Policy At A Glance: March 2018 INSTITUTE FOR HEALTH POLICY AND LEADERSHIP

1990 Medicaid Drug Rebate Program created

1992 340B Drug Pricing Program created

1/1/2018 New reduction in Medicare Part B reimbursement for 340B drugs went into effect

7/1/2019 If enacted, California will remove the use of the 340B program from Medicaid

2010 Affordable Care Act expanded the 340B program

History

Federal and State Changes to the 340B Drug Pricing Program

What is the 340B program? Section 340B of the Public Health Service Act (the 340B Drug Pricing Program) was enacted in 1992 to allow safety-net providers “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”1

Under the 340B program, drug manufacturers offer a 25 to 50 percent discount on outpatient drugs as a condition to have their drugs covered under Medicare Part B and Medicaid. Outpatient drugs sold under the 340B program include prescription drugs and physician-administered biologics (except vaccines). The Health Resources & Services Administration (HRSA) manages the 340B program and sets the maximum price a drug maker can charge for the 340B drug (known as “ceiling price”).

Disproportionate Share Hospitals (DSH), rural referral centers, Critical Access Hospitals (CAH), sole community hospitals, children’s hospitals, freestanding cancer hospitals as well as clinics that receive certain federal grants, such as Federally Qualified Health Centers (FQHC) and Ryan White HIV/AIDS program grantees are eligible to participate in the 340B program. Safety-net hospitals and clinics participating in the 340B program are known as “covered entities.”

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The 340B program was created to help safety-net providers care for their vulnerable patients. Starting this year, Medicare Part B will cut reimbursement for 340B drugs while

California plans to eliminate Medicaid 340B drugs in 2019.

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INSTITUTE FOR HEALTH POLICY AND LEADERSHIP March 2018

THE 340B PROGRAM AND MEDICARE PART B The Centers for Medicare & Medicaid Services (CMS) uses the Average Sales Price (ASP) to calculate payments for drugs covered by Medicare. Medicare Part B historically reimbursed all hospitals under the Outpatient Prospective Payment System (OPPS) six percent above the ASP for 340B outpatient drugs while drug companies provided a discount of at least 22.5 percent below the ASP for these drugs.2 Covered entities keep the difference between the discounted and reimbursed price for 340B drugs. These savings can be channeled towards affordable medications and enhanced, often uncompensated, services for vulnerable patients such as community-based primary care, chronic disease management, medication adherence programs and others. In 2015, 340B total savings were estimated at six billion dollars.3 Participation in the 340B program also grew over the years; from one percent of hospitals participating at its inception to more than 45 percent of all Medicare acute care hospitals currently participating in this drug discount program.2

In 2010, the Affordable Care Act (ACA) expanded the 340B program

by allowing children’s hospitals, CAHs, cancer hospitals, rural

referral centers, and community hospitals to participate in the

program. ACA also established audit and certification requirements

for both the covered entities and drug manufacturers participating

in the 340B program.

The 340B debate in Medicare The Disproportionate Share Hospital (DSH) program gives financial relief to hospitals serving a high share of low-income and uninsured patients. These hospitals buy almost 70 percent of 340B drugs (by dollar value) even though they represent a small portion of the total number of covered entities.3 For this reason, DSH providers have endured the most criticism for their use of the program.

340B supporters argue that the program provides valuable income for DSH providers who serve the nation’s most vulnerable patients. Safety-net hospitals enrolled in 340B provide 60 percent of the uncompensated care in the nation, even though they make up only 36 percent of US hospitals.4

On the other hand, there is concern that the 340B program parameters are unclear while HRSA lacks sufficient regulatory authority to oversee the program adequately and clarify program requirements. Critics further argue that 1) safety-net hospitals are using 340B savings to expand profit margins rather than using it to benefit indigent patients and 2) due to the large drug discounts, 340B providers are incentivized to use the highest cost drug options when prescribing part B drugs.

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INSTITUTE FOR HEALTH POLICY AND LEADERSHIP March 2018

1

New Medicare cuts to the 340B program

In its final OPPS rule for 2018, CMS reduced Medicare’s payment for Part B drugs purchased under the 340B program by almost 30 percent - from six percent above the ASP to 22.5 percent below the ASP - effective January 1, 2018. CMS noted the increased number of 340B-covered entities, rise of Part B drug prices, and patient coinsurance payments as reasons for the rule.5 This cut only affects hospitals paid under Medicare’s OPPS methodology (children’s hospitals, cancer hospitals, and others are excluded).

What will happen next?

CMS will redistribute the estimated $1.6 billion in savings across all hospitals by raising the payment rate for all non-drug services by 1.4 percent.5 This is expected to result in a broader distribution of money, going from drug to non-drug services and from safety-net hospitals to all others, including investor-owned hospitals. Because patients often have supplemental insurance policies that cover out-of-pocket costs for drugs, direct benefit of this cut to patients is unknown. Hospitals can also appeal to CMS to restore the price cuts if they show how 340B savings are benefiting patients.

THE 340B PROGRAM AND MEDICAID

Unlike Medicare Part B, 340B covered entities cannot bill Medicaid more than the actual 340B drug price.

2

“Actual Acquisition Cost” reflects the price that a safety-net provider pays to acquire the 340B medicine. Drug companies must participate in both the 340B program and the Medicaid Drug Rebate program for coverage of their drugs by Medicaid.

Medicaid Drug Discount Programs

Two years before creating the 340B program, congress established the Medicaid Drug Rebate Program, which provides direct rebates to state Medicaid programs. While the 340B program benefits covered entities and the rebate program benefits the state Medicaid agency, both provide relief from high drug costs and cover outpatient prescription drugs dispensed to Medicaid patients.

Duplicate discounts occur when a safety-net provider receives a 340B discount on drugs for Medicaid patients AND the state Medicaid program also receives a rebate through the Medicaid Drug Rebate Program.

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INSTITUTE FOR HEALTH POLICY AND LEADERSHIP March 2018

Duplicate discounts are prohibited to protect drug manufacturers from providing double discounts on the same drug.

To avoid duplicate discounts, safety-net providers decide to “carve-in” (dispense 340B prescriptions to Medicaid patients) or “carve-out” (let state Medicaid agency seek the rebate) when they enroll in the 340B program. Nonetheless, HRSA’s audits found duplicate discounts to be a frequent occurrence.6

State changes to the 340B program

On January 10, 2018, California announced potential changes to Medicaid’s 340B program as part of the Governor’s 2018-19 proposed budget. In it, the Department of Health Care Services proposed to prohibit the use of 340B drugs in Medi-Cal (California’s Medicaid program), effective July 1, 2019.7 This will essentially eliminate safety-net hospitals’ ability to “carve-in” 340B drugs and bill Medi-Cal for 340B drugs. Complying with existing federal requirements, protecting program integrity, preventing unnecessary overpayments, collecting additional drug rebates, and mitigating the time and resources to resolve drug rebate disputes related to 340B claims were cited as reasons for this proposal.7 References:

1. https://www.hrsa.gov/opa/index.html 2. http://medpac.gov/docs/default-source/reports/may-2015-report-to-the-

congress-overview-of-the-340b-drug-pricing-program.pdf 3. https://www.healthaffairs.org/do/10.1377/hpb20171024.663441/full 4. https://www.340bhealth.org/news/340b-health-strongly-opposes-

proposal-to-cut-340b-hospitals-medicare-part-b/ 5. https://www.federalregister.gov/documents/2017/12/14/R1-2017-

23932/medicare-program-hospital-outpatient-prospective-payment-and-ambulatory-surgical-center-payment

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

7. http://www.ebudget.ca.gov/2018-19/pdf/BudgetSummary/HealthandHumanServices.pdf

8. https://www.politico.com/tipsheets/politico-pulse/2017/11/02/why-hospitals-are-suing-cms-over-340b-cuts-223143

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Questions? Please contact Helen Jung, DrPH, MPH. Senior Health Policy Analyst at the Institute for Health Policy & Leadership (helenjung@llu.edu)

Despite concerns about the program, 228 bipartisan members of the House

and 57 bipartisan members of the Senate signed a letter opposing

federal cuts to the 340B program.8

HR 4392 was also introduced in November 2017 to stop 340B cuts.