340B Advantage for Hospitals Starts to Erode

Ted Okon, MBA

A Change this year to 340B Drug Pricing Program improved the competitive standing for independent oncology practices, a gain that was solidified as legal challenges failed to overturn the payment policy change. However, the battle over 340B—specifically, to improve discounts for participating hospitals on outpatient drug purchases and tighten the charitable component of the program—continues in Congress, with multiple legislative initiatives.

For now, the Community Oncology Alliance (COA) is enjoying a sense of confidence that the burgeoning 340B program, which has fueled tremendous hospital growth and consolidation of independent practices, can be limited or curtailed.

“It has long been our position that, at the very least, 340B be reformed such that hospitals are held accountable for using savings to help the neediest patients, and it looks, for the first time ever, that such changes may occur,” said Ted Okon, MBA, executive director of COA, a consortium of independent practices that has long contended the 340B program has forced many independents to merge with hospitals or close their doors.

A Cut in Medicare Rates

The 340B program was established in 1992, with the goal to improve access to needed medications by allowing hospitals to strengthen their charity programs by purchasing outpatient drugs at steep discounts from manufacturers. The Centers for Medicare & Medicaid Services (CMS) has traditionally paid the difference between the discounted and open market prices for these drugs. However, rapid growth of the program, insufficient oversight, and loose restraints on how 340B savings should be used have given rise to concerns that the program is abused. For their part, hospitals have advocated a go-slow approach to program reforms, contending their functioning may be impaired by some of the initiatives.Early this year, CMS cut Medicare payment rates for drugs acquired through 340B, a move that is expected to save $1.6 billion and level the playing field for independent oncologists and other providers that do not qualify for 340B discounts. Previously, participating institutions were paid the average sales price (ASP) plus 6% for drugs they purchased at 25% to 50% discounts from manufacturers. Now, CMS payments have been reduced to ASP minus 22.5%.

A Raft of Legislation

Table. Legislation Introduced to Strengthen the Charitable Focus of the 340B Drug Pricing Program

These actions were introduced, at least in part, because study results have shown that hospitals do not uniformly use 340B discounts to increase the quantity or improve the quality of charity care. One of those studies, which appeared earlier this year in the New England Journal of Medicine (NEJM), concluded that 340B-based “financial gains for hospitals have not been associated with clear evidence of expanded care or lower mortality among lower-income patients” and have spurred a wave of hospital-physician consolidation in hematology and oncology, as well as higher levels of hospital-based drug administration.

“The intention of the policy is that hospitals will use this competitive advantage—the windfall they get from buying medications at a discount and selling them for normal prices—to serve more low-income patients, but it’s not happening,” said Sunita Desai, PhD, a health economist at New York University who coauthored the NEJM study.¹

When the 340B program was established 26 years ago, it was intended to indirectly subsidize full-fledged charity clinics rather than the charitable efforts of hospitals in general. Program expansions that Congress passed from 2003 to 2010 opened the program to acute-care hospitals and other specialty hospitals that operate as not-for-profit entities and serve low-income patients. Eligibility to participate in 340B is largely based on the percentage of Medicaid patients and low-income Medicare patients a hospital has, known as disproportionate share. This threshold currently stands at 11.75%.

Covered entities do not receive discounts on inpatient drugs but can generate 340B revenue by selling eligible outpatient drugs at higher prices than the discounted prices manufacturers are obligated to provide. Provided the drugs are for outpatient use, it doesn’t matter whether the patient receives treatment at a hospital or a satellite. Covered entities can also contract with outside pharmacies to dispense 340B discounted drugs. The number of contract pharmacies participating in the program grew from about 1300 in 2010 to 20,000 in 2017.²

Although the difference between the discounted 340B drug price and payment from patients and their payers can be substantial, participating hospitals are not obligated to pass those savings along to patients. This has been blamed for massive growth in the program and its consequent cost to taxpayers.

A recent congressional report noted that the total saved by participating healthcare providers rose from $3.8 billion in 2013 to $6 billion in 2015.3 And in 2016, $16.2 billion in discounted drug purchases were made through the 340B program, up 35% from 2015, or $4.2 billion.⁴

Government 340B Audits

Independent oncology practices, on the other hand, cannot participate in 340B, no matter how many uninsured or underinsured patients they serve. “Ideally, a discount designed to help the neediest patients would follow those patients and offset the other losses associated with treating them, regardless of whether they sought treatment at a hospital or an independent practice,” Okon said.Audits of 340B by the General Accounting Office (GAO) have added to the concerns about inadequacy of 340B oversight and efficacy, but the debate intensified late last year when HHS announced the cuts in 340B payments.⁵ The American Hospital Association, the Association of American Medical Colleges, and America’s Essential Hospitals (AEH) responded by unsuccessfully suing HHS to block the change, an attempt that was denied first by a US district court and later by a US court of appeals.

With the enormous growth of 340B has come a legislative and policy gridlock that has produced awkward improvements at best, said Blase Polite, MD, MPP, an associate professor of medicine at the University of Chicago who chaired the government relations committee for the American Society of Clinical Oncology. “The 340B program has serious problems. It desperately needs to refocus on the original intent of the program to provide resources and incentives for the delivery of high-quality care for uninsured, underinsured, and low-income patients. All that noted, the program almost certainly does provide vital resources for true safety-net hospitals, and the Medicare cuts will probably have a serious impact on their ability to deliver care. Fixing this program called for a scalpel but it was treated with a shotgun instead.”

The Senate’s Committee on Health, Education, Labor and Pensions has held oversight hearings to investigate how HHS is managing the 340B program and how the program affects both pharmaceutical companies and participating healthcare providers. That testimony focused on ways to improve program operations. For instance, the Office of the Inspector General has insisted that manufacturers’ lists of ceiling prices for drugs be shared with providers so they can verify that they are receiving the discounts for which they are eligible under 340B.

There has also been much debate about the need to better define which patients can be sold drugs purchased with the 340B discount, as lack of clarification has been blamed for abuse of the program, and some discussion of whether the 340B program was fulfilling its primary mission and strengthening the safety net for people who might otherwise go without care. Some hospital advocates contend that 340B savings do not truly compensate for outlays on charitable care.

“Wide gaps often exist between average uncompensated care costs and 340B savings at these hospitals. In Tennessee, for example, Regional One Health, in Memphis, reports uncompensated care costs 8 times greater than its 340B savings,” stated Bruce Siegel, MD, MPH, during a March 2018 hearing.⁶ Siegel is president and CEO of America's Essential Hospitals, a group of 325 hospitals that collectively provide 50% of all their care to patients who are on Medicare or without coverage.

Such hospitals, Siegel testified, must combine 340B windfalls with many other sources of extra revenue just to make surpluses that average 3.2%. The loss of 340B savings, or any other significant funding, would force many group members to cut back on care for those who lack coverage or close their doors.

“The list of comprehensive services made possible by 340B savings is long,” Siegel said. “And we have no tools as cost-effective as 340B for the federal government and taxpayers: Support to hospitals comes from manufacturer discounts, not taxpayer dollars. In fact, restricting 340B likely would leave state and local governments picking up the tab for uncompensated care or necessitate further federal investment.”

A witness for the pharmaceutical industry, Lori M. Reilly, Esq, countered that the 340B program would function acceptably if it were confined to facilities that cared for large numbers of uninsured patients—community health clinics, true safety-net hospitals, etc—but that it has gone awry by letting in many other hospitals, including those that serve affluent districts.

“Medicare data show that 24% of 340B DSH [disproportionate share hospitals] provide 80% of the charity care provided by all 340B DSH hospitals,” said Reilly, executive vice president for policy, research, and membership at the Pharmaceutical Research and Manufacturers of America, a trade group whose members would have to offer fewer discounts on drug purchases if 340B participation were curtailed.7 “It is no longer accurate to characterize the program as primarily focused on care for vulnerable patients by safety-net providers. Instead, 80% of the sales are to DSH and their child sites, more than two-thirds of which provide below-average levels of free and reduced-cost treatments to uninsured or vulnerable patients.”

The authors of the NEJM study tried to see if DSH facilities spent 340B windfalls on underserved patients by comparing Medicare claims data with DSH percentages, but analysis of operations at hundreds of hospitals found no evidence of such behavior. The study did, however, uncover some significant differences in the behaviors of hospitals that did and did not meet the threshold for 340B participation. Eligibility was associated with 230% more hospital-employed hematologist- oncologists than would be expected in the absence of the program (P = .02), a finding that strengthens claims from independent oncologists that the 340B program has unintentionally reduced cancer care competition.

It is not the first study to reach this conclusion. A 2013 article in the Journal of the American Medical Association concluded that simple economics would likely produce the same result: Cut-price supplies would give 340B hospitals a competitive advantage over independents and other hospitals and lead them to expand market share via practice acquisition, new hires, or both.⁸ A 2015 GAO report found that 340B hospitals also prescribed their patients more drugs, or more expensive drugs, than other hospitals and concluded that the differences were most likely due to financial incentives created by 340B discounts.⁹

References

1. Desai S, McWilliams JM. Consequences of the 340B drug pricing program. N Engl J Med. 2018;378(6):539-548. doi: 10.1056/NEJMsa1706475.
2. GAO. Drug Discount Program: Federal Oversight of Compliance at 340B Contract Pharmacies Needs Improvement. GAO-18-480. gao.gov/assets/ 700/692697.pdf. Published June 2018. Accessed August 20, 2018.
3. Energy and Commerce Committee. Review of the 340B Drug Pricing Program. energycommerce.house.gov/wp-content/uploads/2018/01/20180110Review_ of_the_340B_Drug_Pricing_Program.pdf. Published January 10, 2018. Accessed June 13, 2018.
4. Exclusive: the 340B program hits $16.2 billion in 22016; now 5% of U.S. drug market. Drug Channels. May 18, 2017. drugchannels. net/2017/05/exclusive-340b-program-hits-162-billion.html. Accessed August 22, 2018.
5. CMS issues hospital outpatient prospective payment system and ambulatory surgical center payment system and quality reporting programs changes for 2018 (CMS-1678-FC) [news release]. Baltimore, MD: CMS; November 1, 2017. cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017- Fact-Sheet-items/2017-11-01.html. Accessed June 13, 2018.
6. Siegel B. Statement for the record submitted to US Senate Committee on Health, Education, Labor, and Pensions. HELP website. help.senate. gov/imo/media/doc/Siegel1.pdf. Published March 15, 2018. Accessed June 13, 2018.
7. Riley L. Testimony of Lori M. Reilly, executive vice president, Policy, Research and Membership, Pharmaceutical Research and Manufacturers of America. HELP website. help.senate.gov/imo/media/doc/Reilly3.pdf. March 15, 2018. Accessed June 13, 2018.
8. Conti R, Bach P. Cost consequences of the 340B drug discount program. JAMA. 2013;309(19):1995-1996. doi: 10.1001/jama.2013.4156.
9. GAO. Medicare Part B drugs: action needed to reduce financial incentives to prescribe 340B drugs at participating hospitals. GAO website. gao.gov/ products/GAO-15-442. Published June 5, 2015. Accessed June 15, 2018.

Also, the Department of Health and Human Services (HHS) has asked Congress to improve program transparency to prevent overpayments to pharmaceutical manufacturers and 340B providers and clarify program rules to eliminate inconsistent application of 340B discounts. In addition, both houses of Congress are considering amendments to the underlying law, amendments that could temporarily prevent more hospitals from signing up for 340B or force existing hospitals to show that all 340B-related windfalls benefit charitable care.Among the bills under consideration by either the House or Senate are the 340B Optimization Act, which would track actual charity care by requiring 340B hospitals to report low-income utilization rates for outpatient services; the 340B PAUSE Act, which would implement a 2-year moratorium on most new 340B hospital participants, thereby slowing growth of the program; and Helping Ensure Low-income Patients have Access to Care and Treatment (HELP ACT), which would limit hospital participation in the program and increase transparency and reporting requirements (Table).