The Trump administration recently announced a $1.6 billion cut to the badly abused “340B” program, which forces pharmaceutical companies to sell medicines to hospitals that treat significant numbers of poor patients at steep discounts.
A bipartisan group of senators — including supposed fiscal hawks like Sens. John Thune, R-S.D., and Rob Portman, R-Ohio — are trying to block the reform.
That’s disappointing. Hospitals are exploiting 340B to enrich themselves at the expense of poor patients. Their abuse of the program drives up the health tab borne by taxpayers and everyone with private health insurance. Lawmakers committed to limited government ought to overhaul 340B rather than defend the broken status quo.
Most Americans have never heard of the 340B program, which was established by Congress in 1992. Hospitals that serve a “disproportionate share” of needy patients, as defined by a federal formula, are eligible for the lower drug prices the program mandates. Lawmakers figured hospitals would pass the savings along to poor and uninsured patients.
That largely hasn’t happened, as an upcoming study from economist Wayne Winegarden, Ph.D., my colleague at the Pacific Research Institute, makes clear. Instead, hospitals sell the medicines, which they buy at an average discount of 20 percent to 50 percent, at market rates to patients covered by Medicare or private insurance. Hospitals pocket the difference.
This causes a host of problems.
First, poor patients don’t benefit the way Congress intended. Two-thirds of 340B hospitals provide less charity care, as a percentage of total spending on patients, than the average hospital. Many 340B hospitals, which are ostensibly non-profit organizations dedicated to serving disadvantaged communities, spend less on charity care than even for-profit hospitals.
Second, the 340B program drives up patients’ medical bills. Hospitals have an incentive to encourage doctors to prescribe expensive drugs, since a 20 percent markup on a $1,000 drug nets more money than a 20 percent markup on a $100 medicine.
Medicare beneficiaries racked up average drug bills of $144 per patient at 340B hospitals in 2012, according to a 2015 Government Accountability Office report. That’s more than double the average $60 per-patient tab at non-340B hospitals. The GAO explains that the “differences did not appear to be explained by the hospital characteristics . . . or patients’ health status.”
The report concludes that “there is a financial incentive at hospitals participating in the 340B program to prescribe more drugs or more expensive drugs to Medicare beneficiaries.”
Hospitals aren’t merely ripping off Medicare and private insurers by overprescribing pricey drugs. They’re directly harming patients, who face higher co-pays and co-insurance.
Third, the 340B program spurs hospitals to buy small physician-owned practices, which often provide patients with cheaper, more personalized care than bigger healthcare facilities.
Independent clinics generally don’t qualify for the 340B program. But hospital outpatient departments do. So hospitals acquire independent practices and rebrand them as outpatient clinics. That enables hospitals to obtain discounts — and pocket the markups — for medicines prescribed at the clinics.
This consolidation is why 340B program is growing so rapidly. In the last decade, the number of facilities participating has tripled, from 12,400 in 2007 to 38,400 this year.
Fourth, the program shifts costs to taxpayers and people with private insurance. Pharmaceutical companies offset the revenue they lose from the 340B program by raising prices on non-340B purchasers.
The Trump administration hopes to put an end to some of this cost-shifting. The Centers for Medicare and Medicaid Services recently finalized a rule, set to take effect January 1, that would reduce reimbursements to hospitals that administer 340B drugs. Currently, hospitals are reimbursed for the average sales price of a drug, plus an additional 6 percent to cover overhead costs.
This reimbursement rate makes sense when hospitals buy drugs at the average sales price. But it makes no sense when they buy drugs at a steep discount.
The CMS rule would change the reimbursement rate to the average sales price of a drug minus 22.5 percent. That’s more in line with hospitals’ actual acquisition costs. The change would save CMS $1.6 billion.
Six senators are trying to block the rule. And the hospital lobby is suing to overturn the measure.
Let’s hope the Trump administration resists this pressure. The 340B program is welfare for hospitals. It’s time to institute major changes to ensure the program’s benefits actually flow to poor and uninsured patients.