By John McManus, president and founder, The McManus Group
It took a series of damning government reports and investigations documenting the growing abuse of the 340B discount program by nonprofit hospitals and generally lax oversight by the Health Resources Services Administration (HRSA) that administers the program to finally prompt the agency to issue new guidance on how those covered hospitals should operate under the program.
- A 2011 Government Accountability Office (GAO) report found that HRSA had scarcely conducted an audit of a covered hospital and relied almost entirely on “self-policing.”
- A 2014 HHS Office of Inspector General report found that 340B hospitals’ use of contract pharmacies ballooned by 1,245 percent and presented “complications” regarding drug diversion and duplicate discounts.
- A 2015 GAO study showed drug spending for 340B hospitals was twice that of Medicare Part B outpatient spending per beneficiary because of incentives to prescribe more and expensive drugs.
- An investigation by Senator Charles Grassley (R-IA) found that many 340B hospitals’ profits from charging their patients substantially more than the discounted prices they acquired the drugs for greatly exceeded the charity care they provided.
- A June 2015 Medicare Payment Advisory Commission report showed 340B-covered entities and their affiliates spent over $7 billion to purchase 340B drugs in 2013 — three times the amount spent in 2005 — and suggested that Medicare should benefit from the steep discounts 340B hospitals were reaping.
Congress enacted the 340B drug discount program in 1992 and substantially expanded its scope in the Affordable Care Act in 2010. The program now enables more than one-third of hospitals to obtain substantially discounted outpatient drugs for all their patients (except Medicaid) — whether they are uninsured or covered by Medicare or a commercial insurer. The discount is tied to the Medicaid rebate percentage, so many drugs are discounted at 40 to 50 percent or more, and the hospitals can reap a profit by providing them to Medicare and commercially insured and even uninsured patients at market rates.
A September 2015 study by the Berkeley Research Group found that 340B hospitals realized a 123 percent increase in Part B reimbursement for oncology drugs between 2010 and 2013 compared to just 31 percent for non-340B hospitals, while reimbursement in physician offices for the same drugs declined by 5 percent. The 340B program has been a major catalyst in the hospital acquisition of physician practices. Berkeley also found that 340B hospitals receive 50 percent more Part B drug reimbursement per beneficiary than community oncology practices.
Originally intended as an omnibus “Mega-Reg,” successful litigation by PhRMA preventing the applicability of the program to off-label uses of orphan drugs circumscribed the agency’s rulemaking ability and forced HRSA to issue interpretive guidance instead. That guidance was issued on Aug. 28 and solicits comments from affected stakeholders, and the white-shoe law firms that advise both the pharmaceutical and hospital industries are hard at work poring over the text and fashioning responses. The comment period is open until Oct. 27, after which HRSA may elect to publish the changes or subject them to further revision.
THE NEED FOR GREATER OVERSIGHT
While many in the pharmaceutical industry felt the guidance did not go far enough, it clearly validated the fundamental tenet that the 340B program’s abuses had become excessive and that the hospitals benefiting from the program require greater oversight and policing. For example, it creates a new six-part test to determine whether an individual receiving a discounted drug is actually an eligible “patient.” The guidance provides a new requirement that the prescribing physician be an employee or have a contract with a 340B-covered entity. In addition, the determination is made on a prescription-by-prescription basis, meaning the patient must be re-evaluated for eligibility each time. The patient can be prescribed a drug only if admitted as an outpatient. And importantly, hospital employees are specifically excluded from 340B-priced drugs unless they are also patients of 340B-covered entities — an important victory because many 340B hospitals are actually part of sprawling university campuses, like Duke University and Johns Hopkins University, that employ entire communities.
The guidance also provides a new auditing and enforcement capability, including annual certification of covered entities and its “child sites,” the off-campus outpatient facilities owned by the hospital and eligible for 340B discounts. Records and documentation must be retained to validate eligible patients. 340B hospitals have total responsibility for contract pharmacies’ adherence, and annual audits of those pharmacies are suggested.
Notwithstanding these improvements, the pharmaceutical industry has expressed dissatisfaction with the guidance because it fails to curtail the number of contract pharmacies. The number of 340B-covered entities contracting with retail pharmacies and mail order/specialty pharmacies has soared to over 3,000 this year from less than 1,000 in 2010, according to the Berkeley report. The proliferation of contract pharmacies in 340B presents serious potential for drug diversion since the patients are not receiving the drugs at the hospital. Moreover, it’s hard to understand why exponential growth in contracting of chain drugstores in affluent areas is needed to service indigent hospital patients. The attraction of marking up and profiteering from discounted drugs is clearly substantial.
The pharmaceutical industry is also concerned that a terminated 340B hospital — presumably for flagrantly violating new terms of the program — can re-enroll the next year. These hospitals simply need to repay manufacturers for discounted drugs it was not entitled to and demonstrate a commitment to abide by the statutory requirements.
But hospitals complain that the reforms are too onerous and undermine their ability to serve patients. Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, grumbled that the audit trail that would be required to demonstrate that the right prescriptions were discounted may encourage some hospitals to abandon the program. “It’s one thing for the pharmacist to be able to look up the patients’ insurance status and another thing for the pharmacist to ensure each prescription meets the new multipoint test in the guidance, which demands information the pharmacist likely wouldn’t have,” she said.
But it is important to recognize this proposed guidance as noteworthy because it begins to halt the Obama administration’s own overreach and fixation with transferring resources from the pharmaceutical industry to other “deserving” actors, in this case, largely urban hospitals. Liberal groups are scratching their heads because a major strategy for funding Obamacare was through Medicare cuts to hospitals, which would surreptitiously be kept whole through enhanced resources from the pharmaceutical industry by expanding the scope and impact of the 340B program.
In any case, the proposed guidance should be seen as a first step toward reforming the program. Since it is only guidance and not a rule, it’s unclear whether the modest, suggested reforms are enforceable. More importantly, it does not go far enough because it can only interpret the current law. New legislation is needed to fundamentally reform the 340B program, and that must come from Congress.
“New legislation is needed to fundamentally reform the 340B program, and that must come from Congress.”
There was a flurry of activity regarding 340B reforms in the final stages of House consideration of the Energy & Commerce Committee’s 21st Century Cures legislation at the end of the summer, and the pending guidance actually hampered a legislative solution because both sides were eager to see how HRSA would retool the program. But consensus could not be achieved in that compressed time frame, as the Energy & Commerce Committee chairman was focused on enacting the omnibus package before the August Congressional recess.
Perhaps the issuance of the proposed guidance and increased focus on the program can encourage the political parties to come together and develop a proposal that returns 340B to its original mission of assisting the uninsured and indigent, not sprawling mega-hospitals and chain drugstores.
The political stakes are high. 340B hospitals are well organized and reside in almost every member’s district. Pharmaceutical companies are confined to a few zip codes but are armed with a growing stack of government-sponsored studies documenting increasing abuse of the program that the administering agency now explicitly recognizes.