Is Your 340B Program Prepared for an Audit?

The Patient Protection and Affordable Care Act is expected to bring significant change to the healthcare industry, including the expansion of the Public Health Service Act Section 340B Program. Furthermore, there will be increased scrutiny of all organizations with 340B programs by federal oversight organizations such as Heath Resources and Service Administration Office of Pharmacy Affairs and the Office of Inspector General as well as pharmaceutical manufacturers. Internal audit and compliance work plans need to be developed and executed to address this "spotlight" on 340B programs.

The 340B program is an existing program that allows certain eligible hospitals and other providers to purchase outpatient drugs at a discount from pharmaceutical manufacturers. The lower-priced drugs provide costs savings to those eligible facilities which serve a large volume of low-income or uninsured patients.

340B program

Under Sections 7101 to 7103 of PPACA, revisions were made to the 340B program, including the expansion of those facilities eligible to participate in the drug discount program. Children's hospitals, critical access hospitals, sole community hospitals, rural referral centers and free-standing cancer hospitals are now permitted to apply for 340B status as long as they meet specific criteria. 

What's it all about?

The 340B program is based on the premise that by reducing the costs for outpatient drugs for certain hospitals and other providers, these organizations will be able to continue to provide needed healthcare services to low-income or uninsured patients.
A disproportionate share threshold must be met in order to participate in the 340B program as follows:

  • Disproportionate share, children's and free-standing cancer hospitals —11.75 percent
  • Sole community hospitals and rural referral centers — 8 percent
  • Critical access hospitals — 0 percent (no requirement)

In addition, unlike typical 340B program rules, the sole community hospitals, rural referral centers and critical access hospitals may continue to utilize a group purchase organization for obtaining pharmaceuticals, but disproportionate share hospitals, children's hospitals and free-standing cancer hospitals may not.    

How does it work?

Providers must apply to participate in the 340B program, and if approved, they are designated as a "covered entity" and are therefore eligible to receive significant discounts from pharmaceutical manufacturers for providing outpatient drugs to patients. As a covered entity participating in the 340B program, an organization must comply with various statutory requirements on patient eligibility, inventory management, location identification and contract pharmacy monitoring. The savings achieved through the 340B program are utilized by the hospitals to provide more services to low-income, uninsured or underinsured patients or expand other community health programs as needed. 

In 2011, the U.S. Government Accountability Office found that the 340B program got inadequate oversight from the HRSA, and in the last 10 years, the number of locations participating in the 340B program has more than doubled to more than 16,500. Some drug manufacturers have questioned whether all of those hospital locations need a discount drug program. In addition, members of Congress have questioned whether hospitals and other non-profits are using their achieved savings to help the poor and uninsured patients.

The role of internal audit and compliance

As a result of the expansion of eligible organizations and increased scrutiny of the 340B program, these are new areas of opportunity for monitoring by hospital internal auditors and compliance officers.

Internal auditors should include in their work plan the need to test the effectiveness of their hospital's 340B program controls such as:

  • Does the hospital have controls in place to assess patient eligibility for the 340B program?
  • Does the pharmacy inventory management system track and maintain dispensing data on all medications purchased under the 340B program?
  • Has the pharmacy inventory management system controls been tested to ensure their effectiveness?
  • Has the information related to the organization that is listed on the OPA website been reviewed for accuracy?
  • Are there effective monitoring controls over contract pharmacy arrangements?

In addition to testing the effectiveness of internal controls, compliance officers should be testing the organization's compliance with the statutory requirements including:

  • Validate that patient eligibility is assessed prior to dispensing 340B program drugs.
  • Validate that the pharmacy inventory management system is tracking 340B program drugs.
  • Assess the organization's utilization of GPOs in accordance with 340B program requirements.
  • Validate that the Medicaid billings are reflecting the appropriate cost of the drugs dispensed to the patient under the 340B program.
  • Validate the organization is meeting the disproportionate share requirements, as applicable.

As healthcare organizations continue to look for ways to reduce costs, with PPACA expanding health insurance coverage to more people, and the federal government focusing its attention to ensure compliance with all of its laws and regulations, healthcare leadership will need to continuously review the risks associated with their respective organization to ensure that all areas are being addressed, including the 340B program.     

Sarah Dekutowski is a manager in Draffin & Tucker's Consulting service group in Atlanta, where she focuses on the healthcare industry. She also assists in the firm's Audit and Accounting service group. Sarah has significant experience in financial management of complex healthcare organizations, revenue cycle improvement, internal controls and compliance. She has more than 20 years of experience in the healthcare industry, including 3 years as CFO of a multi-specialty faculty physician practice plan of 800 physicians and seven years as CFO and CCO of a large home healthcare and hospice organization.

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