Most 340B purchases are made by hospitals. My exclusive number-crunching below reveals that hospitals now receive 340B discounts on more than 44% of their drug purchases. As I predicted two years ago, the 340B program is taking over the hospital market.
How much of this money goes to uninsured and needy patients? No one knows, and the hospitals aren’t saying much. The Health Resources and Services Administration (HRSA) expects to finalize its Omnibus Guidance in the fall. Unfortunately, HRSA doesn’t seem keen on requiring that any financial savings be directed to the neediest patients. Maybe it just doesn’t want to get a blister on its little finger.
THAT'S THE WAY YOU DO IT
The chart below shows the startling growth in the purchases made under the 340B Drug Pricing Program, all at discounted contract prices. These data come from Apexus, the HRSA-designated Prime Vendor for the 340B Drug Pricing Program.
As I explain in the notes below, these figures likely understate total 340B purchases, because of data collection limitations. Also keep in mind that these data represent purchases at or below the deeply-discounted 340B ceiling prices.
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LEMME TELL YA THEM GUYS AIN'T DUMB
340B purchases have been growing much, much more quickly than have hospitals’ total drug purchases. From 2005 to 2015, total hospital drug purchases grew by 31%, compared with the 400%+ growth in the total 340B purchases noted above.
Consequently, 340B has infiltrated almost half of the hospital market. In 2015, the 340B share had risen to more than 44% of purchases. (See chart below.) The actual percentage is likely higher, because direct sales are not included in the Apexus 340B totals.
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The 340B program is highly controversial, partly because the 340B legislation does not specify or restrict how covered entities should utilize funds generated by the program. Hence, it’s troubling to see that uncompensated care as a percentage of hospitals’ total expenses has remained at about 6% for many years, despite booming 340B purchases.
Defenders of the 340B status quo argue that covered entities should be able to use discounts to reduce their cost of operations, without any transparency or accountability. They frequently claim that 340B spending amounts to “only 2%” of U.S. drug purchases. But the hospital data show that the 2% figure is just misleading propaganda. Given the program’s skyrocketing growth, this bogus stat also needs to be updated to “almost 5%.”
GET YOUR MONEY FOR NOTHIN'
Government oversight and advisory agencies are the 340B program's biggest critics, saying “That ain't workin' .” A few examples:
- The Office of Inspector General (OIG) has documented how 340B-eligible hospital outpatient departments earn tremendous profits from the Medicare Part B program. Gross profit margins are about 60% compared with 3% to 4% for a non-340B outpatient program. The OIG has proposed that the Medicare program could save money by sharing in these mega-profits. See New OIG Report Shows Hospitals’ Huge 340B Profits from Medicare-Paid Cancer Drugs.
- The OIG has also found that two-thirds of hospitals do not offer the reduced 340B prices to uninsured patients. See New OIG Report Confirms Our Worst Fears About 340B Contract Pharmacy Abuses.
- The Medicare Payment Advisory Commission (MedPAC) has found that many 340B hospitals have below-average levels of uncompensated care. See this presentation.
Put another way, hospitals’ profits from outpatient drugs are certainly not in … dire straits. (ouch.)
As I noted last December, HRSA’s recent Omnibus Guidance didn’t bother to require that hospitals explicitly use 340B discounts to help vulnerable and underserved patients. That said, I should note that the guidance also omitted any mention of chicks and MTV.
Notes for nerds:
- The 340B figures represent purchases under the 340B program at contracted prices, as provided by Apexus. Hospitals accounted for about 86% of all 340B purchases. The data include only indirect sales made via wholesalers. The data therefore understate total 340B purchases, because they exclude an unknown amount of manufacturer sales made directly to healthcare institutions.
- Total hospital purchases were measured using non-discounted spending by non-federal hospitals, as reported by IMS Health. These data reflect purchases by hospitals at invoice pricing. Contract pricing, such as a hospital’s GPO or 340B discount processed via a wholesaler chargeback transaction, are generally not reflected on the invoice. We assume that 340B hospitals purchase at 71% of the average invoice price to a non-340B hospital. Therefore, we grossed up hospitals’ 340B purchases by 1.4X (=1.0/0.71).
- Hospitals purchase drugs at about 80% of a drug’s Wholesale Acquisition Cost (WAC), when adjusted for contract pricing. In 2005, the Congressional Budget Office (CBO) estimated the 340B ceiling price to be 61% of a drug’s WAC, or 76% (=0.61/0.80) of the price to a non-340B entity. (source) More recently, the Office of Inspector General estimated that 340B hospitals acquire Medicare Part B drugs at a 34% discount to a drug’s Average Sales Price (ASP), or 66% of the average price to a non-340B entity. (source) To be conservative, we split the difference to arrive at the 71% figure.
- This assumption could still be extremely conservative, because covered entities that participate in the Apexus Prime Vendor Program often pay manufacturers less than the 340B ceiling prices for drugs. According to the OIG, the Prime Vendor Program had more than 7,000 drugs under contract in 2013, with an average discount of 10 percent below the 340B ceiling price. (source)
- Sales via contract pharmacy are included in the 340B purchase total. A 340B-eligible hospital’s wholesaler replenishes the pharmacy’s inventory but invoices the hospital, which pays the wholesaler. This process is called a ship-to/bill-to arrangement. (See Exhibit 128 on page 195 of The 2016 Economic Report on Retail, Mail, and Specialty Pharmacies.) We estimate that these sales were a small portion of total hospital purchases and did not materially affect the conclusions.
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