The Centers for Medicare and Medicaid Services rang in the new year by cutting what Medicare pays hospitals for certain drugs by nearly 30 percent. Hospitals are naturally opposed to this decision and have sued to block the change, arguing that patients and hospitals alike will suffer. But don’t be fooled. A review of the program shows this cut is smart policy that will benefit both patients and taxpayers.
Congress created the 340B Drug Pricing Program in 1992 to offset some of the costs hospitals incur when they treat uninsured and underinsured patients. Over the past 25 years, however, the program has expanded exponentially. Hospitals have exploited the lack of oversight and program requirements to profit at the expense of patients and taxpayers — corrupting the program’s intent, jeopardizing its sustainability, and driving up the cost of drugs and other services for everyone.
Under the program, drug manufacturers who want their drugs covered by Medicaid must provide discounts on drugs dispensed to patients at certain hospitals. However, it is the hospitals that receive the discounts, not the patients, and there is no requirement that the hospitals pass those savings on to their patients or the insurer — including the taxpayers when the government is footing the bill. Further, hospitals aren’t required to publicly report how those savings are used. As a result, hospitals make money under the 340B program by purchasing qualifying drugs at a steeply discounted price and then receiving a much higher reimbursement from government programs and private insurers.
Since 2013, sales under the program have grown an average of 31 percent each year, with more than 42,000 entities participating in 2017. This astounding growth is largely a result of qualifying hospitals acquiring “child sites” to extend the reach of the program — a clear sign of hospitals’ ability to extract profit from the program. The Medicare Payment Advisory Commission found that hospitals receive a discount through the program of at least 22.5 percent, none of which is passed on to Medicare.
In fact, the discounts that eligible hospitals obtain through 340B are so high, some experts believe they are at least partially responsible for increasing pharmaceutical list prices. Further, as hospitals grow to take advantage of the program, they gain more power over prices, driving up the cost for all services.
Under this new rule, CMS is adjusting the amount that hospitals receive for these drugs from Medicare to better reflect the actual cost of the drug to the hospital. Hospitals fighting the change argue that the payment reductions will be devastating, particularly to rural hospitals, and that the cuts will not save Medicare or patients any money. These arguments are problematic for several reasons.
First, CMS isn’t simply pocketing the savings, though perhaps they should be, considering Medicare’s fiscal outlook. Instead, CMS is increasing hospitals’ reimbursement rates for all other items and services to offset the 340B payment cut. CMS is not trying to reduce hospital reimbursements, but rather seeking to eliminate the incentive hospitals currently have to prescribe high-cost drugs to boost their profits, without regard to actual medical need.
Second, CMS excluded certain hospitals from this change, including sole community hospitals, children’s hospitals, and cancer hospitals, ensuring the cuts will not hurt the vulnerable patients served by these hospitals.
Third, Medicare patients will see cost savings because their coinsurance expense is based on CMS’ reimbursement rate, which will be reduced by almost 30 percent.
Finally, and perhaps most important, recent reports show that hospitals continue to provide less charity care while profits continue to rise. In other words, both the amount of uncompensated care hospitals provide and the consequent need for the 340B program are consistently declining.
As Congress details in a new report, the 340B program suffers from a lack of appropriate eligibility standards, requirements regarding the use of savings, and necessary oversight to ensure the patients actually benefit. This change by CMS is just one small step toward fixing the bad incentives of the 340B program. If the hospitals win in court, Congress could legislate to make this change permanent. Without substantial reform, the program’s unsustainable trajectory will continue to wreak havoc on the wider healthcare market.
Tara O’Neill Hayes is a healthcare policy expert at the American Action Forum.
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