Issue No. 30: A Day of Reckoning Approaches for 340B, the Controversial Drug Pricing Programs

It sounded like a good idea at the time, but now, 26 years after Congress established it, the 340B Drug Pricing Program has become the object of critical reports, derisive comments by government officials, and the first small steps at reform.

The program was meant to help poor hospital patients through a somewhat convoluted process. Under the law, if drug manufacturers want to be eligible to participate in Medicaid, they have to provide outpatient medicines at prices discounted by 20% to 50% to hospitals that serve a disproportionate share of low-income Americans.

Such hospitals, as well as affiliated clinics, “can realize substantial savings through 340B price discounts and generate 340B revenue by selling eligible outpatient drugs at a higher price than the discounted price at which the covered entity [i.e., the hospital] obtained the drug,” according to a review earlier this year by the House Energy and Commerce Committee.

The intent of 340B, whose name refers to the section of the Public Health Service Act that authorizes it, was that hospitals would use the extra revenue (the difference between the price at which they sell the drug and the discounted amount they pay for it) to help indigent and uninsured patients.

Gains From 340B Profits Aren’t Going to Low-Income Patients

But that isn’t happening. In a study published in the New England Journal of Medicine in February, Sunita Desai of the New York University School of Medicine and Michael McWilliams of the Harvard Medical School concluded, “Financial gains for hospitals have not been associated with clear evidence of expanded care or lower mortality among low-income patients.”

Another study in 2016, by Avalere Health for the Alliance for Integrity and Reform of 340B, found that in fiscal 2014 charity care represented less than the national average (2.2% of costs) at 64% of 340B hospitals.

Hospitals are ignoring the intent of the 1992 because… well, they can.

As Rena Conti of the University of Chicago and Peter Bach of Memorial Sloan Kettering wrote in Health Affairs:

340 B hospitals are not required to pass along their discounts to patients or insurers or to demonstrate their investments in outpatient programs for the poor. Consequently, these providers can generate 340B profits by pocketing the difference between the discounted price that they paid for the drugs and the higher reimbursement paid by insurers and patients.
 
Sen. Charles Grassley (R-IA) made this point in a 2013 letter to the administrator of the U.S. Health Resources and Services Administration:
 
Hospitals can elect to sell all of their 340B drugs to only fully insured patients while not passing any of the deeply discounted prices to the most vulnerable, the uninsured. This is contrary to the purpose of the 340B program since much of the benefit of the discounted drugs flows to the covered entity rather than to the vulnerable patients that the program was designed to help.
 
Program Quadruples in a Decade

Meanwhile, the 340B program has ballooned in size. Some 40% of all hospitals in the United States now participate as well as thousands of affiliated clinics, for a total of 38,396 covered entity sites, up from 8,605 in 2001.

“It is estimated that discounted drug purchases made by covered entities under the 340B program totaled more than $16 billion in 2016—a more than 30 percent increase in 340B program purchases in just one year,” states the E&C Committee report. Total drug purchases under the program quadrupled from 2007 to 2016 and now represent 5% of all the money spent on medicines in the country and more than half of all U.S. hospital drug purchases, up from 20% in 2009.

The growth of 340B has made the program unmanageable. The network now includes thousands of “contract pharmacies.” As Wayne Weingarten wrote in a December report by the Pacific Research Institute:

As identified in a 2014 report from the Inspector General of the Department of Health and Human Services, contract pharmacies add “complications” to the 340B program. These complications include diversion of 340B discounted medicines to non 340B-eligible patients, receiving duplicate discounts from both Medicaid and the 340B program when such duplication is prohibited, and not offering the 340B discounted price to uninsured patients, the raison d’etre of the program.

Originally, the law allowed only safety-net clinics without an in-house pharmacy to contract out pharmacy services to a retail pharmacy. Then, writes Weingarten, “the 2010 guidance allowed any covered entity, including large hospitals, to establish unlimited relationships with contract pharmacies…. Some hospitals have responded by building networks of hundreds of contract pharmacies that includes Walgreens, Rite Aid, CVS, and Wal-Mart – private, for-profit companies that clearly do not require government support.”

In addition, 340B-qualified hospitals buying up physicians’ practices in neighborhoods that are far from poor. The Desai-McWilliams study found, for example, that facilities owned by hospitals eligible for 340B had “230% more hematologist-oncologists than expected in the absence of the program” and that “program eligibility was associated with lower proportions of low-income patients in hematology-oncology.” In other words, buying up practices of physicians specializing in blood disorders and cancer – specialties associated with more expensive medicines -- gave the 340B hospitals a broader footprint in higher-income areas.

The Conti-Bach study, which looked carefully at the expansion patterns of 340B hospitals concluded:

The primary purpose of the 340B program was to give assistance to low-income and uninsured patients. Since its inception, the program has experienced expansions. However, we observed significant growth in the number of newly registered 340B DSH [facilities with a “Disproportionate Share” of indigent patients] hospitals and exponential growth in the number of outpatient clinics affiliated with them since 2004.

We focused on whether these expansions have been associated with a shift away from the program’s core focus on low-income and uninsured populations. We found that 340B DSH hospitals serve communities that are poorer and have higher uninsurance rates than the average US community. However, beginning around 2004, newly registered 340B DSH hospitals have tended to be in higher-income communities, compared to hospitals that joined the 340B program earlier.

We also found that, compared to 340B DSH hospitals, their affiliated clinics tended to serve communities with socioeconomic characteristics that were more similar to the average US community…. These results suggest that the expansions among 340B DSH hospitals run counter to the program’s original intention.

Our findings are consistent with recent complaints by stakeholders and media reports suggesting that the 340B program is being converted from one that serves vulnerable communities to one that enriches participating hospitals and the clinics affiliated with them

Reforming the Program

The Trump Administration on Jan. 1 took the first step toward reforming the program. Drawing on a 664-page proposal it issued in July, the Centers for Medicare and Medicaid Services laid down new rules that it said would “lower out-of-pocket drug costs for people with Medicare and empower patients with more choices.”

The rules apply to only a small slice of the 340B program -- just to “certain Medicare Part B drugs.”

Instead of reimbursing hospitals at the Average Sales Price (ASP) of a drug plus 6%, CMS will reimburse at ASP minus 22.5%. A Sloan Kettering report in 2016 made it clear that eliminating the mark-up would not cause hardship to 340B hospitals. The 6% premium over ASP…

appears to understate the profit associated with the administration of “Part B” drugs, due to higher gross profits to doctors and hospitals from their commercial insurance contracts and steep discounts available to 340B hospitals. The collective gross profit across all patients and care settings is around 49% but is not evenly applied as the blended profit margin for doctors is around 16% while it is around 140% for hospitals. The subcategory of hospitals in the 340B program earn a blended profit margin of around 210% (other hospitals are at 98%).

CMS is not pocketing the $1.6 billion in savings from the reduction. Instead, it is increasing reimbursement rates for other services the hospitals provide. Also, Medicare patients will benefit because their copayments are based on the CMS reimbursement rate, which is being cut nearly 30%. Seema Verma, the administrator of CMS, noted that Medicare beneficiaries will benefit “from the discounts that hospitals receive under the program by saving an estimated $320 million on copayments for these drugs in 2018 alone.”

Peter Bach of Sloan Kettering told Kaiser Health News, “If Medicare reduces the reimbursement amount, that will directly reduce what patients pay. Patients will see lower prices.”

The Future of 340B

While the reforms leave the vast majority of the 340B program untouched, the changes may foreshadow a major shakeup. Joe Grogan, associate director for health programs at the White House Office of Management, called 340B “really screwed up” in remarks Nov. 14 before a cancer research conference in November, as reported by Politico.

The program, he said, is “incredibly flawed in how it’s operating” and has grown “far beyond its intent.” Grogan said that in many instances 340B isn’t operating to meet its stated purpose of helping hospitals serve low-income and uninsured patients.

The day before Grogan’s remarks, the American Hospital Association (AHA), the Association of American Medical Colleges, America’s Essential Hospitals filed a lawsuit against the Department of Health and Human Services, asking for an injunction to prevent CMS from implementing the 340B changes. Rick Pollack, the president of the AHA, said in a press release, “From its beginning, the 340B Drug Pricing Program has been critical in helping hospitals stretch scarce federal resources to enhance comprehensive patient services and access to care.”

AHA also launched an advertising campaign, which probably appears baffling to anyone unacquainted with government acronyms. Some 228 members of the House signed a letter to Administrator Verma, saying, “We are deeply concerned [about] this misguided policy.” And, as Sally Pipes of the Pacific Research Institute, a conservative think tank, wrote in Forbes, “A bipartisan group of senators – including supposed fiscal hawks like Sens. John Thune (R-SD) and Rob Portman (R-Ohio) – are trying to block the reform.” She added:

That’s disappointing. Hospitals are exploiting 340B to enrich themselves at the expense of poor patients. Their abuse of the program drives up the health tab borne by taxpayers and everyone with private health insurance. Lawmakers committed to limited government ought to overhaul 340B rather than defense the broken status quo.

On Dec. 29, the U.S. District Court dismissed the hospital associations’ suit on jurisdictional grounds. The plaintiffs appealed to the U.S. Court of Appeals for the District of Columbia, which granted an expedited schedule. Briefs are flying back and forth, and oral arguments are scheduled for May 4.

Even if the lawsuit is resolved soon, the fight over 340B is far from over. A program that was much admired when President George H.W. Bush signed it, has grown beyond recognition, with its intent distorted and obscured. The Trump Administration, which wants to make good on its promises to cut health costs and rationalize government programs, clearly has 340B in its sights.

“Like it or not,” wrote Adam Fein on his Drug Channels blog in July, “change may finally be coming to the out-of-control 340B program. Let’s hope Congress can get the program refocused on genuine safety-net providers and financially needy patients.”

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