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Key Senator Turns Up Heat on Pharmacy 340B Purchases

P&T Journal...July 2013

Federal Office in Charge of Drug Discounts Begins to Feel the Heat

      The federally-run 340B drug discount program many safety-net hospitals use to keep their financial heads above water has become a bobbing target for congressional critics and the agency which supervises the program, the Health Resources and Services Administration (HRSA). The program requires brand-name drug companies to sell their medicines at deep discounts to nearly 20,000 hospitals and clinics in the U.S. as the price of selling those same drugs at higher prices to state Medicaid programs. The program has been around since 1992. Congress created it as a way to help hospitals with high uninsured populations generate revenue, allowing them to swim rather than sink. The program has operated in calm waters for two decades. 

     Hospitals eligible for the 340B program include certain disproportionate share (DSH) hospitals, children’s hospitals, freestanding cancer hospitals, rural referral centers, sole community hospitals, and critical access hospitals. While DSH hospitals have been eligible for the program since its inception, children’s hospitals became eligible in 2006, and the remaining hospital types became eligible through the Affordable Care Act (ACA). In 2010 the federal Office of Pharmacy Affairs (OPA), which is located within HRSA and has prime responsibility for the program, opened the door to a major expansion of the program by allowing hospitals to sell 340B drugs from area pharmacies, not just from out-patient pharmacies attached to the hospital, as had been the rule since the program began.

      Those significant expansions of the program have led in part to the sharks now circling it. Some of the criticisms are both on target and at the same time unfair.  The program allows safety net hospitals with a "DSH percentage" above a certain rate--essentially a stand-in for high uninsured population--to purchase brand-name drugs at discounts of 25-40 percent. Hospitals pass those discounts on to their uninsured patients, but bill patients with private insurance or Medicare for what would otherwise be the full price of the drug, pocketing the difference between the discounted price the hospital pays and the higher price the insurance company or Medicare reimburses.
     Some hospitals add millions of dollars of revenue to their bottom lines by selling large percentages of their 340B drugs to private pay patients. Sen. Charles Grassley (R-Iowa) calls the practice "upselling." There is nothing illegal about that. In an interview, a Grassley staffer acknowledges that upselling isn't a violation of the program's legal basis. But she says the senator believes "that it is not appropriate." He is particularly rankled by situations where hospitals use 340B profits to build, for example, oncology clinics which serve very high percentages of private pay and Medicare patients.
     In a letter published on April 11, 2013 in the Charlotte, North Carolina Observer, responding to a critical editorial in that paper, Ted Slafsky and Lisa Scholz, representing Safety Net Hospitals for Pharmaceutical Access (SNHPA), wrote: "The purpose of 340B, from day one, has been to enable safety-net health care providers to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services." Slafsky is the executive director of SNHPA and  Scholz is chief pharmacy officer, chief operating officer.      They were responding to an earlier editorial in the paper lauding questions raised about the program by Grassley.
     Grassley has spotlighted three North Carolina hospitals for upselling; they include Duke University Hospital, UNC Hospital and Carolinas Medical Center. Duke University Hospital reportedly made $69.7 million in profit last year by selling the discounted drugs to patients. Sara Avery, a Duke spokeswoman, declined to comment for this story.
      In an April 18, 2013 press release Grassley wrote: “When I looked at three North Carolina hospitals’ use of this program, the numbers showed the hospitals were reaping sizeable 340B discounts on drugs and then upselling them to fully insured patients to maximize their spread.  If ‘non-profit’ hospitals are essentially profiting from the 340B program without passing those savings to their patients, then the 340B program is not functioning as intended.  Our inquiry into the Georgia hospital will help us continue to examine hospitals’ use of the 340B program.”
    The reference to the "Georgia hospital" is to Columbus (Ga.) Regional Healthcare System. On April 18, 2013, Grassley and Rep. Bill Cassidy (R-La.) wrote to the Columbus hospital after a hospital executive said during a public interview that the hospital does not receive a “windfall of profits” from participating in the program and puts the proceeds into the hospital.  Cassidy says, "I recognize the value and importance of the 340B drug discount program. Given this importance, we must be sure that its good work is not threatened by those who misuse. Our common goal must be better care for those who are less fortunate.”
      The three North Carolina hospitals do serve a high percentage of the less fortunate. Duke University Hospital's Medicare DSH adjustment percentage is 18.9 percent in its most recently filed cost report, as compared to the threshold requirement of 11.75 percent for its participation on the 340B program. However, it is true that a high percentage of Duke patients who receive 340B drugs are not uninsured. The hospital's 340B drugs are distributed in these percentages: Medicare patients 19 percent, North Carolina Medicaid patients 9 percent, private pay patients 67 percent, self-pay patients 5 percent. Those statistics are according to Duke's response to an inquiry from Grassley.
        Carolinas Medical Center (CMC) has a much smaller private pay percentage, although the hospital, in its response to Grassley inquiries, breaks down its 340B distribution into two distinct segments: out-patient pharmacies on one hand,  and its four in-house pharmacies attached to its four community clinics. In the first instance, based on 2011 numbers, the private pay percentage is 41.9 percent and uninsured was 11.3 percent. That is reversed for the four community in-house pharmacies: uninsured 73.9 percent, private pay 0 percent. The CMC charges an amount ranging from $0 to $10 per prescription to uninsured patients, based on individual patient financial resources. These negligible patient payments and low Medicaid reimbursements (12.7 percent...Medicare Part D is the remaining 13.4 percent for the four clinic pharmacies) do not cover the total direct and indirect costs of operating the outpatient community clinic in-house pharmacies; in fact, the CMC operates the outpatient community clinic in-house pharmacies at a $9.8 million average annual deficit to the hospital.

     What is not clear from the North Carolina response is the volume in 340B distribution outpatient pharmacy v. community clinic in-house pharmacy. Given the fact that the CMC reported to Grassley that it "saved" (a synonym here for "profits") $21 million in 2011 one would gather that the out-patient pharmacies served much greater numbers than the four pharmacies at the community clinics, and hence its total private pay percentage is considerably higher than 41.9 percent. A CNC spokeswoman did not respond to repeated e-mail requests for clarification.

      But the CMC put those profits to good use, particularly in the area of pharmacy services. At its cost, the CMC has dedicated multiple clinical pharmacists to the community clinics to provide intensive management of diabetes, asthma, HIV, anticoagulation and heart failure. For example, since an intensive shared decision-making asthma pilot program has been put in place in the CMC outpatient community clinics, hospitalizations and emergency visits for asthma patients dropped from 14.5 percent to 9.3 percent. In this same asthma pilot program, emergency department visits and hospitalizations reduced Medicaid average cost by an estimated 11 percent over usual care. Patients with asthma make up a significant portion of the North Carolina Medicaid population; therefore, any reduction in hospitalizations or additional care ultimately benefits the state Medicaid program.   

     Grassley would probably say that most of the CNC's 340B profits are plowed back to help the uninsured. The trouble is the 20,000 sites in the program do not have to report those details on how they use 340B profits to the OPA. So the program lacks transparency, according to the senator, and the small agency has done very little in the past two decades to either require transparency or even audit hospitals to see whether they are adhering to program rules.

      A September 2011 Government Accountability Office (GAO) report helped seed Grassley's unhappiness. That report basically said the OPA was a watchdog without either a bark or a bite. The GAO concluded: "HRSA’s oversight of the 340B program is inadequate to provide reasonable assurance that covered entities (i.e. hospitals) and drug manufacturers are in compliance with program requirements—such as, entities’ transfer of drugs purchased at 340B prices only to eligible patients, and manufacturers’ sale of drugs to covered entities at or below the 340B price. HRSA primarily relies on participant self-policing to ensure program compliance. However, its guidance on program requirements often lacks the necessary level of specificity to provide clear direction, making participants’ ability to self-police difficult and raising concerns that the guidance may be interpreted in ways inconsistent with the agency’s intent."

     That GAO report, coming on the heels of the ACA expansion of the program, forced the OPA to get off its duff. As a result, the agency announced it would be doing its first-ever audits of hospitals starting in fiscal 2012.  As of February 2013, the OPA had completed audits of 18 of the targeted 51 health systems. Sixteen passed with flying colors. Two had violations related to inaccurate database entry and were required to submit corrective action plans. There have been six audits performed by drug manufacturers, three of them finalized. But David Bowman, a HRSA spokesman, says those results have not been made available. The HRSA has done no audits of drug manufacturers, who, hospitals have alleged, sometimes charge higher prices for medicines than allowed.

     It is hard to blame the OPA, which has a miniscule budget of $4.4 million. The Grassley staffer says her boss is "really pleased" with some of the steps the OPA has taken in the past year, but that the agency "has a long way to go." In addition to the first-time audits, the OPA also did its first-time "recertification" of  the program's participants, and in March of 2013 announced it had kicked out 598 of the 20,000 covered entities. "We were really pleased with that," notes the Grassley staffer. "But even with that decertification process, HRSA is not perfect." She argues that those 598 covered entities, probably mostly hospitals, which were using 340B when they were no longer eligible should have been penalized in some shape or form. They were not. "That is very frustrating for us," the Grassley aide says.

      She also argues that HRSA, the OPA parent agency, has the authority to issue a regulation requiring hospitals to release data on how they use 340B profits. She also says the agency needs to narrow its definition of "patient" so that fewer private pay patients qualify. The agency tried to do that back in 1997 but the rulemaking never became final because of opposition from SNHPA.

     David Bowman, a HRSA spokesman, says, "HRSA is committed to continuous improvement in all its programs, including 340B. The program is currently engaged in drafting regulations to clarify and refine our implementation of the statute. We welcome input from all stakeholders, including Congress, on ways to improve the program."

     The HRSA's tame approach to oversight has been a function not just of inadequate funding, but also a constant political tug of war between hospitals who want more leeway and drug manufacturers who would rather see the program narrowed.

     Both sides have pressed the OPA to alter program rules. But, for example, a HRSA effort in the late 1990s to redefine which patients are eligible for 340B faltered. Congress finally got up the nerve to make some changes in the ACA. Those changes mostly benefitted the hospitals, however.
     The OPA has tried since to balance the equation somewhat. Earlier this year, the OPA issued new guidance relating to whether 340B hospitals could use group purchasing organizations (GPOs) to buy 340B drugs. That has been prohibited from the start, but some hospitals have danced around the prohibition by purchasing covered outpatient drugs through a GPO and subsequently either (1) “replenishing” through accounting by “replacing” the GPO purchased drug with a drug purchased under 340B; or (2) otherwise reclassifying the method of purchase after dispensing.

    Rick Pollack, Executive Vice President, American Hospital Association, stated numerous concerns about the GPO policy in a letter he wrote on April 3, 2013 to the OPA's Pedley. "As we discussed with you at our March 14 meeting, we remain very concerned that the policy changes outlined in the February 7 notice could threaten hospitals’ access to this crucial program," Pollack wrote. "We have heard from many 340B hospitals affected by the notice that they face numerous challenges in modifying existing inventory management practices by April 7 to comply with HRSA’s new GPO guidance. Such challenges include working with vendors to adapt or change current inventory management systems, working with wholesalers to establish new accounts, and working to ensure sufficient time to train staff and audit their internal processes." The OPA subsequently moved the compliance date back to August 7, 2013 from April 7, 2013.

      Congress has also considered additional, post-ACA changes to the program. At the end of the last congressional session, in late 2012, Rep. Cassidy, who signed the letter to Columbus (Ga.) Regional Healthcare System with Grassley, introduced legislation called the Patient Access to Drugs in Shortage Act of 2012 (H.R. 6611) which would have allowed Medicare and Medicaid to reimburse 340B hospitals at the discounted price the hospitals pay, not the higher prices the two federal health care programs have been reimbursing at. That would diminish hospital profits considerably in some cases.
      Rep. Cathy McMorris Rodgers (R-Wa.) also introduced a bill in 2012 called the Rural Hospital and Provider Equity and 340B Improvement Act of 2012 (H.R. 5624). It went in the opposite direction from Cassidy's bill. It expanded the program to make in-patient drugs eligible for 340B pricing, but also required hospitals enrolled in the 340B program to provide to each state a credit on the estimated annual purchases by such hospitals of covered drugs provided to Medicaid recipients for inpatient use.
     Both Cassidy and McMorris are on the House Energy & Commerce Committees, and are Republicans, so they are in the majority. They have the weight to get these bills through the House at least, if they reintroduce them in 2013. But neither has, and neither office responded to e-mails asking whether reintroduction was likely.
     President Obama included in his fiscal 2014 budget request, released in early April, a new fee that hospitals in the 340B program would have to pay. The fee amounts to about one cent for each $10 of 340B drugs purchased by the hospital. That could add up to real money for some hospitals. The proposal was offered, too, in the last Congress. The Senate passed it, the House did not. 
     The heat from the Grassley investigations and OPA audits plus the elimination of access to GPOs come at an inopportune time for many 340B hospitals, about one-third of all hospitals in the U.S. They had been expecting that many of their uninsured patients would suddenly have Medicaid insurance come January 1, 2014, thanks to the ACA. But many states have rejected a Medicaid expansion. The AHA's Pollack, citing the Congressional Budget Office, says about five million fewer people are likely to be covered by Medicaid than originally expected because of state refusals.
     Because of the once-expected flood of new-paying Medicaid patients to hospitals, the ACA greatly reduced what are called "DSH payments" starting January 1 to those very same hospitals. DSH payments go to safety net hospitals from both Medicare and Medicaid. The rational, of course, was that the hospitals no longer needed so much federal aid because many of their uninsured patients, on whom they were losing money, would now be covered by Medicaid.
     John Haupert, president of Grady Health System, told the Washington Post that his Atlanta-based hospital system estimates that 30 percent of its patients lack insurance coverage and an additional 30 percent receive Medicaid, which tends to pay lower rates than private health plans.
      When Grady ran the numbers, it found that it would lose $45 million annually under the health law’s Medicaid cuts to DSH payments. That works out to be about 7 percent of the hospital’s $670 million budget. If those cuts go through, Haupert said, he has thought about cutting back on some of the clinical services the hospital system provides. Georgia has rejected the ACA Medicaid expansion.
     Hospitals, of course, are already losing Medicare reimbursement to the tune of two percent owing to the sequestration in fiscal 2013, the current fiscal year, where all agency and department budgets have been cut as a result of Congress failing to come up with a long-term deficit reduction plan. For hospital pharmacies, though, this is a bit of a good news/bad news. The bad news is that in-patient pharmacy reimbursement is down from ASP+6 percent to ASP+4.3 percent. The good news--and partly in a jaundiced sense--is that physicians who provide chemotherapy administration in their office are beginning to turn patients away because the two percent reduction makes their oncology infusion unprofitable. Those patients in some instances are turning to oncology clinics affiliated with 340B hospitals, who also are losing some Medicare reimbursement, but are better positions to slough off that loss and take new patients because they are getting very expensive oncology drugs at big discounts.
     Of course if Grassley attempts to rein in the 340B program, he is likely to try to cap the percentage of private pay, and maybe even Medicare, patients eligible for discount drugs. If so, and if he is successful, hospitals themselves may have to start turning away desperate oncology patients wanting infusion.