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here’s at least one unassailable fact in the battle over the federal 340B drug discount program: $1.6 billion is a lot of money.

That’s how much so-called safety net hospitals will lose from a Trump administration policy, announced last week, to slash reimbursement to providers in the 25-year-old program.

But other facts about the program are muddy. Supporters say the payments help pay for care of poor patients, and that without them more hospitals will shutter. Various hospital groups are now suing to stop the change from taking place on Jan. 1. Detractors, on the other hand, say the program is being abused by some hospitals that use it to increase their profits and market power.

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Here’s a deeper look at the facts on each side.

How it works

The 340B program requires drug makers to offer discounts of up to 50 percent on medicines sold to safety net hospitals and health centers that serve low-income populations. To participate, hospitals must show the federal government that they serve enough indigent patients.

Under current policy, Medicare reimburses hospitals for the discounted drugs at a much higher rate — 6 percent above average national sales prices. Hospitals get to keep the difference to spend on operations or other services, in recognition of their efforts to serve the indigent and uninsured.

The program was created with bipartisan support and still enjoys backing from both parties. But there is also widespread concern that it has drifted from its initial mission, and that hospitals are not always using the money to serve disadvantaged patients.

Profiteering by hospitals?

Since its creation in 1992, 340B has expanded beyond a core of safety-net providers and community health centers to include much larger hospitals and their networks of outpatient clinics and pharmacies.

By 2011, one study found, the number of 340B sites had ballooned to 16,500 nationwide, nearly double the number in 2001. Many of the new sites were outpatient clinics in more affluent communities, where hospitals could dispense discounted drugs to patients with commercial insurance, which generally pays more than Medicare and gives them bigger profit margins.

“Hospitals could choose to act on the availability of these discounts to really profiteer without having to provide commensurate benefits to the community,” said the study’s co-author, Rena Conti, a health economist and professor at the University of Chicago.

Conti, who has been studying 340B for nearly a decade, said hospitals do not have to explain how much money they make from the program, or disclose how they are using it. Furthermore, she said, commercially insured patients who received the drugs through outpatient clinics do not benefit from the discounts. In fact, many have seen their costs rise due to co-insurance payments and higher deductibles required by their policies.

“That’s fundamentally concerning in a time period when wages have stagnated … and insurers are passing more and more of these costs onto patients,” Conti said. “This program, although it has wonderful original intent, doesn’t necessarily reflect the insurance reality of our time.”

Nor has it kept up with the shift toward outpatient care and other major changes in the industry, she said. “We still need a safety net, maybe more so now than two years ago,” Conti added. “But this program clearly has so many gaps in trying to understand exactly how these remedies are being used and for which population [of patients].”

Rates of reimbursement

In recent years, government regulators have stepped up their scrutiny of the program. The Office of Inspector General conducted a series of reviews of 340B and its impacts on Medicare, including a report that found that in 2013 participating providers were paid 58 percent more than the discounted prices, allowing them to make about $1.3 billion.

In the case of some drugs, the report found, a patient’s co-insurance payment alone was greater than the price paid by the provider. For example, the report said, participating hospitals paid $737 per treatment in the first quarter of 2013 for a drug used to treat bladder cancer. Meanwhile, Medicare beneficiaries were billed $831 per treatment, 13 percent more than the drug cost. In addition, the hospitals received $3,325 per treatment in reimbursement for Medicare.

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That’s a total of $3,419 above the cost of acquiring the drug.

In the report, the inspector general recommended a series of options for trimming reimbursements under the program. The Medicare Payment Advisory Commission (MedPAC), which advises Congress on payments to hospitals, also recommended a 10 percent cut, with savings to be used to fund uncompensated care costs funded by Medicare.

The proposal drew fiery protests from hospital lobbyists and was not enacted. But the MedPAC plan would have been a much better deal than the one now being put into place by Trump, which is a 28.5 percent cut in reimbursements — from plus 6 percent of average sales prices, to minus 22.5.

Lowering drug prices? 

Trump’s director of Medicare and Medicaid, Seema Verma, said the cuts would save $320 million in 2018 for Medicare beneficiaries, who must pay 20 percent of Medicare’s reimbursement rate for their medicines.

In a press release announcing the move, Verma portrayed the policy as part of Trump’s effort to fight high drug prices. However, the facts are more complicated. 

Drug prices for nearly all consumers will not be affected by the policy. Manufacturers will still be required to provide the discounts. And in slashing reimbursements, Trump is siding with drug makers who want to discourage hospitals from participating in the program, which would ultimately save them money, according to 340B supporters.

“It’s part of an effort by the pharmaceutical industry to create barriers to participation in the program,” said Richard Sorian, a spokesman for 340B Health, a lobbying group that represents hospitals that participate in the discount program.

Sorian also questioned whether the reimbursement cuts will save $320 million for Medicare patients, noting that a high percentage of beneficiaries, 86 percent, already have additional insurance coverage for their drug costs. “The actual savings to people is minimal,” he said.

As for concerns that some hospitals are profiting excessively from 340B, Sorian said participating providers have opened their books for hundreds of audits in recent years and are using the funds to help provide care for needy populations. He said Trump’s cuts will undermine efforts to continue that work.

“I don’t know why the administration went in this direction, but it’s unprecedented,” he said. “There is not a lot of support for this outside of the pharmaceutical industry.”

What happens next

The American Hospital Association and other groups are pursuing a lawsuit to stop the move while 340B Health and other groups are lobbying Congress to block CMS’s move legislatively.

Conti, the health economist from the University of Chicago, said the fight over the policy is obscuring some provisions that may help improve the program and lessen the impact on safety net providers.

She said, for example, that the Trump administration’s plan would allow hospitals to appeal to the Centers for Medicare and Medicaid Services to restore cuts if they can show how they are using the 340B money to benefit patients. Conti added that the policy also seeks to create more transparency by requiring providers to report when they supply 340B drugs to Medicare beneficiaries, which could create a better stream of data about its use.

“This is the first bit of sunshine we’ve had in the program,” she said. “CMS is shaking the trees. They want to have more oversight … and maybe they’re trying to fish around for how to do that.”

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  • Does anyone really believe that the drug companies can give 50% discounts to these multi billion dollar hospital systems without inflating prices to everyone else? We are all too quick to beat up on the pharmaceutical industry while giving the huge “not for profit” health systems a pass – even though the hospitals make 10 times the margins on the drugs that most drug companies make. At least most of the drug companies are publicly traded with their financial statements being much more transparent and they pay taxes to boot. I pity the poor nursing home residents that have to pay $300 for a vial of insulin to subsidize the margins of the major health systems.

  • Thanks for the review. I have practiced cancer care (Medical Oncology) for 30+ years. You missed several types of abuses triggered by the lax enforcement of this program. Many of the hospitals were large metropolitan facilities (not rural or underserved). Several large medical centers bought small nearby rural hospital facilities so they could transfer the drugs to the nearby ‘city hospital’ up to 35 miles away. Many hospitals then bought up private practices, which had been traditionally lower cost options. Those practices could not compete when the hospital practice could operate without taxation AND purchase the most expensive supplies at 30-50% discount. Finally, those facilities commonly rewarded their CEOs with multi-million $ bonuses, largely derived from the 340B monies.

    So, I don’t believe that this program has been as ‘good’ as you portray. It needs to be drastically reigned in and carefully assessed for all of the good and bad impacts.

  • There is a lot of concern over who is a ‘patient’. Some entities/organizations who serve ‘clients’, not medical patients, are abusing the 340b program by partnering with mail order 340b pharmacies to boost income, especially at smaller agencies. Some are offering gift cards to their clients when they switch from a legitimate 340b entity-such as a FQHC-based on-site Pharmacy- to the contracted, out of state Pharmacy. I believe, under scrutiny, these ‘clients’ will not be found to be patients under current definition.

  • Seems like one piece of the puzzle would be to prohibit hospitals and providers from charging more than the cost of a drug to anyone.

    • Can you name any businesses who charge ‘only the cost of their product’ and survive? Every business must, at some point, bring in monies to pay staff, physicians, taxes and rental. For cancer clinics the drugs are the highest cost (~80+%) in their operations. Most payers for cancer care underpay for staff, physicians, taxes and rental.

  • Agree that this article has some balance. What is missing is the huge benefit to safety net hospitals, to FQHC’s and to community health centers. 340B allowed many FQHC’s to afford pharmacy benefits for users who are almost all poor and those with limited health care access. On the other hand, there has been some abuse. The approach suggested seems like a typical Federal “meat axe” approach rather than addressing the real problem. From the article it seems the major concern is that the other hospitals are using the “profits” to purposes other than providing care to those with low income. Establishing rules for use of the fund generated could easily address this without the overall cuts. The changes also ignore two key underlying issues — the high number of those without coverage and the virtually unfettered greed of the pharmaceutical industry. Overall price regulation would address the latter and make 340B discounts less needed. The failure of the administration and the Republican majority in Congress to address ACA fixes that would expand instead of contract the number of those with coverage would go a long way toward addressing that issue.

  • Thank you for writing a reasonably balanced look at the 340B program. It’s simply not true that there’s “not a lot of support for this outside of the pharmaceutical industry.” Government oversight groups (OIG, GAO) have been at the forefront of recommending changes to the 340B program. Read the testimony from OIG and GAO at the July House oversight meeting:
    https://energycommerce.house.gov/hearings/examining-hrsas-oversight-340b-drug-pricing-program/

    • I agree, it was great to read a balanced article on this site. We know that all programs/decisions are not 100% good or 100% bad and it was great to read about pros and cons for once. Thank you, Casey!

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