Overview of the Federal 340B Drug Pricing Program

Overview of the Federal 340B Drug Pricing Program Presented by: James A. Raley, CPA Senior Manager Health Care Services Arnett Carbis Toothman LLP 345

340B Program: Overview Provides discounts on outpatient drugs to certain safety net covered entities Program s intent is to allow safety net entities to increase patient services with savings Estimated $6.9 billion dollars in 340B drug purchases last year or about 2.1% of the pharmaceutical market Manufacturers that participate in Medicaid must also participate in the 340B Program 346 346

340B Program AdminisTraTion The 340B Program Team: HRSA s Office of Pharmacy Affairs 340B PVP Prime Vendor Program (Apexus Inc.) Pharmacy Services Support Center (PSSC/PharmTA) 347 347

340B Program: BenefiTs Average savings of 25 50% on outpatient drug purchases for 340B covered entities Savings may be used to: Reduce price of pharmaceuticals for patients Expand services offered to patients Provide services to more patients 348 348

340B Program: Eligible entities Federal Grantees Hemophilia Treatment Centers Federally Qualified Health Centers/ Look alikes Ryan White Programs Sexually Transmitted Disease/Tuberculosis Title X Family Planning Urban/ 638 Health Center Native Hawaiian Health Centers Non grantees Disproportionate Share Hospitals Critical Access Hospitals Rural Referral Centers Sole Community Hospitals Children s Hospitals Free Standing Cancer Hospitals 349 349

AcTive ParTicipanTs in 340B Contract Pharmacy Drug Manufacturer Wholesaler Covered Entity (CE) GPOs and Buying Groups 3 rd Party 340B Administrators (Software Vendors) 350 350

ConTracT Pharmacy Process Flow Covered Entity Contract Pharmacy Rx 340B Admin Wholesaler 351 351

PoTenTial OpporTuniTies Avg. Receipts Avg. Receipts Physician Specialty Per Prescription Physician Specialty Per Prescription Family Practice/Internal Medicine Cardiology Brand $ 104.21 Brand $ 233.14 Generic $ 9.63 Generic $ 4.27 Combined $ 40.14 Combined $ 62.82 Pulmonary Hematology Brand $ 172.94 Brand $ 480.30 Generic $ 2.32 Generic $ 34.25 Combined $ 124.79 Combined $ 136.20 Urology Gastroenterology Brand $ 80.35 Brand $ 367.64 Generic $ 1.76 Generic $ 15.86 Combined $ 37.25 Combined $ 85.63 (1) Receipt per prescription, net of cost of drugs, dispensing fees and administration fees. Source: ACT database of 340B claims 352 352

Medicare DSH - 340B QualificaTion PercenTage El i gible Hospital Non-Profit/Gov't Contract DSH Adjustment Percentage GPO Ex clusion Orphan Drug Ex clusion DSH Hospital Yes 11.75% Yes No Critical Access Hospital Yes No Required % No Yes Rural Referral Center Yes 8% No Yes Sole Community Hospital Yes 8% No Yes Free-standing Cancer Hospital Yes 11.75% Yes Yes Children's Hospital Yes 11.75% Yes No 353 353

Medicare DSH - 340B STraTegies Patient Day Scrub If your hospital is close to the Qualifying Medicare DSH percentage, a Medicaid and Total Patient day scrub may be enough to increase your DSH percentage to the qualifying percentage. Psychiatric Unit Conversion If the hospital has a distinct psychiatric unit, it could possibly be converted to a PPS psychiatric unit so that the Medicaid days and total days would be counted in the Medicaid DSH factor. 354 354

Medicare DSH - 340B STraTegies If the psychiatric unit is large enough, the hospital might be able to create two psychiatric units from the current distinct unit. The Geriatric psychiatric unit would remain a distinct part Medicare unit for older, more medically fragile patients. The reimbursement method would not change in this unit. These patients would not be included in the Medicare DSH calculation. The non geriatric unit would be paid as a PPS unit and be included in the Medicaid DSH fraction. 355 355

Medicare DSH - 340B STraTegies The Medicaid utilization of this type of psychiatric unit is typically between 40 70%. This Medicaid utilization, along with existing PPS services, can often increase the hospital s Medicaid utilization percentage enough to meet the required DSH payment percentage to qualify for 340B. In the example on the next slide, the hospital s current DSH percentage is 6.85%. After converting the psychiatric unit to a PPS unit, the DSH percentage increases to 12.23%, which exceeds the required 11.75% for 340B. 356 356

Medicare DSH - AddiTion of PsychiaTric Days Description Non Qualified Hospital PPS Psych Unit Adjusted DSH % Medicaid Days In State Paid 400 500 900 Medicaid Days In State Eligible 500 500 Medicaid Days Out of State Paid 10 10 Medicaid Days Out of State Eligible Medicaid Days HMO 2,850 1,850 4,700 Medicaid Days Other Medicaid Days Total 3,760 2,350 6,110 Total Days Acute Hospital Days 28,500 3,000 31,500 Total Days Employee Discount Days Total Days Total Hospital Days DSH 28,500 31,500 Total Days Calculated Medicaid 13.19% 19.40% Total Days Cost Report Medicaid % 13.19% 19.40% Total Days SSI% 8.50% 8.50% Total Days Total DSH% 21.69% 27.90% Total Days Allowable DSH% 6.85% 12.23% 357 357

Medicare DSH - 340B STraTegies Reclassification Strategy Ifyourhospitalislocatedinanurbanareaanddoesnotqualifyfor 340B at the 11.75% level, you might be able to reclassify to rural status under 42 CFR 412.103, if your Hospital meets the criteria to become a Sole Community Hospital (SCH), (42 CFR 412.92) or Rural Referral Center (RRC), (42 CFR 412.96). As we saw previously, SCHs and RRCs qualify for 340B at 8%, rather than 11.75%; however, SCHs and RRCs have pros and cons relating to the 340B program. 358 358

Medicare DSH - 340B STraTegies Pro SCHs and RRCs are not subject to GPO exclusion. Con SCHs and RRCs are subject to Orphan Drug Exclusion. This would reduce your 340B benefit if one of your largest 340B savings is going to be an outpatient cancer center. Con Your hospital will be paid the rural wage rate while you are classified rural. Pro You may reclassify to either your home wage or the nearest urban area, if it is higher. Pro As a RRC, you only have to meet 82% of the wage area you wish to reclassify. 359 359

Medicare DSH - 340B STraTegies Example: Urban to rural reclassification as a RRC. Lost revenue for 12 months as rural wage ($4,000,000). Wage reclassification using special access to the closest urban area. Increased Medicare Revenue for 36 months as reclassified urban area ($15,000,000). Eligible for 340B program with a 9.2% Medicare DSH percentage ($1,500,000 annually). 360 360

Commonly Seen Issues 361

DuplicaTe DiscounT Step 1: Manufacturer sells Covered Drug to a CE at 340B discounted price. Step 2: Covered Drug dispensed to Medicaid patient Covered Entity Step 4 & 5: State submits rebate request to manufacturer & manufacturer pays rebate Step 3: CE requests reimbursement from the State 362 362

DuplicaTe DiscounT, cont. Covered entities may not receive a 340B discount for drugs that are subject to a Medicaid rebate. Providers required to inform HRSA (Medicaid billing number) at the time of 340B enrollment how they plan to handle 340B drugs for Medicaid patients Carve In or Carve Out Follow procedures established by each State Medicaid agency In Pennsylvania, CE may choose to: Carve out Medicaid patients from 340B so the State can claim the rebate Use 340B drugs for Medicaid patients and reduce Medicaid payment to the Covered Entity Medical Assistance Bulletin 99 13 08 offers guidance for Pennsylvania Hospitals 363 363

Diversion An individual is a patient of a 340B covered entity only if: the covered entity has established a relationship with the individual, such that the covered entity maintains records of the individual's health care; and 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 consultation), such that responsibility for the care provided remains with the covered entity; and 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. Disproportionate share hospitals are exempt from this requirement. Not considered a patient if the only health care service is the dispensing of a drug for self administration 364 364

OuTdaTed / IncorrecT InformaTion Very important to maintain information in OPAIS Used by manufacturers to screen CE s Requires registration of all contract pharmacy arrangements Registration changes may only be submitted the first 15 days of the quarter (October 1 15; January 1 15; April 1 15; July 1 15) Become effective the start of the following quarter Equally important is the information being maintained by the 340B Administrator 365 365

Compliance RecommendaTions 366

340B Compliance recommendations Leadership Committee Developing a Leadership Committee to foster compliance and expectations for the 340B program. The purpose is to communicate and maintain benefits and compliance for all aspects of the 340B Program, including: Pharmacy Department Quality Department Finance Department Entity Operations Contract Pharmacy Compliance Risk Management 367 367

340B Compliance recommendations Education and Training Develop and maintain staff knowledge as related to the 340B Program. Establish knowledge requirements for the staff. Identify potential gaps with staff knowledge and create training based on knowledge gaps. Educate participating staff on EHR accumulation and 340B drugs that qualify for the 340B Program. Develop and maintain comprehensive 340B policies and procedures. 368 368

340B Compliance recommendations Conduct monthly internal and external audits. Collect, analyze, and disseminate the data to evaluate and guide improvement to the 340B Program. Develop consistent and systematic process to regularly audit 340B procurement, administration/dispensing, and billing transactions at all sites utilizing 340B drugs. Maintain records of all audit results, reporting, and actions taken to correct/improve 340B processes. Establish process to review all audit findings and action items. 369 369

340B Compliance recommendations 340B Independent Audit An independent audit is recommended yearly by HRSA, and the results are a guide for measure and action plans. They can also accompany internal self audit records in the event of an HRSA audit. An independent audit is an audit usually made by professional auditors who are wholly independent of the company or vendors of the entity where the audit is being made. An audit is a planned and documented activity performed by qualified personnel to determine the adequacy and compliance with established standards and procedures. The audit may include both financial and compliance review, and testing of internal controls. Let the audit work for the entity; any issues or problem areas should have recommendations that accompany them to aid in the process of having a 100% compliant 340B Program. 370 370

Skilled Nursing FaciliTy cost analysis 371

Skilled Nursing Facility (SNF) CosT Analysis Hospitals continuing to acquire SNFs Most SNFs being acquired are operating at a loss Hospital based SNFs operating at a loss in most situations SNFs require a different skill set to operate effectively Still comes down to controlling costs and maximizing revenues 372 372

Benchmarking Analyze organization s monthly statistics to assist in future business decisions Compare organization s cost/day to similar organizations Utilize benchmarking data to assist with decision making process regarding future operations Understand your benchmarks and their impact on operations 373 373

Benchmarking Data Dashboard November November Home Home Similar 6/30/17 6/30/16 Organizations Census Admissions 216 130 196 Discharges 174 135 195 Nursing MA Case Mix Index 1.02 0.95 1.07 Hands on Nursing 3.65 3.70 3.50 MC Average Length of Stay 23.00 36.00 42.00 These numbers do not reflect actual results. 374 374

Benchmarking Data Dashboard Financial November November Home Home Similar 6/30/17 6/30/16 Organizations Days in Accounts Receivable 53.00 33.00 36.00 Days Cash on Hand 145.00 162.00 47.85 Debt Service Coverage Ratio 5.74 5.50 3.26 Current Ratio 1.34 3.25 2.75 Debt to Net Assets 2.65 1.50 2.21 Operating Margin 1.15 1.35 1.85 These numbers do not reflect actual results. 375 375

Cost Per Day Analysis Benchmarking Utilizing the Medicaid cost report to evaluate your organization's cost per day can provide valuable insight on how the organization is operating. Organizations with independent living, assisted living, or personal care should evaluate the allocations utilized in the Medicaid cost report in conjunction with review of the cost per day. Ultimately, you want to either validate the cost or determine if it is an indicator of a potential issue. 376 376

Benchmarking Cost Per Day Analysis Average Total Average Cost % of Total Cost Per Patient Day Cost Average COST CENTERS Non Profit Non Profit Non Profit I. RESIDENT CARE COSTS 1 Nursing $4,893,534 $107.68 33.90% 2 Director of Nursing 545,705 12.10 3.78% 3 Related Clerical Staff 128,806 3.04 0.89% 4 Practitioners 11,148 0.15 0.08% 5 Medical Director 26,108 0.66 0.18% 6 Social Services 140,628 3.27 0.97% 7 Resident Activities 269,160 6.29 1.86% 8 Volunteer Services 6,458 0.11 0.04% 9 Pharmacy Prescription Drugs 338,579 7.65 2.35% 10 Over the Counter Drugs 30,329 0.65 0.21% 11 Medical Supplies 221,595 4.76 1.53% 12 Laboratory and X rays 49,951 1.26 0.35% 13 Physical,Occupational & Speech Therapy 941,122 22.83 6.52% 14 Oxygen 40,825 0.82 0.28% 15 Beauty & Barber Services 33,414 0.76 0.23% 16 RC Minor Movable Property 14,814 0.36 0.10% 17 Nurse Aide Training 23,575 0.33 0.16% 18 Other: See Attached 40,220 0.85 0.28% 19 Other: See Attached 9,903 0.22 0.07% 20 TOTAL RESIDENT CARE COSTS $7,765,874 $173.79 53.78% II. OTHER RESIDENT RELATED COSTS 21 Dietary and Food $1,231,172 $28.58 8.53% 22 Laundry and Linens 201,195 4.33 1.39% 23 Housekeeping 415,572 8.57 2.88% 24 Plant Operation & Maintenance 637,775 14.09 4.42% 25 ORR Minor Movable Property 13,043 0.29 0.09% 26 Other: See Attached 22,409 0.57 0.16% 27 Other: See Attached 79,457 0.64 0.55% 28 TOTAL OTHER RESIDENT RELATED COSTS $2,600,623 $57.07 18.02% Focused on Resident Care and Other Resident Related costs, excluding Administrative and Capital costs. 377 377

Benchmarking Cost Per Day Analysis Cost Per Day Average Cost Average Cost Per Patient Per Patient Day Day Over (under) Average Cost November Per Patient Day COST CENTERS Home All Non Profit Non Profit I. RESIDENT CARE COSTS 1 Nursing 113.80 98.77 107.68 6.12 2 Director of Nursing 16.43 10.87 12.10 4.33 3 Related Clerical Staff 1.54 2.88 3.04-1.50 4 Practitioners 0.00 0.14 0.15-0.15 5 Medical Director 1.40 0.71 0.66 0.74 6 Social Services 4.78 3.09 3.27 1.51 7 Resident Activities 5.95 5.49 6.29-0.34 8 Volunteer Services 0.89 0.06 0.11 0.78 9 Pharmacy-Prescription Drugs 16.32 7.83 7.65 8.67 10 Over-the-Counter Drugs 1.45 0.65 0.65 0.80 11 Medical Supplies 5.24 4.13 4.76 0.48 12 Laboratory and X-rays 2.01 1.26 1.26 0.75 13 Physical, Occupational & Speech Therapy 34.98 23.18 22.83 12.15 14 Oxygen 0.00 0.88 0.82-0.82 15 Beauty & Barber Services 0.61 0.56 0.76-0.15 16 RC Minor Movable Property 0.00 0.56 0.36-0.36 17 Nurse Aide Training 0.00 0.26 0.33-0.33 18 Other: See Attached 0.00 0.58 0.85-0.85 19 Other: See Attached 0.00 0.15 0.22-0.22 20 TOTAL RESIDENT CARE COSTS 221.37 162.05 173.79 47.58 II. OTHER RESIDENT RELATED COSTS 0.00 21 Dietary and Food 31.23 24.14 28.58 2.65 22 Laundry and Linens 3.88 3.69 4.33-0.45 23 Housekeeping 8.67 7.62 8.57 0.10 24 Plant Operation & Maintenance 13.22 12.71 14.09-0.87 25 ORR Minor Movable Property 0.00 0.26 0.29-0.29 26 Other: See Attached 0.00 0.38 0.57-0.57 27 Other: See Attached 0.00 0.32 0.64-0.64 28 TOTAL OTHER RESIDENT RELATED COSTS 73.88 49.12 57.07 16.81 Focused on Resident Care and Other Resident Related costs, excluding Administrative and Capital costs. 378 378

Benchmarking Nursing Cost Per Day Nursing cost per day appears high at $6.12 higher per day than the average nonprofit. Potential contributing factors for the higher cost per day: Staffing Fringes Agency Hands on nursing 379 379

Benchmarking Nursing Cost Per Day How do my nursing costs per day compare to my competitors? Nursing Costs November Home 113.50 Avg. Non Profit 107.68 November Home 113.50 Avg. Non Profit 107.68 Variance 5.82 November Home Resident Days 43,344 Estimated Excess Cost $252,262.08 380 380

Benchmarking Nursing Cost Per Day How do my salaries per hour compare to my competitors? November Home Average Non Profit Salaries Per Hour Registered Nurses 34.23 31.85 Licensed Practical Nurses 26.14 23.57 Nurses Aides 17.41 15.05 381 381

Nursing Cost Per Day Benchmarking How does my hands on nursing compare to similar organizations? 2017 November Home hands on nursing hours 3.65 Similar organization hands on nursing hours 3.50 Difference in hours per resident day 0.15 Actual resident days 43,344 Total hours difference 6,502 Total hours difference 6,502 Average hourly rate (RNs, LPNs, CNAs) 25.93 Estimated excess cost over similar organizations $168,565 382 382

Benchmarking Pharmacy Cost Per Day Pharmacy cost per day appears high at $8.67 higher per day than the average nonprofit. Potential contributing factors for the higher cost per day: Part D drug costs Review pharmacy contracts Real Life Example 383 383

Benchmarking Therapy Cost Per Day Therapy cost per day appears high at $12.15 higher per day than the average nonprofit. Potential contributing factors for the higher cost per day: Medicare Part A Resource Utilization Group (RUG) Medicare Part B Case Load Review Therapy Contract Real Life Example 384 384

Dietary Cost Per Day Dietary cost per day appears high at $2.65 higher per day than the average nonprofit. Potential contributing factors for the higher cost per day: Benchmarking Salaries Contracts Cost per meal Guest and employee meals Current Meal Charge Structure 385 385

Benchmarking Dietary Cost Per Day What are my actual meal costs? June 30, 2017 November Home dietary costs $1,353,633 November Home meals served 130,032 Cost per meal 10.41 November Home's cost per meal 10.41 Similar organizations cost per meal 9.53 Difference in cost per meal 0.88 Actual meals served 130,032 Estimated excess cost over similar organizations $114,862 386 386

Benchmarking Board Involvement Providing key indicators to your Board on a monthly basis provides them an understanding of the organization and enhances their basis for strategic business decisions Strategic planning assists organizations in determining their success for the future 387 387

QUESTIONS? James A. Raley, CPA Senior Manager Health Care Services voice: 724.658.1565 or 800.452.3003 e mail: james.raley@actcpas.com 388 388