Today, I provide some context by showing how the program has taken over the hospital market.
Most 340B purchases are made by hospitals. My exclusive number-crunching below reveals that hospitals now receive discounted 340B pricing on more than 50% of their drug purchases.
Curiously, the value of hospitals' uncompensated care has been declining while 340B purchases have been soaring.
340B purchases have been growing much, much more quickly than have hospitals’ total drug purchases. From 2007 to 2016, total hospital drug purchases (at invoice prices) grew by 30%, compared with the 353% growth in total 340B purchases shown in yesterday's chart.
Consequently, 340B has infiltrated more than half of the hospital market. In 2016, we estimate that the 340B share had risen to more than 50% of purchases. (See chart below.) The assumptions behind the calculations appear in the next section.
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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. As a point of comparison, uncompensated care as a percentage of hospitals’ total expenses has declined, from 6.1% in 2012 to 4.2% in 2015. (source) The total value of hospitals' uncompensated care has also declined, from $45.9 billion in 2012 to $35.7 billion in 2015. Fascinating.
Some of the program's defenders seem to forget that most hospitals have tax-exempt, i.e., nonprofit, status in exchange for providing "community benefits." That does not mean that a hospital has an operating loss. Some are quite profitable in the sense that revenues exceed expenses. Here's a useful overview from Health Affairs: Nonprofit Hospitals' Community Benefit Requirements.
See What I Told HHS Secretary Tom Price About the 340B Drug Pricing Program for a summary of the channel distortions caused by the 340B program's takeover of the hospital market.
NOTES FOR NERDS
- Hospitals accounted for 86% of all 340B purchases in 2015 (the most recent year available). 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 QuintilesIMS. (See page 41 of Medicines Use and Spending in the U.S.: A Review of 2016 and Outlook to 2021.) 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.
- The 340B figures represent purchases under the 340B program at contracted prices, as provided by Apexus and published in The 340B Program Hits $16.2 Billion in 2016; Now 5% of U.S. Drug Market. Unfortunately, there is no recent public data on average 340B prices compared with other benchmarks. We assume that 340B hospitals purchase at 70% of the average invoice price to a non-340B hospital. Therefore, we grossed up hospitals’ 340B purchases by dividing by 0.70.
The 70% assumption is probably conservative. Many covered entities that participate in the Apexus Prime Vendor Program often pay manufacturers less than the 340B ceiling prices for drugs. According to an OIG report, 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 142 on page 204 of our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.) We therefore reduced 340B purchases by hospitals so that the figures was comparable to the denominator from QuiintilesIMS data.