340B Drug Discount Program Designed to Help the

Poor Generates Big Profits for Providers

Issue: The 340B prescription drug discount program enacted by Congress as part of the

Public Health Service Act of 1992 provides lower priced outpatient drugs to safety net

hospitals that served a high percentage of indigent and uninsured patients. Covered

entities, eligible hospitals and clinics, receive discounts based on the average

manufacturer price minus the Medicaid unit rebate amount- typically about 20-50%.

Pharmaceutical companies must offer their drugs on the 340B program if they want to

participate in Medicaid. While the law is designed to “stretch Federal resources as far as

possible, reaching more eligible patients and providing more comprehensive services”,

there is growing concern that many covered entities are using the 340B program to

increase profits by selling the discounted drugs to private insurers at full prices, rather

than using the savings gained through the discounts in ways that would benefit needy

patients.

Impact: According to a white paper published by pharmaceutical industry trade groups

(2013), a RAND Corporation study (2014) and a report by the Government Accountability

Office (2011) Federal oversight of the 340B program has been largely inadequate. The

Health Resources and Services Administration (HRSA), which acts as 340B’s primary

enforcement agency, has largely relied on industry self-policing rather than ensuring that

the program is performing its intended operations. Findings from the studies reveal that

since 2004, a point during which a large increase in 340B participation occurred, covered

entities have been serving communities with higher income levels that subsequently

contain a higher percentage of patients with private insurance plans. This has resulted in

enabling covered entities, and the pharmacies they contract with, to sell discounted 340B

drugs at full, non-discounted prices and generate enormous profits.

Next Steps: Although the Affordable Care Act has reduced the number of uninsured

Americans, it has also provided an expansion of 340B covered entities. Thus, according

to RAND’s analysis, drug purchases under the program are expected to double from $6

billion in 2010 to $12 billion in 2016. In response to the 2011 GAO report highlighting the

inadequacy of 340B oversight, HRSA has taken measures to increase compliance

monitoring which has included the auditing of 51 hospitals and ejecting 271 treatment

centers which were found to be in non-compliance with the 340B guidelines. These

centers will have to apply for recertification. On the Congressional end, Senator Charles

Grassley (R-IA) has sent a letter to Walgreen Co. President and CEO Greg Wasson,

questioning the profits generated by the company through drugs sold through the 340B

program.

More information below:

Background on the 340B program

The 340B program was created in 1992 as part of the Public Health Service Act

(PHSA). It requires pharmaceutical companies to offer discounted drugs to

hospitals, clinics and care centers (known as “covered entities) that serve high

numbers of uninsured indigent patients. Drug manufactures must participate in

340B in order to have their drugs covered by Medicaid.

Hospital types must meet certain criteria in order to qualify as covered entities.

The intention is to target hospitals that provide care to the medically underserved.

The organization types that meet general criteria eligibility for registration as

covered entities are as follows:

o Certain disproportionate share hospitals (DSHs), children’s hospitals,

cancer hospitals and rural referral centers.

o Federally qualified health centers and “look-alikes”.

o Family planning and sexually transmitted disease clinics.

o Ryan White Care Act grantees.

o State-operated AIDS drug assistance programs.

o Comprehensive hemophilia diagnostic treatment centers.

o Black lung and tuberculosis clinics.

o Urban Indian clinics.

o Native Hawaiian health centers.

In addition to general criteria eligibility, hospitals must also meet these specific

criteria in order to qualify:

o Disproportionate share hospitals must have a DSH adjustment percentage

above a specified level, which is either greater than 11.75% for DSH

hospitals, cancer centers and children’s hospitals. Rural referral centers and

sole community hospitals must have a DSH adjustment percentage greater

than or equal to 8%.

o The hospital must either be owned by a state or local government, be a

private nonprofit hospital “formally granted government powers” by a state

or local government, or be a private nonprofit hospital contracted by a state

or local government to provide care for low-income individuals who do not

qualify for Medicare or Medicaid.

Affordable Care Act (ACA) expansion

The ACA expanded 340B covered entities to include:

o Critical access hospitals.

o Freestanding non-prospective payment system cancer hospitals.

o Certain non-perspective payment system (PPS) children's hospitals and

rural referral centers with disproportionate share adjustments equal to or

greater than 8 percent.

According to a Congressional Budget Office Estimate, there will be

an estimated 9 million nonelderly uninsured Americans in 2019,

accounting for about 9% of the total population.

All covered entities combined receive annual discounts of nearly $2 billion.

From 2005-2011 the number of hospitals participating in the 340B program grew

from 593 to 1,673 while the number of off-site hospital locations grew from 1,233

to 4,426. The total number of covered entities essentially doubled between 2001

and 2011 from 8,605 to 16,572.

Today, approximately 1 in 3 hospitals participate in the 340B program and account

for nearly 48% of total outpatient hospital visits in the U.S.

Definition of a patient:

The Office of Pharmacy Affairs (OPA) set the definition of a patient qualifying for

the 340B program. These are the criteria:

o The covered entity has established a relationship with the individual, such

that the covered entity maintains records of the individual’s health care.

o The individual receives health care services from a health care professional

who is either employed by the covered entity or provides health care under

contractual or other arrangements (e.g. referral for consultation) such that

responsibility for the care provided remains with the covered entity.

o The individual receives a health care service or range of services from the

covered entity which is consistent with the service or range of services for

which grant funding or Federally-qualified health center look-alike status

has been provided to the entity. Disproportionate share hospitals are

exempt from this requirement.

Hospitals and contract pharmacies profiting through the 340B program:

Although the 340B program was designed to serve disadvantaged and largely

uninsured communities, hospitals have been realizing the profit potential of the

340B program by increasingly targeting wealthier, privately insured communities.

Hospitals can sell 340B drugs they have obtained at discount prices to privately

insured individuals at full market prices and pocket the savings as profits.

Likewise, pharmacies that contract with the hospitals (contract pharmacies) also

benefit from selling drugs they receive at 340B discounts to their customers at full

prices. When the 340B program was first enacted, patients could only receive the

340B discounts if the filled their prescriptions at the hospital’s pharmacy, but the

law was changed in 2010 to allow the hospitals to contract with any number of

neighborhood pharmacies. The majority of these pharmacies, comprising at least

60%, are large retail chains. Walgreens, alone, accounts for all 340B contract

pharmacy arrangements.

The potential for 340B-derived profits is so great that a number of companies have

formed that consult with hospitals on how to maximize their savings.

o In 2012, Duke University Hospital reported profits of $69.7 million, while

noting that $48.3 million in drug costs were saved thanks to the 340B

program.

In 2013, Ranking Member on the Senate Judiciary Committee Chuck Grassley (R-

IA) wrote letters to the President and CEO of Walgreen Co. Greg Wasson and

HRSA Administrator Mary K. Wakefield questioning the vast profits being

garnered by pharmacies and hospitals at the expense of the 340B program.

o An excerpt from the letter to Greg Wasson reads: “Using a complex process

and independent technology vendors, 340B entities are secretly profiting

from drugs that are dispensed by retail community pharmacies and fully

paid by third-party insurance. For a summary, see Hospitals Twist

Prescription Assistance Program For Their Own Benefit. Two weeks ago,

Drug Channels revealed that Walgreens Dominates 340B Contract

Pharmacy Mega-Networks.”

To read the full letter please click here.

An excerpt from the letter to Administrator Wakefield states: “These numbers paint a

very stark picture of how hospitals are reaping sizeable 340B discounts on drugs and

then turning around and upselling them to fully insured patients covered by Medicare,

Medicaid, or private health insurance in order to maximize their spread. For example,

only 5 percent of the patients who received discounted drugs under Duke University

Hospital’s 340B program were uninsured. The vast majority of the remaining patients

who received discounted drugs paid Duke University Hospital full price through private

insurance. As the GAO points out in its September 2011 report, “most [covered entities]

reported that they generated more 340B revenue from patients with private insurance

and Medicare compared to other payers.”

To read the full letter please click here.