The latest disclosures from three North Carolina hospitals should make everyone rethink the 340B program’s purpose, functioning, and oversight. For instance, about 90% of 340B patients have insurance from Medicare, Medicaid, or a commercial payer. What’s more, hospitals earn large profits from the already-insured prescriptions of these patients. Duke University Health System’s gross profits from the 340B program were almost $300 million over the past 5 years. Duke’s 340B pharmacy gross margin was 53%.
Defenders of the 340B program claim that these outcomes are perfectly fine. Yet, we don't even know whether hospitals are providing adequate data so that pharmaceutical manufacturers can avoid double-paying rebates on commercial and Medicare prescriptions.
Did Congress really intend for pharmaceutical manufacturers to subsidize part of the general charity care provided by highly profitable, multi-billion dollar health systems? Read the evidence below and post a comment with your reactions.
CHEWING THE CUD
As always, I encourage you to read the source documents:
- Senator Grassley’s letter to HRSA citing the three N.C. hospitals
- Letter from Duke University Health System to Senator Grassley
- Letter from Carolinas HealthCare System to Senator Grassley
- Letter from University of North Carolina Health Care System to Senator Grassley
MILKING THE SYSTEM
As I point out in The Coming Battle Over 340B Contract Pharmacies, a 340B entity can (legally) profit from a prescription dispensed to an insured beneficiary—after the prescription has been adjudicated, dispensed, and paid by a third-party payer!
Senator Grassley shook loose some eye-opening data on the extent of this practice. Here’s the payer mix for 340B patients at the three North Carolina Hospitals.
Wow! It turns out that the situation is even worse than many of us believed. As you can see, the vast majority of 340B patients have insurance from Medicare, Medicaid, or a commercial payer. At Duke, only 5% of 340B patients are uninsured, cash-pay patients.
This is all perfectly legal under the current 340B regulations, which even permit broad retail community pharmacy networks to service these patients. More than 4,000 Walgreens retail pharmacies act as 340B contract pharmacies.
Let’s pick on Duke University, because so few of its 340B patients were uninsured. According to the HRSA Office of Pharmacy Affairs database, there are 8 locations within the Duke system that are 340B eligible entities. As far as I can tell, Duke does not use contract pharmacies.
Using data reported in its response to Senator Grassley, I computed Duke’s 340B pharmacy profits. In 95% of the cases, the 340B revenues equal the total reimbursement received by a Duke pharmacy from a third-party payer. The340B expenditures reflect the purchase price of the drugs, i.e., the net cost of goods after the 340B rebates. Thus, the difference equals the 340B Gross Profit.
Over the past 5 years, Duke’s gross profits from 340B patients were $292 million—a 53% gross profit margin. By comparison, average gross margins from prescription dispensing at retail pharmacies are 20% to 25%. See Chapter 7 of 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies.
The Charlotte Observer published a statement from Duke providing additional data that allows me to compute hypothetical drug expenditures without the 340B program. Without the 340B discounts, Duke's pharmacy margin is comparable to a typical outpatient retail pharmacy. Thus, in 2012, the 340B program contributed an additional $48.3 million (=$69.7-$21.4) in gross profits to Duke.
As Duke notes in its letter: “The above expense data represents only the purchase price for 340B drugs from the manufacturer, and excludes substantial related storage, handling, preparation, dispensing, and departmental and general overhead costs to DUHS.” So, Duke’s net 340B profits (gross profits minus expenses) are lower.
Some questions that Senator Grassley forgot to ask:
- How does Duke identify the specific commercial and Medicare prescriptions that have been deemed to be 340B eligible?
- How does Duke make sure that manufacturers avoid double-rebating on commercial and Medicare prescriptions?
- Does Duke use the voluntary NCPDP standard for 340B Information Exchange?
In its response to Senator Grassley, Duke proudly highlights $290.6 million of “community benefits provided” in 2012. At first glance, this amount seems sizable relative to the $48.3 million in incremental 340B gross profits.
However, this amount pales in comparison to Duke’s true financial position.
Like all so-called “non-profits,” Duke University Health System’s tax returns are publicly available via Guidestar.org. Check out the two most recent years available:
Duke University Health System has revenues of about $2.4 billion. Operating “profits” were 18.0% in 2009 and 11.4% in 2010. In 2011, profits were reportedly $542 million, or 20% of revenues. (source) I think you’ll agree that “untaxed” is a better description than “non-profit.” Without the 340B program, Duke's 2011 profit margin would have dropped from 20% to 18.4%. Ouch?
Did Duke really use the specific 340B profits for the benefit of uninsured patients? No one really knows. I’m reminded of a line from Deep Cover, a great, underrated early 90’s movie starring Laurence Fishburne and Jeff Goldblum:
“The money doesn’t know where it comes from.”THE STEAKS ARE HIGH
In response to Senator Grassley’s letter, pro-340B lobbying group Safety Net Hospitals for Pharmaceutical Access issued a statement that reads, in part:
“Both HRSA and the Department of Health and Human Services Office of Inspector General have specifically acknowledged that Congress intended for hospitals to charge above the 340B acquisition cost when hospital patients are covered under Medicare or are privately insured.”So, SNHPA and 340B proponents argue that the 340B pharmacy profits are perfectly appropriate. In contrast, I see mounting evidence that the program has moved far beyond its original intent, primarily at the expense of pharmaceutical manufacturers. When will Washington carve this program down to size?