Ask most 340B hospital executives what the 340B program pays for, and you will get a warm answer about the safety net. Ask for the receipts, and the conversation tends to end.
That is the whole problem, and the administration has a chance to fix part of it this month. The Centers for Medicare and Medicaid Services (CMS) has proposed a rule that would stop Medicare from paying hospitals far more for certain drugs than the hospitals pay to acquire them. CMS should finalize it.
Congress created the 340B Drug Pricing Program over three decades ago to help safety-net providers improve access to quality care for low-income patients and later expanded it to reach critical access hospitals, rural referral centers, and sole community hospitals on which many rural areas depend.
Unfortunately, that original purpose has been taken advantage of, driving unprecedented program growth in recent years. The costs of an unchecked and expanding program are borne across Medicare, Medicaid, and drug prices generally. Aligning Medicare’s payments with hospitals’ actual acquisition costs is a measured step toward restoring the program’s integrity and, as a budget-neutral policy, would drive increased payments to small, rural providers across the country where resources are needed most.
To understand the extent to which 340B has been blatantly abused since its inception, it’s important to consider who is actually benefiting. Participation in the 340B program is limited to nonprofit providers. So, almost every dollar of 340B margin lands at an institution that pays no federal, state, or local taxes, on the understanding that it gives back to the community. Yet the intent of the program, which is noble, has not matched up with reality.
The gap between what a hospital pays for a drug and what Medicare pays the hospital for that same drug is not small.
Minnesota is the only state that requires covered entities to document it. Its health department reported earlier this year that Minnesota entities billed payers and patients $3.04 billion for drugs they acquired for $1.53 billion, clearing $1.34 billion after the cost of running the program. That was not public knowledge before the state required it to be.
CMS asked the same question nationally when it surveyed hospitals about what they pay for covered drugs, and the rule now on the table sets Medicare’s payment against the responses it received.
The proposal from CMS is not complicated. The agency issued a new payment rule that links what taxpayers and employers pay to what hospitals actually pay for drugs. Medicare currently reimburses based on average sales price. Hospitals buying through 340B acquire the same drugs for roughly a third less and keep the difference. CMS estimates closing that gap could save Medicare $4.55 billion and cuts patients’ out-of-pocket costs by $1.15 billion in the first year alone.
Opponents of this rule are making claims that it will hurt small and rural hospitals. They need to check the arithmetic. By law, the change cannot save Medicare money overall, so every dollar it stops paying out for 340B drugs has to go back into payments for other outpatient care.
A new analysis by Avalere Health ran the redistribution figures against real Medicare claims. Part B payments would rise for 78 percent of hospitals. Among hospitals with fewer than 100 beds, 88 percent come out ahead, gaining about 7 percent on average. Every single community hospital gains by roughly 8 percent.
So, calling CMS’s proposed rule a cut to rural hospital practices is a red herring. What the rule really does is take profit margins that have been piling up in the largest systems (with facilities of more than 500 beds) and spread them across hospitals delivering care in places with fewer patients and thinner operating budgets.
Moreover, rural sole community hospitals, children’s hospitals, and cancer hospitals are outright exempt from the reduction.
The rate that CMS chose was designed intentionally to be tied to what hospitals reported paying for covered drugs. When CMS asked hospitals what they pay for drugs, only 28.6 percent of 340B hospitals responded. Having sat out the survey, some 340B entities are now whining that the survey sample is too small to rely on.
This brings us back to receipts: If the books showed what they claim the books show, why not open them?
The bottom line: CMS should finalize the rule as written. Then, Congress should finish the job by defining who counts as a 340B patient, reining in contract pharmacies, and making eligible hospitals report what they collect and where it goes.
Kent Kaiser, Ph.D., is the Secretary/Treasurer of the Domestic Policy Caucus, www.domesticpolicycaucus.com.
