The 340B drug discount program was created in 1992 to help uninsured, impoverished individuals obtain low-cost prescription drugs.  Unfortunately, the program has strayed far from its original intent, as pharmacies and hospitals are enriching themselves at the expense of the intended beneficiaries of the program.

Background

The 340B program requires pharmaceutical companies that want to participate in Medicaid to provide discounts of between 20 to 50 percent for drugs to qualified outpatient settings of “covered entities” that provide healthcare services to uninsured, indigent patients.  The entities are supposed to pass along the discounts to their patients, but that does not always happen.

At first, the list of covered entities was limited.  The House Energy and Commerce Committee report that accompanied the legislation creating the program (Rept. 102-384, September 22, 1992), stated that in “giving these covered entities access to price reductions the Committee intends to enable these entities to stretch scare Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

Covered entities at that time consisted of:

• Disproportionate Share Hospitals (DSH) that serve a large population of low-income people and receive payments from the federal government for providing care to uninsured patients;
• Federally-qualified healthcare centers or “look-alikes”;
• Family planning and STD clinics;
• Ryan White Care Act (AIDS) grantees;
• State operated AIDS drug assistance programs;
• Comprehensive hemophilia diagnostic treatment centers;
• Black lung and TB clinics;
• Urban Indian clinics; and
• Native Hawaiian healthcare centers.

Over time, like most government programs, the number of covered entities expanded starting just four years after the law was enacted.  In 1996, the Health Resources and Services Administration (HRSA), the agency that oversees the 340B program, issued guidance that allowed a covered entity that did not have an on-site pharmacy to contract with one off-site pharmacy, even though the law, which created the program, does not give the executive branch the authority to do so.  In 2010, HRSA allowed covered entities to have more than one contract pharmacy.  As a result, total contract pharmacy arrangements grew more than 1,200  percent in just three years.  Currently, there are approximately 16,000 unique contract pharmacies, according to HRSA. 

The Affordable Care Act (ACA) expanded covered entities to include certain free-standing cancer centers, critical access hospitals, rural referral centers, certain sole community hospitals, and children’s hospitals.  According to HRSA, there are now approximately 29,700 sites, of which 11,530 are unique organizations and 18,170 health care delivery sites associated with those organizations.

News reports, government and private investigative reports, and Congressional inquiries have shown there are significant problems with the 340B program.  For example:

• A September 2011 GAO report found that the oversight of the 340B program was inadequate because it relies on self-policing.  Of the 29 covered entities GAO investigated, 62 percent generated revenue by receiving reimbursement from third-party payers, most coming from private insurance or Medicare.  It found the agency’s guidance on program requirements “often lacks the necessary level of specificity to provide clear direction, making participants’ ability to self-police difficult and raising concerns that the guidance may be interpreted in ways inconsistent with the agency’s intent.”
• A February 2014 HHS Office of the Inspector General (OIG) report found that the intricate contracts between covered entities and contract pharmacies were causing drugs to be diverted to ineligible patients and pharmaceutical companies providing duplicate discounts through the program and Medicaid.  Diversion and duplicate discounts are statutorily prohibited.  The OIG stated a major problem is HRSA has not provided a clear definition of a 340B patient.  The lack of a clear definition is leading to drug diversion and is also causing in some cases 340B-eligible patients not getting the discounts, contrary to the whole purpose of the program.
• Senator Chuck Grassley (R-Iowa) has been looking into problems with the 340B program for some time, in particular how hospitals are making money off the 340B drug discount program.  Senator Grassley has also looked at for-profit pharmacies that are reaping in millions of dollars from their contract arrangements in the 340B program.
• A May 2014 IMS Institute for Healthcare Informatics study shows how ACA and the 340B drug program is pushing cancer treatment out of doctors’ offices into hospitals, which is both driving up the cost of treatment for patients and enriching the hospitals.

Another ongoing controversy concerns orphan drugs, which treat a disease that affects fewer than 200,000 people.  Because this population is so small, pharmaceutical companies are provided with incentives such as tax credits, grants, and longer marketing exclusivity to research and develop orphan drugs.

Congress explicitly exempted orphan drugs from the 340B expansion in ACA.  However, following an alarming trend within the Obama administration, which Constitutional expert Jonathan Turley has said is “a massive gravitational shift of authority to the Executive Branch that threatens the stability and functionality of our tripartite system,” HRSA ignored the law and issued a regulation that permitted orphan drugs to be included in the 340B discount program, as long as they were used to treat a condition that was not a rare disease.  Senator Orrin Hatch (R-Utah) was extremely critical of the decision in a letter to HRSA.  The pharmaceutical industry has challenged the decision through a series of lawsuits.

On May 23, 2014, the U.S. District Court for the District of Columbia ruled that HRSA could not add orphan drugs to the 340B program by regulation.  In response to the ruling, HRSA issued an “interpretive rule” that adds orphan drugs to the program.  The pharmaceutical industry is now challenging that decision.   

What’s Next

For most of 2014, 340B stake-holders had been waiting for HRSA to release a “mega-reg” that would have clarified many of the agency’s 340B guidelines and addressed problems within the program.  For example, the regulation would have provided a definition of an eligible 340B patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site facilities.  However, according to a November 19, 2014 Inside Health Policy, HRSA has decided not to issue the mega-reg due in part to the May 2014 federal court ruling on orphan drugs, perhaps as an attempt to avoid another court challenge.

Instead of the “mega-reg,” HRSA plans to address many of the issues that would have been included in the regulation through “guidance documents,” which are expected this spring.  However, guidance does not have the force of law, and the agency’s attempt to circumvent its limited rule making by issuing guidance raises significant legal issues.

In addition to the legal controversy over guidance, there are two reports due shortly on the 340B program from the HHS OIG and the GAO.  While Congress may wait for the reports to be released before members take any action in 340B, there are three other major health-related issues to be considered.  First, if the Supreme Court agrees with the plaintiffs in King v Burwell that the IRS decision to provide taxpayer-funded subsidies to people in the federally-run exchanges is illegal because ACA’s language asserts only people in state-run exchanges get a subsidy, Congress will need to decide how to respond since millions of Americans will no longer have financial assistance to purchase health insurance.  Second, Congress may consider legislation to permanently fix the Medicare payment formula for physicians.  Third, members are working to pass the 21st Century Cures bill, which would update and modernize the regulatory process for bringing new treatments to the marketplace.  In other words, Congress may not have time to address all of the problems with the 340B program this year.

At the very least, however, there should be oversight hearings on the program so Congress would be prepared next year for action.  After all, the last time there was an oversight hearing was in December, 2005 to discuss pricing transparency.  In 2007, HRSA had a voluntary pilot program with some pharmaceutical companies to improve pricing transparency; 100 manufacturers now provide data to HRSA.

In an effort to further develop transparency, Congress included language in the Fiscal Year 2015 Department of Health and Human Service Appropriations Act reminding HRSA that funding was provided in the FY 2014 appropriations bill to make 340B ceiling prices available via a secure Web site and that the agency is supposed to provide an update on its progress by March 3, 2015.  The FY 2015 bill also stated, “There are concerns that HRSA has been unable to demonstrate that the 340B program benefits the most vulnerable patients.  In order to best serve the public need, the program should examine its ability to ensure patients' access to 340B savings for outpatient drugs.”

Clearly, there is a lot more work to be done to fix the 340B program.

More information about the 340B program is available in an article in CAGW’s May 2014 WasteWatcher.