Accounting for Contract Pharmacy Activity- Not Just the Revenue

By: Carolyn Commers, Consultant

Many FQHCs and Look-Alikes participate as Covered Entities in the 340B program through contracted pharmacy arrangements. This involves retail pharmacy contracts and typically a Third-Party Administrator (TPA) to facilitate the process. However, this is not a plug & play, set it and forget it kind of arrangement. A healthy program should have dedicated resources to actively manage the components of program performance, compliance, and the accounting process. But we often see this scenario under-managed in several ways. Compliance is a large arena with many elements, but it doesn’t have to be a daunting mountain to climb. We’ll save that for a later discussion and focus on the accounting process first.

Contract pharmacy activity can be recorded as one GL line, simply revenue, and/or net of all the fees Which is often based off the remit voucher when payment is received. However, merely recording the voucher payment as revenue doesn’t complete the process. Not only is that process quasi cash-based accounting, but it skips over recording fees as expenses and other important details. By doing so, a health center can miss useful pieces of information that can be used to analyze the program. This is a key factor is understanding how revenue is generated, and what fees are a part of the process.

So, what does a TPA actually do and why do we need it? The essential function of a TPA is to identify and verify what scripts are considered eligible, to be attributed to your 340B program.

To achieve this, the TPA accesses the "feed" of claims processing through the "switch" (aka claim billing clearing house) for each retail pharmacy in the contract. The TPA’s software uses patient visits to record data, the lists of prescribers, eligible locations, and other parameters to perform a criteria-matching function.  This is how the program’s claims are separated out from all the other retail pharmacy customers’ activity.  The TPA also helps with inventory management. Most contract pharmacy arrangements function under an inventory replenishment model, using a virtual inventory system. By means of eligible/ineligible script attribution, the system tracks accumulated uses of 340B inventory to facilitate replenishment ordering. In practical terms, the pharmacy store fills & sells the script using their own inventory (non-discounted). If the prescription filled is less than a full bottle from stock, the usage is “accumulated” until a new full bottle is needed. Then the CE (Covered Entity, aka the clinic) will pay the pharmacy store back by re-ordering inventory, at 340B discount price, to replenish the pharmacy’s stock. The pharmacy and TPA manage those purchase orders too, which are made on a wholesale account in the clinic’s name, and the bill is sent to the clinic When inventory is restocked, the store in turn will pay the clinic for the sales (less fees). In short, the clinic has to pay them   back for the inventory we used before they pass along the proceeds.  

To follow best practices for monthly accounting, the reports from the TPA are required. Most produce a financial statement which should include a summary of script volume, sales, admin fees, dispensing fees, estimated 340B drug cost, and a few other elements. It is recommended to record gross sales as revenue and recording the fees separately as expense. The pharmacy drug supplies should be recorded as a separate expense line, via accounts payable since the wholesale accounts will be set up to invoice the clinic directly.

Revenue or “sales” on the TPA statement may be summarized or are sometimes split by insurance plan and patient co-pay. There may also be occasional adjustments called “True-ups” for inventory reversals, or “Carve-out/switch fees” which are pass-thru fees for data access. These should be treated as adjustments, discounting the revenue.

Expense items typically include Admin Fees and Dispensing Fees. TPA has proved itself incredibly useful for attributing scripts to your program and manage the virtual inventory which is exactly what the admin free is meant to be used for. A dispensing fee is charged by the pharmacy store.  The retail pharmacy fills the script to sell, collects the patient co-pay, bills the insurance claim, and receives the insurance payment all on behalf of the CE, but does not keep the proceeds. Since the sales revenue on all the scripts for your program merely bypasses the pharmacy, the dispensing fee is the only way they get paid. Fee structures vary by pharmacy chain, ranging somewhere around $15- $90 per script. Otherwise, there is no incentive for the pharmacy to contract with a 340B CE.

Tracking these revenue and expense lines separately can open a world of opportunity for monitoring the program with metrics. It’s a great idea to pay attention to the script volume count and how that correlates with revenue and fees. Depending on generic or brand name drug, the average sale and cost per script can vary widely. Monthly trending of script count, revenue, fees by type, and inventory cost ratios can help you easily identify problem areas and potential opportunities to grow and optimize your program performance.

Are you interested in learning more? Please contact us for information on how you can account for more with your contract pharmacy program.