The federal drug discount is a good idea gone bad

Defenders of the federal 340B program, which requires drug companies to give discounts to eligible health care organizations, say it is vital as an economic lifeline for safety-net hospitals.

But the program, which was created to help patients, has seen rapid growth and expansion, providing an economic boon for hospitals, which are not passing along the billions of dollars in discounts to poor and underserved patients.

Inadequate transparency, oversight and implementation of the 340B program have distorted its noble intentions, transforming it into a perverse profit generator for many of America’s tax-exempt hospitals. This program exceeded $16 billion in purchasing discounts in 2016, but it was revealed at an oversight hearing earlier this year that only 1 percent of the participants are audited by the federal government.

Though some hospitals provide substantial charity care consistent with congressional intent, the data show that the vast majority do not. A 2016 report by Avalere Health found that 24 percent of 340B hospitals provide 80 percent of all charity care, despite representing less than half the beds available in the program. The same report noted 37 percent of 340B hospitals provided charity care, representing less than 1 percent of total patient costs. The average for all short-term acute care hospitals, according to the report, was 2.2 percent.

Safety-net hospitals are not the problem. The problem is that the majority of 340B hospitals and their suburban clinical affiliates provide little charity care. The majority of qualifying hospitals are simply using this government program to increase their profit margins.

The number of participating hospitals has rapidly increased since the 340B program started in 1992. In a report by Drug Channels published in July 2017, the number of 340B contract pharmacy locations grew from 1,000 in 2005 to almost 20,000 in 2017. Hospitals have become adept at taking advantage of the program because it allows them to acquire drugs at discounts ranging from 20-50 percent; those discounts don’t have to be passed on to patients, because the federal statute governing the 340B program is silent on how the savings must be used.

One of the most common gambits is for a 340B hospital to buy an independent oncology practice, which prescribes high-cost cancer drugs (often more than $10,000 a month for each patient). Because of this, deep margin, tax-exempt 340B hospitals are able to make substantial profits. The natural consequence of this financial incentive is the consolidation of oncology practices to hospitals or health systems, a higher-cost site of service. This shift increases the cost of healthcare substantially.

About 22 percent of Texas residents between 19 and 64 years of age are uninsured. The sheer magnitude of sick patients who do not have insurance is high. We need appropriate transparency, oversight and operation of this federal program to ensure that funds intended to care for this population actually are used to serve it. There are countless examples of individual cancer patients who live in close proximity to tax-exempt facilities that implement this program that are unable to benefit from the services they provide. Patients often simply do not have access.

For too many hospitals, the 340B program has become a road to profits — not a safety net and not a way to expand charity care for uninsured, indigent patients. For too many patients, particularly those with cancer, the 340B program has increased their cost of care.

Congress must fix 340B, restoring its integrity for the sake of the patients and safety-net providers who truly need it. The natural consequences of inaction will be further increases in drug prices and consolidation of health care to more expensive sites of service that our nation cannot afford.

Disclosure: Texas Oncology has been a financial supporter of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

Debra Patt

MD & vice president, Texas Oncology