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340B: Let It Be?

October 03, 2018
With accelerated innovation in the biopharmaceutical industry, drug prices have soared faster than anticipated and drawn national attention to individual cases of fraud. Affordability has dropped in the wake of declining accountability and transparency. Since taking office, President Trump has said one of his biggest priorities is to reduce the price of prescription drugs and claims that the reform of the 340B Drug Discount program will be one of the ways to do so.[1] However, the program and its effect on drug prices is currently one of the most controversial issues in health care.

The 340B Drug Discount program was created in 1992 as a section of the Public Health Service Act; it sought to stretch “scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” It requires pharmaceutical manufacturers to enter pharmaceutical pricing agreements (PPA) in which manufacturers provide front-end discounts on covered outpatient drugs to covered entities (such as certain hospitals and federal grantees).[2] These specified providers serve vulnerable and low-income patients in critical access areas. Within this model, certain “separately payable” drugs that are covered through Medicare Parts B and D are also eligible for discounts – patients would simply make their usual copayment and the insurer would be billed for the non-discounted drug price.

In 2010, the Affordable Care Act (ACA) expanded the eligibility criteria for the 340B program. As the number of 340B hospitals grew from nearly 1,700 in 2011 to 2,479 in 2017, discounted drug purchases made by covered entities under the 340B program totaled more than $16 billion in 2016 (nearly a 400% increase in purchases from 2009). Furthermore, according to the Administration’s blueprint, the increase also created “additional pressure on manufacturers to increase list prices.”[3]

A 2015 report by the Government Accountability Office (GAO) compared 340B hospitals with non-340B hospitals in terms of spending for Medicare Part B drugs.[4] The GAO found that in both 2008 and 2012, per beneficiary of Medicare Part B, spending was substantially higher at 340B hospitals than at non-340B hospitals; indicating that beneficiaries at 340B hospitals were either prescribed more drugs or more expensive drugs than beneficiaries at the other hospitals in GAO’s analysis.

Image: Per Beneficiary Part B Drug Spending Was Substantially Higher at 340B DSH Hospitals Compa...Image: Per Beneficiary Part B Drug Spending Was Substantially Higher at 340B DSH Hospitals Compared with Non-340B Hospitals, Source: US Government Accountability Office[5]

The Centers for Medicare & Medicaid Services (CMS), which oversees the Medicare program, uses a statutorily defined formula to pay hospitals for drugs at set rates regardless of hospitals’ costs for acquiring the drugs. It thus creates a financial incentive for hospitals participating in the 340B program to prescribe more drugs or more expensive drugs to Medicare beneficiaries. The Health Resources and Services Administration (HRSA) and CMS have limited ability to combat this incentive because the 340B statute does not restrict covered entities from using drugs purchased at the 340B discounted price for Medicare Part B beneficiaries and the Medicare statute does not limit CMS reimbursements for such drugs. In light of this exploitive practice, Congress is now considering effective ways to protect Medicare Part B beneficiaries at 340B hospitals.

For example, on November 1st, 2017, the CMS finalized the Hospital Outpatient Prospective Payment (OPPS) rule, which cut Medicare Part B reimbursement for drugs purchased at 340B discounts by 28% ($1.6 billion). CMS claimed the cut would lower out-of-pocket drug costs for Medicare patients by reducing the payment rate for certain Medicare Part B drugs purchased by hospitals through the 340B program.[6] Rural community hospitals, children’s hospitals, and OPPS-exempt cancer hospitals are exempted from the drug payment reductions in 2018, and the Administrator of CMS Seema Versa said that “Medicare beneficiaries would benefit from the discounts hospitals receive under the 340B Program by saving an estimated $320 million on copayments for these drugs in 2018 alone.” Because lower Medicare reimbursements represent lower enrollee’s coinsurance at 340B hospitals, reduced reimbursement means lower prices for patients overall. CMS stated that savings from the cut will be reallocated to hospitals paid under the OPPS.[7]

Less than two weeks after the OPPS rule was announced, a long list of healthcare organizations including the American Hospital Association, the Association of American Medical Colleges, America’s Essential Hospitals and others, filed a lawsuit against the U.S. Health & Human Services Department (HHS), arguing that the agency lacks the authority to slash the payments and that the rule undermines the intent Congress had when creating the program.[8] In December 2017, US District Judge Rudolph Contreras dismissed the lawsuit stating that the groups did not have standing to sue since the cuts had not taken effect yet.[9]

Since then, lobbying on both sides has escalated.[10] The pharmaceutical industry claims that hospitals are profiteering from the program by exploiting the absence of regulations that force hospitals to provide discounted drugs to uninsured/low income patients. Hospitals can then prescribe discounted medicines purchased through the 340B Program to patients who have insurance and can pay full price, pocket the difference, and profit from a program.[11] A coalition supported by the drug industry called the AIR340B, reported that 340B hospitals’ revenue has grown, while their level of charity care did not change.[12] Meanwhile, hospitals argue that as the entities that determine drug prices, drug companies are using hospitals as a scapegoat.[13]

Overall, a need for transparency and accountability in the 340B program is apparent. With CMS’ new OPPS rule implementing 340B cuts and 340B stakeholders taking action to reform the program in its favor, there is much uncertainty for the future of 340B.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.



  [2]Overview - 340B Health,” accessed July 30, 2018, https://www.340bhealth.org/340b-resources/340b-program/overview.

  [3]“American Patients First: The Trump Administration’s Blueprint to Lower Drug Prices | Publications | Insights | Faegre Baker Daniels,” accessed July 26, 2018, https://www.faegrebd.com/en/insights/publications/2018/5/american-patients-first-the-trump-administrations-blueprint-to-lower-drug-prices.

  [4]U. S. Government Accountability Office, “Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals,” no. GAO-15-442 (July 6, 2015), https://www.gao.gov/products/GAO-15-442.

  [5]U. S. Government Accountability Office, “Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals,” no. GAO-15-442 (July 6, 2015), https://www.gao.gov/products/GAO-15-442.

  [6]Centers for Medicare, Medicaid Services 7500 Security Boulevard Baltimore, and Md21244 Usa, “2017-11-01-2,” May 17, 2018, https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-11-01-2.html.

  [7]“CMS Finalizes Policies That Lower Out-of-Pocket Drug Costs and Increase Access to High-Quality Care | CMS.” CMS.gov Centers for Medicare & Medicaid Services, www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-11-01-2.html.

  [8]Sarah Jane Tribble, “Heated And Deep-Pocketed Battle Erupts Over 340B Drug Discount Program,” Kaiser Health News (blog), November 28, 2017, https://khn.org/news/heated-and-deep-pocketed-battle-erupts-over-340b-drug-discount-program/.

  [9]“Judge Tosses AHA Challenge to 340B Cuts,” Modern Healthcare, accessed July 26, 2018, http://www.modernhealthcare.com/article/20171229/NEWS/171229919.

  [10]David Pittman, “Hospitals and PhRMA Face off over Drug Prices and 340B Program,” POLITICO, accessed July 26, 2018, http://politi.co/2hib6Qb.

  [11]“Pacific Research Institute | Well-Meaning Drug Discount Program Encourages Hospitals to Profit Rather than Effectively Serve Poor,” accessed July 26, 2018, https://www.pacificresearch.org/well-meaning-drug-discount-program-encourages-hospitals-to-profit-rather-than-effectively-serve-poor/.

  [12]“Reports – Alliance for Integrity and Reform of 340B,” accessed July 26, 2018, http://340breform.org/reports/.

  [13]Pittman, “Hospitals and PhRMA Face off over Drug Prices and 340B Program.”


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