DEPART!''ilENT OF HEALTH t-\:~D HUMAN SERVICES 
OFFICE OF INSPECTOR GENERAL 
FEB 0 4 2014 

TO:  Mary K. Wakefield, Ph.D., R.N. 
Administrator 
Health Resources and Services Administration 
FROM:  Stuart Wright 
Deputy Inspector General 
for Evaluation and Inspections 
SUBJECT: 	 Memorandum Report:  Contract Pharmacy Arrangements in the 
340B Program, OEI-05-13-00431 
This memorandum report describes selected covered entities' contract pharmacy 
arrangements and their oversight of those arrangements to prevent (1) diversion of drugs 
purchased through the 340B Drug Pricing Program to ineligible patients and (2) duplicate 
discounts through Medicaid. 
SUMMARY 
Covered entities participating in the 340B Drug Pricing Program (hereinafter referred to 
as the 340B Program) may contract with pharmacies to dispense drugs purchased through 
the program (hereinafter referred to as 340B-purchased drugs) on their behalf.  Such 
pharmacies are referred to as contract pharmacies. 
According to Health Resources and Services Administration (HRSA) guidance, covered 
entities that establish contract pharmacy arrangements must oversee these arrangements 
to prevent diversion of 340B-purchased drugs to ineligible patients and duplicate 
discounts through Medicaid.  Diversion and duplicate discounts are statutorily prohibited . 
HRSA guidance recommends that covered entities' oversight activities include periodic 
comparisons of covered entity records and contract pharmacy records, as well as annual 
independent audits. 
We found that contract pharmacy arrangements create complications in preventing 
diversion, and that covered entities are addressing these complications in different ways . 
The covered entities that we reviewed in our study use different methods to identify 
340B-eligible prescriptions to prevent diversion in their contract pharmacy arrangements. 
In some cases, these different methods lead to differing determinations of 340B eligibility 
across covered entities.  That is, two covered entities may categorize similar types of 
prescriptions differently (i.e., 340B-eligible versus not 340B-eligible) in their contract  Page 2  Mary K. Wakefield, Ph.D., R.N. 
 
 
pharmacy arrangements.  As a result, there is inconsistency within the 340B Program as  
to which prescriptions filled at contract pharmacies are treated as 340B-eligible. 
 
We also found that contract pharmacy arrangements create complications in preventing 
duplicate discounts. Most covered entities in our study prevent duplicate discounts by 
not dispensing 340B-purchased drugs to Medicaid beneficiaries through their contract 
pharmacies, though difficulties exist with identifying beneficiaries covered by Medicaid 
managed care organizations (hereinafter referred to as MCO Medicaid).  However, some  
covered entities that do dispense 340B-purchased drugs to Medicaid beneficiaries 
through their contract pharmacies did not report a method to avoid duplicate discounts. 
 
Additionally, we found that some covered entities in our study do not offer the 
discounted 340B price to uninsured patients at their contract pharmacies.  Neither the 
340B statute nor HRSA guidance addresses whether covered entities must do so; 
however, if covered entities do not, uninsured patients pay the full non-340B price for 
their prescription drugs at contract pharmacies. 
 
Finally, we found that most covered entities in our study do not conduct all of the 
oversight activities recommended by HRSA.  Although almost all covered entities 
reported monitoring their contract pharmacy arrangements, the extent of such monitoring 
varies. Few covered entities reported retaining independent auditors for their contract 
pharmacy arrangements as recommended in HRSA guidance. 
 
BACKGROUND 
 
Although the majority of covered entities do not use contract pharmacies, the use of 
contract pharmacies has increased rapidly over the past few years.  Since 2010, the 
percentage of all covered entities that use contract pharmacies has risen from 10 percent 
to 22 percent. Moreover, the number of unique pharmacies serving as 340B contract 
pharmacies has grown by 770 percent, and the total number of contract pharmacy 
arrangements has grown by 1,245 percent.1  
 
Additionally, recent HRSA audits of covered entities have found instances of diversion 
and duplicate discounts related to contract pharmacies.  Of the 32 covered entities for 
which finalized HRSA audits resulted in adverse findings, 10 were cited for diversion 
and/or duplicate discounts through contract pharmacies.2  
 
The 340B Drug Pricing Program  
                                                 
1  Office of  Inspector General (OIG) analysis of  HRSAs covered entity database, June  2013.  These growth  
figures reflect calculations  between March 5, 2010, and May 31, 2013.  Covered entities may have multiple 
health care delivery sites (represented by parent and child records in the database) as well as multiple 
contract pharmacies.  To account  for this complexity and avoid duplicate counting, we have defined a 
contract pharmacy arrangement as a unique  association between a pharmacy and a covered entity parent 
record, and have attributed all contract pharmacies associated with child records to their parent records.   
Throughout this report, counts of covered entities represent unique parent records.   
2 Results of  HRSAs 340B Program audits as of January 8, 2014.  Accessed at 
http://www.hrsa.gov/opa/programintegrity/auditresults/results.html on January 13, 2014. 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 3  Mary K. Wakefield, Ph.D., R.N. 
 
 
The Veterans Health Care Act of 1992 established the 340B Program in section 340B of 
the Public Health Service Act (PHS Act).3 The 340B Program requires drug 
manufacturers participating in Medicaid to provide discounted covered outpatient drugs 
to certain eligible health care entities, known as covered entities.  Congress intended for 
the savings from 340B-purchased drugs to enable [covered] entities to stretch scarce 
Federal resources as far as possible, reaching more eligible patients and providing more 
comprehensive services.4 However, the 340B statute speaks only to covered entities 
eligibility and compliance; it does not specify how savings from the 340B Program  
should be used. 
 
Covered entities include community health centers and disproportionate share hospitals 
(DSHs), among other provider types.5 As of May 31, 2013, 10,510 covered entities were 
participating in the 340B Program, including 1,103 community health centers and 
1,039 DSHs.6, 7  
 
To participate in the 340B Program, covered entities must register with HRSA, the 
agency responsible for administering the program.  HRSA adds covered entities to its 
database after receiving and approving their registration forms.  Covered entities must 
annually sign an agreement certifying that they meet 340B Program requirements and 
that their information in the database is correct.8  
 
Once approved, covered entities may purchase covered outpatient drugs under the 
340B Program at or below the 340B ceiling price.9 340B ceiling prices are calculated 
using a statutorily defined formula.  Drug manufacturers that participate in Medicaid 
must sell covered outpatient drugs to covered entities at or below the 340B ceiling price.10  
 
Prohibition of diversion. Covered entities may dispense 340B-purchased drugs only to 
eligible patients. According to HRSAs patient definition, an individual is an eligible 
patient only if:  
 
(1)  the covered entity has established a relationship with the individual, such that the 
covered entity maintains records of the individuals health care; and 
(2)  the individual receives health care services from a health care professional who is 
either employed by the covered entity or provides health care under contractual or 
other arrangements (e.g., referral for a consultation) such that responsibility for 
the care provided remains with the covered entity; and  
                                                 
3  Veterans Health  Care Act of 1992, P.L. 102-585  602;  PHS Act  340B; 42  U.S.C.    256b. 
 
4 H.R. Rep.  No. 102-384 (Part  2), at  12 (1992)(Conf. Rep.). 
 
5  42 U.S.C.  256b(a)(4) enumerates the complete list of the types of entities eligible to  become covered 
 
entities. 

6 OIG analysis of HRSAs covered entity database, June  2013. 

7 References to  community health centers include all covered entities in HRSAs covered entity database of 

the entity type  Consolidated Health Center Program, which covers some additional providers.  See 

http://opanet.hrsa.gov/OPA/CoveredEntityAcronyms.aspx. 

8  42 U.S.C.  256b(d)(2)(B)(i). 

9  42 U.S.C.  256b(a)(1). 

10  42 U.S.C.  1396r-8(a)(1)  and 256b(a)(1).  

Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 4  Mary K. Wakefield, Ph.D., R.N. 
 
 
(3)  the individual receives a health care service or range of services from the covered 
entity which is consistent with the service or range of services for which grant 
funding or Federally-qualified health center look-alike status has been provided to 
the entity.  DSHs are exempt from this requirement.11  
 
Dispensing 340B-purchased drugs to ineligible patients, a practice known as diversion, is 
prohibited by law.12  
 
Prohibition of duplicate discounts.  Subjecting drug manufacturers to duplicate discounts 
on 340B-purchased drugs is prohibited by law.13 Duplicate discounts occur when a drug 
manufacturer pays a State Medicaid agency a rebate under the Medicaid drug rebate 
program on a drug sold at the already-discounted 340B price.14   The risk of duplicate 
discounts applies to MCO Medicaid as well as traditional fee-for-service Medicaid 
(hereinafter referred to as FFS Medicaid) in States where drug manufacturers are paying 
rebates on drugs dispensed through MCO Medicaid.15, 16  
 
Covered entities choose whether to dispense 340B-purchased drugs to Medicaid 
beneficiaries.  Covered entities indicate their choice in HRSAs covered entity database.  
State Medicaid agencies use this information to identify Medicaid payments for 
340B-purchased drugs and exclude those drugs from rebate requests to drug 
manufacturers.17  
 
340B Contract Pharmacies 
Covered entities may contract with one or more pharmacies to dispense 340B-purchased 
drugs on their behalf.18  A pharmacy dispensing 340B-purchased drugs on behalf of a 
covered entity is referred to as a contract pharmacy.19  
 
                                                 
11  61  Fed.  Reg. 55156, 5515755178 (October 24, 1996). 

12  42 U.S.C.  256b(a)(5)(B).  

13  42 U.S.C.  256b(a)(5)(A)(i). 

14 Under the Medicaid drug rebate program, drug manufacturers are required to pay  rebates to State 

Medicaid agencies, which are calculated using a statutorily defined formula, for most covered outpatient 
 
drugs.  42  U.S.C.  1396r-8. 

15 In general, MCO Medicaid differs from FFS Medicaid in that State Medicaid agencies prospectively pay 

managed care  organizations a fixed monthly  amount to  provide care to  beneficiaries, rather than  paying
  
providers directly for care provided to beneficiaries.  See 42 U.S.C.  1396b(m). 

16 Beginning in  March 2010, drug manufacturers that  participate in the Medicaid drug rebate program were 

required to pay rebates for covered outpatient drugs dispensed to individuals enrolled in  MCO Medicaid if
  
the managed care organization is  responsible for coverage of such  drugs.   42 U.S.C.  1396r-8(b)(1)(A). 
  
Covered outpatient drugs dispensed through MCO Medicaid and subject to  discounts under the 340B  

Program are not subject to rebates under the Medicaid drug rebate program.  42 U.S.C.   1396r-8(j)(1).
   
However,  a previous OIG report found  that not  all  States are collecting rebates on  drugs dispensed through 

MCO Medicaid.  OIG, States Collection of Rebates for  Drugs  Paid Through Medicaid Managed Care 
 
Organizations, OEI-03-11-00480, September 2012. 
 
17 OIG,  State Medicaid Policies and Oversight Activities Related to  340B-Purchased Drugs, 

OEI-05-09-00321, June 2011. 

18  75  Fed.  Reg. 10272, 10277 (March 5,  2010). 

19 Covered entities may dispense 340B-purchased  drugs through in-house pharmacies instead  of or in 

addition to contract pharmacies. 

Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 5  Mary K. Wakefield, Ph.D., R.N. 
 
 
Contract pharmacy inventory models.  Contract pharmacy arrangements generally use 
one of two distinct inventory models:  the pre-purchased inventory model or the 
replenishment inventory model.20  
 
In the pre-purchased inventory model, the covered entitys 340B-purchased drugs are 
kept in stock at the contract pharmacy.   When filling prescriptions on behalf of the 
covered entity, the contract pharmacy uses the covered entitys 340B-purchased drugs.  
When filling other prescriptions, the contract pharmacy uses its own non-340B-purchased 
drugs. 
 
In the replenishment inventory model, no 340B-purchased drugs are kept in stock at the 
contract pharmacy.  When filling prescriptions on behalf of the covered entity, the 
contract pharmacy uses its own non-340B-purchased drugs.  When a sufficient quantity 
of a given drug has been dispensed on behalf of the covered entity, the covered entity 
purchases that quantity of the drug at the discounted 340B price and has it delivered to 
the contract pharmacy.  This order of 340B-purchased drugs thus replaces or 
replenishes the non-340B-purchased drugs originally dispensed on behalf of the 
covered entity. 
 
Contract pharmacy arrangements using the replenishment inventory model generally use 
computerized tracking systems because the prescribed quantity of a drug rarely matches 
the quantity by which the drug is ordered. For example, a drug may be prescribed in 
quantities of 30 pills but ordered in quantities of 100 pills.  Thus, a replenishment order 
of 340B-purchased drugs can be placed only after the contract pharmacy has filled four 
prescriptions for the drug (i.e., dispensed a total of 120 pills) on behalf of the covered  
entity.  This order replaces 100 of the 120 pills dispensed on behalf of the covered entity, 
leaving 20 pills awaiting replenishment.  Covered entities often hire companies known as 
340B administrators (hereinafter referred to as administrators) to manage these tracking 
systems. 
 
Contract pharmacy billing process for insured patients.  When contract pharmacies 
dispense 340B-purchased drugs to patients with health insurance, they bill health insurers 
for the 340B-purchased drugs dispensed.  Pharmacies send insurance claims for 
dispensed drugs to electronic transaction routing companies, which forward the claims to 
the correct insurers. The routing companies use a combination of two codes from the  
insurance claimsthe Bank Identification Number and Processor Control Number 
(hereinafter referred to as BIN/PCN)to identify a patients health insurer and benefits.21  
 
 
 
   
                                                 
20 OIG analysis of interviews with covered entities and administrators, 2013. 

21 National Council for Prescription  Drug Programs.  Explanation of  BIN/PCN. Accessed at 
 
http://www.ncpdp.org/pdf/ExplanationofBIN.PCN.pdf on October 25, 2013. 

Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 6  Mary K. Wakefield, Ph.D., R.N. 
 
 
Covered Entity Oversight of Contract Pharmacy Arrangements  
Covered entities must ensure that their contract pharmacy arrangements comply with the 
340B statute and relevant HRSA guidance.22, 23  In guidance, HRSA generally directs 
covered entities to:24  
 
(1)  ensure that contract pharmacy arrangements prevent diversion of 

340B-purchased drugs to ineligible patients; 

(2)  ensure that contract pharmacy arrangements do not result in duplicate discounts; 
and 
(3)  conduct oversight of contract pharmacies to detect and remedy any instances of 
diversion, duplicate discounts, or other program violations. 
 
HRSA has announced plans to issue formal regulations that will address program  
elements, including its patient definition and contract pharmacy arrangements.25  
 
Preventing diversion in contract pharmacy arrangements.   To prevent diversion, covered 
entities identify which prescriptions filled at their contract pharmacies will be categorized 
as 340B-eligible (hereinafter referred to as 340B-eligible prescriptions).  Covered entities 
and their contract pharmacies may dispense 340B-purchased drugs only to individuals 
who meet all applicable components of HRSAs patient definition.  Such individuals can, 
however, fill any of their prescriptions at a covered entitys contract pharmacynot just 
those that originate from the covered entity.  As a result, if a covered entity does not 
consider all prescriptions for an individual to be 340B-eligible, then in practice the 
covered entity will have to determine 340B eligibility at the prescription level.  
Administrators often assist covered entities in identifying 340B-eligible prescriptions.  
 
Preventing duplicate discounts in contract pharmacy arrangements. To avoid duplicate 
discounts in contract pharmacy arrangements, HRSA presents covered entities with two 
options:  
 
(1)  not dispensing 340B-purchased drugs to Medicaid beneficiaries through their 
contract pharmacies; or 
(2)  dispensing 340B-purchased drugs to Medicaid beneficiaries through their 
contract pharmacies, and making an arrangement with the State Medicaid 
agency to prevent duplicate discounts.  HRSA guidance notes that covered 
entities should inform HRSA of any such arrangement.26  
 
                                                 
22  75  Fed.  Reg. 10272, 1027410278 (March 5, 2010). 

23 Since the inception of the 340B Program, HRSA has generally used interpretive guidance and statements 

of policy, rather than  formal rulemaking, to  administer it.  See 75  Fed. Reg.  10272, 10273  (March  5,  2010).  

However, HRSA recently issued a final rule  addressing limited program elements.  See 78 Fed. Reg. 

44016, 4402744028 (July 23, 2013). 

24  75  Fed.  Reg. 10272, 1027710278 (March 5, 2010). 

25 HRSA.  340B Drug Pricing Program:  Important Benefit, Significant  Responsibility. Accessed at 

http://www.hrsa.gov/opa/update.html on  January 22, 2014. 

26  75  Fed.  Reg. 10272, 10278 (March 5,  2010). 

Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 7  Mary K. Wakefield, Ph.D., R.N. 
 
 
Although covered entities indicate in HRSAs covered entity database whether they 
dispense 340B-purchased drugs to Medicaid beneficiaries, that indication does not 
necessarily apply to their contract pharmacy arrangements. 
 
HRSAs recommended oversight activities. HRSA guidance recommends that covered 
entities conduct oversight activities for their contract pharmacy arrangements, including 
the following:27  
   
(1)  monitoring their contract pharmacy arrangements by periodically comparing 
the covered entitys prescribing records with the contract pharmacies  
dispensing records to detect irregularities (e.g., potential diversion or duplicate 
discounts); and 
(2)  retaining independent auditors to perform annual audits. 
 
Although HRSA guidance states that covered entities are expected to conduct oversight 
activities, it also states that [t]he precise methodology utilized to ensure compliance and 
obtain the necessary information is up to the covered entity given its particular 
circumstances.28  Covered entities must notify HRSA if they find that diversion or 
duplicate discounts have occurred in their contract pharmacy arrangements.29  
 
Related Office of Inspector General Work 
In June 2011, OIG published a review of States reimbursement policies and oversight 
related to 340B-purchased drugs. OIG found that States lacked pricing information 
needed for oversight and that nearly half of States did not have written 340B policies.30  
 
In September 2012, OIG published a review of States collection of rebates for covered 
outpatient drugs dispensed through MCO Medicaid.  OIG found that most States that pay 
for covered outpatient drugs through MCO Medicaid had obtained the utilization data 
needed to collect rebates, but that some had not yet collected rebates.  OIG also found 
that most States had processes in place to verify that MCO Medicaid payments for 
340B-purchased drugs were excluded from  rebate requests to drug manufacturers.31 The 
review did not specifically address issues related to contract pharmacy arrangements. 
 
METHODOLOGY 
 
Scope 
We interviewed 30 covered entities15 community health centers and 15 DSHsto 
learn about how they operate and oversee their contract pharmacy arrangements.  We did 
                                                 
27 Ibid. 

28 Ibid. 

29 Ibid. 

30 OIG,  State Medicaid Policies and Oversight Activities Related to  340B-Purchased Drugs, 

OEI-05-09-00321, June 2011. 

31 OIG,  States  Collection of Rebates for Drugs Paid Through Medicaid Managed Care  Organizations, 

OEI-03-11-00480, September  2012. 

Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 8  Mary K. Wakefield, Ph.D., R.N. 
 
 
not include other types of covered entities (hemophilia treatment centers, family planning 
clinics, etc.) in this study. 
 
Data Collection and Analysis  
To describe how covered entities operate and oversee their contract pharmacy 
arrangements, we interviewed 30 covered entities and 8 administrators.   
 
We selected a purposive sample of 15 community health centers and 15 DSHs from  
HRSAs covered entity database.  We selected our sample to represent a diverse group of 
covered entities, on the basis of the following considerations: 
 
   number of covered entity sites (i.e., unique parent and child records); 
   dispensing of 340B-purchased drugs to Medicaid beneficiaries; 
   number of contract pharmacy arrangements; and 
   location (i.e., rural versus urban, State). 
 
The 30 covered entities in our final sample represent contract pharmacy arrangements 
with 199 unique contract pharmacies.  See Appendix A for a detailed description of the 
selection process for our sample of covered entities.  
 
We conducted structured interviews with staff from the selected covered entities 
regarding their contract pharmacy arrangements.  Our interviews focused on the covered 
entities methods to prevent diversion and duplicate discounts, as well as their oversight 
activities.  
 
We also interviewed eight administrators to learn about how they assist covered entities 
in preventing diversion and duplicate discounts in contract pharmacy arrangements.  We 
selected these administrators based on availability and prevalence in the industry.  These 
administrators worked with 20 of the 30 covered entities in our final sample.  The 
remaining 10 covered entities either worked with an administrator that we were unable to 
interview or did not work with an administrator.  
 
Limitations  
The results of this memorandum report are limited to the 30 covered entities selected in 
our purposive sample, and are not representative of or generalizable to other covered 
entities. We did not verify the accuracy of covered entities or administrators interview 
responses for this memorandum report, nor did we review the records of covered entities 
or contract pharmacies to identify instances of diversion or duplicate discounts. 
 
Standards 
This study was  conducted in accordance with the Quality Standards for Inspection and 
Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency. 
 
 
 
 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 9  Mary K. Wakefield, Ph.D., R.N. 
 
 
RESULTS  
 
To prevent diversion in their contract pharmacy arrangements, covered entities in 
our study use different methods to identify 340B-eligible prescriptions; in some 
cases, this leads to differing determinations of 340B eligibility across covered entities  
Covered entities in our sample reported different methods of identifying 340B-eligible 
prescriptions to prevent diversion in their contract pharmacy arrangements.  To prevent 
diversion, covered entities must accurately identify 340B-eligible prescriptions filled at 
their contract pharmacies.  Some covered entities reported that they identify 
340B-eligible prescriptions when the prescriptions are written, whereas others reported 
that their administrators do so after the prescriptions are written.   
 
Nine covered entities reported that they identify 340B-eligible prescriptions when the 
prescriptions are written.  These covered entities reported that they determine whether a 
given prescription is 340B-eligible and indicate that determination on the prescription for 
the contract pharmacy.  Covered entities reported using a variety of tools to distinguish 
340B-eligible prescriptions for their contract pharmacies, including printed barcodes for 
paper prescriptions and designated values in notes fields for electronic prescriptions.  
 
The remaining 21 covered entities reported that in at least one of their respective contract 
pharmacy arrangements, their administrators identify 340B-eligible prescriptions after the 
prescriptions are written. In such arrangements, these covered entities provide data to an 
administrator, which identifies 340B-eligible prescriptions by comparing the data to 
prescriptions filled at contract pharmacies.  Covered entities reported that this method 
prevents diversion. 
 
Covered entities whose administrators identify 340B-eligible prescriptions after the 
prescriptions are written provide their administrators with a variety of data types.  For 
covered entities in our sample, these data types most commonly include patient lists (e.g., 
names, dates of birth) and/or prescriber lists (e.g., National Provider Identifiers (NPI), 
Drug Enforcement Administration numbers).  Some covered entities reported providing 
clinical information (e.g., diagnosis codes, procedure codes), lists of eligible sites, and/or 
detailed patient encounter data. Some administrators reported that covered entities may 
also provide them with electronic prescribing data.  Additionally, covered entities 
reported that they sometimes filter data before providing it to their respective 
administrators (e.g., by limiting the prescriber list to only those who work exclusively at 
the covered entity).  
 
Administrators interviewed for this study use a variety of data-comparison methods to 
identify 340B-eligible prescriptions after the prescriptions are written.  Some  
administrators reported that they customize their comparison methods to accommodate 
covered entities preferences and/or data availability.  For example, some covered entities 
and administrators reported using time  limits that govern how long a patients 
prescription is identified as 340B-eligible following the patients most recent visit to the 
covered entity.  Additionally, one covered entity and one administrator reported that 
340B eligibility is not always determined solely on the basis of automatic data 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 10  Mary K. Wakefield, Ph.D., R.N. 
 
 
comparison; in some cases, prescriptions may be queued for the covered entity to 
manually review and identify those it deems 340B-eligible.  
 
The variety of data types and comparison methods used to identify 340B-eligible 
prescriptions can result in differing determinations of 340B eligibility across covered 
entities. In some cases, covered entities using different data types and/or comparison 
methods categorize similar types of prescriptions differently (i.e., 340B-eligible versus 
not 340B-eligible) in their contract pharmacy arrangements.  Although our sample cannot 
account for all possible combinations of data types and comparison methods, covered 
entities and administrators did note several instances in which they would categorize 
similar types of prescriptions differently.  The four scenarios below illustrate the different 
determinations of 340B eligibility that covered entities told us they would make for 
specific types of prescriptions. 
 
Scenario 1: Nonexclusive physician  
 
A physician practices part time at a covered entity, but also has a private practice.  The 
physician first sees an individual at the covered entity.  On a separate occasion, the 
physician sees the same individual at his private practice and writes a prescription for 
the individual.  The individual fills the prescription at the covered entitys contract 
pharmacy. 
 
 
One covered entity in our sample noted that it would automatically categorize the 
prescription in Scenario 1 as 340B-eligible.  This covered entity uses a list of all 
prescribers to identify 340B-eligible prescriptions.  Because the physician in Scenario 1 
would be on the prescriber list, the prescription would be categorized as 340B-eligible, 
even though it was written at the physicians private practice (i.e., originated outside of 
the covered entity).  
 
Another covered entity in our sample noted that it would not categorize the prescription 
in Scenario 1 as 340B-eligible. This covered entity also uses a prescriber list to identify 
340B-eligible prescriptions, but the covered entity limits the prescriber list to only those 
prescribers who work exclusively at the covered entity.  Because the physician in 
Scenario 1 would not be on the prescriber list (as he does not work exclusively at the 
covered entity), the prescription would not be categorized as 340B-eligible. 
 
A third covered entity in our sample noted that it may or may not categorize the 
prescription in Scenario 1 as 340B-eligible, on the basis of a manual review.  This 
covered entity provides its administrator with a list of all prescribers who work at the 
covered entity, but flags those prescribers who do not work exclusively at the covered 
entity. Its administrator automatically categorizes prescriptions from exclusive 
prescribers as 340B-eligible, but queues prescriptions from nonexclusive prescribers for 
covered entity staff to review and categorize as 340B-eligible or not 340B-eligible. 
 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 11  Mary K. Wakefield, Ph.D., R.N. 
 
 
Scenario 2: Time limit after patients visit 
 
A physician sees an individual at a covered entity and writes a prescription for the 
individual. Four months after filling the original prescription, the individual refills the 
prescription at the covered entitys contract pharmacy.  The individual is not seen at 
the covered entity during those 4 months. 
 
 
One covered entity in our sample noted that it would not categorize the refilled 
prescription in Scenario 2 as 340B-eligible.  This covered entity categorizes prescriptions 
filled at its contract pharmacies as 340B-eligible only if they are filled within 60 days of 
the patients most recent visit to the covered entity. 
 
Several other covered entities in our sample noted that they would categorize the refilled 
prescription in Scenario 2 as 340B-eligible.  Some of these covered entities have longer 
time limits regarding patient visits (e.g., 12 months) that would include the prescription in 
Scenario 2. Alternatively, one of these covered entities has no limit as to how long after 
the patients visit a prescription can be filled and still be categorized as 340B-eligible.  
 
Scenario 3:  Prescription from a referred physician  
 
A physician sees an individual at a covered entity and refers the individual to a 
specialist who is not affiliated with the covered entity.  The specialist writes a 
prescription for the individual, and the individual fills the prescription at the covered 
entitys contract pharmacy.  
 
 
Two covered entities in our sample noted that they would not categorize the prescription 
in Scenario 3 as 340B-eligible. These covered entities use prescriber lists to identify 
340B-eligible prescriptions.  Because the specialist in Scenario 3 would not be on the 
prescriber list (as he does not work at the covered entity), the prescription would not be 
categorized as 340B-eligible. 
 
One covered entity in our sample noted that it would categorize the prescription in 
Scenario 3 as 340B-eligible.  This covered entity also uses a prescriber list to identify 
340B-eligible prescriptions. However, the covered entitys administrator queues 
prescriptions written by prescribers who are not on the prescriber list for the covered 
entity to manually review and identify those it deems 340B-eligible.  The covered entity 
noted that during this manual review, it categorizes prescriptions as 340B-eligible if its 
records indicate that the patient was referred to the prescriber.  Because the covered 
entitys physician in Scenario 3 referred the individual to the specialist, the prescription 
would be categorized as 340B-eligible, even though it originated outside of the covered 
entity.  
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 12  Mary K. Wakefield, Ph.D., R.N. 
 
 
 
Scenario 4:  Matching prescription to clinical information  
 
A physician sees an individual at a covered entity for chest pain and writes the 
individual a prescription for a blood pressure medication (related to the chest pain).  
During that visit, the physician also writes the individual a prescription for a sleep  
medication (related to a previously diagnosed condition).  
 
 
One covered entity in our sample noted that only the prescription for blood pressure 
medication in Scenario 4 would be categorized as 340B-eligible.  This covered entitys 
administrator uses clinical information from  patients visits (i.e., diagnosis and procedure 
codes) to identify 340B-eligible prescriptions.  Specifically, the administrator identifies a 
prescription as 340B-eligible only when it relates to one of the diagnosis or procedure 
codes from the patients most recent visit.  Because the prescription for blood pressure 
medication in Scenario 4 relates to the individuals diagnosis from his most recent visit 
(i.e., chest pain), it would be categorized as 340B-eligible.  Because the prescription for 
sleep medication does not relate to that diagnosis, however, it would not be categorized 
as 340B-eligible. 
 
Many covered entities in our sample do not use clinical information from patients visits 
to identify 340B-eligible prescriptions, and thus would likely categorize both 
prescriptions in Scenario 4 as 340B-eligible.  Because both prescriptions are written at 
the covered entity by a prescriber who works for the covered entity, there would be no 
basis on which to categorize the prescriptions differently without comparing them to 
clinical information from the patients visit.  
 
Twenty-two of thirty covered entities reported that to prevent duplicate discounts, 
their contract pharmacies do not dispense 340B-purchased drugs to Medicaid 
beneficiaries 
Twenty-two of thirty covered entities reported preventing duplicate discounts by not 
dispensing 340B-purchased drugs to Medicaid beneficiaries through their contract 
pharmacies.32  Twenty of these covered entities reported that their contract pharmacies do 
not dispense 340B-purchased drugs to either FFS Medicaid beneficiaries or MCO 
Medicaid beneficiaries. The remaining two reported that their contract pharmacies do not 
dispense 340B-purchased drugs to FFS Medicaid beneficiaries, but that they did not 
know whether their contract pharmacies do so for MCO Medicaid beneficiaries. 
 
To avoid dispensing 340B-purchased drugs to Medicaid beneficiaries through their 
contract pharmacies, covered entities or their administrators identify prescriptions for 
Medicaid beneficiaries and do not categorize them as 340B-eligible.  Covered entities 
                                                 
32 These covered entities may still dispense 340B-purchased drugs to Medicaid beneficiaries at their 
in-house outpatient pharmacies and/or  have  physicians administer 340B-purchased drugs to Medicaid 
beneficiaries at their eligible sites. 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 13  Mary K. Wakefield, Ph.D., R.N. 
 
 
and administrators reported that they identify these prescriptions by comparing the 
insurers BIN/PCN to the list of Medicaid BINs/PCNs for the State.  While Medicaid  
beneficiaries may still use contract pharmacies to fill prescriptions originating from the 
covered entity, those prescriptions will be filled using the contract pharmacies own 
non-340B-purchased drugs. 
 
Administrators reported difficulties in identifying prescriptions for MCO Medicaid 
beneficiaries. Administrators reported that it can be difficult to identify prescriptions for 
MCO Medicaid beneficiaries in contract pharmacy arrangements.  Specifically, they 
reported that accurately identifying such prescriptions is difficult for two reasons:  
insufficient information from State Medicaid agencies and BINs/PCNs that are not 
exclusive to Medicaid.  
 
First, administrators reported that BINs/PCNs for MCO Medicaid plans are not readily 
available. Administrators reported that as a result, they must research which BINs/PCNs 
represent MCO Medicaid plans, which is inefficient and may still result in incomplete 
information.  Without a complete list of MCO Medicaid BINs/PCNs, covered entities and 
their administrators cannot be sure they are accurately identifying all Medicaid 
prescriptions to avoid duplicate discounts. 
 
Second, administrators reported that many insurers that operate both MCO Medicaid 
plans and private insurance plans use the same BIN/PCN for both types of plans.  One 
administrator reported that in an attempt to avoid the risk of duplicate discounts, it 
categorizes all prescriptions with BINs/PCNs used for MCO Medicaid plans as not 
340B-eligible, even though some of those prescriptions may be for privately insured 
patients and thus do not pose a risk of duplicate discounts.  As a result, covered entities 
may forgo potential savings from prescriptions for privately insured patients that could be 
categorized as 340B-eligible without risking duplicate discounts. 
 
Although 8 of 30 covered entities reported that their contract pharmacies dispense 
340B-purchased drugs to Medicaid beneficiaries, 6 did not report a method to prevent 
duplicate discounts. Eight of thirty covered entities reported that their contract  
pharmacies dispense 340B-purchased drugs to FFS Medicaid and/or MCO Medicaid 
beneficiaries. Only five of these covered entities reported notifying their State Medicaid 
agency that they do so, and none reported notifying HRSA. 
 
Six of the eight covered entities did not report a method to avoid duplicate discounts.  
According to HRSA guidance, covered entities should not dispense 340B-purchased 
drugs to Medicaid beneficiaries through their contract pharmacies unless they have made 
an arrangement with their State Medicaid agency to prevent duplicate discounts.  Two of 
the six covered entities dispense 340B-purchased drugs to both FFS and MCO Medicaid 
patients through contract pharmacies, whereas four dispense 340B-purchased drugs to 
MCO Medicaid beneficiaries but not to FFS Medicaid beneficiaries. 
 
Two of the eight covered entities reported methods for avoiding duplicate discounts.  For 
example, one covered entity instructs its contract pharmacies to include the covered 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 14  Mary K. Wakefield, Ph.D., R.N. 
 
 
entitys NPI on Medicaid claims for 340B-purchased drugs, per the State Medicaid 
agencys policy.  The State Medicaid agency is thus able to identify those claims and 
exclude the 340B-purchased drugs from its rebate requests to drug manufacturers.33  
 
Eight covered entities do not offer the discounted 340B price to uninsured patients 
in any of their contract pharmacy arrangements 
Eight of thirty covered entities reported that they do not offer the 340B price to uninsured 
patients in any of their contract pharmacy arrangements.  Neither the 340B statute nor 
HRSA guidance addresses whether covered entities must do so, but if covered entities do 
not, their uninsured patients pay the full non-340B price for prescriptions filled at 
contract pharmacies.  Seven of these eight covered entities use administrators that 
determine 340B eligibility after drugs are dispensed, which means that their contract  
pharmacies do not know at the time they dispense the drugs whether patients 
prescriptions are 340B-eligible. As a result, the contract pharmacies do not know to 
charge the discounted 340B price.  Administrators may later identify uninsured patients 
prescriptions as 340B-eligible, but those patients will have already paid the full 
non-340B price. All but one administrator reported being able to allow covered entities 
to offer the discounted 340B price to uninsured patients at contract pharmacies; however, 
some covered entities choose not to do so.  Seven of the eight covered entities are DSHs. 
 
Eighteen of thirty covered entities reported offering the discounted 340B price to 
uninsured patients in at least one of their contract pharmacy arrangements.34 In a 
commonly reported process, covered entities work with their administrators to provide  
uninsured patients with a 340B discount card, which the patients present at contract 
pharmacies so the pharmacies know to charge the discounted 340B price.  Alternately, if 
the covered entity identifies 340B-eligible prescriptions when the prescriptions are 
written, the contract pharmacy knows for all patients which prescriptions are 
340B-eligible, and can therefore charge the discounted 340B price to uninsured patients.  
Of the 18 covered entities, 13 are community health centers.   
 
For the remaining four covered entities in our sample, it is unclear whether their contract 
pharmacies offer the discounted 340B price to uninsured patients. 
 
Almost all covered entities in our study monitor their contract pharmacy 
arrangements, but few have retained independent auditors as recommended in 
HRSA guidance 
Twenty-five of thirty covered entities reported that they monitor their contract pharmacy 
arrangements internally to detect potential diversion or duplicate discounts.  Covered 
entities reported monitoring their contract  pharmacy arrangements in a variety of ways, 
including: 
                                                 
33 The State Medicaid agency uses the NPI on contract pharmacies Medicaid claims to locate the covered 
entitys record in HRSAs covered entity database.  Because the covered entity has indicated in HRSAs 
covered entity database that it dispenses 340B-purchased  drugs to Medicaid  beneficiaries, the State 
Medicaid agency excludes the drugs for those claims from its rebate requests to  drug manufacturers. 
34 Some of these covered entities charge uninsured  patients a fee based  on  a sliding scale in at least one of  
their contract pharmacy arrangements; this sliding-scale fee may be lower than the 340B  price. 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 15  Mary K. Wakefield, Ph.D., R.N. 
 
 
 
   comparing drug dispensing records from  their contract pharmacies to their 
internal records of prescriptions, patients, prescribers, and/or clinical information; 
and 
   reviewing reports provided by administrators to look for Medicaid beneficiaries 
whose prescriptions were incorrectly identified as 340B-eligible. 
 
Monitoring may be conducted on a regular schedule, or may be performed on an ad hoc 
basis. Of the 25 covered entities that reported monitoring their contract pharmacy 
arrangements internally, 17 reported doing so on a regular schedule and 8 reported doing 
so on an ad hoc basis. 
 
Only 7 of 30 covered entities reported that they have retained independent auditors for 
their contract pharmacy arrangements, as recommended in HRSA guidance.  Six of these 
covered entities retain auditors in addition to doing their own monitoring as described 
above, while one of these covered entities relies only on its auditor for oversight.  HRSA 
guidance states that while specific compliance methods are left up to the covered entity, 
annual independent audits are expected. 
 
Four covered entities reported that they neither monitor their contract pharmacy 
arrangements nor retain independent auditors. 
 
Some covered entities have detected problems through their oversight activities.  Ten 
covered entities reported that they have discovered instances that could be considered 
diversion or that could have resulted in duplicate discounts in their contract pharmacy 
arrangements. 
 
These 10 covered entities reported that they did not notify HRSA of the instances because 
their administrators or contract pharmacies had corrected the problems.  Eight of the ten 
covered entities reported that their administrators corrected the problems by changing the 
status of filled prescriptions from 340B-eligible to not 340B-eligible.  The other two 
covered entities reported that their contract pharmacies were able to correct the problems.  
Specifically, one of the two covered entities reported that its contract pharmacy 
purchased non-340B drugs to replace the 340B-purchased drugs that were incorrectly 
dispensed. The other covered entity reported that it did not know how its contract  
pharmacy corrected the problem. 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 16  Mary K. Wakefield, Ph.D., R.N. 
 
 
CONCLUSION 
 
Contract pharmacy arrangements create complications in preventing diversion in the 
340B Program, and the covered entities in our study reported addressing those 
complications in different ways.  Covered entities in our study reported different methods 
of identifying 340B-eligible prescriptions, and in some cases their determinations of 
340B eligibility differ from one covered entity to another for similar types of 
prescriptions. This suggests a lack of clarity on how HRSAs patient definition should be 
applied in contract pharmacy arrangements.  Covered entities appear to have differing 
interpretations of what HRSA guidance requires; some may also have chosen to apply 
more stringent criteria in the absence of a clear directive.  Regardless, there is 
inconsistency within the 340B Program as to which prescriptions filled at contract 
pharmacies are treated as 340B-eligible. 
 
Contract pharmacy arrangements also create complications in preventing duplicate 
discounts. Most covered entities in our study reported that, to prevent duplicate 
discounts, they do not dispense 340B-purchased drugs to Medicaid beneficiaries through 
their contract pharmacies.  However, administrators reported difficulties in identifying 
beneficiaries covered by MCO Medicaid, and some covered entities that do dispense 
340B-purchased drugs to Medicaid beneficiaries through their contract pharmacies did 
not report a method to avoid duplicate discounts. 
 
Furthermore, some covered entities in our study have implemented additional processes 
to offer the discounted 340B price to uninsured patients at contract pharmacies, but others 
have not. Neither the 340B statute nor HRSA guidance addresses whether covered 
entities must offer the discounted 340B price to uninsured patients; however, if covered 
entities do not, uninsured patients pay the full non-340B price for their prescription drugs 
at contract pharmacies. 
 
Moreover, most covered entities in our study do not conduct all of the oversight activities 
recommended by HRSA.  Although almost all covered entities reported monitoring their 
contract pharmacy arrangements, the extent of such monitoring varies.  Few covered 
entities reported retaining independent auditors for their contract pharmacy arrangements 
as recommended in HRSA guidance.  Without adequate oversight, the complications 
created by contract pharmacy arrangements may introduce vulnerabilities to the 340B 
Program. 
 
This memorandum report is being issued directly in final form because it contains no 
recommendations.  We are continuing to review contract pharmacy arrangements in the 
340B Program and may include recommendations in an upcoming report if appropriate.  
If you have comments or questions about this report, please provide them within 60 days.  
Please refer to report number OEI-05-13-00431 in all correspondence.   
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 17  Mary K. Wakefield, Ph.D., R.N. 
 
 
APPENDIX A  
 
Detailed Description of Process for Selecting Sample of Covered Entities 
 
We selected a purposive sample of 30 covered entities15 community health centers and 
15 DSHsfrom HRSAs covered entity database.  We chose to focus on a limited 
sample so we could conduct in-depth interviews that captured the many details and 
complexities of covered entities contract pharmacy arrangements.  
 
We selected only covered entities with at least one contract pharmacy arrangement that 
had been active for a year or more (i.e., since July 1, 2012, or before).  We did so 
because, according to initial conversations with stakeholders, it can take upwards of 
6 months for contract pharmacy arrangements to become fully operational after being 
established.  HRSAs covered entity database  listed a total of 1,658 covered entities with 
at least 1 contract pharmacy arrangement that had been active for a year or more.  The 
30 covered entities in our final sample represent contract pharmacy arrangements with 
199 unique contract pharmacies. 
 
To ensure a final sample of sufficient size, we selected an initial sample of 40 covered 
entities. Our final sample included the first 30 covered entities that met our criteria and 
with which we were able to schedule interviews.  
 
We selected our sample to represent a diverse group of covered entities, on the basis of 
the following considerations: 
 
   Number of covered entity sites (i.e., unique parent and child records) 
 
We classified covered entities by 3 categories:  those with only 1 site, those 
with 29 sites, and those with 10 or more sites.  We selected at least one 
covered entity from each category.  
 
	   Dispensing of 340B-purchased drugs to Medicaid beneficiaries 
 
We classified covered entities by 3 categories:  those for which all sites 
dispense 340B-purchased drugs to Medicaid beneficiaries, those for which 
some sites do so, and those for which no sites do so.  We used the covered 
entitys indication in HRSAs covered entity database to make this 
classification.  We selected only covered entities from the all or some 
categories, to increase the likelihood of including at least some covered 
entities that dispense 340B-purchased drugs to Medicaid beneficiaries through 
their contract pharmacies. 
 
	   Number of contract pharmacy arrangements (only those active for a year or 
more) 
 
We classified covered entities by 3 categories:  those with only 1 contract 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)   Page 18  Mary K. Wakefield, Ph.D., R.N. 
 
 
pharmacy arrangement, those with 29 contract pharmacy arrangements, and 
those with 10 or more contract pharmacy arrangements.  We selected at least 
one covered entity from each category. 
 
   Location  
 
We classified covered entities by three categories:  rural; both rural and 
nonrural (i.e., some sites were marked rural and some sites were marked 
nonrural); and nonrural or no indication.  We used the rural indicator in 
HRSAs covered entity database to make this classification.35 We selected at 
least one covered entity from each category.  We also attempted to select  
covered entities from a variety of different States. 
 
Table 1 shows the breakdown of the 1,658 covered entities with at least 1 contract 
pharmacy arrangement active for a year or more, as well as the 30 covered entities in our 
final sample, by the categories described above. 
 
Table 1: All Covered Entities and Final Sample, By Category 
Number of  All  Number of Covered  
Category  
Covered Entities   Entities  in Final Sample  
Number of Covered Entity Sites 
1  816  6 
29   661  16 
10+  181  8 
Dispensing of 340B-Purchased Drugs to Medicaid Beneficiaries 
All sites  530  23 
Some sites  133  7 
No sites  995  0 
Number of Contract Pharmacy Arrangements 
 1  851  8 
29   629  17 
10+  178  5 
Location 
    Rural (DSH only)   73  5 
    Both Rural and Nonrural (DSH only)   4  2 
    Nonrural or No Indication  1,581   23 
Total  1,658   30 
Source:  OIG analysis of HRSAs covered entity database, 2013. 
 
                                                 
35 The rural indicator in  HRSAs covered entity database applies only to  DSHs.  As such, only DSHs are 
represented in  the rural and both rural and nonrural classifications. 
Contract Pharmacy Arrangements in the 340B Program (OEI-05-13-00431)