340B Discount Programs for Oregon Pharmacies

By Brad MacLiver
Authorship and profile at Google


The U.S. Department of Health and Human Services provides a program for discounted prescription drugs to qualified Federally Qualified Health Centers (FQHC), Disproportionate Share Hospitals (DSH), and other qualified entities. When these facilities don’t have their own pharmacies they are allowed to contract with a local OR pharmacy. The drug pricing program is often referred to as 340B, named after the section of the law that established the program.

       
Section 340B legislation was enacted to provide indigent and uninsured populations access to deeply discounted medications. Since the program was enacted to assist certain populations there are restrictions and regulations in how the program operates and who the medications can be dispensed to.

Pharmacies in Oregon can be contracted by a FQHC, or similar 340B qualified entity, to manage and dispense the medications. Patients from these entities provide additional traffic in the pharmacies allowing the pharmacies the opportunity for additional front end sales along with the Rx sales.

Oregon independent drug store owners participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the pharmacy should have dispensing and inventory records, billing statements, etc. Business records should show that drugs purchased by customers, under the 340B Drug Pricing Program, were not diverted to people who are not part of the program.

Along with the additional record keeping a pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy will also need to have a location for the 340B inventory, which is separate from their normal inventory, or have a software management system to track the separate inventories.

A system of separating inventory is required because the drug inventory used for the 340B pharmacy program is owned by entity who contracted the pharmacy.  The 340B inventory is not “owned” by the pharmacy, so, for tax purposes, this inventory will be treated differently. The Oregon pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers who participate in a 340B program can purchase only the designated medications from a pharmacy contracted with a 340B entity, this permits an Oregon pharmacy to have a market niche. Contracted pharmacies servicing 340B customers benefit from additional customer traffic visiting the store.

Given the current economic situation and high unemployment, many people no longer have their insurance benefits. This will likely expand the need for 340B pharmacy programs and provide additional 340B customers to a participating pharmacy in Oregon.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also consider other aspects of their business and the current market conditions of the pharmacy industry. What are the pharmacy’s goals over the next couple years? A younger Oregon pharmacy owner with long term objectives can benefit for many years from the added customers. However, a pharmacy owner considering selling the business in the next couple years should be aware that acquisition values are based on the customer files, and many buyers are not currently willing to include 340B customer files in their offers. This results in a lower pharmacy business valuation and market price for the pharmacy despite the volume of business. Also, due to the current economic conditions there are some 340B customers who despite the deeply discounted prices, have chosen not to purchase medications. Pharmacy owners need to consider the added costs and time of 340B inventory and customer tracking and reporting, may not be offset by the fees received.

If an OR pharmacy owner is considering the benefits of participating in a 340B program, or is considering selling the pharmacy in the couple years, it is advisable to discuss the options with the pharmacy industry expert.

 

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Pharmacy Transactions and Capital Gains Tax in Oregon

By Brad MacLiver
Authorship and profile at Google


Nearly everything that you own or use for personal or business purposes are capital assets.  When an Oregon pharmacy owner sells a capital asset, the difference in the amount sold and the amount paid is called a capital gain (or loss).

Capital gains also include investment income that occurs because of real assets such as property, financial assets, and intangible assets like goodwill.  In Oregon and all of the U.S., all capital gains must be reported to the IRS and the appropriate taxes must be paid.

When selling a drug store or pharmacy in Oregon, there are a few tax strategies that can be utilized to help offset tax liabilities.  Unless a professional has handled a large amount of pharmacy acquisitions, they typically will not know the federal regulations that allow for reduction of tax liability for the pharmacy owner.

In an era where financing a business in Oregon is more difficult, pharmacy sellers might be required to reduce their asking price so a pharmacy buyer can quality for financing.  To make matters worse, in addition to lower offers they will be required to pay a greater percentage in taxes.

This is troubling for pharmacy sellers who want as much money as possible out of the deal.  For most pharmacy owners in Oregon, their business is the biggest asset they will ever have, and selling the business for a certain price has been part of their plan for retirement and their estate.  Knowing they will need reduce the size of the proceeds in taxes will cause some pharmacy owners in Oregon to reevaluate their retirement plans.  Fortunately, there are several financial tools and strategies which allow the pharmacy owner to stick to their plans.

Family Foundations are tax exempt/nonprofit organizations, which provide tax advantages and control over philanthropic activities. Family foundations are typically private foundations that are funded by a small number of sources, and do not conduct widespread fund-raising activities. They may receive gifts from friends and limited sources. Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Having a Family Foundation provides a number of benefits for Oregon businesses including, income tax deductions, exemptions from estate and gift taxes, along with the reduction or elimination of other taxes.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for pharmacy business owners in Oregon to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

Washburn & Associates has extensive experience in the business of acquiring pharmacies and drug stores in Oregon.  Pharmacy consulting firms like Washburn & Associates have the knowledge and experience structuring these transactions appropriately and can save a pharmacy owner large amounts of cash from taxes when selling a pharmacy.

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