The blockbuster fight over this obscure federal program explains America’s drug prices

One of the fiercest battlefields in the war over prescription drug prices is a little-known federal program that pits the powerful pharmaceutical lobby against a formidable hospital industry.

President Trump is preparing to give his first major speech Friday on lowering drug costs, a signature campaign promise, but his administration is already making changes to the 340B program, which provides significant discounts on medications for US hospitals that treat a high number of low-income patients.

In a regulation finalized last year, the administration slashed Medicare payments for those hospitals. The Centers for Medicare and Medicaid Services claimed it would save tens of millions of dollars for patients. Drugmakers praised the regulation as proof that the Trump administration is doing more work to cut drug costs than critics give them credit for. Hospitals scorned it, saying big pharma was successfully distracting federal officials from the real problem: list prices for prescription drugs, which they and other critics say are too high.

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The truth is probably somewhere in the middle. The 340B program has grown significantly since it was first enacted in the 1990s, and recent academic studies have questioned whether it’s really achieving its ostensible purpose: reducing the money hospitals spend on drugs so they can provide more health care to low-income patients.

Some experts think that in a self-perpetuating cycle, 340B may be contributing to drugmakers hiking their prices to account for the mandated discounts. Hospitals also don’t seem to have great answers to questions about how exactly they’re using money they save through 340B, and new research suggests patients aren’t feeling the benefits.

But as with all good policy fights, the debate about 340B is actually about something else. Instead of talking about drug prices, the conversation is being shifted to other areas, like pharmacy benefits managers and drug discounts, and away from the unavoidable fact that the current system allows pharmaceutical companies to set whatever list prices they want for their new drugs because they hold monopolies for years. The costs for those protected medicines are driving much of the recent growth in drug spending.

Two things can be true at once: 340B may be in need of reforms — and yet the focus on discounts misses the list prices that set the starting point for what people eventually pay.

The hospitals vs. pharma debate over 340B, explained

On its surface, the 340B program is deceptively simple: Hospitals and other health care providers (like county health departments and HIV/AIDS clinics, whose participation in the program is less controversial) that treat a higher share of uninsured and Medicaid patients are entitled to mandatory discounts on prescription drugs, as much as 50 percent.

The idea is that the hospitals will then use that money to care for their low-income patients, though the program does not set super-specific standards for what that actually means.

Kevin Wolf/AP

That’s one of the points of contention: Pharma will argue these savings are not being passed along to patients — and has research published in the New England Journal of Medicine to support that case. A 2018 report found no measurable difference in “safety-net or inpatient care for low-income groups or in mortality among low-income residents of the hospitals’ local service areas.” Hospitals dispute that study and contend that it’s unrealistic to expect them to be able to show how a dollar saved in 340B is spent on other health care and that they already have to meet rigorous compliance requirements.

Hospitals might be right about the difficulties of showing how one dollar saved in one area is later used elsewhere, but that isn’t helpful when you’re testifying before the Senate health committee and being grilled by a top senator on the program.

Sen. Lamar Alexander (R-TN), who chairs the health committee, asked about this very issue at a recent hearing on 340B. When Bruce Siegel, president of America’s Essential Hospitals, told him that he didn’t have an estimate on the savings for patients, Alexander pressed him on whether that information is something hospitals should be able to provide lawmakers.

“So we don’t have any idea,” Alexander said. “Would that not be something we should know?”

“I think that is something we should know, along with many other things we should know about this program,” Siegel offered, alluding to his belief that drug makers should also face more scrutiny, to Alexander’s evident dissatisfaction.

Pharma says 340B is spinning out of control. Is it?

The other argument between drugmakers and hospitals is about the size and growth of the program, which the pharmaceutical industry says has become too large.

MedPAC, the independent advisory group tasked with overseeing Medicare and federal health care programs, found that 340B providers purchased $7 billion worth of drugs in 2013, three times as much as they bought in 2005, and received $3.8 billion in discounts through the program. A recent congressional report showed those trendlines continuing into 2016.

The number of hospitals and clinics that receive drug discounts through 340B nearly quadrupled from 583 in 2005 to 2,140 in 2014, according to MedPAC, though much of that increase was driven by Congress’s decision in the Affordable Care Act to expand eligibility to certain high-need hospitals.

The point is, whichever way you slice the numbers, 340B is a much bigger program than it was 15 or 20 years ago. All of these data points make up the drug industry’s argument that the program has expanded beyond its original intent.

“There is mounting evidence that [a program that] was intended for a relatively small number of hospitals is increasing costs for patients, fueling consolidation and even more expensive prescriptions,” Steve Ubl, president and CEO of PhRMA, the major drug industry lobbying group, told me and several other reporters at a recent briefing. “We do think the program is in fundamental need of reform.”

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The counterpoint from hospitals is threefold. First, they will say that the data about the number of hospitals covered by 340B is misleading — Congress itself decided to expand access to certain small hospitals in high-need areas through the Affordable Care Act, which drove up the raw number of 340B providers, even if many of those hospitals have 25 or fewer beds and do not therefore represent a dramatic expansion in terms of patients.

Second, they will tell you that part of the reasons for the increase in 340B discounts is the rising prices for prescription drugs. The discounts balloon commensurate with the prices of the drugs: As IQVIA reported last month, list prices — before accounting for discounts and rebates — increased by 58 percent over the past five years. (The formula for 340B discounts is complicated, but we are trying to keep this simple.)

Yet there is also an argument that 340B itself, because drug manufacturers know they must provide those discounts, drives up the prices of medicines.

“That’s simply because pharmaceutical companies are monopolist; they have price-setting ability,” Rena Conti, a professor at the University of Chicago who has written about this issue in the 340B program, told me. “They have every incentive to take discounts that get distributed in one place and build that into the list price.”

Third, and maybe most importantly, hospitals argue this is all a distraction. The $18 billion 340B program is a small sliver of the $457 billion prescription drug market. For whatever problems the program might have — and hospitals vigorously contend it is necessary for them to be able to cover low-income patients — it simply isn’t a major driver of drug costs in the United States, they say.

“We are concerned that the disproportionate attention paid to 340B distracts from the larger conversation we need to have about manufacturer pricing practices and how those practices drive up costs and limit access to care,” Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, said in a statement.

There are multiple problems with drug prices. Reforming 340B addresses just one.

The Trump administration has already taken one step to cut 340B costs, by slashing Medicare payments to those providers; hospitals estimate it could end up being a nearly 30 percent cut. The administration said it would save money for Medicare patients, whose out-of-pocket costs are based on how much Medicare pays for drugs.

Hospitals are suing, arguing the administration has no legal authority to make this change while also lobbying Congress to block it. It is possible Trump will announce new reforms to 340B in his drug pricing speech Friday; Bloomberg’s Alex Ruoff spied a recent notice from the administration that seemed to suggest as much.

In talking with Conti, she made the case that 340B is in need of some fundamental reforms. She pointed to the lack of transparency about how hospitals use their savings: “I think it’s in everybody’s interest to have a handle on, if hospitals are making of millions of dollars on this program, we’d like to have some oversight on how they’re using to take care of vulnerable people.”

She also told me the metrics for determining which hospitals qualify for 340B are “pretty broken” because they don’t account for hospitals expanding and treating more patients in outpatient clinics. At this point, nearly 50 percent of the US hospitals that accept Medicare patients qualify for the program, MedPAC reported.

While some hospitals might treat more lower-income people in the hospital itself, thus qualifying for 340B discounts, their overall patient population once you account for the outpatient clinics could actually be quite well off, Conti said. That would seem to belie the purpose of the program as most people understand it, though 340B hospitals have their own data that they say shows they provide the bulk of uncompensated health care in the United States. They strongly oppose changing the program’s eligibility criteria.

Still, pharma could very well be right: 340B could and should be improved. But the hospitals are right about something too. The drug industry has undertaken a concerted effort to focus much of the drug pricing debate on programs like 340B, on the mysterious pharmacy benefit managers who serve as the middlemen between pharma and health plans, and on the benefits that health insurers offer that increasingly ask patients to pay more money out of pocket.

Those are real issues. Even though aggregate spending on prescriptions has plateaued in the last couple years, most Americans still say drug costs are their top priority for Congress. One in four people who get health insurance through their work say they struggle to pay for their medications.

The other drug price problem is a lot harder to solve

But there is another more difficult problem: the laissez-faire system that gives pharmaceutical companies a monopoly that lasts for years when they produce a new drug and which they can prolong with their own games. That monopoly allows drug companies to set whatever list price they want — and while drug companies are right that almost no one actually pays those list prices, they still set the starting point from which discounts and rebates are used to lower the cost, and some patients do pay money out of pocket based on those higher list prices under their health insurance plan.

We have tried to construct a system to bring down costs: We allow generic substitutes to be brought onto the market at a much lower price once enough time has passed, we have mandated certain rebates for Medicare and Medicaid (and 340B), and health insurers and PBMs have negotiating power to extract deeper discounts from drugmakers.

But there are limits, especially when a new medicine comes on the market that has no alternative. “What this really is about is that we have no mechanism in place to restrain the prices for drugs that have no therapeutic substitute,” as Conti told me. “That’s really where these discounts and rebates are not satisfying.”

This system has evolved this way for a reason: We want drug companies to have strong incentives to create new breakthrough treatments that cure diseases and give people a better life. The US biopharmaceutical sector is unrivaled in its ability to create medicines that, very recently, have cured hepatitis C and could soon produce amazing new cancer drugs.

But the price for that innovation is the highest drug spending in the world.

And those pioneering hepatitis C drugs also debuted with an $84,000 price tag. Drug companies can and will argue that those high prices are worth paying when you look at the long-term value provided. But that doesn’t make it any easier for a state Medicaid system that covers poor people, who are disproportionately affected by the disease, and needs to balance its books every year. States struggled to pay for the drugs and sought to restrict access as a result. The mandated discounts helped only so much.

It’s silly to pretend there are easy answers. Medicine is a business. That’s capitalism. And we have seen remarkable advances in science under the system we have.

But as we chip away at programs like 340B or scrutinize the way insurers have shifted more of the cost burden onto their customers, there remains an elephant in the room that’s being ignored. And nobody, not even Trump, seems willing to look too hard in its direction.

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