The debate over changes to the 340B drug pricing program

Created in 1992, the 340B Drug Pricing Program is a U.S. federal government program intended to give safety net providers—those that organize and deliver a significant level of both healthcare and other health-related services to the uninsured, Medicaid, and other vulnerable populations—discounts on outpatient drugs to “stretch scare federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

Basically, the program requires drug manufacturers participating in Medicaid and Medicare Part B to provide discounts on outpatient drugs to 340B providers.

Providers eligible for 340B discounts include numerous types of hospitals, including Disproportionate Share Hospitals (DSHs), Critical Access Hospitals, sole community hospitals, freestanding children’s hospitals, and freestanding cancer hospitals. In addition, certain federal grantees are 340B-eligible providers, e.g., federally qualified health centers. DSHs, freestanding children’s hospitals, and freestanding cancer hospitals are required to have their Medicaid and uninsured populations account for 11.75 percent or more of their total patient populations in order to be eligible for the program. DSHs accounted for 75 percent of 340B drug purchases in 2011 and continue to account for the majority of total 340B purchases.

The program benefits safety net providers by offsetting the cost of providing free or discounted drugs to patients who cannot pay and by generating funds to improve and expand programs such indigent clinics and free oncology services for low-income patients.

Eligible patients must receive services from a covered entity (CE), defined as the healthcare provider that has established a relationship with the patient and maintains records of the individual’s care. Contract pharmacies dispense 340B drugs to CEs’ 340B-eligible patients.

Saliently, CEs are able to purchase drugs for outpatient use at the sizable 340B discounts—which generally range from 20 percent to 50 percent—for all their outpatients, not just their Medicaid or uninsured patients. As of October 2016, there were 12,148 CEs, and there were 2,871 hospitals as CEs as of July 2017. Total discounted purchases under the program have grown steadily during the past decade and reached $16.2 billion in 2016.

The program is administered by the Office of Pharmacy Affairs within the Health Resources and Services Administration (HRSA), an agency of the U.S. Department of Health and Human Services.

Criticisms of the Program
For years, the 340B program has been fraught with controversy, with CEs and drug makers defending and attacking the program, respectively. HRSA, the U.S. Government Accountability Office, and the HHS Office of Inspector General have all pointed out the lack of accountability and oversight of the program. There have been many reporting and program integrity issues. For example, in fiscal year 2016, 44 percent of CEs were found to have diverted benefits (discounted drugs) to ineligible patients.

Proposed Reimbursement Cut
On July 13, the day after the conclusion of the 340B Coalition Summer Conference in Washington, D.C., the Centers for Medicare and Medicaid Services (CMS) issued its 2018 Medicare Hospital Outpatient Prospective Payment System (OPPS) proposed rule.

Contrary to the Trump administration’s deregulation bent, the proposed rule included a dramatic decrease in 340B reimbursement of hospitals by CMS from Average Sales Price (ASP) plus 6 percent to ASP minus 22.5 percent.

This recommendation was based on a Medicare Payment Advisory Committee study, which concluded that hospitals in the 340B program receive a minimum discount of 22.5 percent of ASP for drugs paid under the OPPS.

Projected Impacts
There would be no immediate or direct impact on drug makers. However, hospital margins on the 340B program would shrink significantly, and the 340B hospital association contends that “roughly 60% of hospitals would be likely or very likely to withdraw from 340B as a result of a payment cut that would take away all of their 340B savings on Part B drugs.” However, the proposed change would reduce patients’ coinsurance obligations, as they pay a percentage (typically 20 percent) of the amount that Medicare pays the hospital.

Next Steps
Public comments on the proposed rule were received from July 13 through Sept. 11. Importantly, on Aug. 21, the Advisory Panel on Hospital Outpatient Payment asked CMS to rescind the reimbursement formula change proposal, and an American Hospital Association-sponsored study concluded that the change would reduce hospitals’ aggregate revenues by $1.65 billion in 2018. CMS is expected to release the final rule sometime between mid-October and mid-December.

As a result of the significant proposed change to 340B reimbursement, a big cloud of uncertainty hangs over the program’s economics and perhaps even its viability.

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