Tuesday, April 09, 2013

Hospitals' Extraordinary 340B Pharmacy Profits from Insured Patients

Senator Charles Grassley (R-IA) has uncovered some very uncomfortable truths about the out-of-control 340B drug discount program. The Charlotte Observer has a summary: NC hospitals reap profits from discount drugs.  (Original source documents linked below.)

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.


As always, I encourage you to read the source documents:
These hospital letters were a response to Senator Grassley’s September 2012 letter, which I highlight in How Hospitals Inflate Specialty Drug Prices.


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?

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.”

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?


  1. Adam: it is clear that Senator Grassley has misrepresented the intent of The Veterans Health Care Act that created the 340B program. I wonder if he read it. I also wonder how much Pharma has contributed to his campaign fund.
    As to the drug manufacturers, the better question is how they can continue to get away with their ridiculous predatory pricing.

    It is useful to understand that the brand managers at the Pharma firms simply include the rebates and discounts the are forced to provide to Safety Net Plans, Medicaid and the like in their margin calculations. Rather than pick on the 340B Covered Entities, which act as a safety net, turn your focus to Pharma. As an example, you might look at the history of price increases for drugs used to treat MS.
    Mike Winkelman R.Ph
    Winkelman Management Cinsulting

  2. Mike-
    Not defending them by any stretch, but perhaps the manufacturers have to use "predatory pricing" as you say because every time they turn around someone else has their hand in the PHARMA cookie jar. Paying sizable rebates on Medicare/Medicaid/PBM claims then 340b rebates on top of that might force manufacturers to raise prices.

  3. Mike,

    You are not correct about rebates. There is a Medicaid exclusion file that prevents manufacturers from paying double rebates on the same prescriptions. However, manufacturers usually have no way to know which Medicare and commercial scripts have been flipped to 340B, so there is no way to budget.

    You also forget that hospitals routinely mark-up drugs by 3X or more. Look at the chart in How Hospitals Inflate Specialty Drug Prices.


  4. Adam: As you are aware, there is no statutory prohibition against "double rebating" on Medicare and commercial claims under 340B. As such, it is not clear why it would be Duke's (or any other 340B entity's) obligation to prevent Pharma from paying Part D or commercial rebates on drugs purchased at 340B price.

    The NCPDP standard allows for flagging of retail claims as "340B". Once the claims are identified, it is possible for payers to remove them from the rebate invoices going forward. Obviously, there is nothing stopping payers from including in their network contract language a requirement for adherence to this NCPDP standard. As we saw with Walgreens/ESI, even very large pharmacy players have, at best, limited ability to push back on payers, so widespread adoption of this standard is a reasonable expectation. Again, though, this strikes me as something for Pharma and payers to enact, not something for 340B entities to drive.

    It's also worth noting that the NCPDP standard creates an immediate opportunity for for-profit PBMs to capture most or all of the 340B benefit for themselves and, when publicly-held, their shareholders. There is no statutory or regulatory protection against this. I'm curious - do you see this as a problem in terms of "intent"?

  5. Terri-bull. I am not at all a-moo-sed.

  6. As an anesthesiologist who can obtain no real understanding of pharmacy contracting, all is clear as mud. Anesthesiologists are at ground zero for shortages of generic injectables. Plenty of data will support the contention that generic injectables are a complicated manufacturing business with marginal returns. The actual acquisition costs of many injectables anesthesiologists use is probably small compared to other expenses. If this discussion in any way contributes to pharmaceutical shortages, someone please explain. The comment that many folks have their hand in the PHARMA cookie jar seems to make a whole lot of sense.

  7. The sad result of the wild profitability of 340B is that it has moved cancer care from the physician office delivery system back into hospitals. Besides the hospitals and PBMs, no one benefits from this shift---it is more expensive for pharma, payers, patients, and the public. Additionally, the physician office delivery system offered cancer care in almost every community. The lure of 340B is dismantling all of this...and the reimbursement situation with privately-insured drugs is untenable and, in the long term, will be unsustainable...

  8. Adam: I apparently was not clear in my comments. I was not commenting on the intricacies of the 340B process. Rather, I was simply stating that, so long as manufacturers are free to raise their prices whenever they wish to do so, they are largely immune to the cost implications of broader use of the 340B process; they just offset by ratcheting up the costs.

    I also disagree that Pharma is materially impacted by any so-called double dipping when a drug bought at the 340B price is 'sold' at market rates -- and the PBM gets a rebate in the process. In my view, these are unrelated. The 340B rules are clear that any 'savings' from the 340B effort belong to the covered entity.

    This all needs a deeper dive. The Senator does not understand the process or the intent of 340B, and your reporting of the matter does an injustice to the 340B Covered Entities (CEs) that need this extra margin to fulfill their missions. To be sure, I do not dispute the fact that some CEs have worked the system to their advantage, but this pales when compared to the routine practices of most of the Pharma firms.How about an article listing the number of Pharma firms that have been found by the federal government to lack integrity and, in response, signed Corporate Integrity Agreements (CIAs).

  9. There is double-dipping on both ends of the distribution through 340B loopholes. Manufacturers end up paying PBM/payer rebates on drugs purchased through 340B covered entities, because there is no clear and consistent way of identifying the 340B drugs in rebate submissions. Payers have no motivation to "impose" the requirement of the NCPDP standard on covered entities - especially if "rebates volume" is a metric by which the pharmacy director is measured. The more claims eligible for manufacturer rebates, the better. The only one it "costs" directly is the manufacturer.

    There is also a well known, but little discussed phenomenon, that the VAST majority of returns from 340B covered entities are returned as full priced items. So you may buy 70% retail/30% 340B as an entity - but your returns are 100% retail. Somehow, only those full priced drugs go out of date or create returns. Hmmmmm.... You have to look at 852 and 867 forms in detail to even have a chance at detecting it.

    Applaud Grassley for exposing these loopholes. The hospital lobby, the consumer lobby, the pharmacy lobby, the insurance lobby all profit or benefit from the overreach of 340B. Only Pharma is harmed, and PhRMA is gun shy about raising this because it turns into a "yeah, but your prices are high so it's justified" diatribe.

  10. There is no question that 340B is being used beyond what it was intended. In Knoxville, TN the Covenant Health Hospital System lost 340B at it's Parkwest hospital so they immediately moved oncology infusions out of the hospital and practically across the street (.5mi away) into the Thompson Cancer Survival Center West which is a "satellite" of their downtown hospital (11.6mi away) which still has 340B. A hospital system should not be allowed to use the 35mile radius to utilize 340B in affluent areas to milk the system. Hospital systems' satellite offices should be affiliated with the hospitals they are closest to in order to eliminate this gaming of the 340B program (which is obviously giving it a bad name).

  11. Well, I'm a pharmacist who has managed both a 340B pharmacy program and a state medicaid drug program. From my perspective, the 340Bs have a healthcare mission, and would be in a world of hurt without access to 340b pricing. From the Medicaid perspective, managing the rebate exclusion file is a constant task, but doable. My immediate concern is the contracted pharmacies, and my limited ability to monitor their billing practices and their potential to game the 340B system. In the end, PHARMA will administer the smackdown, and the contracted pharmacies (who have no particular healthcare mission except profit) will be the death of the 340B program.

  12. Adam: It's also reasonable to assume that companies that go to great lengths to develop orphan or ultra-orphan drugs would have legitimate concerns about 340b programs effectively repricing their drugs to the point of dramatic operating losses. Hence the 340b program could actually stifle innovation and commercialization of much needed drugs for orphan conditions! Very sobering.

  13. There is another side to the 340B conundrum. The Medicaid exclusion rule results in the carve-out of Medicaid beneficiary drug use from 340B cost basis replacement. The HRSA GPO exclusion rule requires disproportionate share hospitals (DSH) to purchase drugs at the WAC cost basis. At the same time, many state Medicaid programs insist on reimbursing the DSH hospital at 340B cost levels, even though the hospital can prove that all Medicaid drugs are purchased at WAC and no 340B purchased drugs are used for Medicaid patients. The much maligned double rebating situation seems to be perfectly OK when Medicaid is doing the gouging.