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Three Proposals to Reform the 340B Drug Discount Program

Rena M. Conti, PhD; Peter B. Bach, MD, MAPP; Michael Kolodziej, MD
The 340B Drug Discount Program has rapidly expanded over the last few years and may be missing its original intent. Here are 3 possible steps that could enhance the programís function and mirror Congressí original intent to enhance access for the poor to essential medical services.
Section 340B of the Public Health Service Act, passed by the Congress in 1992, was intended to provide assistance to medical providers who serve poor, underinsured patients.1 The 340B Program provides enrolled hospitals and other providers (340B-qualified entities) with deep discounts on the acquisition costs of outpatient drugs, whether those drugs are later administered by physicians or dispensed by pharmacies.2 Reports suggest the original program has substantially expanded in recent years via newly qualified entities, affiliated clinics, and contract pharmacy relationships.

Through deep acquisition cost discounts, the original intent of the 340B program was to enable underfinanced medical providers (a variety of safety net clinics and selected hospitals and their affiliated clinics and pharmacies) to purchase otherwise expensive drugs for the outpatient treatment of their patients. By statute, the program does not require 340B entities to pass on the drug discounts to the patients they treat, nor to the insurance plans that cover those patients.2 Neither does it require these entities to limit the patients who receive the discounted drugs to those who are poor and in need. Instead, 340B entities, alone or via their contract pharmacies, can dispense discounted drugs to all their patients (except in some cases those insured by Medicaid), and keep the profits they make when they bill insurers and patients for the drugs as if they had purchased them at full price.3 Because the discounts pertain to drugs delivered to all of a qualified entity’s patients, whether they are poor or have terrific insurance, 340B-qualified entities make money by treating patients who reimburse for drugs at rates well above the discounts mandated by the 340B program.

The 340B program is overseen by Health Resources and Services Administration (HRSA), which falls within the purview of the Secretary of HHS. Under current rules, HRSA requires qualified safety net clinics to report the volume of patients served, their vulnerability, and how specific revenue streams are being used to increase access to medical care or improved quality of care. However, other qualified entities—including hospitals and contract pharmacies—that make up the vast majority of the program’s current scope, do not face these same reporting requirements. 


Critics speculate that the opportunity to profit from this provision has created an impetus for 340B-qualified hospitals to push the envelope on the program’s intent—by opening outpatient clinics or pursuing affiliations with outpatient clinics in affluent communities where most patients will be well-insured. By so doing, hospitals increase their opportunity to profit from dispensing discounted drugs while being reimbursed at retail rates, but divert from the goal of the program, which is to provide services to the poor. Two of us (Conti and Bach) empirically evaluated this contention, using nationally representative data on program participants in 2012, matched to US Census Bureau data on local communities’ socioeconomic characteristics. We found that 340B-qualified hospitals are expanding their base into communities that tend to be affluent and well-insured, consistent with the most profitable expansion strategy that counters the objectives of the program.4 It is uncertain whether these affiliations and mergers improve the outpatient care patients receive. It is clear, however, that these activities drive up costs of providing care—and ultimately, commercial insurance premiums—since hospital outpatient contracts tend to be much more generous than physician office contracts and charge facility fees on top of service charges to payers and patients.   

Other work has examined how 340B qualification influences prescription drug dispensing patterns. If 340B hospitals are aiming to conserve resources and deliver high-value, low-cost care, prescribing should favor low-cost (often generic) drugs. But if 340B hospitals are aiming to maximize profits, they will tend to prescribe more expensive (often branded) drugs, because the profits from each prescription are based on the retail cost of the drug, with larger profits coming from more expensive drugs.  These studies have shown that, in fact, contract pharmacies for 340B hospitals disproportionately favor branded, patent-protected drugs over generic therapeutic substitutes, overall, and within a therapeutic class—a pattern that does not appear to be driven by a patient’s clinical complexity alone.4 A 2015 Government Accountability Office (GAO) report corroborated these findings. In both 2008 and 2012, GAO estimated per beneficiary Medicare Part B drug spending, including oncology drug spending, was substantially higher at 340B hospitals compared with non-340B hospitals. On average, beneficiaries at 340B hospitals were either prescribed more drugs or more expensive drugs than beneficiaries at other hospitals.5

The scope of the program is currently so vast that drug prices are also driven up for all consumers. By definition, branded manufacturers hold monopoly power, and recent consolidation in the generics market has similarly concentrated pricing power. As these manufacturers face significant and expanding demand for discounts on the acquisition prices of these drugs, they are able to pass the costs of these discounts onto other payers.

In August 2015, HRSA released its’ proposed “mega” guidance regarding manufacturer and qualified entity participation in the 340B drug discount program.6 The proposal  recommends several changes to the program, including tightening the definition of which patients are eligible for treatment with drugs acquired at 340B prices, and which physicians are eligible to administer or prescribe drugs acquired at 340B prices. However, the actual impact of this proposal remains uncertain, particularly because recent court rulings have created doubts regarding HRSA’s authority to implement their new standards.7  

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