e-Texas e-Texassmaller smarter faster governmentDecember, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts

Recommendations of the Texas Comptroller

Chapter 8: Health and Human Services

Improve Drug Purchasing

by the Texas Department

of Criminal Justice


The University of Texas Medical Branch at Galveston purchases pharmaceutical drugs for the Texas prison system through a drug consortium. While this reduces costs, even lower prices are available through the federal “340B” drug pricing program. To qualify for this program, the Texas Department of Criminal Justice should modify its correctional health services agreement with the Correctional Managed Health Care Committee.


Prescription drugs play an increasingly important role in modern medicine and, thus, in the state budget, since Texas provides a wide variety of medical services. The rising cost of pharmaceuticals makes it important that Texas make every effort to obtain the lowest possible drug prices. In fiscal 1999, Texas spent about $28 million for prison drugs.[1]

Congress addressed the rising cost of pharmaceuticals by creating a Medicaid rebate program in 1990. This program required drug companies to enter into a rebate agreement with the US Secretary of Health and Human Services as a precondition of participating in Medicaid. Under the rebate program, drug manufacturers were required to give Medicaid the “best price” for each outpatient drug covered under the plan. Drug manufacturers, however, attempted to minimize the impact of the rebates on the large Medicaid market by raising their “best prices,” consequently increasing rather than easing the burden on federal and state providers.[2]

In 1992, Congress enacted Section 340B of the Public Health Service Act to correct the problems resulting from the Medicaid rebate program. The 340B Drug Pricing Program requires pharmaceutical manufacturers participating in Medicaid to enter into a second agreement with the federal government to provide additional, negotiated discounts on covered drugs purchased by certain government-supported facilities serving vulnerable patient populations. Under the program, providers are eligible for the Medicaid “best price,” but may negotiate even larger discounts.

The federal government is very specific about which facilities are eligible for 340B discounts. Generally, eligible providers include hospitals that care for large numbers of indigent persons (“disproportionate share” hospitals); state-operated AIDS drug assistance programs; federally-qualified health centers; certain treatment programs for tuberculosis, black lung, and sexually transmitted diseases; and primary care clinics. Non-Medicaid patients may receive 340B drugs if they are patients of an eligible entity. An individual is considered a patient of an eligible entity if they meet the following criteria:

  • the covered entity has established a relationship with the individual, such that the covered entity maintains records of the individual’s health care;
  • the individual receives health care services from a health care professional that is either employed by the covered entity or provides health care under contractual or other arrangement (e.g., referral for consultation) such that responsibility for the care provided remains for the covered entity; and
  • the individual receives a health care service or range of services from the covered entity that is consistent with the service or range of services for which grant funding has been provided to the entity.[3]

According to the Public Hospital Pharmacy Coalition (PHPC), pharmaceutical prices available under Section 340B are significantly lower than both wholesale and retail prices. A recent analysis of 100 popular outpatient drugs found that, on average, 340B prices are 34 percent lower than wholesale prices. Another survey indicated that 340B prices are 22 percent lower than those available to group purchasing organizations such as HMOs.[4]http://www.hrsa.gov/odpp/faqs.html). (Internet document.) Still another report found that the 340B price is about 60 percent of the manufacturer’s price, and thus much lower than the retail prices charged to customers at pharmacies.[5]http://www.drugpricing.org/drugdisovr.html). (Internet document.) PHPC estimates that participating hospitals have saved an average of more than $2 million annually since Congress enacted the 340B Program.[6](Internet document.)

Purchasing Prescription Drugs for Texas Prisons

The Texas Department of Criminal Justice (TDCJ) maintains a contract with the Correctional Managed Health Care Committee (CMHCC) to obtain correctional health services through the University of Texas Medical Branch at Galveston (UTMB) and Texas Tech University Health Sciences Center. UTMB serves about 78 percent of the prison population, while Texas Tech cares for the remaining 22 percent.

As a large disproportionate share hospital, UTMB qualifies for the 340B program. Yet UTMB negotiates all state prison prescription drug prices through a pharmaceutical drug consortium, including prescription drugs for prisoners served by Texas Tech. While the consortium does negotiate lower prescription drug prices, they cannot always match the savings possible through 340B. The 340B prices available to disproportionate share hospitals, however, are not available for Texas prison outpatient drug purchases due to certain federal requirements. For example, to receive the 340B drug discount, the Huntsville pharmacy would have to be added to UTMB hospital’s Medicaid cost report.

To be eligible for 340B drug prices, as noted above, federal law requires patients to receive care from a health care professional employed by or under contract with an eligible entity, in this case UTMB. Consequently, for prisoners receiving services from Texas Tech to be eligible for 340B prices, UTMB rather than CMHCC would have to contract with Texas Tech and its health care providers. According to PHPC, Texas could save about 22 percent on prison outpatient drug purchases by implementing these changes.[7]http://www.drugpricing.org/drugdisovr.html). (Internet document.)


State law should be amended to require the Texas Department of Criminal Justice (TDCJ) to modify its contract with the Correctional Managed Health Care Committee (CMHCC) so that the University of Texas Medical Branch at Galveston (UTMB) can purchase prescription drugs for the prison population at federal 340B prices. Texas Tech University should cooperate with UTMB in this effort.

To be eligible to participate in the federal 340B drug pricing program, TDCJ, CMHCC, UTMB, and the Texas Tech University Health Sciences Center should make the necessary administrative and contract modifications. UTMB should use its expertise in purchasing pharmaceutical drugs to make sure it complies with federal requirements under the 340B program. TDCJ and CMHCC should amend their contract so that UTMB rather than CMHCC can contract directly with Texas Tech health care providers for health care services.

Fiscal Impact

Texas could save up to 22 percent on prison outpatient drug purchases if the state qualifies to purchase outpatient pharmaceutical drugs for prisoners at 340B prices. statewide. This recommendation would produce no additional costs for the state.

Savings/(Cost) to the
General Revenue Fund
$ 4,915,000
$ 4,973,000
$ 5,069,000
$ 5,191,000
$ 5,295,000

[1] Matt Keith, UTMB/TDCJ Managed Health Care, Department of Pharmacy, April 24, 2000. (Faxed communication.)

[2] US General Accounting Office, Drug Prices: Effects of Opening Federal Supply Schedule for Pharmaceuticals Are Uncertain (Washington, DC, June 1997), p. 4.

[3] US Department of Health and Human Services, Health Resources and Services Administration, Office of Pharmacy Affairs, “Overview and Frequently Asked Questions: 340B Drug Pricing Program” (

[4] Public Hospital Pharmacy Coalition, “An Overview of The Section 340B Drug Pricing Program” (

[5] US Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices (Washington, DC, April 2000), p. 108 (http://aspe.hhs.gov/health/reports/drugstudy/index.htm).

[6] Public Hospital Pharmacy Coalition, “An Overview of The Section 340B Drug Pricing Program” (

[7] Telephone interview with William H.E. von Oehsen, founder of the Public Hospital Pharmacy Coalition, Washington, DC, March 9, 2000.

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Post Office Box 13528, Capitol Station
Austin, Texas

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