340B Is a Good Idea Gone Bad

Defenders of the 340B Drug Discount Program say it is vital to safety net hospitals and the patients they serve. On that, we agree wholeheartedly. The program was originally intended by Congress to provide assistance to those treating uninsured or underinsured patients so that this vulnerable population had access to medical treatment. However, inadequate oversight has distorted the noble intent of 340B, transforming it into a perverse profit generator for many of America’s tax-exempt hospitals, few of which provide any meaningful level of charity care.

Few 340B hospitals provide meaningful charity care

Though some 340B hospitals provide substantial charity care consistent with Congressional intent, the data show that the vast majority do not. A 2016 report by Avalere Health found that only 24 percent of 340B hospitals provide 80 percent of all the charity care, despite representing less than half the beds available in the program. The same report also noted 37 percent of 340B hospitals provided charity care representing less than 1 percent of total patient costs.

Many 340B hospitals are receiving drug discounts for all their patients (insured, underinsured, uninsured) even though care for the underserved is a tiny fraction of their total costs. And the problem is getting worse. Since 2011, the number of hospitals with that low level of charity care has grown more than 50 percent. Without meaningful governmental oversight, tax-exempt hospitals are expanding rapidly into neighborhoods with well-insured populations in order to reap gains from 340B without the risk of having to care for underfunded patients.

Safety net hospitals are not the problem. The problem is that the majority of 340B hospitals provide little charity care. They are simply using this government program to increase their profit margins. Those who support the 340B program and defend the perverse turn the program has taken, must be either uninformed or misinformed.

340B is now more about hospital profits, not patients

Since its inception in 1992, there has been a rapid increase in the number of hospitals participating in the 340B program. Today, approximately 45 percent of all U.S. hospitals have 340B designation. Hospitals have become adept at taking advantage of 340B because it allows them to acquire drugs at discounts ranging as high as 60 percent — discounts that they do not pass on to patients. To take advantage of these deep discounts, many hospitals have embraced 340B as an open-ended arbitrage (think: buy low; sell high) allowing them a substantial increase in their drug revenue.

One of the most common gambits is for a 340B hospital to buy an independent oncology practice, which prescribes high-cost cancer drugs (e.g. often more than $10,000 a month for each patient). Frequently these are in suburban areas where patients predominantly have private insurance, yet the 340B discounts still apply. Because of this deep margin, tax-exempt 340B hospitals are able to make a substantial profit. Turning a profit on well-insured cancer patients was never the intent of 340B.

Mounting 340B discounts fuel rising drug prices

There is a clear connection between the dramatic expansion of 340B discounts and the increasing price of drugs. Simple economics dictate that discounts are not free. Pharmaceutical manufacturers compensate for the up to 60 percent discounted sales price they are required to give to the growing number of 340B facilities. As the program proliferates, and discounts increase to hospitals, drug companies incorporate the 340B discounts into their prices. Worse, 340B hospitals benefit when drug prices rise as the $5,000 a month they obtain from a $10,000 a month drug becomes $5,500 when the price rises 10 percent.

It’s no coincidence that the astronomical growth of 340B in hospitals has coincided with rising Part B drug prices. Simply put, hospitals benefit from higher 340B discounts based on increasing drug prices while cancer patients pay higher costs because these discounts are usually not given to them.

Federal government and oncologists are concerned about 340B

It is not just a few oncologists sounding the alarm on the 340B program – it’s those of us in community oncology that treat the majority (56 percent) of American’s with cancer. This important program has been abusively by hospitals with little direct patient benefit. The result over the last decade has been a shift of cancer care from the lower cost setting in community practices into the much more expensive hospital setting. The actuarial firm Milliman calculated that this shift cost Medicare $2 billion extra in 2014 alone.

The government is also concerned. Its own watchdog agency, the Government Accounting Office (GAO), found in a June 2015 report that per beneficiary Medicare Part B drug spending, including oncology drug spending, was substantially higher at 340B hospitals than at non-340B hospitals. On average, beneficiaries at 340B hospitals “… were either prescribed more or more expensive drugs than beneficiaries at other hospitals in GAO’s analysis.” In addition, a 2014 report by the Office of Inspector General (OIG) found that two-thirds of hospitals do not offer the reduced 340B prices to uninsured patients – the very patients 340B was designed to help.

The 340B program desperately needs reform

For too many hospitals, the 340B program has become a road to profits, not a safety net and not a way to expand charity care for uninsured, indigent patients. For too many patients, particularly those with cancer, the 340B program has not reduced their cost of care one cent.

The 340B program has gone off the rails and too often just serves to perversely line hospital system pockets and increase drug prices. Congress must act to fix 340B, restoring the integrity of this critically important program for the sake of the patients and safety net providers who truly need it.  The natural consequences of inaction will be further increases in drug prices and consolidation of health care to a more expensive site of service that our nation cannot afford.

Debra Patt, MD, is vice president of Texas Oncology in Austin, Texas. Jeff Vacirca, MD, is CEO of  NY Cancer Specialists and president of the Community Oncology Alliance in Long Island, N.Y.

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.

Morning Consult