Tuesday, December 18, 2018

GAO Confirms It: 340B Hospitals and Contract Pharmacies Profit from Low-Income, Uninsured Patients (rerun)

This week, I’m rerunning some popular posts before the holidays. Click here to see the original post and comments from July 2018.

Expect 340B to stay in the news during 2019. Unfortunately, a sensible, bipartisan legislative fix still seems unlikely.

The United States Government Accountability Office (GAO) has just issued a must-read report on the 340B Drug Pricing Program: Federal Oversight of Compliance at 340B Contract Pharmacies Needs Improvement.

Some of the report’s most startling revelations confirm our worst fears about how hospitals and pharmacies are abusing the 340B program.

Here are two especially dispiriting findings from the GAO’s analysis:
  • 16 out of 28 hospitals (57%!) did not provide discounted drug prices to low-income, uninsured patients who filled prescriptions at the hospital’s 340B contract pharmacy. Seriously?!?
  • Many 340B contract pharmacies can earn excessive profit margins of 15% to 20% from brand-name 340B prescriptions. As I have long suspected, large, publicly-traded pharmacies are sharing in the 340B discounts generated for covered entities.
Bottom line: Hospitals and pharmacies are making money from poor people. Are you kidding me?!? For shame!

The 340B program’s apologists will have a hard time rebutting the uncomfortable facts from this GAO report. Calling something a “drug discount program” apparently doesn’t mean that the neediest patients get access to those discounts. Read on, and prepare to be outraged.

P.S. In two upcoming articles about 340B, I’ll review the pharmacies participating in the program and then examine the role of specialty pharmacies and pharmacy benefit managers.


As always, I encourage you to read the source material for yourself. Click here to access the full GAO report. It’s a dense, complex overview of how 340B covered entities work with external contract pharmacies—and the many unresolved problems with the 340B program.

The GAO’s analysis confirms what I have uncovered in previous Drug Channels articles. The government’s report also supports many other observations that I have made over the years:

The GAO received survey responses from 55 covered entities: 27 federal grantees and 28 hospitals. The GAO summarized the results in this damning chart:

[Click to Enlarge]

As you can see, an astounding share of covered entities—33% of federal grantees and 57% of hospitals—do not provide discounts to low-income, uninsured patients. I am stunned by this revelation. Poor patients pay full price, while the hospital collects a big discount.

Where’s the money from this soak-the-poor strategy? No one knows.

Don’t forget: For years, hospitals and their lobbyists have been claiming that savings from the 340B program are used to support care for low-income and uninsured patients. Some hospitals have even published testimonials that describe how patients benefit from the 340B program.

Indeed, the GAO report confirms that a minority of hospitals do the right thing by passing along some or all of the drug discounts. The report discusses how these entities determine eligibility and communicate the pricing to patients.

But the GAO data, which come from an independent government oversight agency, unequivocally demonstrate that most hospitals are not sharing the savings with needy patients. The GAO’s latest findings confirm the results of the 2014 Office of Inspector General (OIG) report, which I reviewed in New OIG Report Confirms Our Worst Fears About 340B Contract Pharmacy Abuses. The earlier study found that two out of three hospitals did not offer the 340B discounted prescription price to uninsured patients via contract pharmacies.

So be skeptical when you read stories about the generosity of a 340B covered entity. As always, the plural of anecdote is not data.


The GAO report also provides the first public look at the astounding profits that some contract pharmacies can earn from the 340B program.

As a reminder, 340B contract pharmacies earn per-prescription fees paid by the 340B entity instead of typical dispensing spreads and fees. For background, see Section 10.5 of our 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

Appendix A lists the fee arrangements in agreements that the GAO reviewed. Here is how I characterize the three basic payment structures:
  • Type 1: Flat fee. (In some cases, the flat fees differed for brand vs. generic prescriptions or by product type.)
  • Type 2: Flat fee + % of negotiated reimbursement between pharmacy and payer
  • Type 3: Flat fee + % of difference between (1) negotiated reimbursement between pharmacy and payer and (2) 340B acquisition cost
The table below summarizes our exclusive analysis of the 28 agreements with comparable information.

[Click to Enlarge]

Some observations about these fees:
  • For the flat fee only agreements, the fee amounts are somewhat higher than a pharmacy’s usual gross profit. However, the figures are reasonable given the additional costs and complexity of operating as a 340B contract pharmacy.

    There is one notable exception for the flat-fee-only agreements: One unnamed federal grantee pays its contract pharmacies $1,750 for each brand-name hepatitis C prescription.
  • The pharmacies that earn a share of total reimbursement are being grossly overcompensated. For a typical specialty drug, a pharmacy earns a gross margin of 15% to 20%—far higher than the profitability of a typical specialty prescription.
  • The GAO identified four contracts for which the pharmacy earned an average of 20% of the difference between (1) negotiated reimbursement between pharmacy and payer and (2) 340B acquisition cost. Keep in mind that in some cases, hospitals can acquire brand-name pharmaceuticals for as little as $0.01, a practice known as penny pricing. When this occurs, pharmacies with the third type of agreement are also grossly overcompensated and sharing in the 340B discounts.
Bottom line: It’s clear that 340B entities are paying fees that often far exceed a pharmacy’s typical profits from dispensing a third-party-paid prescription.

Even worse, these big profits are often being earned on prescriptions for which a low-income, uninsured patient paid full price. That’s outrageous.

Large, for-profit pharmacy chains are the primary operators of contract pharmacies. As I asked last year in The Booming 340B Contract Pharmacy Profits of Walgreens, CVS, Rite Aid, and Walmart: “How is the program working as intended when multi-billion dollar, publicly traded pharmacies garner a disproportionate share of 340B profits by dispensing prescriptions to patients with good third-party insurance?”


The 340B Drug Pricing Program continues to expand at double-digit rates, per The 340B Program Reached $19.3 Billion in 2017—As Hospitals’ Charity Care Has Dropped (Note that these figures were provided to me by the Health Resources and Services Administration.)

It is long past time for Congress to make some sensible policy changes. Here are three recommendations for 340B contract pharmacies:
  • Mandate that contract pharmacies for 340B covered entities charge no more than the discounted 340B price to uninsured, underinsured, and vulnerable patients. There is simply no excuse for the unethical profiteering that the GAO has uncovered.
  • Require greater transparency as well as the disclosure of fees and profits generated by 340B contract pharmacies. This would ensure that discounts provided under the 340B program are utilized appropriately.
  • Require that contract pharmacy fees be based on fair market value standards. This would prevent for-profit pharmacies from capturing 340B discounts.
The unmanaged and unexpected growth of contract pharmacies is causing significant channel distortions within the U.S. pharmaceutical distribution and reimbursement system. Needy patients are not benefiting from prescriptions filled at 340B contract pharmacies. Hospitals and pharmacies are profiting inappropriately from 340B discounts.

Let’s hope the GAO’s latest revelations will motivate change.

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