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The lunacy of 340B and Medicare’s inability to negotiate drug prices

Why do we mandate a better deal for business than for taxpayers?

Health Care un-covered by Wendell Potter

When you combine Medicare’s inability to negotiate drug discounts with the drug discounts mandated for health care providers by the 340B Drug Pricing Program, what do you have?


The absurdity of Medicare paying a 340B hospital the average service price (ASP) plus 6% for a drug that the hospital may have purchased for $.01 boggles the mind and boils my blood.

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Medicare is funded with taxpayer dollars. Non-profit hospitals are likewise largely subsidized on the backs of taxpayers. So how are we getting %$^&ed on both ends of the bargain here?

A bit of history is in order.

History of Medicare drug price negotiations and “non-interference”

The law that established the Medicare Part D benefit, which covers retail prescription drugs, includes a provision known as the “non-interference” clause, which stipulates that the Health and Human Services (HHS) secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [prescription drug plan] sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs.”

In effect, this provision means that the government can have no direct role in negotiating or setting the price of drugs in Medicare Part D.

For drugs administered by physicians who are covered under Medicare Part B, Medicare reimburses providers 106% of the average sales price (ASP), which is the average price to all non-federal purchasers in the U.S., inclusive of rebates. In other words, Medicare takes the price a manufacturer sets, in contrast to how traditional Medicare sets payment rates for hospitals, physicians, and other providers.

While the Inflation Reduction Act of 2022 aimed to “tackle” this issue, it would be more accurate to characterize it as a soft push.

To start, HHS will identify 10 drugs whose prices will be negotiated by 2026 with the following qualifications: The drugs can’t have any direct competitors and the medications must have been on the FDA approved list for many years. These two rules are the reason some of the costliest drugs may not be among the first to have their price negotiated.

By 2029, a total of 60 drugs will be on the list. For medications covered under Part B —such as chemotherapy and other drug infusions at a hospital or doctor’s office — negotiated prices won’t take effect until 2028. A lot can happen in five years, including a very big election.

History of 340B and recent court rulings

Congress created the 340B Drug Pricing Program in 1992 to protect safety-net hospitals from escalating drug prices by allowing them to purchase outpatient drugs at a discount from manufacturers. Initially, covered entities only included disproportionate share hospitals (DSH) — which serve a “disproportionate” share of low-income Medicare or Medicaid patients — and some non-hospital entities, like Federally Qualified Health Centers.

The list of covered entities gradually expanded, and the program ballooned well beyond its original intent. For example, from 2014 to 2019, the 340B program went from a $5 billion program to a $30 billion program, seeing a 47% compound annual growth rate in five years that significantly outpaced other government pricing programs. For 2021, discounted purchases under the 340B program reached a record $43.9 billion, a remarkable $5.9 billion increase (15.6%) more than 2020, with hospitals accounting for 87% of these skyrocketing purchases.

This rocket-like growth is also driven by the rapid rise of contract pharmacies, which dispense 340B discounted drugs to eligible patients on behalf of their health-care provider partners. In 2010, there were about 1,300 contract pharmacies in the program; today, there are around 30,000.

Court Rulings

In mid-2017, HHS proposed reducing the Medicare reimbursement rates for drugs acquired through the 340B Program from ASP plus 6% to ASP minus 22.5% -- effectively narrowing the spread that the hospitals were able to keep. Presumably, this was an attempt to tame the exponential growth of spending by Medicare on drugs that were subject to 340B pricing.

The American Hospital Association (AHA) and others sued and ultimately prevailed in the U.S. Supreme Court on the grounds that HHS hadn’t followed its own procedures in lowering the reimbursement amounts. The question of how to reconcile the ruling with the lower payments that had been in effect for several years was left to the agency.

On Jan. 10, 2023, a federal judge ordered HHS to create a plan to correct “underpayments” made to 340B hospitals. The court gave HHS several options to “remedy” this underpayment, including the possibility of a prospective one-time rate increase, adjustment of reimbursement rates in future years to make up for its underpayments, or amending the 2018 and 2019 Outpatient Prospective Payment System (OPPS) Rules and issue retroactive payments accordingly.

The court acknowledged that nearly $10 billion dollars of underpayments were at stake and remanded the matter to allow HHS to issue a detailed plan to remedy that situation.

How did we get here?

The American taxpayer can neither benefit from negotiating drug prices with pharma, nor can they benefit from federally-mandated discounts drug manufacturers must make available to a growing morass of largely profit-seeking entities. Budget neutrality requirements will mean that HHS will have to find $10 billion to fork over to the 340B entities that have so skillfully played this system. Provider payment cuts? Lower reimbursement rates? We will have to wait and see.

How does one reconcile the fact that we mandate a better deal for business than we do for taxpayers? There is a reason that the Medicare Part D legislation was supported by big pharma – the drug lobby worked hard to ensure that Medicare wouldn’t be allowed to cut into the profits which flowed to it, as a result of the millions of new customers delivered to them by Part D. Similarly, the American Hospital Association and other beneficiaries of the 340B program seem to have a much stronger voice in Washington than the American taxpayer and consumer.

This isn’t just a fiscal issue for Washington, this is an issue for every individual who has been impacted by the high cost of pharmaceutical drugs. Does getting an $84,000 bill for a drug that costs the hospital $.12 seem fair to anyone but the chief revenue officer of the hospital?

Currently, there is no transparency about where that $83,999.88 must be spent and there is mounting evidence that it is increasingly a source revenue for otherwise profitable institutions. Perhaps CVS made the point best in its annual shareholder filing, where it warned investors that any reduction in 340B contract pharmacy arrangements could “materially and adversely affect the Company.”



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