Double-dippers drive up drug costs

In searching for answers to why drug costs are high, we only need look at problems our own government has created.

One of the biggest culprits distorting prices is the once obscure “340B Drug Pricing Program.” Created in 1992, it requires drugmakers to offer steep discounts to certain safety net clinics and hospitals to help them “stretch scarce federal resources.” The original intent was to reduce drug costs for uninsured and vulnerable patients by passing the discounts along to them.

But this program has little oversight or accountability and no transparency or requirements that the generous 340B discounts be shared with the patients the program was intended to help. 

Instead, the program has morphed into a profit center for big businesses in the health sector to make big profits on the “spread” between the low 340B price they’ve paid to acquire a drug and the higher prices they charge when they sell it. 

In a 2018 report, the Government Accountability Office found that fewer than half of the hospitals surveyed pass along the 340B discounts to low-income, uninsured patients. GAO further found that if the some of the discount is passed along to the patient, the facilities still charge a higher price than they had paid for the drugs. 

When the program was created, the safety net providers were able to contract with an outside pharmacy if they didn’t have one in-house to dispense the medications. But after passage of the Affordable Care Act, the limit on one-contract pharmacy was eliminated, allowing eligible hospitals to contract with an unlimited number of outside distributors. 

Since then, the program has grown by almost 500 percent and now is almost as large as the Medicaid outpatient prescription drug market. The number of contract pharmacies has exploded.  

In 2010 there were fewer than 1,300 pharmacies contracting with hospitals to provide 340B-priced drugs. Today there are 28,000. And the program accounts for 63 percent of gross provider and pharmacy margins.

Almost half of the U.S. pharmacy industry now is reaping profits from the program. Instead of small pharmacies near a community health center, Walgreens, CVS, Walmart, and many others are now “contract pharmacies” that can benefit from the ultra-low 340B purchase price, and with no obligation to pass the savings along to qualified patients. 

340B has grown so much that it now is impacting prices throughout the health sector. Many earn fees based upon the price a patient or the patient’s insurance company pays. The higher the price, the larger their fees. The incentive is to fill more expensive drugs in a category, dispensing a brand medicine when a generic would do. 

So not only can they sometimes purchase a drug for a penny, but they can resell it to patients, many of whom are insured, at much higher prices. Patients required to pay a percentage of the retail cost may not know they could have had a lower-cost generic instead of the much more expensive brand-name drug. Patients, insurers and taxpayers all pay more. 

The News & Observer found in its own investigation that, “Large hospitals [with access to 340B discounts] are dramatically inflating prices on chemotherapy drugs…[They] routinely mark up prices on cancer drugs two to 10 times or more over costs,” adding that there is “little indication that the hospitals pass” the discounts along to patients.

340B has been in the news again recently because some pharmaceutical companies have taken action to curtail abuse of the program. Some have announced they still will provide the 340B discounts, but only to in-house pharmacies of eligible hospitals — as was the case in the first 18 years of the program. The companies also say they are sometimes forced to provide the 340B discounts on top of Medicaid rebates, “double-dipping” which is prohibited by law.

Contract pharmacies allows hospitals and others to improperly benefit from duplicate discounts without the knowledge or approval of drug manufacturers, the companies say. Moreover, the companies want verification that the discounts are going to patients and to those eligible to receive them.

Two government studies earlier this year criticized lax oversight of the program, calling out the Health Resources and Services Administration (HRSA), which is primarily responsible for 340B.

Insulin prices are particularly problematic. President Trump recently issued an executive order explaining that, for the nation’s eight million diabetics who use insulin, the price of the drug has risen dramatically over the past decade. “The list price for a single vial of insulin today is often more than $250 and most patients use at least two vials per month,” the order states. For some forms of injectable epinephrine, the price can be more than $600 per kit.

Because of 340B, Federally Qualified Health Centers may purchase insulin at “one penny per unit of measure. These steep discounts, however, are not always passed through to low-income Americans at the point of sale,” according to the executive order. It directs these centers to pass along the deeply discounted prices to patients as a condition for continuing their participation in the program. Comments are due Oct. 28 on the notice of proposed rulemaking (NPRM) for the EO. 

But there are many more big players that will not be affected by the executive order.

This program is a mess. True safety net hospitals that need the program, and which are more likely to pass the savings along to patients, are concerned that abuse by the big guys jeopardizes the program for their vulnerable patients who truly need it. Congressional action is needed to set standards and make sure the program is serving the patients for whom it was designed.

Grace-Marie Turner is president of the Galen Institute, a non-profit research organization devoted to market-based solutions to health policy problems. Follow her on Twitter @gracemarietweet. She can be reached at galen@galen.org.