Discounted Drugs for Profit: Peter Bach, MD, on the 340B Program

Peter B. Bach, MD; Gabriel Miller


December 04, 2014

Editor's Note: The 340B Drug Discount Program was created by the US federal government in 1992 to provide vulnerable patient populations with access to designated outpatient drugs. The law requires that pharmaceutical manufacturers give specified discounts to clinics and hospitals that qualify for the program as safety-net providers.

Recently, the number of clinics and hospitals receiving 340B discounts has expanded dramatically. As a result, the program has been criticized from both within the government, in reports from the Government Accountability Office, and among the medical community.

Peter B. Bach, MD

Peter B. Bach, MD, is director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, and a member of the Institute of Medicine's Board on Health Care Services. His research focuses on healthcare policy, particularly as it relates to Medicare, as well as the cost of cancer care delivery.

Dr Bach spoke with Medscape about the expansion of the 340B program and how hospitals and clinics are using drug discounts provided by the 340B program to generate revenue.

Medscape: There are currently many controversial economic issues in oncology. Why have you devoted yourself to, among other topics, the issue of how the 340B program is being used?

Dr Bach: I have been involved in several areas in my career related to cancer drug pricing and incentives. The 340B program has gotten nearly everyone's attention because, in many ways, it has perturbed the oncology market once again by reintroducing the opportunity to make large profits through prescribing expensive drugs.

So I don't think it is a unique focus for me, but it is emblematic of problems that we have been trying to get out of the business of oncology—the focus on primary revenue being from the buying and reselling of drugs.

Medscape: How should the 340B program be used, ideally?

Dr Bach: If you look at the initial legislative and implementation history, it seems clear that the program was aimed at true safety-net providers and organizations that took care of certain at-risk populations—Ryan White clinics, black lung clinics, Federally Qualified Health Centers (FQHCs)—in other words, narrow subsectors of the healthcare system where care is free or heavily subsidized. The one part of the care that the program provides for is the distribution of pharmaceuticals. So for the rare providers who really do serve this very special, hard-to-reach population with unmet healthcare needs, they put in place legislation that these providers are able to get discounted drugs, just like Medicaid programs can.

That was the intent, and if you look at the participation in the program, it was initially consistent with that intent. But hospitals have been very effective at lobbying toward changing the program to tests that were more math than mission, and now many large hospitals with many insured patients can wedge themselves into the program on the basis of having a small percentage of inpatients who are poor. This lets them get heavily discounted drugs for their outpatients.

Remember that the only component of eligibility in 340B that requires no reporting on the use of proceeds is the disproportionate share hospital (DSH) program; eligibility for this program has to do with inpatients, yet 340B provides services and drugs for outpatients. So you could have a hospital with a very small number of beds and a very small population of poor patients, yet one that crosses the threshold for 340B eligibility, but also a massive outpatient network of wealthy, well-insured patients. The hospital can distribute 340B discounted drugs through those networks and charge both insurers and patients for them. That would not violate any provision of the program, and that doesn't make sense.

Medscape: How has 340B changed in recent years, particularly with respect to its original mandate to provide discounted drugs to vulnerable patients?

Dr Bach: I didn't participate in developing this legislation, but I was responsible in part for implementing it: When Medicare changed from average wholesale price (AWP) to average selling price (ASP), the private payers mostly followed. When they did that, they took the enormous, sticker-price–related profits out of cancer drugs, or at least physician-administered cancer drugs—what we call "part B" drugs. And that was a good thing. They created some problems as well, but they got rid of this problem: The doctors were making 20%-30% on a drug. That was a very powerful incentive to prescribe more expensive drugs, which was bad for patients if the drugs were no better, and was bad for the cost of healthcare.

We got rid of that, but the 340B program has sort of expanded and then exploded, and it has reintroduced the exact same set of incentives for outpatient drugs. Because rather than bumping up reimbursement over sticker price, which is what the old AWP system used to do, it passes profound discounts through to 340B entities. They will make 30%, 40%, maybe 50%—double their money, in some cases—on drugs, which is a powerful incentive to use more expensive drugs.

Medscape: Critics contend that hospital systems are exploiting the 340B program. Can you take me through some examples of how hospital systems might be abusing the program?

Dr Bach: "Exploit," "abuse"—those are loaded words. A good question is, how are they taking advantage by using the program's provisions to enrich themselves? It makes sense that they would do this, given those provisions.

The key is, if you can get discounted drugs and give them to well-insured patients, you can nearly double your money on most of those drugs. If you can't distribute those drugs yourself—for example, you don't own an outpatient pharmacy—most retail pharmacies and major ones, such as Walgreens, will sign contracts with you so that if you send your patients to them and they can distribute discounted drugs and charge insurers full boat for them, both share in those profits. And if you have the ability to infuse drugs, then you buy a drug for a 30%-40% discount under ASP; you administer it to a patient; and you send a bill to Medicare for ASP plus four, or bill to UnitedHealthcare for ASP plus 20 or something like that, and there is your profit.

You can generate more and more cash, more and more profits, the larger your distribution network is, and there is no requirement to give the drugs only to patients who are themselves in need. It is a system-level program; it is not a patient-level program.

My major objection is that this is a misuse of the program in regard to how it was intended; it was intended to shore up safety-net institutions, so that it took care of poor and indigent patients. Essentially, this is a capital cost, or an inventory cost, that Congress intended to reduce, but it has now been transformed into this wide-ranging program that hospitals are involved in now, and are reconfiguring their business plans as a result.

There is the problem with the incentives driving the use of high-cost drugs. And there is a market perturbation problem, which is that now if you are a 340B entity, the potential profits from outpatient drugs are much larger than they are for outpatient community-based doctors who give infused drugs. So there has been this arbitrage where hospitals are able to buy practices and then shuttle through discounted drugs to generate profits, and the infrastructure for community care delivery is collapsing as a result.

Medscape: If it is the hospital system that is generating revenue from this, why would a physician prescribe, say, a brand-name antineoplastic drug that would get a bigger discount under 340B or generate more revenue for the hospital when they could prescribe something that is cheaper, if it is not benefiting the physician per se but is benefiting the hospital?

Dr Bach: First of all, once you are employed by a hospital or some other entity, these things are one and the same. Actually, if you are employed by the hospital, they are allowed to give you—and many do give you—performance-based contracts. They can focus on relative value units (RVUs) and many other things, and there are structures in place that allow hospitals to play a very big role in physicians' prescribing patterns, be they care maps, preprinted order sets, or pharmacy and therapeutics (P&T) committees—things like that.

Remember, we are the ones who excluded Zaltrap® from our formulary at Memorial Sloan Kettering, right? It was with the agreement of our colorectal oncologists—it's a colorectal drug—but nevertheless, it was the P&T committee that dictated that in the second-line metastatic setting, if you were going to use an anti-vascular endothelial growth factor drug, it was going to be Avastin®. So hospitals are capable of having a very sizeable impact, through numerous means, in terms of physician prescribing patterns.

Medscape: What role has 340B played in the surge in practice mergers and acquisitions by hospitals in recent years?

Dr Bach: I think there are several examples. I think the Community Oncology Alliance has been tracking this and how many of these practice mergers into hospitals have occurred.

I am not saying that being a part of a hospital is necessarily a bad thing for patients—I work at a hospital-—but what is problematic here is that it is simply a change of organization that causes way more money to flow into the exact same practice, because insurance rates are higher, and to allow discounted drugs to flow to that practice. So they are getting it on both ends: You change your affiliation, you can get drugs for cheaper and you can get higher reimbursement. It is a very logical business step, and we are seeing a collapse of the community-based delivery infrastructure and higher insurance rates as a consequence.

We have hospitals with numerous far-reaching networks of doctors who can now push through higher insurance rates to commercial payers. And so they get it both ways. The community docs in the old days used to get lower reimbursement than hospitals for your average administered drug, but when they change affiliation—when their practice is purchased or they sign these other practice agreements—then all of a sudden, the insurance rates are higher.

Say the average chemotherapy from UnitedHealthcare given by a doctor's office gets reimbursed about 22% above sale price. Once that same office in the same location with the same staff and the same doctors gets purchased by a hospital, they are making 140% of the sale price. So nothing happened except a change in organization, but it moved the business to a different contract. That all adds to the cost of healthcare.

And most specialty drugs—tiered drugs such as these—have coinsurance, not copayment. This means the out-of-pocket cost for patients is indexed to the price of the drug, and that price is not what the doctor paid, which will be discounted under 340B; it is what the insurer pays. So the out-of-pocket cost goes up with it.

Medscape: Is this the general trend: You have a hospital that is in an urban area that originally qualifies for 340B; then they buy, say, suburban outpatient clinics or rural outpatient clinics, and then they incorporate those into their distribution network?

Dr Bach: That is exactly what is happening. That is what Dr Rena Conti's and my research[1] showed—that over time, the patient niche served by, or at least located next to, where the clinics and hospitals are acquiring is getting wealthier.

And so that was the hypothesis we aimed to test. If the program is being diverted toward more affluent, well-insured patients, that is the pattern we should see. If it is entrenching more deeply into serving poor communities, then these acquisitions and mergers should go into poor communities. Like I said, we saw the opposite.

Medscape: Should the 340B program be reformed? Should it be scrapped entirely? And in either case, what should take its place, given the vital and laudable role that it has historically played in helping at-risk, underserved patients?

Dr Bach: I think very few things ever get scrapped, so it would make sense to reexamine it, given that we now have the Affordable Care Act. We have a broader set of patients insured, particularly those in need, and we should try to understand what their needs are and how to achieve them, and probably reform the program to target those. In the interim, there should be no ability to buy a practice that serves affluent patients and send through inexpensive drugs and pass through higher rates. It doesn't make any sense to have that.

And I actually believe, and this is going to be very hard to get to, that eventually we need a system where the providers and the hospitals that are making decisions about which items in healthcare are provided to a patient—drugs, devices, and things that are essentially variable-cost goods—have no financial interest in that decision. That is really where we need to get to. We can't have a situation where doctors are incentivized to use more expensive drugs or less expensive drugs. The decision should be based on what is best for patients. We need to get there because all of these corrupting forces are due to that—trying to take advantage of the "buy low, sell high" opportunity that 340B and some of these other things have created.

When I look at this program, I have thought that there are a couple of solutions. One is to go back to its original mission and focus on the few centers that could really use the help in terms of inventory cost. Another is for hospitals and clinics to pass the discounts through, which they do not do, when they buy a practice in a wealthy suburb with well-insured patients; currently, they are capturing the profits instead. Or you could target the discounts toward disadvantaged patients in the same way we do with Medicaid patients; that is easily feasible and doable, but the hospitals don't want to do that because all of their profits come from buying a discounted drug and then giving it to a Medicare beneficiary, or a patient who is insured with UnitedHealthcare or Aetna or whatever.

Editor's note: This interview has been condensed and edited for clarity.


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