Tuesday, May 14, 2019

EXCLUSIVE: 340B Program Purchases Reach $24.3 Billion—7%+ of the Pharma Market—As Hospitals’ Charity Care Flatlines

The 340B Drug Pricing Program continues to expand at double-digit rates. According to our government contacts, discounted 340B purchases hit a record $24.3 billion in 2018. That figure is an astonishing 26% higher than its 2017 counterpart.

What’s more, we have found that since 2014, purchases under the program have grown at an average rate of 28% per year. By comparison, manufacturers’ net drug revenues have grown at an average rate of below 5% over the same period. Consequently, the 340B program has grown to account for at least 7% to 8% of the total U.S. drug market.

Nearly all of the billions in 340B discounts have accrued to hospitals. Yet hospitals' charity care has dropped amid the 340B program’s growth. The charts have the details.

So where did the money go? We have no idea, because hospitals and their lobbyists fight any call for them to disclose or account for how they use their 340B profits—while consistently misrepresenting the program's size and growth. Be skeptical when you read random stories about the generosity of a 340B covered entity. As always, the plural of anecdote is not data.

Read on for the latest details and ponder who really benefits from the 340B program's size—and how much longer this shocking growth can continue.

UNSTOPPABLE 

For the past few years, the Health Resources and Services Administration (HRSA) has provided Drug Channels with data measuring the 340B program. For general background on the program, see Section 11.5 of our 2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. I also highlight a few other resources below.

The following chart shows the ongoing surge in covered entities’ purchases made under the 340B Drug Pricing Program.

[Click to Enlarge]

We include the estimated invoice value of these purchases. The undiscounted invoice figure is our highly conservative guess based on HRSA estimates of total savings in 2015 by covered entities. We believe that this savings rate underestimates actual discount rates, so the figures above differ slightly from our previous estimates. The actual undiscounted figures are unknown, but are likely larger.

Here’s a summary of our latest findings:
  • Discounted purchases made under the program via Apexus, the HRSA-designated Prime Vendor, totaled $24.3 billion in 2018—an increase of 25.9% from $19.3 billion in 2017.
  • The compound average growth rate (CAGR) of 340B purchases was 28.1% from 2014 through 2018. Wow.
340B ACCOUNTED FOR 7% to 8% OF THE MARKET IN 2018

Many partisan supporters try to minimize 340B’s share of the total U.S. market. In reality, the 340B program is a significant and growing part of the industry. Here are two computation approaches that yield comparable results:

1) 340B as a share of discounted purchases

The discounted HRSA figures above include purchases at or below the deeply discounted 340B ceiling prices. An appropriate comparison must therefore also be discounted purchases.

According to IQVIA’s Medicine Use and Spending in the U.S.: A Review of 2018 and Outlook to 2023, manufacturers’ net revenues were $344 billion in 2018.

Using net revenues, 340B’s share in 2018 was 7.1%, or $24.3 billion ÷ $344 billion.

2) 340B as a share of undiscounted purchases

An alternative method compares estimated undiscounted 340B purchases at invoice prices with IQVIA’s invoice-price spending market size. This figure was $482 billion in 2018. It represents the amounts paid to wholesalers and distributors by their pharmacy or hospital customers, including prompt-payment and volume discounts but excluding such off-invoice discounts as 340B discounts an PBM rebates.

Using invoice-price spending, 340B’s share in 2018 was 8.1%, or $39.2 billion ÷ $482 billion.

These are very rough estimates that understate 340B’s actual share of the market. That’s because the data from Apexus includes only indirect sales made via wholesalers. The $24.3 billion figure is therefore less than the actual total of 340B purchases at discounted prices, because it excludes an unknown amount of manufacturer sales made directly to healthcare institutions.

For an alternative estimate, I recommend Measuring the Relative Size of the 340B Program: 2017 Update. Using different assumptions about 340B discounts, Berkeley Research Group concluded that 340B was 10.1% of the U.S. market in 2017.

Note that 340B Health, which lobbies for hospitals that participate in the 340B program, continues to falsely claim that 340B was "less than 2% of total drug company revenues" in 2015. It wasn't true then and is certainly not true today.

HOSPITAL CHARITY CARE HAS NOT KEPT PACE WITH 340B

The 340B program is highly controversial, in part because its founding legislation did not specify or restrict how covered entities should utilize the funds that the program generates. Here are some complementary data that raise additional questions.

Most 340B purchases are made by hospitals. The 340B program’s defenders usually argue that hospitals provide charity care that justifies the amazing growth shown above.

An embarrassing point of comparison: The total value of hospitals' uncompensated care has declined, from $46.8 billion in 2013 to $38.4 billion in 2017 (the most recent year available). These data come from the American Hospital Association. Uncompensated care as a percentage of hospitals’ total expenses has also declined, from 5.9% in 2013 to 4.0% in 2017.

[Click to Enlarge]

BTW, uncompensated care has hit a historic low as a percentage of expenses. This figure remained unchanged from 2016 to 2017, despite a 7% increase in community hospital operating expenses.

My simple observation is consistent with data from the U.S. Government Accountability Office (GAO). In a June 2018 report, the GAO found that more than 20% of 340B hospitals provide minimal amounts of charity care. Links and my discussion appear in our July 2018 news roundup.

Hospitals have many non-340B, government-granted incentives to subsidize charity care. The majority of hospitals in the United States operate as nonprofit organizations and, as such, are exempt from most federal, state, and local taxes. In exchange, they are expected to provide various "community benefits" to maintain this non-profit status. (See Nonprofit Hospitals' Community Benefit Requirements from the Robert Wood Johnson Foundation.) Much of the uncompensated care reported in the chart above is tied to these requirements—and not to the 340B program.

LEARN MORE

Long time readers know that I think the 340B program is long overdue for reform, especially in light of the many abuses and problems that have been uncovered. Substantial evidence suggests that 340B savings are not always shared with patients and their insurance providers, including Medicare.

To learn more about the 340B program, consider these useful articles:

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