Cost accounting in the Pharmacy has always been a difficult proposition. Many drugs are billed in increments mandated by CMS in multiples of Rx doses. The NDC listed in the Rx formulary for generic items may not be the NDC of the drug purchased from the distributor. The purchased unit of measure may not be the same as the dose or billed unit of measure. In short, costing is a quagmire.
Introduction
Organizations which are "covered entities" in the federal 340b program have yet another hurdle to overcome when assigning cost to 340b drugs. As a brief review, the 340b program was established to mandate deep discounts on high-cost drugs, allowing the providers to free up cash and reduce the burden of rendering non-compensated (charity) care. In other words, the drug companies are subsidizing charity care, to some extent. The Health Resources and Services Administration (HRSA, part of the DHHS) issues quarterly directives of which drugs are included on the 340b list. Covered entities, i.e., hospitals, expend resources to manage their 340b program in accordance with some very strict rules. However, there is no FASB guidance (which I'm aware of) governing how the hospital reports the 340b savings on its financial statements. This is where I believe there is room for improvement to both costing and financial reporting.
It's All About the Invoice
Drug distributors send invoices to their hospital customers generally separated in three ways:
- Drugs purchased at GPO contract pricing
- Drugs purchased at WAC (wholesale acquisition cost) pricing
- Drugs purchased at 340b pricing
The invoices go to the Pharmacy where they are approved for payment, and the expense is recorded as an operational expense to the Pharmacy cost center using the drugs. There is no calculation of the net 340b "savings" vs. the typical GPO price.
Frequently, drugs on the 340b schedule are used by both Inpatients and Outpatients, but HRSA rules explicitly state the drug purchased at the 340b price can only be used on certain types of Outpatients. Therefore, the Pharmacy must keep the inventory separate to ensure 340b purchases are not administered to patients not eligible to receive 340b drugs. This is a challenge for both the Pharmacy and the Cost Accountant. Billing data passed to the costing system typically makes no distinction between a drug purchased at 340b pricing and the same drug purchased at GPO or WAC pricing.
The Pharmaceutical industry has proposed changes to the 340b program which would mitigate the cost accounting problem. These changes would pass the 340b savings to the hospital in the form of "back-end" rebates. In other words, the hospital would pay the distributor WAC or GPO pricing for 340b drugs. Then, the manufacturer would issue a periodic rebate (via the distributor) in a lump sum to the hospital which equates to the amount saved. This would completely solve the cost accounting issue (if the rebate is booked to a separate account in the ledger). However, hospitals are fighting this proposal (through the AHA) because it has cash flow implications.
A Closer Look at the Accounting
HRSA has no regulation stipulating how 340b savings are to be used. The 1992 law creating the 340b program only states “The fundamental purpose of the 340b program is the enable covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” My interpretation is that the savings should be booked in the ledger as an offset to uncompensated care deductions, on the revenue side of the ledger. However, the hospital receives no information to easily tease out the net 340b discount. They pay the invoices as ordinary operating expense. This leads some in the hospital to look at the 340b program as a profit center. A common question I get from clients who are enrolled in the 340b program is “We want to know how much we’re making from 340b.” This may indicate a fundamental misunderstanding about the intent of the 340b program: Pharma is helping to subsidize high-cost drugs, which allows the hospital to provide uncompensated care.
340b Costing: A Possible Workaround
In my opinion, 340b drugs should be costed as if they were purchased at GPO prices. The resulting expense variance to the ledger should be reclassed to revenue deductions and incorporated into the net revenue model. If Pharma's "back-end" rebate proposal wins approval, the cost accounting of 340b will get much simpler, but will not make the hospitals happy.
In a perfect world, the distributor's invoice would show the 340b discount as a specific line item which could be captured and recorded in the ledger. Operating expense would reflect the gross amount of the invoice, and the discount recorded as an offset to either revenue deductions or drug expense (as a distinct rebate account). I doubt this approach would happen without legislative action.
In the meantime, the Cost Accountant can utilize the wholesaler spend history report and add this off-ledger calculation to their list of workarounds required to cleanse source data. The drug distributor can produce detailed purchase history of all drugs, broken out by pricing method (GPO, WAC, 340b). These reports can be requested in Excel format and used to "gross-up" the 340b costs using GPO (or WAC if needed) prices. The delta amount becomes the effective 340b discount, and the Cost Accountant can reclass this amount from Pharmacy expense to any appropriate ledger account. This would also provide an answer to the question "How much do we make on 340b?", which should be answered as "This is how much you save on 340b."
