340B in 2020: Rampant Dysfunction, or a Crucial Support System?

340B in 2020: Rampant Dysfunction, or a Crucial Support System?

In June 2020, the Health Resources and Services Administration (HRSA) reported that net purchasing volume under the 340B program in 2019 was at least $29.9 billion. This accounts for purchases made through wholesalers and excludes direct-from-manufacturer and some specialty distributor purchases – the total volume is therefore higher. To provide some context for this figure, according to analysis by Drug Channels, it:[i]

  • is 23% higher than corresponding 2018 volume
  • is over 330% higher than corresponding 2014 volume
  • rivals the total volume of outpatient drugs paid for under the Medicaid program
  • accounts for 8.3% of total US net prescription drug sales
  • implies total 340B discounts on the order of $28 billion off of list price for branded drugs, or 16% of all gross-to-net price discounts provided on branded drugs

The laudable intent 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.”[ii] The logic is that lower medication costs will help ease financial constraints that could otherwise impede delivery of care by entities that treat a disproportionately high number of lower socioeconomic status patients. While 340B has been a source of financial support for covered entities and their patient populations,[iii] [iv] growth in the program has been in contrast to improvements in insurance coverage, poverty rates, and other important indicators (at least in the period leading up to the COVID-19 crisis).

So, is the 340B program fulfilling its original purpose? Are its intended and unintended consequences helping the troubled US healthcare system? Has it taken on a complex life of its own that, without efficient oversight, creates perverse market incentives? Opinions vary widely, but one thing is sure: an understanding of 340B customer dynamics should play a crucial role in biopharmaceutical value and market access strategy planning.

340B: Nearly 30 Years of Controversy

Since its creation by Congress in Section 340B of the 1992 Public Health Service Act, the 340B Drug Pricing Program has enabled certain “safety-net” hospitals/health systems and other qualifying health care providers/organizations (“covered entities”) to obtain significant point-of-sale discounts on select outpatient medicines. These medicines include FDA-approved prescription drugs, biologics, and prescribed over-the-counter products; vaccines are excluded from the program.[v] Conditions of the 340B program,[vi] managed by HRSA,[vii] require that covered entities serve a high proportion of “uninsured and/or low-income vulnerable people.”[viii] A patient eligible for 340B-purchased drugs must also receive health services other than medications (unless the entity is a federally funded state-run AIDS drug assistance program) from healthcare professionals employed by a 340B entity, which must maintain records of the patient’s health.[ix]

Pharmaceutical manufacturers must provide direct discounts on outpatient medicines to 340B covered entities in order to obtain Medicaid coverage for their products[x] (as of 2018, 743 pharmaceutical manufacturers participated in the 340B program[xi]). The program requires manufacturers to discount branded medicines by 23.1% of average manufacturer price (AMP), by 17.1% for branded pediatric drugs and certain hemophilia treatments, and by 13% for generics, plus additional discounts to offset price increases above inflation. Discounts can be greater for other reasons: the Medicaid best price statute applies to 340B purchasing as well, and some manufacturers offer supplemental 340B discounts (which do not impact AMP or best price; the concept of penny pricing is addressed below).[xii] This overlap with the Medicaid program also creates real risk of “double-dipping”, whereby manufacturers are charged a 340B discount and a Medicaid rebate for the same patient’s medication. This outcome is prohibited under the 340B program, but nonetheless can occur due to significant limitations in oversight.[xiii]

Covered entities often realize a positive cash impact due to the difference between 340B acquisition price (often on the order of 25-50% below list price)[xiv] and the reimbursement rate paid by insurers (which varies depending on the type of insurer and negotiated terms). In turn, this difference supports free or heavily discounted medicines to uninsured or low-income patients, and/or supports community health programs and other comprehensive health services such as primary care clinics, comprehensive hemophilia support services, substance abuse support programs, and mental health services.[xv] [xvi] However, it is nearly impossible to know exactly how 340B savings are used, as the program lacks transparency requirements for earmarking, tracking, and reporting of funds. Furthermore, medicines acquired by a 340B covered entity can be provided to any and all patients served by the covered entity, including the commercially insured.

A Voracious Appetite for Discounted Drugs

If the effectiveness of a program is measured by growth in sheer size and reach alone, then the experience of recent years can only mean that 340B is a runaway success, attracting entities and becoming an increasingly important driver of their operational performance. Between 2014 and 2019, as the number of covered entities grew, drug purchases under the 340B program expanded by 232% (an annual rate of over 27%). Volume is highly concentrated in a small number of entities; Disproportionate Share Hospitals (DSH), which serve a high rate of low-income patients and receive additional payments from the Centers for Medicare and Medicaid Services (CMS) to cover the cost of providing care to uninsured patients,[xvii] account for 80% of 340B medication purchases by dollar value despite representing just 9% of 340B entities.[xviii] [xix]

However, these dynamics stand in sharp contrast to indicators of need for the program over the same period:

  • The US poverty rate fell by 2.5 percentage points from 2014 to 2017[xx]
  • The number of uninsured Americans decreased by 1.9 percentage points from 2014 to 2018[xxi]
  • Uncompensated care – healthcare services provided by hospitals or providers that do not get reimbursed – declined from 6.1% in 2012 to 4.3% of hospitals’ total expenses in 2016[xxii]
  • Charity care represented 3.3% of total patient costs at 340B hospitals in 2011, on average, falling to 2.7% in 2017, and was under 1% at nearly a third of DSH 340B entities[xxiii]


US Drug Purchasing and Key Healthcare Indicators

Sources: https://www.drugchannels.net/2020/06/new-hrsa-data-340b-program-reached-299.html#more; https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html; https://www.census.gov/library/publications/2019/demo/p60-267.html; https://www.census.gov/library/publications/2019/demo/p60-266.html


Parent-Child Relationships

In many cases, a covered entity (a “parent”) may own any number of other locations that are integral to their operations (“child sites”) that thereby participate in the 340B program. Between 2010 and 2017, the number of enrolled parent entities has increased by over 30%. When including ‘child sites’, the program grew over the same period by over 60% to include 42,029 sites (12,722 parent sites and 29,307 associated sites). [xxiv] [xxv] [xxvi] [xxvii]

Gaps in 340B’s utilization framework and oversight create the risk of large provider organizations bending the program to suit their financial goals by purchasing valuable, costly medicines at discounted prices, while not allocating all savings to care for eligible patients. Instead, discounts can be used as a means of growth, and to perpetuate additional positive cash flow. For example, by acquiring community oncology and physician practices, 340B health systems can ‘convert’ them to hospital-based settings and Hospital Outpatient Departments (OPDs), at least on paper, which applies 340B program discounts to their medication purchases. Although the payment rates for medications are the same in OPDs and physicians’ offices, Medicare payments are higher in OPDs for drug administration services, evaluation and management office visits, and some diagnostic tests. This system creates a financial incentive to acquire community oncology and physician practices to transform them to OPDs without changing their location or patient mix. All else being equal, a 340B health system can acquire community oncology and physician practices, transform them to OPDs without changing their location or patient mix,[xxviii] and immediately increase the practices’ profitability.

Contract Pharmacies

Covered entities are able to contract with for-profit pharmacies to dispense medications covered under the 340B program. As a result, the number of pharmacies contracting with 340B covered entities has rocketed from ~1,300 locations in 2010 to over 23,000 in 2019.[xxix] Big pharmacy chains now account for 60% of 340B contract pharmacies despite comprising only 35% of all US pharmacies. This over-indexing is assuredly related to the lucrative profit margin associated with dispensing medications under the 340B program (15-20% gross margin for brands) in comparison to other third-party-paid prescriptions.[xxx] [xxxi] However, this is not a national issue; a recent study found that two-thirds of states prohibit contract pharmacies, and instead require claims-level identifiers or pharmacies to bill for medications using a different NPI or provider number to identify 340B medications dispensed by contract pharmacies.[xxxii]

Growth in Number and Reach of 340B

Sources: https://energycommerce.house.gov/wp-content/uploads/2018/01/20180110Review_of_the_340B_Drug_Pricing_Program.pdf; https://www.gao.gov/assets/330/323702.pdf; https://www.gao.gov/assets/710/703966.pdf

Limited Oversight of a Complex Program

Contract pharmacies are not subject to direct HRSA annual audits; the respective covered entity is expected to ensure compliance with program rules.[xxxiii] [xxxiv] In fact, of the covered entities that are subject to audit, HRSA averages only 200 per year, and in fiscal years 2017-2019 years, 48% of those have resulted in sanctions including repayments to manufacturers, termination of ineligible off-site locations, and termination of contract pharmacies.[xxxv] Audits are, therefore, delivering results, but on the assumption that most negative findings were the result of best efforts to implement a logistically highly complex program, sanctions are not solving the problem. While inevitably there likely are some bad actors that are intentionally breaking the 340B program rules, the alternative of operating in the clear and growing business under the framework of a loosely regulated, government-mandated price discount program, must be the primary attraction for most covered entities.

Penny Pricing Is Ripe for Abuse

Created with the intent of inoculating the 340B program from price increases and to generally discourage manufacturers from raising prices faster than inflation, the 340B program requires pharmaceutical manufacturers to add any price increases above the rate of inflation onto the 340B discount. To avoid price becoming negative, the HRSA has long provided guidance that, should a drug’s ceiling price calculation result in a $0.00 per unit amount, the ceiling price should be set at $0.01 per unit.[xxxvi] As of 2019, the penny pricing rule became law, with civil penalties imposed for exceeding that price.[xxxvii]

Some pharmaceutical manufacturers report penny pricing for valuable products that have seen the benefit they deliver to patients grow tremendously since launch. Humira, the best-selling drug in the world, became available to 340B covered entities for one penny per unit in 2016.[xxxviii] [xxxix] 340B entities can still bill commercial insurance companies for full reimbursement, usually based on a percent of billed charges, WAC, AWP, or ASP prices. Commercial patients are still charged a copay or coinsurance based on the full reimbursed price. Despite acquiring the medicine for $0.01, 340B covered entities can generate significant positive cash flow from providing it to patients, and would therefore benefit from efforts to steer patients to 340B sites of care.

COVID-19 Causes Tremendous Challenges – Is 340B Expansion a Lifeline?

The COVID-19 public health emergency has undoubtedly altered the trajectory of many metrics discussed earlier. Unemployment has soared, poverty rates may lag but follow, insurance coverage is shifting, and infection rates continue to rise. Hospital and other healthcare workers have stepped in to protect us with valiant effort, while hospitals themselves have suffered financially. Non-emergency procedures and other regular visits have been postponed or cancelled, as normal staffing at and visitation to medical facilities became unfeasible.

One result is that 340B entities have requested enhanced flexibility from the already-lax rules that provided the skeletal framework for growth during years of economic expansion. Some requested exceptions are logical responses to unprecedented times, for example, exemption from the rule requiring a certain rate of low-income patients be treated at a DSH. In June 2020, however, HRSA issued guidance indicating that, assuming certain basic criteria are met, covered entities may now expand their discounted purchasing to other sites of care that they own, but have not registered with the program. While we as a country are in unprecedented times, this dissolution of already generous basic program fundamentals may be a response that is hard to undo: 340B advocates have already communicated to their members that they intend to lobby HRSA to make the change permanent.[xl]

Advocacy Groups Fight to Keep 340B Provisions Intact

In an environment of constant 340B program criticism, advocacy groups such as HealthNet, Ryan White Clinics for 340B Access, and Let340B defend the program by highlighting that it accounts for less than 3% of the ~$457 billion in US drug spend.[xli] These groups have expressed concerns with Democrats’ proposed changes/reforms ancillary to their efforts to regulate medication pricing.

Last year, CMS finalized a proposed change to reimbursement for physician-administered medicines at 340B covered entities, from average selling price (ASP) plus 6% to ASP minus 22.5%.[xlii] [xliii] The result would have been a significant decline in net cash flow for covered entities – and the child sites they have acquired in recent years – purchasing these products.  However, a court ruling has struck down the cut after the American Hospital Association and other organizations sued CMS. CMS is now appealing the decision and pushing ahead with its ongoing payment rate reduction, even though the policy was vacated by a federal court in May 2019.[xliv] [xlv] [xlvi]

Recent History of Potential 340B Reforms

Pharmaceutical Companies Push for Clarity and Accountability

Lax oversight, complex administration, and potentially abusive practices have increased criticism of the 340B program. As stated by the Pharmaceutical Research and Manufacturers of America (PhRMA), pharmaceutical manufacturers want clearer guidelines on 340B eligibility criteria for patients and entities, plus control mechanisms for for-profit contract pharmacies, among other revisions.[xlvii] Potential reforms to address unresolved 340B issues include requiring cost savings to be earmarked or clearly reported, applying 340B discounts only to select patients (e.g., Medicaid or uninsured) served by covered entities, regulating third-party contracting, and clarifying patient and covered entities eligibility criteria.

In the meantime, the number and consumption of 340B entities keeps growing, as does their role in biopharmaceutical product commercialization strategy. Some form of the program will likely be a part of the US market for years to come, and as manufacturers prepare to bring new products to market, the importance of recognizing 340B’s benefits and challenges is clear.

[i] https://www.drugchannels.net/2020/06/new-hrsa-data-340b-program-reached-299.html#more

[ii] https://www.hrsa.gov/opa/index.html

[iii] https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html

[iv] https://www.340bhealth.org/members/340b-program/overview/


[vi] https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html

[vii] https://www.340bhealth.org/members/340b-program/overview/

[viii] https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html

[ix] https://www.340bpvp.com/resource-center/faqs/patient-definition/

[x] http://www.medpac.gov/docs/default-source/reports/may-2015-report-to-the-congress-overview-of-the-340b-drug-pricing-program.pdf?sfvrsn=0

[xi]  https://web.archive.org/web/20180123152514/https://energycommerce.house.gov/wp-content/uploads/2018/01/20180110Review_of_the_340B_Drug_Pricing_Program.pdf

[xii] https://www.340bhealth.org/members/340b-program/overview/

[xiii] https://www.gao.gov/assets/710/703966.pdf

[xiv] https://www.gao.gov/assets/710/703966.pdf

[xv] https://www.340bhealth.org/members/340b-program/overview/

[xvi] https://www.aha.org/fact-sheets/2019-04-05-fact-sheet-340b-drug-pricing-program#targetText=Hospitals%20use%20340B%20savings%20to,management%20and%20community%20health%20programs.

[xvii] https://www.hrsa.gov/opa/eligibility-and-registration/hospitals/disproportionate-share-hospitals/index.html

[xviii] https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html

[xix] https://www.phrma.org/en/Advocacy/340B

[xx] https://www.census.gov/library/publications/2018/demo/p60-263.html

[xxi] https://www.census.gov/library/publications/2015/demo/p60-253.html

[xxii] https://www.drugchannels.net/2018/05/exclusive-340b-program-reached-193.html

[xxiii]  https://340breform.org/wp-content/uploads/2019/11/AIR340_LeftBehind-v6.pdf

[xxiv] https://web.archive.org/web/20180123152514/https://energycommerce.house.gov/wp-content/uploads/2018/01/20180110Review_of_the_340B_Drug_Pricing_Program.pdf

[xxv] https://oig.hhs.gov/oei/reports/oei-12-14-00030.pdf

[xxvi] https://energycommerce.house.gov/wp-content/uploads/2018/01/20180110Review_of_the_340B_Drug_Pricing_Program.pdf

[xxvii] https://www.gao.gov/assets/330/323702.pdf

[xxviii] http://www.medpac.gov/docs/default-source/reports/may-2015-report-to-the-congress-overview-of-the-340b-drug-pricing-program.pdf?sfvrsn=0

[xxix] https://www.drugchannels.net/2019/07/walgreens-cvs-and-walmart-lead-25000.html


[xxx] https://www.drugchannels.net/2019/07/walgreens-cvs-and-walmart-lead-25000.html

[xxxi]  https://www.drugchannels.net/2018/07/gao-confirms-it-340b-hospitals-and.html

[xxxii] https://www.manatt.com/Manatt/media/Media/PDF/Comprehensive-50-State-Survey-Infographic_10-08-19.pdf

[xxxiii] https://www.gao.gov/products/GAO-18-556T#summary

[xxxiv] https://www.hrsa.gov/opa/implementation/contract/index.html

[xxxv] https://www.hrsa.gov/opa/program-integrity/index.html

[xxxvi] https://www.340bhealth.org/members/340b-program/key-terms/

[xxxvii] https://www.rwc340b.org/hhs-finalizes-manufacturer-cmp-and-penny-pricing-rule-effective-january-1-2019/

[xxxviii] https://www.finance.senate.gov/imo/media/doc/AbbVie%20Responses.pdf#page=18

[xxxix] https://www.drugchannels.net/2020/06/new-hrsa-data-340b-program-reached-299.html

[xl] https://340breport.substack.com/p/hrsa-lifts-major-barrier-to-using?token=eyJ1c2VyX2lkIjo3MjI5NDE2LCJwb3N0X2lkIjo1MTg1ODYsIl8iOiJ4K1JpZiIsImlhdCI6MTU5Mjc3MzQzMywiZXhwIjoxNTkyNzc3MDMzLCJpc3MiOiJwdWItMjQxNTMiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.t9vadnRpE-5GnZfTYlZLbxV8Y7ptdk9ySoG5Jl-pBCI

[xli] https://www.medicareinteractive.org/glossary/outpatient-prospective-payment-system-opps

[xlii] https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html

[xliii] https://www.healthleadersmedia.com/finance/judge-rules-340b-cuts-unlawful-decision-applauded-industry-stakeholders

[xliv] https://www.healthleadersmedia.com/finance/cms-finalizes-340b-site-neutral-cuts-2020

[xlv] https://www.beckershospitalreview.com/finance/hospitals-win-challenge-to-site-neutral-pay-policy.html

[xlvi] https://www.quarles.com/publications/were-340back-review-of-major-developments-to-the-340b-program/

[xlvii] https://www.beckershospitalreview.com/finance/340b-hospitals-provided-below-average-rates-of-charity-care-report-finds.html