Hospitals Snap Up Practices Under 340B Drug Program

Aaron Vandervelde

A federal program originally meant to require drug manufacturers to provide significant discounts for outpatient drugs is increasingly being used by hospitals to acquire private oncology practices. Critics claim that this unintended consequence of the program is threatening independent community oncology practices, especially in indigent neighborhoods.

Moreover, hospitals, community health centers, and clinics that participate in the federal 340B drug pricing program are coming under scrutiny from lawmakers and the pharmaceutical industry because of the rise in acquisitions.

Consequently, oncology advocacy groups are casting a wary eye because the additional revenue that hospitals save by participating could be used to acquire more community oncology practices.

A study from the Berkeley Research Group and funded by the Biotechnology Industry Organization (BIO) found that acquisitions of physician-based oncology practices by 340B-covered entities increased significantly from 2009 to 2012; preliminary data in 2013 indicate this trend continuing.

“I think that this is a concern for community oncology practices, at least for those who want to stay independent, because the financial pressures that exist in the community setting do not exist, at least as it relates to the drug cost, in the hospital setting,” said Aaron Vandervelde, a director at BRG and author of the study, “340B Covered Entity Acquisitions of Physician- based Oncology Practices.”¹

“That disparity in the cost structure creates an incentive for 340B hospitals to acquire oncologists, whether practices or individual physicians, and as 340B hospitals’ relative market share grows, it puts additional pressure on those community oncologists who have remained independent,” Vandervelde said.

The 340B program is a federal program that requires drug manufacturers to provide significant discounts for the purchase of outpatient drugs by eligible participants in the program.

Eligibility for the program is limited to specified covered entities that meet certain conditions laid out in the statute, including certain public and nonprofit hospitals that serve a disproportionate percentage of low-income patients, children’s hospitals, critical access hospitals, and federally qualified health centers and specialty clinics that receive federal grants to provide care for underserved medical communities. Physicians and physician groups do not qualify as covered entities and are not eligible to participate.

Findings

The primary finding of the study was that the volume of acquisitions increased significantly compared with prior time periods. Vandervelde also found that the acquisitions usually involved very large practices. “When we compared the volume of 340B chargebacks at the hospital prior to the acquisition, and then following the acquisition, the total chargebacks almost doubled after the acquisition,” said Vandervelde. “That suggests that the practices that were being acquired were very significant in size, as opposed to solo physician practices. “These were large multiphysician, and in some instances multisite, practices that were being acquired,” he said.

Typically, the effect of the acquisition was immediate, said Vandervelde. “There was a very steep increase in the curve of chargebacks between the first month prior to the acquisition and the 2 months following the acquisition, and then that curve flattened out because presumably 100% of all eligible purchases were now going through the 340B program,” said Vandervelde.

This finding was delineated using the database of the Office of Pharmacy Affairs, the government agency that administers the 340B program.

The third finding from the study indicates that a sizable majority of the physician-based sites were acquired in higher median income locations compared to where the hospital itself was located (see Figure 1). “There is likely to be a percentage of commercially-insured patients in those higher median income geographies, which leads to greater drug product margins,” explained Vandervelde. “For example, if you purchased a practice that was located in a very low income area where a lot of the residents were on Medicaid, the Medicaid reimbursement amount would be much lower than [that for] a commercially insured reimbursement amount. That’s because the 340B program doesn’t affect reimbursement, it just affects costs, and you would have a lower product margin in that lower median income area,” Vandervelde said.

Figure 1. Total Study Eligible 340B Chargebacks at Acquired Site by Difference in Median Income Between Acquired Site and Acquiring Covered Entity

Note: 47 Acquired Sites are excluded from this analysis because they have the same median income as the Acquiring Covered Entity.

That sentiment was echoed by Brad Tallamy, policy director for the Alliance for Integrity and Reform of 340B (AIR 340B), a coalition of patient advocacy groups, clinical care providers, and biopharmaceutical innovators.

“We weren’t surprised that a lot of 340B hospitals are acquiring practices in wealthier areas. Patients in higher income communities usually have insurance and those payers will pay hospitals more than [will] a patient from a lower income community,” said Tallamy.

The BRG study also looked at the amount of charity care that was reported by 340B hospitals (see Figure 2). “We compared the amount of the chargebacks and the amount of charity care reported by the hospitals in their hospital cost reports.

Figure 2. Average Yearly Cost of Charity Care vs Study-Eligible 340B Chargebacks

Note: Charity care cost calculated using the hospitals’ operating cost-to-charge ratio

We observed that for many of the hospitals included in the study the amount of the chargebacks actually exceeded the hospitals’ reported charity care cost on its most recently filed cost report,” Vandervelde said.

Overhaul

AIR 340B is dedicated to reforming and strengthening the 340B program to ensure it directly supports access to outpatient prescription medicines for uninsured indigent patients.

The group is proposing regulatory and legislative overhaul of the program to bring it back to its original intent.

“There are changes that should be made by Congress and the Health Resources and Services Administration (HRSA),” said Stephanie Silverman, a spokesperson for AIR 340B.

“We believe that the changes need to include a fresh and aggressive look at eligibility criteria, accountability, and transparency reforms,” she said. “In the absence of oversight, the 340B program is not operating as it was intended,” said Silverman. “We need to make sure through legislative and regulatory change that there’s a connection between the 340B benefit and the patient,” said Silverman. “In the aftermath of the ACA, the landscape of the patient community has changed, but there are medically underserved patients still out there, particularly in the hematology- oncology space,” she said

“For the practitioners, the current scenario creates an unleveled playing field. They can’t deliver the same care under the same economic terms as a hospital or hospital-owned practice, and when these practices disappear through hospital acquisition there’s less patient access,” Silverman stated.

When community providers merge with hospitals or go out of business because chemotherapy reimbursement is too low, “patients end up paying more—by receiving their treatment in a hospital, or traveling farther to get treatment,” she said. There are some advantages when community oncology practices merge with hospitals, though: oncologists who become frustrated with the administrative burdens of medical practice may just decide to become employees of a hospital and give up the autonomy of running a practice.

Sen. Charles Grassley (R-Iowa) has been critical of the program, going so far as requesting information from stakeholders including pharmaceutical trade groups to hospitals that were reportedly charging a mark-up on drugs purchased through the 340B program.²

“Even if the 340B program allows this kind of upselling, that doesn’t make it right,” Grassley said in a statement. “It also isn’t right that we don’t know how hospitals are reinvesting 340B revenue. Nothing that I know of requires 340B hospitals to report how they use program savings and revenue. They could use the money for uninsured patients or they could use the money toward building a new wing.”

In a statement about the role of 340B, the American Hospital Association (AHA) said: “While the 340B program accounts for only 2% of the $325 billion annual drug purchases in the US, it provides enormous benefits to safety-net providers and the patients they serve. In fact, 340B hospitals account for 62% of all the uncompensated care provided in United States hospitals and benefit from annual drug savings of $1.6 billion to $3.2 billion per year.”

The AHA also made these points in support of the 340B program:

• The 340B program is essential to helping safety-net providers stretch limited resources to better serve their communities.
• The AHA opposes all efforts to scale back or significantly reduce the benefits of the 340B program.
• The AHA supports program integrity efforts to ensure this vital program remains available to safety-net providers and encourages HRSA to develop a process to help financially distressed providers meet new program integrity provisions.

The American Society of Clinical Oncology has kept a close watch on hospitals that participate in the 340B program and issued these 4 recommendations to Congress in April 2014:

• When considering 340B’s future, policy makers should focus on how to best meet the original intent of the program to provide resources and incentives to deliver high-quality care for uninsured, underinsured, and low-income patients.
• Policy makers should adopt policy changes that address the size and future growth of the 340B drug pricing program.
• Improve compliance and oversight by issuing guidance to clarify relevant definitions and provide funding for key oversight activities related to the program.
• Place special emphasis on understanding and responding to any adverse impacts that the 340B program may have on patient access to high-quality oncology care.

Court ruling

In May the US District Court for the District of Columbia struck down an HRSA regulation that governed some drug sales under 340B, saying the agency did not have the authority to issue the regulation.

“The court decision relates to orphan drugs in the context of 340B,” said Silverman. “The ruling raises questions about regulatory pathways— policy analysts have raised questions about the agency’s broader authority in rule making, and whether the agency has gone beyond its boundaries on the orphan drug side,” she said, noting AIR 340B is not a party to this case.

A posting on the agency’s website contends that the agency continues to stand by its interpretation described in the published final rule, which allows the 340B covered entities affected by the orphan drug exclusion to purchase orphan drugs at 340B prices when orphan drugs are used for any indication other than treating the rare disease or condition for which the drug received an orphan designation.

Oncology practices remain on guard, however.

The pressure to merge with hospitals remains. “It is important for community oncologists to understand the dynamic and to recognize that hospitals are certainly evaluating all of the options that are out there in terms of acquiring practices. Oncology practices, in particular, are an attractive option because of the difference in the drug cost,” said Vandervelde.

References

1. Vandervelde A. 340B covered entity acquisitions of physician-based oncology practices. http://www.brgexpert. com/media/publication/449_340B Physician-based Oncology Practice Acquisitions.pdf. Published April 22, 2014.
2. Grassley on Hospital Industry Report on Discount Drug Program. http://www.grassley.senate.gov/news/newsreleases/ grassley-hospital-industry-report-discount-drugprogram. Accessed on July 21, 2014.