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Drug payment cuts to 340B hospitals spur debate on best path forward

Hospitals say revenue from the 340B program is essential, while others contend the original law is being abused.

Jeff Lagasse, Associate Editor

On August 3, an federal appeals court ruled that 340B hospitals will now be subject to Medicare cuts in outpatient drug payments by nearly 30%, reversing an earlier ruling calling those cuts illegal. The 2-1 decision by the U.S Court of Appeals for the District of Columbia Circuit essentially gives the Trump Administration and the Department of Health and Human Services the legal authority to reduce payment for Medicare Part B drugs to 340B hospitals.

HHS Secretary Alex Azar said the action means patients – particularly those who live in vulnerable areas – will pay less out-of-pocket for drugs in the Medicare Part B program. But providers, including the American Hospital Association, the Association of American Medical Colleges and America's Essential Hospitals, said the 340B decision will hurt hospitals and patients in these vulnerable areas.

Hospitals that serve large numbers of Medicaid, Medicare and uninsured patients were getting the drugs for a discounted price, but, getting reimbursed at the higher price, HHS pays all hospitals for Medicare Part B drugs. The hospitals, many of which are in the red or operating on thin margins, were using the pay gap in the price difference to cover operational expenses. HHS deemed it inappropriate that these facilities would use Medicare to subsidize other activities and initiatives, and the appeals court agreed.

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As per the original 340B legislation, discounts on drugs can range from 13% to 32% off the average retail price for participating providers, but Medicare Part D sets reimbursement in an entirely different way, leading to the significant reimbursement discrepancies – until the ruling, which furthered HHS' push to narrow the spread between acquisition price and reimbursement.

THE DEBATE

"The opportunity to exploit this buy/sell differential probably has something to do with the explosive growth there's been in the number of participating institutions in 340B," said Michael Abrams, cofounder and managing partner of Numerof and Associates. "According to the data I came across, discounted 340B purchases grew 23% from 2018 to 2019, and currently make up about 8% of the total of the U.S. drug market. So from my perspective this looks like a loophole that's been used by a small number of large institutions, who in many cases don't serve that many disadvantaged patients, but nonetheless serve enough to qualify for the 340B program and to purchase the drugs they buy at the discounted rate."

Groups representing U.S. hospitals would disagree with that assessment, and, in fact, when the appeals court handed its ruling, the AHA, AAMC and America's Essential Hospitals said 340B hospitals and their patients would "suffer lasting consequences."

"The decision conflicts with Congress' clear intent and defers to the government's inaccurate interpretation of the law, a point that was articulated by the judge who dissented from the opinion," the groups wrote in a statement. "For more than 25 years, the 340B program has helped hospitals stretch scarce federal resources to reach more patients and provide more comprehensive services. Hospitals that rely on the savings from the 340B drug pricing program are also on the front-lines of the COVID-19 pandemic, and today's decision will result in the continued loss of resources at the worst possible time."

President and CEO of 340B Health Maureen Testoni also lamented the appeals court's decision, calling the cuts "discriminatory."

"These cuts of nearly 30% have caused real and lasting pain to safety-net hospitals and the patients they serve," she said earlier this month. "Keeping these cuts in place will only deepen the damage of forced cutbacks in patient services and cancellations of planned care expansions. These effects will be especially detrimental during a global pandemic."

Abrams contends that much of the confusion and legal wrangling can be attributed to the vagueness of the original 340B legislation, the stated goal of which was to "enable participating institutions to stretch scarce financial dollars." With little else to go on in terms of the language, those on each side of the issue were able to interpret it in their own way, with participating institutions saying it's within the bounds of the law to use that revenue stream to enhance their mission – another phrase that's open to wide interpretation. 

"There's no question this is being put to uses that were never intended," said Abrams, adding that the profits generated by the buy/sell differential often disappear into balance sheets with little to no accountability.

Hospitals, for their part, feel they're under siege by HHS at a critical time for the healthcare system's financial viability. Even before the COVID-19 pandemic, hospitals saw the migration of lucrative inpatient procedures, such as hip and knee replacements, to freestanding outpatient facilities, which in some cases are not owned by the hospital. That represents a significant loss of revenue. Factor in the lost revenue from cancelled or delayed elective procedures due to the coronavirus, as well as patients who are too cautious to enter the healthcare system, and hospitals are hurting. AHA President and CEO Rick Pollack said in July that half of all U.S. hospitals will likely be in the red by the end of the year.

A COMPLICATED PICTURE

Actions by the pharmaceutical industry are also adding to the complication. A recent statement from America's Essential Hospitals alleges that recent actions by pharmaceutical manufacturers "hinder access to affordable medications for millions of people who face financial hardships and defy clear statutory requirements that they provide drugs to 340B Drug Pricing Program covered entities."

The manufacturers have threatened punitive actions – including withholding 340B drugs to contract pharmacies – for failing to comply with reporting requirements that Essential Hospitals call "arbitrary."

"These data requests have no clear link to program integrity," the group said. "Rather, they seem to be little more than a fishing expedition."

A concrete example can be found in AstraZeneca's decision to refuse 340B pricing to hospitals with on-site pharmacies for any drugs that will be dispensed through contract pharmacies. In a statement this week, Testoni of 340B called this action an "attack" on the 340B program that will hurt healthcare institutions as well as low-income and rural Americans.

"We believe that refusing to offer discounts that the 340B statute requires is a violation of federal law," said Testoni. "We are calling on Health and Human Services Secretary (Alex) Azar to exercise his authority to stop these overcharges before they cause permanent damage to the healthcare safety net."

Abrams sides more with the appeals court decision, saying that requiring the pharmaceutical industry to sell drugs at a discount comes with significant regulation to ensure they do so – a stark contrast to the lack of regulation around the resulting revenue. Though another appeal certainly isn't out of the question, Abrams expects participation in the program to shrink back to a level reflecting the size of the target populations.

"This is about helping disadvantaged patients get their drugs, and that should be the driving activity of the program," he said. "I'm fine with HHS taking this problem on, because it was an abuse that was never intended in the original legislation. It just seems to me that HHS really wants the healthcare sector to deliver care that is more accountable both for efficient use of resources and outcomes."

One person who disagrees is Circuit Judge Cornelia Pillard, who wrote the dissenting opinion in the appeals court decision.

"The challenged rules took a major bite out of 340B hospitals' funding," she said. "Often operating at substantial losses, 340B hospitals rely on the revenue that Medicare Part B provides in the form of standard drug-reimbursement payments that exceed those hospitals' acquisition costs. 340B hospitals have used the additional resources to provide critical healthcare services to communities with underserved populations that could not otherwise afford these services."
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com