Inflation Reduction Act Price Controls and the 340B Program
Under the multi-billion-dollar 340B program, drug manufacturers must provide deep discounts to certain hospitals and clinics. However, federal law explicitly prohibits "double dipping" schemes where manufacturers must give both a steep 340B discount to hospitals and substantial rebates to State Medicaid programs for the same dispensed drug to the same patient. This practice, known as a "duplicate discount," is unlawful. So, if these duplicate discounts are unlawful, why isn't the prohibition of the double-dipping scheme being enforced?
Researchers have chronicled duplicate discounts as a regular occurrence. Here is what the Schaeffer Center at USC wrote about the prevalence of duplicate discounts: “Although audits are limited to a small share of covered entities (hospitals), noncompliance is potentially high: Of the 1,240 audits conducted between 2012 and 2019, roughly 75% resulted in at least one finding of noncompliance."
In addition, federal government watchdogs such as the Government Accountability Office (GAO) have warned participants in the 340B program to clean up their act, which could easily be done with some clever software. Still, the cleanup never comes, and the violations of federal law continue unabated. There is little doubt that the federal government and the Health Resources and Services Administration (HRSA), the agency that oversees the 340B program, do not get involved in the duplicate discount scheme because the only party harmed by duplicate discounts are drug companies, a very unsympathetic constituency.
However, the problem of duplicate discounts is about to go nuclear as Congress has extended government price controls to the most popular Medicare drugs. Within a few short years, 60 of the most commonly prescribed drugs will be subject to federal price controls. As such, participants in the 340B program can obtain 340B discounts by purchasing medicines at meager prices while capturing the price control discount demanded by Congress through the Inflation Reduction Act (IRA). The combined discounts for many of these drugs will mean drug companies will be giving away their medications for free.
While the price control law also forbade these 340B/price control duplicate discounts, Congress put very little in the law to prevent it from happening. Congress left it to drug manufacturers and "third-party administrators" to resolve the duplicate discount issue. Third-party administrators are claims processing companies with no interest or appetite to stand in the way of for-profit pharmacies, hospitals, and governments grabbing as much money as they can from 340B. So, it will be left to drug manufacturers to prevent duplicate discounts, which will be fiercely opposed by 340B program participants who are making lots of money from the lawless nature of the program. It is also important to note that third-party administrators will profit from this new scheme as another new cottage industry is being provided with life through our byzantine healthcare system.
Recently, Johnson & Johnson (J&J) attempted to head off the duplicate discount problem by converting to a "rebate" system for two of their drugs subject to government price controls, otherwise known as Maximum Fair Price (MFP). Under this system, the company would first require confirmation that a drug purchase did not involve a duplicate discount. They would write a check to the hospital for the 340B discount if they confirmed the purchase was legal. J&J staff told us they could confirm the legality of the purchase and send a check within four or five days, even before the drug wholesaler billed the hospital.
Nonetheless, when Johnson & Johnson made this proposal, the outcry from those who regularly violate federal law was significant. Even the Health Resources Services Administration (HRSA), the federal agency that runs 340B and is responsible for the integrity of the program, attacked the J&J plan and threatened to make the company ineligible to participate in Medicare and Medicaid drug programs, a financial death blow for a drug company. It is quite ironic that a federal agency, HRSA, fiercely opposed a plan that would have prevented routine violations of federal law. J&J initially abandoned the rebate program; however, upon further consultation, J&J has decided to file suit against HRSA to ensure that the company can confirm that 340B claims are actually purchased and dispensed by a 340B entity, specifically focused on the Disproportionate Share Hospitals (DSH).
CMS has introduced the concept of creating a "clearinghouse" called Medicare Transaction Facilitator (MTF) where claims data could be stored, and then duplicate discounts could be flagged for medicines whose prices were set through IRA. But all HRSA has done is float the idea, not create anything. It seems unlikely they will.
But, at the end of the day, many actors in the system are making billions from duplicate discounts, so very few people have any interest in reform or standing up for the "rule of law." Transparency and accountability will help fix the problem; unfortunately, those principles are opposed by HRSA, which steadfastly ignores removing corruption from the current 340B model.
The 340B program is, in general, a wasteful program that does not serve the low-income populations it was intended to serve. It’s now an issue that could be addressed by the incoming Administration, and should be on the list of programs that the newly introduced Department of Government Efficiency examines.
William S. Smith, PhD, is Senior Fellow and Director of the Life Sciences Initiative at Pioneer Institute in Boston.
Robert Popovian, Pharm.D., MS, is Senior Visiting Health Policy Fellow of the Life Sciences at Pioneer Institute in Boston.
