Hospitals Brace for Impact of 340B Drug Pricing Program Changes

September 14, 2018

Mary Beth Nierengarten

Created and enacted into law in 1992, the 340B Drug Pricing program was intended to help hospitals and clinics that disproportionately care for vulnerable, poor, and rural patients offset the care of these patients by providing discounts on outpatient drugs. The program has greatly expanded since its creation, with about 40% of US hospitals now buying outpatient drugs through the program.

In January 2018, changes to the 340B program went into effect that reduced the payment rate for certain Medicare Part B drugs purchased by hospitals through the program. The changes were reflected in the Hospital Outpatient Prospective Payment System (OPPS) final rule, issued in November 2017 by the Centers for Medicare and Medicaid Services. Under the final rule, and implemented in January 2018, Medicare payments for outpatient drugs to hospitals in the 340B program are reduced by 28.5%, which represents an estimated $1.6 billion in cuts.

The final rule has been met with great controversy. Proponents of the changes say they were needed to rein in the expansion of the program to hospitals that are not using the discounts to offset the high cost of their patients as the program intended but to generate profits. Opponents point to the fallacious thinking of reducing payments to a program that provides needed medical assistance to patients in a medical delivery system that increasingly is making it harder to afford care.

340 Health, the organization that represents more than 1300 hospitals and systems participating in the 340B Drug Pricing program, has voiced concern that participating hospitals will be hurt by the reduced payments. “Hospitals across the country have said the loss of this Medicare revenue will negatively impact their ability to serve patients in need,” they said in a statement.

Whether or not this will be borne out by the data remains to be seen. As yet, it is difficult to find data on specific effects of the program changes on 340B hospitals and clinics. According to the statement by 340 Health, “it is too early to have data on the impact of the cuts.” Contributing to the lack of data, they said, is that fact the program changes went into effect at the same time that many hospitals were beginning their fiscal year with budgets already in place. Another factor is the ongoing legal and legislative battles ensuing over the changes. “Many hospitals are appealing claims submitted under the rule,” said 340 Health, and “200 members of the House of Representatives have now cosponsored legislation to reverse these cuts.”

Projections of How 340B Hospitals Will Be Affected

What is available are projections about how the changes will affect 340B hospitals. An analysis of the projected effects of the 340B program cuts published by Avalere Health in January concluded that most 340B hospitals (85%) will see net payment increases overall, with an average net payment increase of 1.5% in their total Part B payments. When breaking it down by urban vs rural hospitals, the report highlighted that rural hospitals will receive the highest net pay increase (2.7%) vs urban hospitals (1.4%). These increases are based on the projection that that the non-drug Medicare Part B reimbursement increases also specified in the OPPS final rule (3.2% increase) would outweigh the 340B reimbursement cuts.

The analysis, which reflected 3824 hospitals paid under OPPS, also highlighted that payment increases for the 55% of hospitals that serve a disproportionate number of low-income patients, or total disproportionate share hospitals (DSH), would offset the 340B program cuts.

Hospital groups, however, have criticized the study and provided their own projections about what the cuts mean to their operations. In March, the American Hospital Association (AHA), released their most recent data in 2015 showing that 340B tax-exempt hospitals provided over $50 billion in total benefits to their communities. In a July letter to secretary of Health and Human Services Alex Azar, the AHA also highlighted that one of every four of these hospitals had a negative operating margin. 

“Efforts to scale back the program would have devastating consequences for the communities serviced by 340B hospitals while only driving more revenue to drug manufacturers,” AHA representatives state in the letter.

When asked for specific information on how the payment cuts may affect hospitals, 340 Health cited reports from two individual 340B participating hospitals. In May, Joseph M Devin, the chief financial officer at Boon County Hospital in Boone, IA, wrote about the jeopardy of the rural hospital, and other rural hospitals, if the 340B program payments are reduced or eliminated. “On average, 340B saves each rural hospital about $10,000 a year,” he wrote. “That may not sound like much, but in a small town with only one hospital, that can be the difference between keeping a hospital open and losing it forever.”

He also emphasized that the savings achieved by the Part B drug discounts are used to provide needed safety-net services. “Our 25-bed critical access hospital uses its 340B savings to provide the only hyperbaric wound care center within a 60-mile radius—a necessity for many patients living with diabetes, infections, or certain types of trauma,” he wrote.

David L Ramsey, president and CEO of Charleston Area Medical Center (CAMC) in West Virginia, also wrote of the adverse effects of the program cuts. In February he wrote, “The new policy will reduce CAMC’s drug savings by $7.4 million in 2018 alone,” he said. “That will force us to reduce our workforce further and will result in a cutback in important services to our most vulnerable patients.”

He underscored that the hospital had an operating loss of $30 million in 2017 that resulted in reducing their workforce by 300 employees.

Increased Scrutiny of 340B Hospitals

Driving the change in 340B payments has been a concern that newer participating hospitals are reaping the benefits of the drug discounts without carrying out the intention of the program to reinvest the revenues saved to bolster safety net care.

To counter this charge, increased and ongoing transparency about how 340B hospitals differ from nonparticipating hospitals and whether the discounts received, and revenues saved, are truly used for their intended purpose—caring for the low-income and vulnerable patients—will be needed.

Speaking at the annual meeting of 340B Health in July, Secretary Azar called for two kinds of reforms for the 340B pricing program: “greater transparency surrounding how these discounts are being used, and reforms to reduce the gap between discounted prices and the reimbursement provided, particularly by government programs.” He added, “We believe changes along these lines are essential to the future of the 340B program.”

New data describing how the 340B program has affected participating hospitals and those not participating in the program have begun to provide this transparency. For example, a research letter by Nikpay et al, published in JAMA Internal Medicine in August 2018, reported on how nonprofit and public hospital 340B participants differ from nonparticipants in uncompensated care, provision of low-profile services, and financial stability in 2015. Overall, they found that 41.8% of all nonprofit and public general acute-care hospitals participated in the 340B program in 2015. Compared with nonparticipating hospitals, the 340B hospitals were less financially stable, had more uncompensated care, and provided more low-profit services.

Importantly, the study looked at participating hospitals by time of enrollment in the 340B program: early participants (before 2004), intermediate participants (between 2004-2010) and late participants (after 2010). The study showed that later participants were more financially stable than early participants and spent less of their budget on uncompensated care.

These results indicate that the “recent reimbursement reforms will likely have different effects across 340B participants,” the authors suggested. “Targeting cuts might mitigate potential adverse effects on participants that provide a large amount of charitable medical care and operate at a substantial loss,” they concluded.

Commenting on the study, Sean Dickson, JD, MPH, officer, Drug Spending Research Initiative, The Pew Charitable Trusts, Washington, DC, said that the findings indicate that “changes to the 340B program could magnify the differences between 340B hospitals and other hospitals—since 340B hospitals are already less profitable, reducing these hospitals’ 340B savings could worsen their financial situation.”

He also pointed out that, although the study found differences between the hospitals that entered the 340B program earlier vs more recently, “the newer 340B hospitals are still less profitable than non-340B hospitals and provide more uncompensated care,” he said.

In an accompanying commentary to the Nikpay study, Mr Dickson, along with lead author Allan J. Coukell, discussed the importance of studies like this to better inform changes to the program. “We believe that more data about how the program affects hospitals as well as manufacturers will aid policymakers,” said Mr Dickson.