OLR Research Report

November 28, 2006




By: John Kasprak, Senior Attorney

You asked for information on federally qualified health centers and the “Section 340B” drug pricing program.


A federally qualified health center (FQHC) is a type of health care provider defined by the Medicare and Medicaid statutes. FQHCs are private nonprofit or public health care organizations located in or serving federally-designated medically underserved areas or populations. They include all organizations receiving grants under “Section 330” of the federal Public Health Service Act which defines federal grant funding opportunities for organizations to provide care to underserved populations. They must be governed by a board of directors with a majority of its members being consumers of the center. FQHCs provide services to all regardless of ability to pay and charge on a sliding fee scale basis.

The Section 340B Drug Pricing Program requires drug manufacturers to provide outpatient drugs to certain covered entities, including FQHCs, at a reduced price. The law requires drug manufacturers to sell any drug provided in an outpatient setting to eligible entities at or below the 340B statutory ceiling price. This includes prescription drugs and can include over-the-counter drugs. Eligible entities, such as an FQHC, can take advantage of this program through an in-house pharmacy or a contract with a local pharmacy. A growing number of community pharmacists are contracting with eligible entities under the 340B program.

The 340B legislation also mandated the establishment of a “prime vendor”, typically a single preferred wholesaler specializing in serving a group of customers, to help simplify the process for eligible entities to obtain 340B drugs.



“FQHC” is a designation the federal Bureau of Primary Health Care (BPHC) and the Centers for Medicare and Medicaid Services (CMS) assigned to private nonprofit or public health care organizations that serve predominantly uninsured or medically underserved populations. FQHCs are located in or serve a federally designated Medically Underserved Area or Population (MUA or MUP).

All FQHCs must be governed by a consumer board of directors and provide comprehensive primary health, oral, and mental health and substance abuse services to persons in all stages of life. FQHCs offer their services to all persons regardless of ability to pay and charge for services on a board-approved sliding fee scale based on patients' family income and size. FQHCs must comply with “Section 330” program requirements (see below) and all applicable state and federal regulations. (FQHCs are also known as Community/Migrant Health centers, Community Health Centers and 330 Funded Clinics.)

Section 330 Program Requirements

Section 330 refers to a section of the Public Health Service (PHS) Act (42 U.S. Code, Chap. 6A, 254b). Section 330 defines federal grant funding opportunities for organizations to provide care to underserved populations. Types of organizations that may receive grants include community health centers, migrant health centers, health care for the homeless programs, and public housing primary care programs.

Governance Requirements. Section 330 requires all FQHC Boards of Directors to have a majority (at least 51%) of consumer members. To be considered a “consumer,” a person must receive the majority of his health care at the FQHC. Nonconsumer members are selected from professional fields such as legal, financial, health care, and social services. No more than half of the nonconsumer members can earn more than 10% of their income from the health care field.

BPHC specifies that FQHC boards must have between nine and 25 members. Employees and their relatives are ineligible. FQHC bylaws must prescribe specific methods for selecting new board members. FQHC boards have legal and fiduciary responsibilities for clinic operations and grants, must perform periodic strategic planning, and evaluate progress toward organizational goals.

Mission and Strategy Requirements. The mission of all FQHCs must include the improvement of the health status of underserved populations in their targeted service area. FQHCs must assess the needs of the community and populations that they serve. Based on that, the FQHC must design culturally and linguistically appropriate health services programs. After setting up the services, FQHCs must measure the effectiveness and quality of services provided. They must collaborate with other health care providers, such as specialty providers, hospitals, and other social service agencies.

Health Services Requirements. FQHCs must provide the following services, either directly or through a written contractual arrangement:

● Primary care;

● Dental;

● Mental health;

● Substance abuse;

● Diagnostic lab and X-ray;

● Prenatal and perinatal;

● Cancer and other disease screening;

● Blood level screenings (lead levels, communicable diseases, and cholesterol);

● Well child services;

● Child and adult immunizations;

● Child eye and ear screening;

● Family planning;

● Emergency medical;

● Pharmaceutical;

● Case management;

● Outreach and education;

● Eligibility and enrollment services;

● Transportation and interpretation; and

● Referrals to specialty providers and hospital services.

FQHCs must provide all patients with a “continuum of care.” This means that patients have access to all required services, access to specialty and hospital services, and after-hours coverage. Hours of operation must encourage access to care by having some early morning, evening or week-end hours. FQHC health care providers must ensure the appropriate mix of services for the target population. Also, FQHCs must consider the mix of services already available to patients through other providers to minimize the duplication of services and maximize the efficient use of their financial resources. If FQHCs do not directly provide required services, they should have written agreements with other providers for those services.

All FQHCs must have a medical director who supervises all clinical activities and medical doctors who are licensed and residency-trained. Other clinicians must have appropriate licensure. Also, all FQHCs must establish policies and procedures for hours of operation, patient referral and tracking, use of clinical protocols, risk management, procedures, patient satisfaction assessment, and consumer bill of rights and patient grievances.

Staffing Requirements. FQHCs must be open a minimum 32 hours per week and also have professional call coverage when closed, directly or through an after hours care system. It must have a core staff of full-time providers, but there is no specific definition of core staff or specific requirements for staffing mix at an FQHC. It should maintain a staffing level that allows for between 4,200 to 6,000 visits per year for each full-time equivalent health care provider.

Management and Finance System Requirements. FQHC management teams include the chief executive officer, chief financial officer, medical director, and other key department heads. The FQHC's management information system should have the capacity to provide the management team with information on utilization and finances. To meet Section 330 requirements, the financial system must use a fund accounting model and have internal controls, track revenues and expenses against the FQHC operating budget, and provide for timely billing and collections. FQHCs must undergo an annual independent financial audit.

The facilities where FQHCs provide health services must meet health and safety code standards and, ideally, Joint Commission on the Accreditation of Healthcare Organizations standards.

Benefits of Being an FQHC

For FQHCs that are PHS 330 grant recipients, the biggest benefit is the grant funding available. Start-up FQHCs can receive up to $650,000. Other benefits include:

● Enhanced Medicare and Medicaid reimbursement

● Medical malpractice coverage through the federal Tort Claims Act

● Eligibility to purchase prescription and nonprescription medications at reduced cost through the 340B Drug Pricing Program (see below)

● Access to National Health Service Corps

● Access to the federal Vaccine for Children program

● Eligibility for various other federal grants and programs.



The “340B Program” was established by 602 of the Veterans Health Care Act of 1992 (P.L. 102-585), which put Section 340B of the Public Health Service Act into place.

Sometimes referred to as “PHS Pricing” or “602 Pricing,” the 340B Drug Pricing Program requires drug manufacturers to provide outpatient drugs to certain covered entities specified in federal law (42 U.S.C. Section 340B(a)(4)) at a reduced price. Drug manufacturers that participate in Medicaid must also agree to participate in the 340B Drug Pricing Program. Participating entities can realize significant savings on pharmaceuticals.

The 340B price defined in statute is a ceiling price, meaning it is the highest price a covered entity would have to pay for a given outpatient drug. Entities can negotiate below ceiling prices with manufacturers. As a result, 340B prices are about 50% of the average wholesale price.

The program is administered by the Office of Pharmacy Affairs (OPA) of the Health Resources and Services Administration (HRSA), under the federal Department of Health and Human Services (HHS; see

Covered Entities

Section 340B of the Public Health Service Act (PHSA) authorizes only the following entities to participate in the program:

1. FQHCs which include (a) FQHC look-alikes, (b) consolidated health centers ( 330(e) PHSA), (c) migrant health centers ( 330g PHSA), (d) health care for the homeless ( 330(h) PHSA), (e) healthy schools/healthy communities, (f) health centers for residents of public housing ( 330(i) PHSA), and (g) office of tribal programs or urban Indian organizations (P.L. 93-638);

2. a family planning project receiving a grant under 1001 PHSA (42 U.S. C. 3001);

3. an entity receiving a grant under subpart II of part C of Title XXVI of the Ryan White Care Act (RWCA, relates to categorical grants for outpatient early intervention services for HIV);

4. a state-operated AIDS Drug Assistance Program receiving financial assistance under the RWCA;

5. a black lung clinic funded under 427(a) of the Black Lung Benefits Act;

6. a comprehensive hemophilia diagnostic treatment center receiving a grant under 501(A)(2) of the Social Security Act (SSA);

7. a native Hawaiian health center funded under the Native Hawaiian Health Care Act of 1988;

8. an urban Indian organization funded under title V of the Indian Health Care Improvement Act;

9. an entity receiving assistance under title XXVI of the Indian Health Care Improvement Act (other than a state or unit of local government ), but only if certified by the HHS secretary;

10. an entity receiving funds under 42 U.S.C. 247c (relating to sexually transmitted diseases) or 42 U.S.C. 247b(j) (treatment of tuberculosis), through a state or local government unit, if certified by the secretary; and

11. a disproportionate share hospital (as defined in 1886(d)(1)(B) of the SSA) that does not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement and subject to other conditions.

According to a recent National Conference of State Legislatures survey, Connecticut has 99 approved 340B facilities.

The HRSA Pharmacy Services Support Center (PSSC) provides information, education, technical assistance, and policy analysis to help eligible entities optimize the 340B program's value and provide affordable, comprehensive pharmacy services. PSSC can be found at

340B Patients

Any patient of a participating 340B entity is considered a 340B patient, provided the entity controls the patient's medical records and has primary responsibility for the patient's care. Care must be provided by a provider employed by or contracted with the entity. For more information on this and other program terms and topics, see

Covered Drugs

Section 340B requires manufacturers to sell any drug provided in an outpatient setting to eligible entities at or below the 340B statutory ceiling price. This includes prescription drugs and can include over-the-counter drugs, if a prescriber writes a prescription for the drug. Vaccines and drugs given in inpatient care settings are excluded.

A participating entity cannot resell or transfer outpatient drugs to anyone other than a patient it covers. The penalty for failing to comply is forfeiture of the discounts back to the manufacturer and disqualification from the program. Manufacturers and the OPA have the right to audit the records of covered entities to determine whether diversion has occurred.

The 340B law also provides that a drug purchased through the program cannot be subject to both a 340B discount and a Medicaid rebate. This is to protect manufacturers from giving duplicate discounts on the same drug—a 340B discount up front when the covered entity purchases the drug, plus a Medicaid rebate to the state after the drug is billed to Medicaid.

Contracted Pharmacy

The 340B Program now offers a “contracted pharmacy” option for covered entities. When Congress enacted 340B, it did not consider that some covered entities, especially FQHCs, local health departments, and other facilities, would not be able to participate due to their lack of an in-house pharmacy capable of purchasing and dispensing discounted drugs. These facilities complained about their inability to participate, particularly as they realized that the start-up costs and expertise required to set up an in-house pharmacy created a considerable burden (see

Community health center groups, in particular, worked with the pharmacy affairs office at HRSA to develop other options for full participation in the program. As a result, HRSA published a final notice on August 23, 1996 that outlined guidance for setting up contracted pharmacy arrangements between a 340B-eligible entity and a local pharmacy. A growing number of community pharmacists are taking advantage of the opportunities to participate as contracted pharmacies.

Eligible entities can choose to contract with a local pharmacy to provide services to their patients. In addition, entities that have more than one site can contract with one pharmacy per delivery site. The agreement between the covered entity and the pharmacy should include those elements outlined in the Contract Pharmacy Services Model Agreement (attached; a sample contract is also attached.) OPA does not review the actual contracts between 340B covered entities and contracted pharmacies. Parties must have their own legal counsel review all contracts and other legal documents to ensure that all federal state and local requirements are met.

In order to ensure that drug manufacturers and drug wholesalers recognize contracted pharmacy arrangements, covered entities choosing to use a contracted pharmacy must submit to OPA a self-certification that they have signed an agreement with the contract pharmacy.

OPA also has approved several clinical pharmacy demonstration projects. These test other entity-pharmacy relationships, including multiple-pharmacy models.

Prime Vendor

The original 340B legislation mandated the establishment of a “prime vendor” in order to simplify the process for obtaining 340B drugs. A prime vendor is typically a single “preferred” wholesaler that specializes in serving a group of customers—in this case covered entities in the 340B program. Benefits of the 340B Prime Vendor Program include familiarity with subtleties of the 340B program; value-added services; and sub-340B prices, due to negotiations with drug manufacturers using the collective purchasing volume and market share potential of covered entities. As a result, the 340B prime vendor is able to provide high quality services and low drug prices.

HealthCare Purchasing Partners International (HPPI) currently has the exclusive agreement with HRSA to serve as the official prime vendor for participating entities. HPPI has managed the Prime Vendor Program since June 2003 when it took over another company.

HPPI is responsible for expanding the number of pharmacy distributors and covered entities participating in the program by using its expertise in developing efficient distribution networks and securing sub-340B discounts through contract negotiations and competitive bidding processes. A covered entity can participate in the HPPI program by using its existing drug distributor.

The Prime Vendor Program is funded through nominal fees charged to distributors and suppliers to avoid any costs to the covered entities. Sec. 340B entities do have to complete a participation agreement with HPPI in order to access the Prime Vendor contract portfolio, since HPPI is a separate contractor of HRSA.

More information is available at


Section 340B participating entities are listed in OPA databases. The best way to search for a covered entity is by city, state, entity type, ID number, or zip code. OPA has a detailed “Public Access Guide” which describes the download process. The covered entity database can be found at

The contracted pharmacy database is located at

Also, the manufacturers database can be found at