340b Reform: A Story of Off-Target Priorities

Appropriate reform of the federal drug-discount program requires elimination of inpatient disproportionate share hospitals (DSHs) as a determining measure, thereby better linking medications to program beneficiaries.

By Steve Y. Lee, MD

Disclosure:  The author is employed by NYU Langone Health, a private, non-profit hospital system, and has clinical responsibilities at Bellevue Hospital Center, a municipal safety-net hospital.  Both are 340B program beneficiaries.

In a head-scratching decision, the Centers for Medicare & Medicaid Services (CMS) announced, as part of its November 2017 Hospital Outpatient Prospective Payment System (OPPS) final rule, fundamental changes to the 340B drug discount program.  Whereas the program had previously allowed eligible hospitals to purchase outpatient Part B drugs at a substantial (approximately 20%-50%) discount and bill Medicare at prevailing rates, the new plan maintained program eligibility and discounts from pharmaceutical manufacturers but cut Medicare reimbursement to average sales price minus 22.5%.

The 340B program was originally conceived in its current form in 2010 as a mechanism to compensate hospitals for the care of low-income patients.  Beneficiary hospitals and spending have subsequently proliferated, with program spending increasing from $2.4 billion in 2005 to $16 billion in 2016. Payments under 340B have been blamed in part for the rapid growth of pharmaceutical spending and have been singled out by the Trump Administration’s May 2018 “American Patients First” plan as a major driver of drug costs.

Health system issues aside, 340B has also failed to deliver its primary goal of increasing access to therapy for poor and uninsured patients as its patient eligibility criteria are not at all dependent on its beneficiaries. At its crux, 340B eligibility requires inpatient disproportionate share hospital population adjustments of 11.75% or greater, but discounted drugs are delivered in hospital outpatient clinics, which can be inaccessible to the original underinsured inpatient target population who are forced to seek outpatient care at safety-net hospitals.

Unintended consequences of this program include acquisitions of urban and community hospitals by robust health systems to obtain 340B eligibility.  Independent oncology practices, which are locked out of 340B eligibility by virtue of not owning a hospital, are increasingly being acquired by 340B hospital systems hoping to further exploit their drug margin advantages.  This expansion increasingly places discounted drugs in affluent communities for which 340B benefits were never intended. Consequently and paradoxically, 340B eligibility has been found to be associated with a lower proportion of low-income patients in high-impact specialties such as oncology.

If the primary problem is misdirected eligibility, why would CMS’ fix address reimbursement?  It’s a problem of advocacy actors.  Currently, the 340B debate pits big pharma, which wants to shrink the program, against big hospitals, which want to maintain the program, against the government, which wants to reduce overall Medicare spending.  In this setting, the $1.6 billion across-the-board reimbursement cut is an imperfect compromise between these parties, as drug discounts likely drop while all existing hospitals maintain access to a semblance of 340B largess.  Losing out are true urban safety-net hospitals (some rural hospitals were exempted from cuts), whose slim margins were slashed by the CMS decision.  While lamenting effects to safety-net hospitals, no hospital-based lobby went as far as to suggest protecting them at the expense of cutting eligibility of their more profitable brethren.  Independent practices, which remain locked out of 340B discounts and continue to have to make sacrifices to care for underinsured patients, are also losers.

In Washington, DC, practice-based organizations such as the Community Oncology Alliance have sounded the alarm on the downstream effects of 340B abuse.  Unfortunately, big-tent physician advocacy organizations such as the American Medical Association (AMA) and the American Society of Clinical Oncology (ASCO) have been limited to nuanced advocacy, as described in a 2014 JOP article; bare-fisted lobbying has been hamstrung by heterogenous memberships that include both hospital-employed and independent-practice physicians.  Prompted by distressed member oncologists, AMA physicians finally adopted policy in 2018 pushing for greater 340B oversight.

Fundamental reform of the 340B program requires a better linkage between the patients who establish 340B eligibility and those who benefit from 340B-discounted drugs.  The most straightforward strategy would be to abolish inpatient DSHs as an eligibility criterion and replace it with threshold proportion of low-income outpatients treated in the Medicare Part B setting.  In a bizarre turn of events, oncologists and other physicians may find an unusual ally in big pharma, as an outcome in which drug discounts are limited to practices that provide care to meaningful populations of low-income patients would reduce unnecessary discounts overall.  This solution would maintain needed compensation for safety-net hospitals while cutting the fat out of hospitals with minimal exposure to low-income outpatients.  Finally, outpatient-based eligibility provides the additional benefit of increasing access to independent practices which could be compensated for caring for low-income patients.

Federal interest in 340B-related legislation is high, with at least three active bills asking for increased transparency of beneficiaries and/or a moratorium in 340B expansion. The findings will be grisly; oncologists must seize the opportunity to shift 340B benefits to low-income patients and the practices that treat them.