The U.S. has recently begun to include in free trade agreements provisions regarding government health care programs which reimburse entities for prescription drugs. The U.S.-Australia free trade agreement was the first to include such provisions, followed by the U.S.-Korea Free Trade Agreement (Korea FTA). Similar language is likely to be included in the Trans-Pacific Partnership Free Trade Agreement (TPP FTA), which includes Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.
In response to outcry from state legislative associations, the Korea agreement included a footnote exempting Medicaid from the requirements of the agreement. However, there remains confusion regarding whether the Medicaid footnote also applies to the 340B program. This note outlines the differences between the programs, concluding that because they are two separate programs, the 340B program is required to follow the regulations of the Korea FTA.
Medicaid Prescription Drug Program
Medicaid is a joint federal and state program created under the Social Security Act. Managed at the federal level by the Centers for Medicare and Medicaid Services (CMS), the program provides health care services to qualifying low-income and disabled individuals. Each state receives federal funds to support the program, based on the services provided and the populations covered in the state. Over 50% of Medicaid beneficiaries are children, however, beginning in 2014, ACA requires that the program cover all individuals who fall under a certain income level. States also have leeway to expand the program to include individuals who do not meet the federal criteria. States are required to provide various services to Medicaid enrollees, including inpatient and outpatient hospital care, x-rays and laboratory testing, and physician services. Other services such as prescription drugs, home health care and dental services are optional. Medicaid enrollees receive covered services “from any institution, agency, community pharmacy, or person, qualified to perform the service or services required,” and which meets the requirements for participation in the program.
States which elect to provide drug coverage to Medicaid enrollees will cover only those drugs manufactured by companies which enter into an agreement with CMS. Under this agreement, manufacturers agree to provide discounts in the form of rebates for drugs dispensed to Medicaid enrollees. The amount of the rebate for each drug varies based upon the manufacturer’s quarterly pricing calculations, the formula for which is specified in the federal Medicaid agreement with the manufacturers. The rebate is calculated as either a percentage of the average manufacturer price (AMP) of the particular drug, or the AMP minus the lowest commercial price paid for that drug during the applicable quarter (called “best price” or “BP”) for the quarter.
To receive a prescription, enrollees present their prescription at any participating pharmacy which fills the prescription, then submits an invoice to the state Medicaid agency for reimbursement. Each state determines its own pharmacy reimbursement rates—generally a percentage of the drug’s average wholesale price (AWP). States in turn invoice the manufacturer of the drug the rebate amount for each prescription filled for a Medicaid enrollee during the applicable quarter.
Section 340B of the Public Health Services Act
The 340B program is managed by the Health Resources and Services Administration Office of Pharmacy Affairs (HRSA OPA). The program is a mechanism by which certain qualified health centers may purchase prescription medications at a discounted price. There are many types of organizations which qualify as “covered entities” under the program, including federally-qualified health centers like health care for the homeless and migrant health centers. In addition, certain organizations which receive federal grants under a family planning project, the Ryan White Act, the Native Hawaiian Care Act, or the Indian Care Improvement Act may be eligible to purchase prescription drugs at the 340B discounted price. Finally, disproportionate share hospitals, certain children’s and rural hospitals may also qualify.
Covered entities purchase prescription drugs either from the Prime Vendor, or directly from the manufacturer, at the applicable discounted price. However, only patients of that facility who receive health care services in addition to receiving prescription drugs at the facility are eligible to receive outpatient medication at the 340B discount rate from that facility.
Medicaid Compared to 340B
While they are two completely separate programs, there is certainly some overlap between the Medicaid prescription drug program and the 340B program. First, the 340B discount calculation utilizes the same prices outlined in the Medicaid statute. Specifically, the maximum price that a covered entity will pay for prescription drugs is the AMP for the preceding quarter minus the rebate percentage for that quarter. This price is also referred to as the 340B “ceiling price.” In addition, drug manufacturers which would like their drugs to be covered under the Medicaid program are required to not only enter into a Medicaid agreement, they must also enter into separate agreements to make their drugs available under the 340B program and to provide their drugs to the Department of Veterans Affairs.
However, the most substantial difference between the programs is that covered entities are explicitly prohibited from submitting claims to Medicaid for prescriptions filled with drugs purchased under the 340B program. A facility which participates in the 340B program and provides health care services to Medicaid enrollees must keep the stock of medication purchased at the 340B discount rate separate from its regular stock of medications. The facility can only use 340B medication for non-Medicaid enrollees.
340B is Not Exempt from the Korea Free Trade Agreement
The Medicaid footnote in the Korea FTA states: “For greater certainty, Medicaid is a regional level of government health care program in the United States, not a central level of government program.” This language equivocally exempts Medicaid, but mentions no other U.S. health care programs. As such, any health care program in the U.S. which meets the standards set out in the Korea FTA must abide by its regulations.
The Korea FTA applies to health care programs under which “the health care authorities of a Party’s central level of government make the decisions regarding” coverage and reimbursement of pharmaceuticals. Further, even though the federal government does not directly reimburse for drugs under the 340B program, direct reimbursement is not required by the Korus FTA—only that decisions regarding drug coverage and reimbursement under the program are made at the central level of government. Therefore the Korea FTA applies to 340B because at the central level of government HRSA “manages procedures for listing pharmaceutical products”,” indications for reimbursement,” and “setting the amount of reimbursement for pharmaceutical products” for the program.
For a more in-depth discussion of the impact the Korea FTA could have on the 340B program, see: http://www.reducedrugprices.org/av.asp?na=601.
 The language to be included in the TPP has not been made public by the U.S. Trade Representative, but sources indicate that the language will be very close to that included in the Korea agreement. See Sean Flynn, Shape of U.S. TPP Pharmaceuticals Chapter Emerges, International IP and Public Interest, June 15, 2011, http://infojustice.org/archives/3871.
 See 42 U.S.C. § 1396a(a)(10)(A)(i).
 42 U.S.C. § 1396b.
 See Kaiser Family Found., Medicaid Enrollment: June 2010 Data Snapshot, 6 http://www.kff.org/medicaid/upload/8050-03.pdf.
 Id. at § 1396a(10)(A)(i)(VII).
 Id. at § 1396a(10)(A)(ii).
 Id. at § 1396a(10)(A); See also 42 U.S.C. § 1396d(a).
 Id. at § 1396d(a).
 42 U.S.C. § 1396a(a)(23).
 Id. at § 1396a(a)(33)(B); See also 42 C.F.R. § 447.15.
 42 U.S.C. § 1396r-8(b) (States will not receive federal funds for prescriptions filled for non-contract medications).
 42 U.S.C. § 1396r-8(c); See also 42 C.F.R. § 447.505.
 42 C.F.R. § 447.512; See also Ctrs. For Medicare and Medicaid Servs., Medicaid Prescription Reimbursement Information by State, Quarter Ending March 2011, http://www.cms.gov/Reimbursement/Downloads/1Q2011ReimbursementChart.pdf
 See 72 C.F.R. § 447.
 42 U.S.C. § 256b.
 Id. at § 256b(a)(4).
 Id. at § 256b(a)(8).
 61 C.F.R. 55156, 55157 (Oct. 24, 1996).
 Supra note 16 at § 256b(a)(1)-(2).
 42 U.S.C. § 1396r-8(a)(1), (5), and (6).
 Supra note 16 at § 256b(a)(5).
 See U.S. Dept of HHS, Health Resources and Servs. Admin., Frequently Asked Questions, http://answers.hrsa.gov/app/answers/detail/a_id/428.
 Free Trade Agreement between the U.S. and the Republic of Korea, Chapter 5, FN 3, available at http://www.ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file899_12703.pdf.