340B Reform Gets A Kick Start

By John McManus, president and founder, The McManus Group

In a swift one-two punch, potential reform of the 340B drug discount program suddenly lurched into gear when:

1. The Energy & Commerce Committee held an oversight hearing, with newly installed Chairman Greg Walden (R-OR) citing concerns with the “340B program’s rapid growth without additional and proportional oversight;” and
2. The Trump administration released a proposed rule to reduce Medicare payments for Part B drugs to 340B hospitals from average sales price (ASP) +6 percent to ASP -22.5 percent.

Background
The 340B program was enacted in 1992 to give safety-net hospitals assistance with prescription drugs for their indigent and uninsured patients. It provides statutorily mandated discounts of 23 to 100 percent (depending on the drug and how it has been priced from date of launch).

In testimony to the Energy & Commerce Committee, the Government Accountability Office (GAO) observed, 340B hospitals “can purchase drugs at 340B prices for all eligible patients regardless of the patients’ income or insurance status and generate revenue, such as by receiving reimbursement from a patient’s insurance, that may exceed the 340B price paid for the drugs. The 340B program does not dictate how covered entities should use this revenue or require that discounts on the drugs be passed on to patients.”

The size and scope of the program has ballooned in recent years — more than doubling from nearly $6 billion in 2010 to more than $13 billion in 2015 and is projected to keep growing for the foreseeable future, according to Berkeley Research Group. The GAO noted that the number of covered entities — hospital sites and grantees — had more than doubled in the past five years, totaling 38,000 sites in 2017.

Erin Bliss, assistant inspector general for evaluation and inspections at HHS Office of Inspector General,  testified, “Despite the 340B program’s goal of increasing access and providing more comprehensive care, neither the 340B statute nor HRSA guidance speaks to how 340B providers must use savings from the program — nor do they stipulate that the discounted 340B price must be passed on to uninsured patients.”  

That is a remarkable statement. The Office of Inspector General (OIG) admits the 340B drug discount program may not actually lower drug costs for patients and does not know what the providers are doing with these substantial resources!

When Chairman Walden pressed Capt. Krista M. Pedley, director, office of pharmacy affairs at HRSA, if the agency knows how the savings are spent and whether patients are benefitting, she responded, “The statute is silent as to how savings are used. Therefore, HRSA does not audit or have access to that information.” Sounds like we are in need of statutory reform!

The skyrocketing number of “contract pharmacies” is also troubling — growing from 1,300 in 2010 to 18,700 in 2017, making the prospect of illegal drug diversion to patients unrelated to the 340B hospital much more likely. While 340B providers are prohibited by law from dispensing 340B-purchased drugs to anyone who is not their patient, the law does not define what constitutes a “patient.”  How is it then enforceable? Moreover, if the only sanction is paying back what you stole, where is the deterrent?

Chairman Walden acknowledged that HRSA has made improvements to its oversight efforts, but HRSA’s audit activities remain at or below 200 annual audits of covered entities since 2012 despite the rapid growth of the 340B program.

Though the congressional hearing is an excellent way to spark interest in the issues, the hospital lobby is powerful and should not be underestimated when it comes to actually trying to move legislation. While 340B hospitals are spread across every member’s district, drug companies are located in a select few ZIP codes.

340B Hospital Outpatient Proposed Rule
Concerned with congressional inaction on 340B but committed to advancing reforms, the Trump administration released a proposed rule that would reduce Part B reimbursement for 340B drugs to ASP (average sales price) minus 22.5 percent.  The thought is that Medicare should benefit from the discounting in the 340B program, not just allow hospitals to profit from the spread between the 340B price and the current reimbursement scheme of ASP plus 6 percent. These ideas have been circulating from MedPAC (Medicare Payment Advisory Commission), GAO, and the OIG for several years, but the industry was surprised when the Trump administration issued the proposal in the heat of the drug-pricing debate.

The CMS proposal would save Medicare $900 million in lower payments for Part B drugs dispensed by 340B hospitals, including $180 million in lower copayments by beneficiaries. Yet because the hospital outpatient payment system is budget neutral, those cuts would result in commensurate increased spending on other items and services. That quirk in the law is another reason a legislative solution is required — unrelated services, such as imaging and outpatient surgery should not receive payment increases simply because Medicare pays acquisition cost for HOPPS (Hospital Outpatient Prospective Payment System) drugs at 340B hospitals.

Notwithstanding the hoopla over the CMS proposal, a proposed rule does not necessarily mean it will become finalized policy. Hospital groups quickly mobilized to oppose the proposal, with the American Hospital Association urging CMS to “abandon its misguided 340B proposal and instead take direct action to halt the unchecked, unsustainable increases in the cost of drugs.”  

Hospitals that participate in 340B must be deemed “nonprofit” hospitals, which do not pay taxes because of the “community benefit” they provide. But in mid-July Politico — the inside Hill rag read by most Capitol Hill aides — released a devastating critique of the so-called nonprofit hospital sector. Its investigation showed the top seven hospitals by revenue (all deemed nonprofit) substantially increased their revenue under Obamacare, but simultaneously dramatically cut their charity giving. Operating revenue jumped from $29.4 billion in 2013 (before ACA implementation) to $33.9 billion in 2015 (the last year data is available). In that same period, the free treatment for low-income patients by those hospitals plummeted from $414 million in 2013 to $272 million in 2015.

Politico explains: “To put that another way: The top seven hospitals’ combined revenue went up by $4.5 billion after the ACA’s coverage expansions kicked in, a 15 percent jump in two years. Meanwhile, their charity care — already less than 2 percent of revenue — fell by almost $150 million, a 35 percent plunge over the same period.”

Not a single hospital has lost its tax exemption despite massive profits, which are often spent on executive salaries, elaborate new facilities, and provider acquisitions to strengthen market power.

This is not to say that the entire hospital industry is faring well. According to a recent Chartis Group and iVantage Health Analytics study, 41 percent of rural hospitals faced negative operating margins in 2016. And since 2010, 80 such hospitals closed. There are a variety of reasons, including serving the disproportionately sick, lack of a necessary supply of physicians, and low volume of patients.

But perhaps it is time to rethink the concept of community hospitals. Hospitals that exploit a drug discount program designed to assist low-income beneficiaries and are thriving on various government-run payment schemes ought not be able to escape the taxation required of all other businesses in the U.S.   Just as important, new and innovative ways of delivering care should be explored, particularly in rural and underserved areas. For example, freestanding emergency centers essentially constitute the first floor of a hospital and can provide vital emergency care in underserved areas, yet Medicare does not recognize them as legitimate providers. Providing more accessible care at a discount seems like a workable solution.

The momentum is with proponents of reform to hospital payments and the 340B program. Now is the time for action!

John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.