The WasteWatcher: The Staff Blog of Citizens Against Government Waste

How the 340B Drug Discount Program is Increasing Cancer Costs

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


There are many reasons why cancer care costs are rising, and the 340B outpatient drug discount program is needlessly contributing to the increase.  Consumers and taxpayers end up paying the price for the program’s misuse.

The program, which has been mismanaged by the Health Resources and Services Administration (HRSA), is also a perfect example of what happens when the government gets involved in price regulation.  Price controls always lead to marketplace distortions, causing price shifting, as well as shortages or excesses.

Citizens Against Government Waste wrote about the problems with the 340B program in the May 2014 and February 2015 editions of WasteWatcher.  The program was created by Congress in 1992 and requires pharmaceutical manufacturers that participate in Medicaid to provide heavily discounted drugs, typically between 20 to 50 percent, to particular federally-funded clinics and non-profit hospitals called “covered entities” that provided direct clinical care to large numbers of poor, uninsured Americans.

Like most government creations, the 340B program has grown in size.  Through the years, Congress has increased the number of entities that can participate, especially under the Affordable Care Act.  In addition, HRSA provided guidance that allowed covered entities to privately contract with numerous for-profit pharmacies.

In theory, the covered entities are supposed to use the drug savings to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  However, because there is no clear definition of a 340B eligible patient or guidance on how the drug savings should be spent, as well as a dearth of Congressional oversight, the program has been increasingly exploited. 

Numerous government, private, and investigative news reports have shown that the program has been utilized by disproportionate share hospitals (DSH), and their contract pharmacies, to increase their profits instead of passing along the discounts to indigent, uninsured patients as Congress intended.  DSH hospitals are a covered entity that serve a disproportionate number of low-income patients.

The 340B program has been particularly detrimental to the field of cancer care.  An April 2016 study, “Cost Drivers of Cancer Care: A Retrospective Analysis of Medicare and Commercially Insured Population Claim Data 2004-2014,” which was written by Milliman and commissioned by the Community Oncology Alliance, analyzed the trends in the overall and component costs of cancer care over 10 years and compared it to cost trends in the non-cancer population.  Milliman also looked at the average annual per-patient spending on patients with cancer, those that were being actively treated with cancer, and those being non-actively treated in both the Medicare and general populations.

The study found that three key dynamics affect the costs of cancer care.  First, costs are rising because the U.S. population is growing, people are living longer and thus more likely have to face cancer, and cancer survival rates are increasing.

Second, the study found that the while the cost of chemotherapy drugs are increasing, largely driven by newer and more effective treatments, their costs are offset by decreases in other areas of cancer care, such as patients spending less time in the hospital or avoiding surgery.

Third, the study found that the location where patients receive chemotherapy infusion has dramatically shifted from lower-cost physician offices to higher-cost hospital outpatient settings.

Milliman found that between 2004 and 2014, chemotherapy infusions delivered in hospital outpatient departments increased from 15.8 percent to 45.9 percent in the Medicare population and 5.8 percent to 45.9 percent in the commercial population.  They also found that 340B hospitals now account for 50.3 percent of all hospital outpatient chemotherapy infusions.

The Milliman study gives credence to several other reports that the 340B drug discount program is pushing cancer care to hospital outpatient departments.  For example, an October 2013 Clinical Oncology article reported that the lack of a clear definition of 340B patients, such as whether they have insurance or an ability to pay, has enabled hospitals to utilize the drug discount program as a way to generate revenue.  By purchasing oncology physician offices, the 340B eligible hospitals can administer their heavily discounted cancer drugs to their newly acquired outpatients, accept their co-pays, and charge insurers the full reimbursable price, pocketing the difference.

A June 2015 Government Accountability Office report also supports the notion that the 340B program is fueling the trend for hospitals to purchase oncology physician offices.  The GAO compared 340B DSH hospitals to non-340B hospitals.  Even though DSH hospitals get payments from the federal government because of their special status, GAO found that “12 percent of 340B DSH hospitals were among the hospitals that reported providing the lowest amounts of charity care across all hospitals.”

GAO also found that there is “a financial incentive at hospitals participating in the 340B program to prescribe more drugs or more expensive drugs to Medicare beneficiaries.”  Furthermore, GAO found that while the average number of oncology patients served in an outpatient setting increased for all hospital groups from 2008 to 2012, the largest increase, 45 percent, was seen in 340B DSH hospitals.  Milliman found that for 2014, if the infused chemotherapy site had not shifted to a hospital’s outpatient setting, Medicare would have saved $2 billion.

HRSA has contributed to these problems by failing to improve and finalize guidance on how the drug savings should be used, and to clarify exactly what a 340B patient is so that the drug discounts help indigent, uninsured people as Congress originally intended, rather than enable hospitals to get richer.

Congress needs to fix the program and there will certainly be objections to any modifications to the law that would cut off the hospitals’ 340B ATM, which is working too well in fattening their wallets.  Meanwhile, cancer costs will unnecessarily continue to rise because of the continued misuse of the 340B drug discount program.

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