INSIGHT: Administrative Actions to Address Drug Prices Could Shrink the 340B Drug Pricing Program and Limit Hospital Savings

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By Jeffrey I. Davis and Christine M. Morse

In its efforts to address the issue of high drug prices, the Trump Administration has, among other things, set its sights on the 340B drug pricing program. The 340B program, enacted by Congress in 1992 under Section 340B of the Public Health Service Act (42 U.S.C. § 256b), requires drug manufacturers to sell outpatient drugs at discounted rates to certain public and nonprofit hospitals—those that treat high volumes of low-income patients or are located in rural areas—and other safety net providers that receive federal grant funding, collectively referred to as “covered entities.” Hospitals participating in the 340B program include large academic medical centers, community hospitals, children’s hospitals, free-standing cancer hospitals, and small facilities in remote locations.

On Friday, May 11, the Administration released a plan to address drug pricing entitled, “American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs.” The Department of Health and Human Services (HHS) followed up on the blueprint by issuing a request for information (RFI) on May 14, 2018, to help the agency develop future policies to address high drug prices.

The blueprint questioned whether growth in the 340B program has contributed to higher drug prices, stating that the “additional billions of dollars in discounted sales and the cross-subsidization necessary may have created additional pressure on manufacturers to increase list price[s].” Through the issuance of the RFI and actions taken since, the Administration has signaled an interest in changing the 340B program in ways that would limit its scope and reduce hospital access to program savings.

340B Questions Raised By the Administration

HHS included a discussion of the 340B program in a section of the blueprint outlining actions under review, and the RFI posed a series of questions related to possible 340B program changes the Administration could pursue to address high drug prices.

In particular, HHS asked whether growth in the 340B program has forced drug manufacturers to increase drug list prices to compensate for the additional discounts being provided to 340B covered entities. HHS also asked whether changes to certain 340B program rules would “help refocus the program towards its intended purpose.” Specifically, HHS suggested possible changes affecting the definition of a 340B-eligible “patient,” the use of 340B drugs in off-site outpatient facilities, known as “child sites,” and the practice by covered entities of
contracting with pharmacies to dispense 340B drugs on their behalf.

Comments in Support of the 340B Program

While comments submitted by covered entities in response to the RFI acknowledged the problem of high drug prices in general, the comments also urged HHS to consider their view that the 340B program is not, in fact, a contributor to rising drug prices. Total discounts offered by drug manufacturers under the 340B program reduced overall manufacturer revenues by less than 2 percent. Researchers have concluded that 340B is such a small share of the market that the program cannot plausibly cause manufacturers to increase drug prices. Other commenters have noted that restricting the 340B program would merely take away resources from hospitals treating high volumes of low-income patients and redistribute the discounts to drug manufacturers.

With respect to the 340B program changes suggested in the HHS blueprint, hospital commenters expressed significant concern that such changes may well adversely affect hospitals’ ability to treat low-income patients. In particular, changes that would narrow the definition of a 340B-eligible patient, reduce the use of 340B drugs at hospital child sites, or restrict contract pharmacy arrangements would limit the instances in which hospitals could use 340B drugs. With reduced access to 340B-discounted drugs, hospitals would lose the valuable savings that permit them to support the services currently available to their low-income patient populations.

Comments Suggesting How 340B Can Help Address High Drug Prices

Some commenters noted ways that the 340B program helps address the issue of high drug prices. For example, the statutory formula behind the 340B ceiling price includes a provision that increases the amount of the discount when a manufacturer raises a drug’s price faster than the rate of inflation. This inflation discount serves as a disincentive for manufacturers to increase prices. By extension, the inflation discount under the 340B program reduces drug costs for payers, including Medicare.

Other hospital comments suggested that HHS take steps to enforce its own policy requiring drug manufacturers to sell their products to 340B providers for $0.01 when the inflation discount results in a price calculation of zero. This long-standing policy, referred to as the “penny price policy,” was included in a final regulation published in January 2017, but enforcement of the regulation has been delayed by the Administration on five separate occasions. Final Rule, 340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation, 82 Fed. Reg. 1210 (Jan. 5, 2017). That regulation addresses the 340B ceiling price calculation as well as civil monetary penalties for drug manufacturers that overcharge 340B providers. Enforcement of the penny price policy would likely help to address the problem of high drug prices by serving as a disincentive for manufacturers to increase them.

Comments Encouraging 340B Restrictions

Other commenters, particularly those representing drug manufacturers, encouraged the Administration to move forward with the kinds of changes to the 340B program raised in the RFI. In particular, a number of these commenters suggested that HHS should update its patient definition test in a manner that would effectively reduce the number of covered entity patients who are eligible to receive 340B drugs. In essence, patients who have been receiving 340B drugs since the program’s inception would be deemed ineligible based on a new, more restrictive patient definition.

Some commenters also called for updating eligibility standards, both for hospitals and their child sites. Several stakeholders called for the eligibility standards to be “tightened” in ways that would reduce the number of entities eligible to participate in the program.

Some of the comments specifically focused on collecting charity care information for hospitals and child sites as well as modifying the hospital and child site eligibility rules by tying a covered entity’s eligibility to its charity care levels. Such proposals would dramatically change the program, given that the current hospital eligibility criteria are based on a hospital’s level of care to Medicaid and low-income Medicare patients. “Charity care,” as that term is defined, generally does not include the care provided to underinsured patients, such as Medicaid beneficiaries. Rather, charity care focuses on services provided to uninsured patients who qualify for a hospital’s financial assistance policy. Basing eligibility on charity care alone would not fully capture the contributions of 340B hospitals to the health care of many low-income communities and would fundamentally change the 340B program.

Potential 340B Program Changes

The actions taken by the Administration clearly indicate a move toward policy changes limiting the scope of the 340B program. While such efforts may be intended to address ever-increasing drug prices, hospitals participating in the 340B program and their patients are likely to be affected most.

HHS Secretary Alex Azar expressed interest in making changes to the 340B program in comments last month to 340B providers attending the 340B Coalition Annual Conference. In his remarks, he listed “two kinds of reforms [that] are necessary: greater transparency surrounding how these discounts are being used, and reforms to reduce the gap between discounted prices and the reimbursement provided, particularly by government programs.” Although much of the political debate surrounding the 340B program has focused on possible program “reforms,” many of the suggested changes appear to be directed more toward reduction than reform.

With regard to the first area of “reform,” Secretary Azar’s comments imply that hospitals are not using their 340B benefit properly. Secretary Azar suggested the possibility that the 340B benefit is being “diverted to unintended purposes, unrelated to supporting care for low-income patients.” Similarly, the RFI asked whether changes to program rules, such as the patient definition test, would “help refocus the program towards its intended purpose.” These remarks, along with the kinds of potential program changes put forward by the Administration and the comments submitted by drug manufacturers in response to the RFI, collectively suggest a view of the 340B program’s purpose that is different from how the program has operated since its inception.

House committee report language issued during debate over the enactment of the 340B program states that the purpose of the 340B program is to enable covered entities to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” H.R. Rep. 102-384, Pt. 2 (1992). In addition, Congress included eligibility criteria in the 340B statute that targets for participation in the 340B program hospitals that treat high volumes of Medicaid and low-income Medicare patients. These actions suggests an intent by Congress to ensure safety net providers have the resources they need to support the provision of a broad variety of health care services to low-income patients, including uninsured, underinsured, and other vulnerable populations.

In contrast, drug manufacturers submitted comments in response to the RFI suggesting that hospital eligibility criteria should be focused on charity care levels and a hospital’s provision of care to uninsured patients. These comments suggest a view of the program’s purpose to either: (1) provide discounted drugs directly to uninsured patients, or (2) directly funnel 340B savings to charity care. Changes to program rules in line with this view of the program’s purpose would go beyond simple reform and would instead fundamentally change the 340B program by reducing its size and limiting covered entity access to program savings.

The second category of “reforms” put forward by Secretary Azar would decrease the overall savings realized by 340B covered entities by reducing reimbursement for 340B drugs covered by government programs. In its 2018 payment rates under the Outpatient Prospective Payment System (OPPS), the Centers for Medicare & Medicaid Services (CMS) began reducing Medicare Part B drug reimbursement to certain 340B hospitals by nearly 30 percent, cutting payments from average sales price (ASP) plus 6 percent to ASP minus 22.5 percent. CMS has proposed to continue these payment cuts for 2019 and extend the cuts to additional hospital locations. CMS estimated that the new reimbursement rates for 340B drugs reduced reimbursement to 340B hospitals in 2018 by $1.6 billion, and the proposed changes for 2019 would reduce reimbursement by another $48.5 million. These cuts will ultimately result in the significant reduction of resources available to many hospitals, dramatically limiting their ability to provide care in communities that are already underserved.

Next Steps

The political debate surrounding the 340B program has also sparked keen Congressional interest this year, with hearings in both the Senate and the House of Representatives. The Senate Health, Education, Labor, and Pensions (HELP) Committee held several hearings earlier this year, and another hearing was held in July by the House Energy and Commerce Health Subcommittee seeking feedback on 15 legislative proposals to address the 340B program. While Congress continues to re-examine the program and evaluate possible legislative changes, it is also clear that the Administration will be focusing on the 340B program as part of its efforts to address high drug prices. Stakeholders should monitor forthcoming drug pricing proposals for possible changes to 340B, including policies that could limit the scope of the program and reduce hospital access to 340B savings.

Author Information

Jeffrey I. Davis is a senior advisor in Baker Donelson’s Government Relations and Public Policy Group and of counsel with the firm in Washington. Christine M. Morse is a shareholder in Baker Donelson’s Baltimore office.

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