Friday, October 10, 2014

How Hospitals Inflate Specialty Drug Prices

Last Sunday, 60 Minutes aired a controversial anti-pharma story called The Cost of Cancer Drugs. The segment prominently featured several Memorial Sloan-Kettering and MD Anderson physicians, all of whom spoke with no self-awareness about health care costs. (Hints: Drugs are not the problem.) For your consideration, here is a rerun of a still-relevant Drug Channels article from October 2012, complete with my original 340B predictions from that period. P.S. Special pricing for our new 2014–15 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors ends today!

Many people blame pharmaceutical manufacturers for high specialty drug prices. Yet channel intermediaries also add to drug prices, via mark-ups that account for the costs, profits, and value of the channel's services. But sometimes these mark-ups are eye-poppingly outrageous, as appears to be the case for North Carolina hospitals.

According to N.C. nonprofit hospitals make big money on cancer drug markups, hospitals are routinely marking up specialty drugs far above Average Sales Price (ASP). For example, the table reproduced below shows that Duke University Hospital received nearly $23,000 for Avastin, versus an ASP of about $6,000. And as reported in Prices soar as hospitals dominate cancer market, hospitals are buying independent oncology practices and then able to charge more “for the same chemotherapy in the same office,” due to differences in payment methods.

For payers, these examples highlight the appeal of channel management strategies such as white bagging and medical benefit management. For manufacturers, the stories illustrate what happens to drug prices as providers consolidate and traditional classes of trade blur.

Read on and be outraged.


The two news stories linked are part of Prognosis: Profits, two must-read and highly-recommended investigative series:
These series shine an unflattering light on the practices of so-called “non-profit” hospitals, including executive salaries, pricing policies, profitability, patient care, and much more.

Journalism junkies should also read Behind the Story: Using tips from sources, data and documents to uncover inflated hospital prices, in which the lead reporters describe the background for the drug pricing story.


Here’s how the reporters describe their findings regarding specialty drugs:
We also found that hospitals are dominating the market on cancer care. Hospitals are acquiring formerly independent oncology clinics and employing oncologists – and that immediately raises prices because the hospital charges are higher.
As a real-life example, let's look at what various hospitals were actually paid for Avastin. (source) As you can see, the hospitals managed to get much, much more than a paltry ASP+6%.

[Click to Enlarge]

The article details other examples of egregious markups. Levine Cancer Institute, owned by Carolinas HealthCare, collected nearly $4,500 for 240 milligrams of irinotecan, which is 68 times the Medicare payment of $66. (FYI, I show Medicare payment limits and channel profits for irinotecan in Profits from Generic Injectables: Too High or Just Right?.)

Reimbursement methods explain much of the discrepancy. Outpatient clinics get reimbursed based on such drug pricing benchmarks as Average Sales Price (ASP) or Average Wholesale Price (AWP).

In contrast, hospitals get reimbursed by commercial payers based on a negotiated percentage of charges—the hospital's self-defined list price for a drug. Basically, a hospital marks-up a drug to create a stratospheric "charge," and then discount the charge to merely outrageous.

Perhaps you may now understand one more reason why hospitals strongly oppose white bagging. In the white bagging process, a specialty drug is dispensed to the patient by a specialty pharmacy but drop-shipped directly to the provider, such as a hospital pharmacy or a physician office. The provider loses the ability to earn any profit margin on the drug, and must absorb any additional costs of handling and storage.

I have heard stories of major health systems that flatly refuse to sign payer contracts involving white bagging. No surprise, given the dollars involved.


I was pleasantly surprised to see the reporters dig into the 340B drug pricing program. As they write:
We also reported how many hospitals took advantage of a federal program known as 340B to purchase their drugs at steep discounts - anywhere from 20 to 50 percent. The 340B program was designed so that hospitals could provide drugs to poor or uninsured patients, but there's little evidence that hospitals are passing on the savings to patients. Rather, the hospitals use the program to purchase drugs for all outpatients, including those with private insurance.
Yes, this is a true, but little-known fact: 340B hospitals are permitted to use drugs purchased at the 340B price for all individuals who meet the definition of a patient, whether or not those patients are low income, uninsured, or underinsured. I describe how this can be done in my economic report on retail, mail, and specialty pharmacies.

The articles sparked at least one Congressional investigation regarding 340B discounts. Here’s an excerpt from Senator Chuck Grassley’s scathing letter to the Duke University Health System:
One reason Duke University Health System’s huge mark-up of drug prices, as reported by the article, raises serious questions is that it is both a 340B covered entity and non-profit hospital. As such, it receives massive discounts, at manufacturers’ expense, for these drugs. However, when selling these deeply discounted drugs, Duke University Health System does not seem to be passing those savings on to its patients. Instead, the 340B discounts appear to be simply subsidizing its bottom line operating margins. In fact, Duke University Health System has been generating record surpluses—$542 million in 2011. If ‘non-profit’ hospitals are essentially profiting from the 340B program without passing those savings to its patients, then the 340B program is not functioning as intended.

This inquiry could spread to other channels. Hospitals are allowed to purchase and dispense 340B drugs through retail pharmacies, so 340B pricing can reach a broad set of “eligible patients.” By 2013, the Health Resources and Services Administration (HRSA) projects that more than 14,000 community pharmacies will act as contract pharmacies for 340B entities.

The channel blurring and controversy will only grow.


  1. Has anyone done, even a rough, extrapolation as to what effect this has on spending across the system as a whole? We keep seeing these isolated instances of 340b and pricing abuse, but I'm not sure I've ever see a combined number.

  2. The shallow understanding of the Pharmaceutical Industry by the mainstream media has always been and continues to be- embarrassing. And this passes for "investigative journalism". Ok.

    The 340b program has always been used to support the bottom line of big institutions. The program should be radically circumscribed. The fact that it has not been, given the wide perception and snapshot evidence that it is being misused, suggests that it was a part of some unholy deal cut in a back room of a Congressional staff office by someone who was told to get a deal done.

    But the line item multipliers as a shock? Methinks.......

    This is what institutions have done exquisitely well over decades now- jack every line item. A local cardiology group owned cath lab right across the parking lot from a large hospital a few years ago, and being the excellent negotiators that they are, these physicians had negotiated a rate with the major plans of $550/cath. They sold out to that hospital across the parking lot, and the morning after the ink was dry, the caths in that cath lab were $3000/cath.

    Nothing is ever cheaper after it gets strained through the billing dept at a hospital. And buying advantages are only seen as opportunities for margin "home runs", not an opportunity to provide care for less.

    Having said that, I'm not sure that even should be where the focus of healthcare gauging should begin. At least these institutions, physicians, and the Industry provide CARE. Lets start with all the money that gets sucked up into the care flow money machine that provides no care.

    Have a great weekend. It appears to be cocktail hour at The Little Cottage in the Woods.

  3. Just read your daily note and wanted to clarify a statement about 340b. The government's intent for 340b was to create a revenue stream for DSH (and similarly cash-strapped) facilities when federal funds had dried up. That revenue could be used to invest back into any kind of service the hospital/facility felt it needed to support. It was NOT intended to reduce patient drug costs as the excerpts cited in your article today assert.
    I grant this is a technical difference in the grand scheme of things and it certainly doesn't discredit the abundant examples of 340b abuses.
    Maybe you already knew this, but from reading your daily blog i get the sense that you like to be accurate and above reproach so wanted to be sure it was called out just in case.

    Love your work.

  4. Nope, I've never seen such a calculation. More evidence in Attention, Hospital Shoppers: Cancer Markup Madness. It's a lot.

  5. Reasonable people differ on the 340B program's true purpose in today's health care system. For a thought-provoking perspective, check out 340B Program: MYTH vs. FACT.

  6. Apropos your article has given thrust to my belief. In India too we are seeing increasing trend of such activities.

    1-This huge price difference is used for nefarious activities of paying cutback to physicians,hospital pharmacy purchase in-charge thereby exploiting patient’s struggle.

    2-Patient are generally unaware whether the medicines were actually administered, moreover

    3-Some hospitals are recovering service charges or fees even on medical bills which is illegal.

    4-Some hospitals are recovering VAT in their price but not submitting it to state revenue. This 5% becomes their undue profit if they are not remitting it to Govt.

    5-Many hospitals bargain large quantity discounts on the basis of yearly purchase, but this benefit is not passed onto patients.

    There ought to be Governing machinery which should include insurance audit members and Govt. regulatory officials to check pricing in hospitals and institutions especially of specialty drugs....