across health centers, with one center reporting 22 percent and another reporting 74 percent. Of the centers that do not participate in the 340B Program currently, approximately 44 percent of their patients have no form of prescription drug insurance coverage. Across all centers that were able to report, approximately 41 percent of patients do not have drug coverage. Based 11

on an estimated total patient population in all health centers of more than 100,000, at least 41,000 current health center patients without drug coverage may currently or potentially benefit from the 340B Program. Furthermore, health centers report the ability to increase their combined current patient load by at least 16,000 statewide. Assuming that the characteristics of the potential patient population mimic those of the current population, 41 percent of those patients would not have prescription drug coverage. By extension, an additional 6,500 individuals might benefit from having access to lower cost prescriptions through the 340B Program by becoming a patient of a health center, bringing the total up to 47,500. The demographic information provided is only representative of the potential populations who might be served by expanding use of the 340B Program in Maryland. Data from disproportionate share hospital outpatient clinics, local health departments, and other potential covered entities is not included. IV. Activity in Other States Regarding 340B and FQHCs Other state legislatures have considered a variety of options for expanding access to prescription drugs by capitalizing upon the eligibility of FQHCs and other covered entities to purchase prescription drugs through the 340B Program. These other options include: Expansion of federally designated Medically Underserved Areas (MUAs) Supporting pharmacy infrastructure Supporting patient education models Coordinating patient assistance programs Bulk purchasing Expansion of Federally Designated Medically Underserved Areas (MUAs). The Arkansas legislature passed a bill during the 2001 session that directs the State of Arkansas Department of Human Services to request MUA designations from the federal government needed to establish FQHCs eligible to purchase drugs at reduced prices. The act encourages the expansion of FQHCs with the explicit goal of assisting residents of Arkansas to purchase prescription drugs at discounted prices. During the 2001 session, the Vermont legislature passed a bill with similar provisions, including matching grant funds and technical assistance to support the conversion of rural health centers and other clinics into FQHCs in order to qualify them as covered entities. Supporting Pharmacy Infrastructure. Vermont s legislation also includes a contract to be awarded by the Vermont Department of Health to enact a provision that all federally qualified health centers in the state participate in the 340B Program allowing them to provide their patients access to discounted prices for prescription drugs. 12

Proposed legislation in Connecticut would have provided funds to support FQHCs in establishing a pharmacy network, with the intent that they would make lower cost prescription drugs available to Medicare recipients, people with disabilities, and those not covered by health insurance. Supporting Patient Education Models. The General Assembly of Connecticut has also considered legislation that would provide grant funds to community health centers or other non-profit organizations for patient education campaigns. These funds would support efforts to identify health care providers and pharmacies that offer low cost prescription drugs, and to educate residents about how to access those sources of low cost drugs throughout the state. Coordinating Patient Assistance Programs. Vermont has also considered an option for securing funding from pharmaceutical companies to support the cost of a statewide program, run by community health centers or other non-profit community health organizations, to better coordinate patient assistance programs for prescription drugs. This is similar to the Maryland Medbank Program currently administered by the Maryland Health Care Foundation. Bulk Purchasing. The State of Texas passed legislation during the 2001 session creating the Interagency Council on Pharmaceuticals Bulk Purchasing. Among other things, one of the primary duties of this newly created council is to investigate bulk purchasing options for a variety of state agencies, including the state employees retirement system and the Texas Department of Health. The Council is specifically directed to consider the discount purchasing opportunities available to disproportionate share hospitals, the health department, and federally qualified health centers. V. Maryland Recommendations It is clear from this analysis that the 340B Program is not the right platform for widespread expansion of pharmacy benefits to uninsured Maryland residents. Expansion is limited to eligible covered entities and this program cannot serve individuals who are not patients of covered entities. Furthermore, implementation of the 340B Program may not make sense for all eligible covered entities. As discussed in Section Three, an organization must consider several factors when deciding whether to begin participation. The 340B Program is not one size fits all. The individual circumstances of each organization determine the appropriate model and level of participation. However, this should not discourage eligible covered entities from carefully considering the potential benefits of participating in the 340B Program. Implementation of a program by covered entities can increase access to lower cost prescription drugs for current and potential patients of those entities. At a time when prescription drug costs are rising rapidly, it is prudent to take advantage of those opportunities to purchase pharmaceuticals at previously legislated discounts. The savings achieved by these entities through lower drug 13

prices may be used to increase services in other areas or further discount drug prices for patients in need. A. The State Should Explore Purchasing More Eligible Drugs at 340B Prices The State is currently purchasing some eligible drugs at the 340B price and our analysis shows that the State may save additional money by converting all eligible drug purchases to 340B prices. The Department is currently examining its purchasing arrangements to see if there are savings opportunities. B. Other Covered Entities Should Consider Participating in the 340B Program Community health centers, disproportionate share hospitals, and other covered entities have several options for participating in the 340B Program. One option is for an organization to develop its own program and to participate individually. Some of the community health centers in Maryland currently employ this method. Another option is for a covered entity to join an existing group purchasing organization. Examples might include the Prime Vendor Program supported by HRSA, or a program coordinated by the Texas Association of Community Health Centers that currently negotiates prices on behalf of 220 covered entities in 17 states. Both of these options dictate the wholesaler that an entity must use, and therefore may not be the best choices for some covered entities. However, it appears that these organizations may be able to negotiate prices below the 340B price ceiling, a potential incentive for selecting this option. At least two community health centers in Maryland are currently enrolled in the Prime Vendor Program. A third option is for several covered entities to develop a group purchasing program themselves. This option would make sense if several of the entities currently use the same wholesaler, or if they are able to design a program through an existing association that could negotiate for them regardless of the wholesaler used. They might even extend this option to make it a network model under the alternative demonstration program supported by HRSA. Smaller programs would likely benefit from the assistance and purchasing power of larger partners, such as disproportionate share hospitals. Baltimore Medical System, Inc. is reportedly in discussions with Johns Hopkins Bayview Medical Center about developing such a model to maximize economies of scale and to increase purchasing power. The process of collecting information for this report revealed that many covered entities lack accurate and current information about the 340B Program. Throughout the course of this study, we were able to provide several covered entities with information about current program regulations. At least one 14

community health center executive is planning to begin participating as a result of information learned through this process. There are no state barriers in Maryland that would prohibit or limit the potential expansion of the federal 340B Program, and there is demonstrated interest among eligible covered entities in participating. At least two disproportionate share hospitals have reportedly contacted HRSA about their intent to join the program. Because HRSA is heavily promoting this program to its grantees, substantial technical assistance to facilitate enrollment may be available from federal sources. Any outreach efforts to educate uninsured residents about this program would need to be carefully coordinated with eligible covered entities and would depend on the level of expanded participation. The 340B Drug Pricing Program is a valuable federal program that provides eligible covered entities access to discounted prices on prescription drugs. The recent documented rise in drug prices and the increasing reliance upon prescription drugs to treat health conditions both dictate the importance of capitalizing on all available opportunities to obtain price discounts. While the current federal program restrictions limit expansion possibilities, uninsured patients of community health centers, local health departments, and outpatient departments of disproportionate share hospitals could all benefit from increased participation in the 340B Program among eligible covered entities. 15

References The Kaiser Family Foundation. (July 2000). Prescription Drug Trends a Chartbook. Maryland Health Care Commission. (January 2000). State Health Care Expenditures: Experience from 1998. Mathematica Policy Research, Inc. (July 1999). An Analysis of Purchases, Savings, and Participation in the PHS Drug Pricing Program. U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation. (April 2000) Report to the President: Prescription Drug Coverage, Spending, Utilization and Prices, Posted April 20, 2001, Accessed July 9, 2001. <http://www.aspe.hhs.gov/health/reports/drugstudy.htm> U.S. House. 102 nd Congress. H.R. 102-384 Part 2, The Medicaid Drug Rebate Amendments of 1992. Von Oehsen III, William H. (May 2001). Pharmaceutical Discounts Under Federal Law: State Program Opportunities. Oakland, CA: Public Health Institute, Oakland. 16

Estimated Price Compared to Average Wholesale Price (AWP) for Medicaid and 340B Drug Pricing Program 340B 49% Medicaid Net 60.50% Attac chment A AWP 100% 0% 20% 40% 60% 80% 100% 120% Source: Pharmaceutical Discounts Under Federal Law: State Program Opportunities, William H. von Oehsen, III, Powell, Goldstein, Frazer Murphy, LLP, May 2001.

Attachment B Model of 340B Program With a Contracted Pharmacy Manufacturer Wholesaler Ship To Bill To Covered Entity (e.g. FQHC) Retail Pharmacy Patient