340B Boosting Hospital Profits, Losing Focus on the Poor

Roxanne Nelson

October 15, 2014

UPDATED October 16, 2014 // Editor's note: This article has been updated with the addition of rebuttals to the assertions made by the authors of the report.

In a case of unintended consequences, a federal program designed to help low-income and uninsured patients is instead being used to boost hospital profits according to a report published in the October issue of Health Affairs.

The assertion is made by two academics: Rena Conti, PhD, assistant professor of pediatrics and population health sciences at the University of Chicago Medicine; and Peter Bach, MD, director of the Center for Health Policy and Outcomes at the Memorial Sloan Kettering Cancer Center in New York City.

But the Safety Net Hospitals for Pharmaceutical Access (SNHPA) and American Hospital Association (AHA) have taken issue with many of the issues raised, and have published rebuttals to the report.

The 340B Drug Discount Program, established in 1992 to help qualified hospitals and their outpatient clinics serve low-income and uninsured patients by providing discounts on outpatient drugs of 30% to 50%, has recently come under intense scrutiny.

Enrollment in 340B escalated in the past decade, and now more than one-third of the 4375 nonfederal hospitals in the United States qualify for the 340B program, note Drs Conti and Bach in their report. From 2001 to 2011, the number of sites participating in 340B roughly doubled. To assess the degree to which recently registered facilities are serving vulnerable communities, the authors conducted an analysis of the populations served by qualifying hospitals and clinics before and after 2004, when the program began to undergo a substantial increase.

Their findings show that the more recent affiliates are not targeting poorer communities or the uninsured. Instead, they are serving communities that have higher household incomes, much less unemployment, and higher rates of health insurance coverage.

Hospitals participating in the program can boost their profits by prescribing drugs to privately insured patients or those on Medicare because they are not required to pass the discounts on to patients or insurance companies or to show that they are investing in outpatient programs for low-income populations. These facilities generate profits by "pocketing the difference" between the 340B discounted price and the higher reimbursement paid by insurers and patients, Drs Conti and Bach report.

Not surprisingly, criticism that the program has strayed from its original intention has been increasing. Recent Congressional and news reports suggest that for selected hospitals, profits from the 340B program can be significant. The American Society of Clinical Oncology recently issued a policy statement calling for the 20-year-old program to be revisited to ensure that it is still meeting the intent of the legislation.

Generating Profits

"The program has come under scrutiny by critics who contend that some hospitals exploit the drug discounts to generate profits instead of either investing in programs for the poor or passing the discounts along to patients and insurers," write Drs Conti and Bach. "Our findings support the criticism that the 340B program is being converted from one that serves vulnerable patient populations to one that enriches hospitals and their affiliated clinics."

They point to the example of Duke University Hospital, which, in 2012, reported 5-year profits of $282 million. These were accrued in their outpatient departments and affiliated clinics as a result of their participation in the 340B program.

Drs Conti and Bach cite a report published last year in the New York Times that suggests that by administering drugs obtained with 340B discounts to fully insured patients, a single medical oncologist who practices at a 340B-affiliated outpatient clinic could generate $1 million per year.

"Policy makers need more national, systematic, and independent information on exactly how these hospitals and their clinic affiliates are using the profits — generated from purchasing drugs at discounted prices and charging patients and their insurers full price — to care for poor and uninsured patients," Dr Conti told Medscape Medical News.

"Because hospitals have changed so much since the inception of this program, basing eligibility for these discounts on the poverty of the inpatient population alone seems outdated and not consistent with healthcare reform more generally," she said.

Expansions Not Helping the Poor

In their evaluation, Drs Conti and Bach focused on 340B hospitals that also participated in the Medicare Disproportionate Share Hospital (DHS) program, which uses a formula that takes into account the proportion of low-income and uninsured patients treated as inpatients to calculate payment for services.

The number of DSH hospitals and clinics has also sharply increased during the past decade. In 2012, 960 DSH hospitals and 3964 affiliated outpatient clinics were qualified for 340B. Of the hospitals, 53% reported at least one affiliated clinic and, on average, these 510 hospitals had nine affiliated clinics each (median, 4; range, 1 - 140).

Residents in communities served by the 340B DSH hospitals tended to have lower incomes than those in average communities in the United States, and rates of uninsured were higher. In general, however, DSH hospitals that registered for the 340B program in 2004 or later were serving communities with fewer low-income people than those registered before 2004 (P < .05).

In 2012, communities with 340B DSH affiliated clinics had fewer uninsured residents than communities with 340B DSH hospitals (P < .0001). The socioeconomic characteristics of communities with affiliated clinics were significantly more similar to national averages (P < .01), and the differences between communities with 340B DSH hospitals and those with affiliated clinics were also significant (P < .01).

Clinics affiliated with 340B entities that registered in 2004 or later tended to serve more well-to-do communities with higher levels of insurance than those that registered before 2004 (P < .01).

"These results suggest that the expansions among 340B DSH hospitals run counter to the program's original intention," Drs Conti and Bach write.

There are some prudent steps that can be taken to shift the program back to its core focus, they suggest. One would be for facilities to be more transparent and show, dollar for dollar, how these profits are serving the poor and uninsured. If they are unable to do that, then they should be forced to "scale back the program to institutions that can and do provide clear benefit to our most impoverished and medically needy fellow Americans and/or pass the discounts on to patients and their insurers," Dr Conti commented.

"Once the facts are in about the way this program is or is not ensuring the vitality of the safety net, it is up to policy makers to have a practical debate about the merits of these policy proposals or alternatives," she added.

Rebuttal From SNHPA

The SNHPA published a rebuttal to the report on a Health Affairs blog.

The authors are Maureen Testoni, JD, and Charles Hart, MD, MS, both from the SNHPA, which is a nonprofit organization of more than 1000 hospitals and health systems participating in the federal 340B drug discount program.

They say that the analysis by Drs Conti and Bach neglects an essential point: "Compared to non-340B DSH hospitals, 340B DSH hospitals provide over twice as much care to Medicaid and low-income Medicare patients, and almost twice as much uncompensated care."

They also assert that Drs Conti and Bach misconstrue the 340B program's intent. They say that it is not and never was meant to be a direct assistance program for the poor. Rather, it is a program that allows certain providers within the American healthcare safety net to stretch federal resources to reach more eligible patients and provide more comprehensive services, they explain.

As an example of this, 340B savings helped the Henry Ford Hospital fund four oncology clinics and related services in Detroit and surrounding townships, they point out.

Another point is that hospital outpatient clinics are growing in number due to several widely documented trends, such as the shift from inpatient to outpatient settings in order to prevent admissions and subsequent readmissions. In their report, Drs Conti and Bach failed to "evaluate whether these trends are leading 340B DSH hospitals to establish more outpatient clinics than non-340B DSH hospitals," they write. "Without this comparison, there is no way to meaningfully determine whether 340B is driving an increase in hospital offsite locations."

The SNHPA authors also note that the census data used in the analysis do not measure the income of patients who are actually seen by hospitals at their clinics, and that the number of DSH hospitals enrolled in the 340B program has actually declined since the Affordable Care Act became law in 2010.

Finally, the SNHPA officials acknowledge that although the report accurately describes the 340B program — in that it permits discounted drugs for all outpatients, regardless of insurance status — it also suggests that hospitals might be "profiting" as a result. "In fact, Congress specifically designed the program to help 340B providers 'stretch their scarce resources' and reach more patients," they point out.

"The fact remains that 340B DSH hospitals support heavy caseloads of Medicaid and low-income Medicare patients — regardless of where their outpatient clinics are located," they say.

Drs Conti and Bach responded to the SNHPA rebuttal in a comment on the blog post. They say that "Testoni and Hart seem to have misunderstood our analysis that focuses on 340B participants."

They reiterate that they never said that the 340B program is a direct assistance program to the poor, but add that "there is no difference of opinion that its intent is to aid the poor: by its nature the program is indirect, and so are our inferences."

"We do not think it as hard to recognize profit-seeking behavior as Testoni and Hart seem to suggest," they write. "If hospitals acquire or open clinics in wealthy neighborhoods, their intent is to provide care to wealthy patients with good insurance. The inverse is presumably true as well. Our study showed the former behavior more than the latter."

The SNHPA authors also "advance some euphemisms here and there," they note, "in that they seek to relabel what we correctly termed profits (the difference between acquisition and reimbursement rates) as 'stretching scarce resources'."

The anecdote about the four oncology clinics in Detroit funded by 340B savings is "interesting but not particularly informative," Drs Conti and Bach say. "According to a 2013 report, the 340B program brought in $70 million annually for the Henry Ford Health System by charging insured patients and their insurers nondiscounted drug prices after giving them discounted drugs."

"Even if all of these profits went to four clinics (which seems unlikely), we prefer our nationally representative analysis over this incomplete anecdote as a means to understand how this program is being used and misused," they add.

The SNHPA officials also objected to the measures of poverty used in the analysis, even though "we use data collected by the US Census Bureau, the reference standard for determining income levels in the nation and in specific communities," they write. "They may have also overlooked the fact that our findings are robust to various alterations in the size of the catchment area we used," as well as being "robust to alternative metrics of the wealth of the population served by 340B hospitals directly reported to the Centers for Medicare and Medicaid Services on their hospital cost reports."

A Real Disservice, Says AHA

The AHA has also published its objections, and says that the report by Drs Conti and Bach does a "real disservice to this important program that has a proven track record in helping patients get the medicines they need."

The AHA says that Drs Conti and Bach are "individuals with known connections to the pharmaceutical industry," although when they listed potential conflicts of interest in their report, the only mention was that Dr Conti received support from the National Cancer Institute.

The study "reaches incorrect conclusions about how hospitals are using the 340B Drug Pricing Program," the AHA says.

The design of the study also provides a "questionable framework for analysis" because it does not focus on the geographic areas served by 340B facilities, it adds.

The AHA asserts that Drs Conti and Bach accurately evaluate that there has been an increase in the number of 340B hospitals and clinics, but they have ignored the "effects of changes to the program since 2004."

The Medicare Modernization Act began expanding the program that year, to include rural and small urban hospitals, by raising the cap on the DSH adjustment. "Subsequent laws expanded the program to include other hospital types," writes the AHA. "They also ignored the most obvious reason for the growth in reported hospital-based 340B clinics, which is the Health Resources and Services Administration's new reporting system, which requires hospitals to register all outpatient units on their Medicare cost report as 340B sites."

Dr Conti reports receiving support from the National Cancer Institute.

Health Aff (Millwood). 2014;33:1786-1792. Abstract

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