Unsweet Charity: 340B Abuses When Hospitals Buy Oncology Practices

The Biotechnology Industry Organization (BIO) has released a troubling new analysis of the 340B drug discount program, titled Trends in 340B Covered Entity Acquisitions of Physician-based Oncology Practices. (Free download.)

The report highlights what happens when a hospital buys an oncology practice:

• Within about six months, the hospital is using 340B discounts to buy drugs for the acquired outpatient oncology sites.

• The sites quickly account for about 40% of the hospital’s total 340B chargebacks.

• Almost half such hospitals pocket the 340B savings, as evidenced by 340B chargebacks from the acquired sites that exceed the hospitals’ total charity care.

Read on for an insightful chart, along with my explanation for the economics behind hospitals' acquisitions of physician oncology practices. Add this report to the growing evidence that the 340B drug discount program often benefits hospitals and their executives, not needy patients.

THE TEMPTATION TO SHIFT CARE

Economic pressures are (1) encouraging physicians to become hospital employees, and (2) shifting care, such as chemotherapy, away from community practices to hospital outpatient departments. As I discuss in our 2013-14 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, these trends are negative for specialty distributors that sell to independent physician offices/clinics.

Many industry observers have said that hospitals’ ability to use 340B discounts is driving this site-of-care shift. There are two major reasons why hospitals profit significantly from oncology practice acquisitions:

• Hospitals can generate more revenue from specialty drug administration than can independent physician-owned clinics. (See Attention, Hospital Shoppers: Cancer Markup Madness and How Hospitals Inflate Specialty Drug Prices.)

• Hospitals can purchase oncology drugs using the 340B drug discount program. Such clinics must treat “eligible patients,” appear on the hospital’s Medicare Cost Report as a “child site,” be registered on the Office of Pharmacy Affairs (OPA) database, and meet certain other criteria.

PLUCKING MONEY FROM THE 340B TREE

The BIO study, conducted by Berkeley Research Group, examined 340B-covered entities that had acquired a physician-based oncology practice. Six manufacturers provided 340B chargeback data for oncology-related products. Almost all of the oncology practices were acquired by a Disproportionate Share Hospital (DSH).

The study found that hospitals move quickly to grab the extra profits. Sites get registered about six months after acquisition. As the chart below (from page 13 of the report) shows, the 340B chargebacks nearly double immediately after OPA registration. (The study’s author confirmed a small typo—the horizontal axis should read “Months Before/After Registration of Physician-Based Oncology Practice.”)

[Click to Enlarge]

Curiously, chargebacks start increasing five months BEFORE OPA registration. Does this suggest diversion to the acquired sites prior to official registration on the OPA database? Hmmm.

Within two months, the acquired sites account for about 40% of the covered entities’ total chargeback volume.

SOUR APPLES

As I note in 340B Hospitals: Not So Charitable, most 340B-eligible hospitals do not provide much charity care.

I’m sad to report that the latest study confirms this result. For almost half of the covered entities, 340B discounts exceeded charity care. (See the chart on page 9 of the report.) In other words, hospitals received more in 340B rebates from one small part of their operations than the total charity care provided by the entire hospital.

The results probably understate the full extent to which hospitals are pocketing the 340B discounts, because the study looked only at those 340B chargebacks associated with the acquired practices.

This finding directly contradicts the noble sentiments espoused by the program’s defenders. Instead of using 340B funds to assist the uninsured or help the needy, the 340B discounts were used for such general hospital expenses as hospital executive salaries.

Consider Barnabas Health, a 340B-covered entity. In 2012, its CEO was paid $22 million. (source) Is this a new definitions of how hospitals “stretch scarce dollars?”

ROTTEN TO THE CORE

In the past few weeks, editorials from hospitals executives have strenuously defended the existing 340B program. While I’m sure they are sincere in their beliefs, the problematic evidence keeps mounting:

• During the past decade, purchases under the 340B drug discount program have grown by 800%. In 2013, hospitals received 340B discounts on at least 25% of their drug purchases. (See EXCLUSIVE: 340B Is Taking Over the Hospital Market—With a 25% Share.)

• 340B-eligible hospitals generate large profits on provider-administered drugs through excessive mark-ups over acquisition costs. (See How Hospitals Inflate Specialty Drug Prices.)

• Hospitals also earn large 340B profits from retail prescriptions that are dispensed to fully-insured patients. (See Hospitals Twist Prescription Assistance Program For Their Own Benefit.)

• According to the Office of Inspector General (OIG), two-thirds of the hospitals do not offer discounted 340B drug prices to uninsured patients. Ick. (See New OIG Report Confirms Our Worst Fears About 340B Contract Pharmacy Abuses.)

• Many 340B-eligible hospitals do not provide much charity care. Only 22% of hospitals account for 80% of the total charity care that 340B hospitals provide. (See 340B Hospitals: Not So Charitable.)

• The largest drugstore chains—Walgreens, CVS, and Rite Aid—are enabling the abuses by acting as “contract pharmacies.” (See Walgreens Still Dominates Booming 340B Contract Pharmacy Market, with CVS and Rite Aid Right Behind.)

The latest study provides more evidence that the 340B program has strayed far from its original purpose. While the report doesn’t name names, it’s clear that many large, profitable, well-funded health systems are profiting from the out-of-control 340B program. Given the recent orphan drug decision, it’s no longer clear that HRSA has the power to clean up this mess.

No one knows how many covered entities are abusing the system. The good apples—the 340B entities that require additional financial support to support needy patients—should be worried that the bad ones could rot away the program for everyone.