The Request: Capstone advised a client on the potential acquisition of a US company that provides 340B-focused retail and specialty pharmacy management. Our diligence focused on determining the likelihood, rationale, and impact of federal and state 340B reforms to the target company across a dozen specific issues, including:

• Medicare reimbursement cut for 340B scripts;
• Commercial payors cut reimbursement for 340B scripts;
• Change the formula for calculating 340B purchase discount;
• Redefine outpatient scripts; and
• Limit number of eligible clinic locations.

Background: The 340B program was established in 1992 as part of the federal Public Health Service Act to help publicly funded healthcare providers serve uninsured and underinsured patient populations. The ability for 340B hospitals to generate significant profits from contract pharmacy networks, in conjunction with the expansion in hospital eligibility under the Affordable Care Act, led to growth in the number of covered entities from 1,365 in 2010 to more than 6,000 by July 1, 2017. This rapid growth has led to more criticism of the program and growing pressure to enact reforms. This sentiment has manifested itself in the form of congressional hearings on the 340B program, proposed rules by the Centers for Medicare & Medicaid Services (CMS) to lower 340B Medicare Part B reimbursement, and the Trump administration including 340B program reform in its recent budget proposals.

Our Process: Over three weeks, Capstone conducted a rigorous review of the public record of existing and proposed regulation and legislation. We combined this research with targeted conversations policymakers, and other stakeholders to refine our analysis on the outlook for the following potential 340B program and drug pricing reforms, and how these reforms could impact the Target.

Our Outreach: As part of our analysis, Capstone engaged in more than two dozen conversations to discern the policy and regulatory outlook for the target company, including:

• Office of Speaker of the House Nancy Pelosi (D-CA)
• Staff of Senate Health, Education, Labor and Pension (HELP) Committee
• Offices of Senators Debbie Stabenow (D-MI), Sheldon Whitehouse (D-RI), Joni Ernst (R-IA), and Angus King (I-ME)
• Senior adviser to the secretary for drug pricing, US Department of Health and Human Services (HHS)
• Government affairs head for a national retail pharmacy chain
• Industry associations such as America’s Health Insurance Plans (AHIP) and the Pharmaceutical Care Management Association (PCMA)

The Outcome: Capstone provided our clients with an in-depth final report, as well as regular update calls and presentations, regulatory and legislative environment for issues related to specialty pharmacy, drug pricing and the 340B drug discount program, and whether the policy environment could shift in ways that affect the target company’s business model.