More Proof the 340B Program Needs Reform | Citizens Against Government Waste

More Proof the 340B Program Needs Reform

The WasteWatcher

On July 6, the Government Accountability Office (GAO), the independent, non-partisan investigative arm of Congress, released a report entitled, “Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals.”  The report confirms what Citizens Against Government Waste (CAGW) has been saying for some time; the 340B drug discount program is being abused by many hospitals for profit-making purposes and needs to be reformed.

Who ultimately pays for hospitals' abuse of this program?  Taxpayers and patients, through higher Medicare costs, higher health insurance premium costs, and escalating drug costs.

CAGW has written about problems with the 340B program for some time and has called for more frequent congressional oversight and meaningful reforms.  A comprehensive review of the program and how it is being misused can be found in the May 2014 WasteWatcher.


The 340B drug discount program, created in 1992 by Congress, is overseen by the Health Resources and Services Administration (HRSA), an agency within the Department of Health and Human Services (HHS).  It requires pharmaceutical manufacturers that want to participate in Medicaid to provide heavily discounted outpatient pharmaceuticals (as much as 50 percent) to certain healthcare facilities, called “covered entities,” that serve large numbers of low-income, uninsured patients.  The savings enable patients of these covered entities to get access to prescription drugs and also allows, according to Congressional intent, the entities to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

The program has grown substantially in the last decade and the number of covered entities allowed to participate in the program was expanded under the Affordable Care Act (ACA), more often referred to as ObamaCare.  According to a May 2015 Medicare Payment Advisory Commission report, covered entities include six types of hospitals and 10 types of clinics that receive federal grants.  The number of hospitals systems utilizing the program has grown exponentially; from 583 in 2005 to 1,365 in 2010, to 2,140 in 2014.

But along with its growth, problems have also increased.  A September 2011 GAO report and a February 2014 HHS Office of the Inspector General (OIG) report found many troubling issues within the program, such as 45 percent of covered entities had profited from the 340B program, that the savings from the discounted drugs were often not passed along to low-income patients, that drugs were being diverted to people that were not patients of the covered entities, and that drug manufacturers were providing duplicate rebates to covered entities and states via the 340B program and Medicaid respectively, both practices which are proscribed by law.

The GAO was asked by members of Congress to (1) compare 340B hospitals with non-340B hospitals in terms of financial and other characteristics and (2) examine how Medicare spending at 340B hospitals for all drugs and, in particular, cancer drugs, compared to spending at non-340B hospitals.  To accomplish the task, GAO looked at HRSA data from 2008 and 2012.  The GAO only considered Medicare Part B drugs, which are drugs either administered by, or under the supervision of, physicians in their offices or in hospitals' outpatient departments.  The GAO focused narrowly on one of the six 340B hospital types: disproportionate share hospitals (DSH).  DSH hospitals serve a significantly higher number of low-income, uninsured patients and receive compensatory payments from the Centers for Medicare and Medicaid Services (CMS) to cover those costs.

The GAO reported:

  • Approximately 40 percent of all hospitals participate in the 340B drug discount program. The majority of 340B drugs in the program are sold to hospitals as opposed to the other covered entities, and DSH hospitals account for 80 percent of all 340B drug purchases.
  • In 2012, 340B DSH hospitals were generally larger and tended to be teaching hospitals, compared to non-340B hospitals.
  • DSH hospitals tended to provide more charity and uncompensated care than non-340B hospitals. However, a sizeable number, 12 percent, provided relatively small amounts of charity care and 14 percent provided relatively small amounts of uncompensated care across all the hospitals GAO examined.
  • GAO found that in 2008 and 2012, per beneficiary Medicare Part B drug spending, including oncology drugs, was substantially higher at 340B DSH hospitals than at non-340B hospitals.
    • The data indicates the 340B DSH hospital Medicare patients were either prescribed more drugs or more expensive drugs than Medicare patients at the other hospitals.
    • The differences in spending did not appear to be explained by hospital characteristics or patient status.
    • In 2012, average beneficiary spending at 340B DSH hospitals was $144 compared to $60 at non-340B hospitals.
  • CMS uses reimbursement rates based on a statutorily defined formula to compensate hospitals for the drugs they purchase, regardless of what the hospitals paid for the drugs.
    • 340B hospitals, because they get access to greatly discounted drugs, have an incentive to prescribe more drugs or more expensive drugs, which allowed them to pocket the difference between the purchase and reimbursement costs.
    • Unnecessary drug spending has undesirable effects: increased costs to the Medicare program and beneficiaries who are subjected to higher costs.
    • The unnecessary spending raises concerns about the appropriateness of care provided to Medicare beneficiaries.

The GAO report also mentioned a problem that independent oncology practices and providers are experiencing due to the abuse of the 340B program.  Since 2008, according to the Community Oncology Alliance, 313 independent clinical cancer treatment sites have closed and 544 cancer practices have been acquired or entered into formal agreements with hospitals.  The Alliance argues hospitals are purchasing the private clinics to gain more cancer patients, thus further expanding their outpatient base, which enables them to generate more revenue through the 340B program.

The GAO report confirms the fundamental problems with the 340B drug program and clearly indicates it is being abused.

For example, there is no clear definition in the law of what a 340B patient is except that he or she must be a patient of a covered entity.  While the law’s intent was to enable low-income, uninsured patients to get access to prescription drugs, the lack of clarity enables hospitals to use 340B discounted drugs for all of their outpatients whether they have insurance or not.  Therefore, to be eligible to get access to 340B discounted drugs, the definition of 340B patient should also include being uninsured and having a low income.

Non-hospital covered entities, such as federally-qualified health centers, Ryan White HIV/AIDs program grantees, and specialized clinics must operate within the rules of their federal grants and programs so there is more of a guarantee they will utilize their 340B drug savings for what the law intended and that is to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  On the other hand, 340B hospitals have no such restriction and can utilize the funds for anything they choose, such as constructing new buildings and other overhead and investment activities.  Congress should institute an audit or tracking system for how 340B hospitals utilize their pharmaceutical savings and make sure it is in line with the law’s intent.

Lastly, utilizing a DSH hospital designation as being eligible for the 340B program should be re-evaluated.  Being designated a DSH hospital by CMS requires calculating the number of days Medicare and Medicaid patients have been in the hospital.  But Medicare and Medicaid are government health insurance programs, which provide drug coverage for their beneficiaries.  This is contrary to the intent of the 340B program to help patients without insurance.  Perhaps looking at how much uncompensated care a hospital provides to uninsured, indigent patients and the financial shape of the hospital are better eligibility measures for the 340B program.

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