June 6, 2018

The $1.6 billion reduction in the federal 340B Drug Discount Program that went into effect in 2018 could negatively impact the operating performance of many participating non-profit hospitals, credit research firm S&P Global Ratings has reported.  The Centers for Medicare & Medicaid Services (CMS) has reduced 340B payments by about 30 percent for most medication for 2018.  According to a 2015 report by the Medicare Payment Advisory Commission, about half of United States hospitals are now 340B participants.

The American Hospital Association and several other organizations and health systems sued the Department of Health and Human Services in 2017 before the reductions went into effect.  Although the case was dismissed in late 2017, as of May 2018, a federal appellate court is considering reviving the case.  But “despite the possibility of a legal challenge to the cuts, additional proposed program reforms at the federal level could further negatively affect these providers’ finances,” S&P predicted on its website.

The cuts would hit small, rural and disproportionate share (DSH) hospitals that participate in the program especially hard, as well as federally qualified health centers, such as public housing primary care clinics, homeless clinics, HIV clinics and some cancer centers, according to S&P.  These healthcare providers depend much more for financial sustenance than many large health systems on the discounts they receive on 340B drugs.  “If they cannot generate sufficient cash flow due to the cuts, we believe they will serve fewer patients, which in turn would add to the burdens on some hospitals, because patients without options tend to seek treatment from hospital emergency rooms or clinics,” S&P said.

Established in 1992, the 340B program has generated controversy and criticism during the past several years, in part for its lack of transparency.  In brief, the 340B program requires pharmaceutical manufacturers to offer discounts to safety net hospitals and health centers that serve low-income populations.  In order to receive discounts on the medications, healthcare providers must demonstrate that they care for a significant population of indigent patients.  However, critics contend that too little is known about how hospitals use their 340B savings.

While proponents of the 340B program argue that these drug discounts are essential in enabling many providers to create a safety net for the nation’s most vulnerable patients, detractors claim that some hospitals reap profits from the program rather than funnel resources appropriately to extend medical services for underserved populations.

Under the program, CMS has reimbursed participating hospitals for the discounted medications at a rate higher than the national sales average.  These savings are meant to be used to support care for low-income patients.  However, concerns persist that hospitals have strayed from this mission.

A 2014 Health Affairs study found evidence that the program “is expanding in ways that could maximize hospitals’ ability to generate profits from the 340B drug discounts.”  An analysis of data for 960 hospitals and almost 4,000 clinics registered with the program in 2012 and their community socioeconomic characteristics found that hospital-affiliated clinics that had registered for the 340B program in or after 2004 served communities with higher wealth and rates of insurance coverage than those who had registered before 2004.  The authors concluded that “the 340B program is being converted from one that serves vulnerable patient populations to one that enriches hospitals and their affiliated clinics.”

Similarly, a 2018 analysis of Medicare claims funded by the Agency for Healthcare Research and Quality and published in the New England Journal of Medicine reported that “financial gains for hospitals have not been associated with clear evidence of expanded care or lower mortality among low-income patients.”

The AHA has challenged the study’s validity, claiming that the use of fee-for-service Medicare data does not accurately reflect those who benefit the most—children and the working poor.  AHA also reported that the delivery of uncompensated care by hospitals is increasing.  In 2016, 4,840 community hospitals provided a total of $38.3 billion in uncompensated care, up from $35.7 billion at 4,862 community hospitals in 2015.

Among other things, the current administration’s recently released blueprint to lower drug prices calls for hospitals to be required to publish how they use their 340B savings and supports payment reductions for hospitals that do not provide sufficient uncompensated care. The AHA has called for similar oversight for drug companies, stating that “any effort to add transparency to the 340B program should include more robust transparency requirements of manufacturers.”

Most recently, HHS has delayed until July 2019 a decision on the 340B program that would impose civil monetary penalties for drug manufacturers that knowingly and intentionally overcharge hospitals for outpatient drugs, in order to “allow a more deliberate process of considering alternative and supplemental regulatory provisions.”

In a statement, AHA Executive Vice President Tom Nickels voiced the organization’s opposition to the delay, “especially considering that HRSA [the Health Resources & Services Administration, which oversees the program] began rulemaking on this issue more than seven years ago. . . The irony is not lost on us that drug companies continue to push for increased reporting for hospitals and others while resisting any transparency on their part.”