How Hospitals Inflate Specialty Drug Prices

Last Sunday, 60 Minutes aired a controversial anti-pharma story called The Cost of Cancer Drugs. The segment prominently featured several Memorial Sloan-Kettering and MD Anderson physicians, all of whom spoke with no self-awareness about health care costs. (Hints: Drugs are not the problem.) For your consideration, here is a rerun of a still-relevant Drug Channels article from October 2012, complete with my original 340B predictions from that period. P.S. Special pricing for our new 2014–15 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors ends today!

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Many people blame pharmaceutical manufacturers for high specialty drug prices. Yet channel intermediaries also add to drug prices, via mark-ups that account for the costs, profits, and value of the channel's services. But sometimes these mark-ups are eye-poppingly outrageous, as appears to be the case for North Carolina hospitals.

According to N.C. nonprofit hospitals make big money on cancer drug markups, hospitals are routinely marking up specialty drugs far above Average Sales Price (ASP). For example, the table reproduced below shows that Duke University Hospital received nearly $23,000 for Avastin, versus an ASP of about $6,000. And as reported in Prices soar as hospitals dominate cancer market, hospitals are buying independent oncology practices and then able to charge more “for the same chemotherapy in the same office,” due to differences in payment methods.

For payers, these examples highlight the appeal of channel management strategies such as white bagging and medical benefit management. For manufacturers, the stories illustrate what happens to drug prices as providers consolidate and traditional classes of trade blur.

Read on and be outraged.

PROGNOSIS PROFITS

The two news stories linked are part of Prognosis: Profits, two must-read and highly-recommended investigative series:

• The Charlotte Observer's stories
• The News & Observer's stories

These series shine an unflattering light on the practices of so-called “non-profit” hospitals, including executive salaries, pricing policies, profitability, patient care, and much more.

Journalism junkies should also read Behind the Story: Using tips from sources, data and documents to uncover inflated hospital prices, in which the lead reporters describe the background for the drug pricing story.

UNBELIEVABLE MARKUPS

Here’s how the reporters describe their findings regarding specialty drugs:

“We also found that hospitals are dominating the market on cancer care. Hospitals are acquiring formerly independent oncology clinics and employing oncologists – and that immediately raises prices because the hospital charges are higher.”

As a real-life example, let's look at what various hospitals were actually paid for Avastin. (source) As you can see, the hospitals managed to get much, much more than a paltry ASP+6%.

[Click to Enlarge]

The article details other examples of egregious markups. Levine Cancer Institute, owned by Carolinas HealthCare, collected nearly $4,500 for 240 milligrams of irinotecan, which is 68 times the Medicare payment of $66. (FYI, I show Medicare payment limits and channel profits for irinotecan in Profits from Generic Injectables: Too High or Just Right?.)

Reimbursement methods explain much of the discrepancy. Outpatient clinics get reimbursed based on such drug pricing benchmarks as Average Sales Price (ASP) or Average Wholesale Price (AWP).

In contrast, hospitals get reimbursed by commercial payers based on a negotiated percentage of charges—the hospital's self-defined list price for a drug. Basically, a hospital marks-up a drug to create a stratospheric "charge," and then discount the charge to merely outrageous.

Perhaps you may now understand one more reason why hospitals strongly oppose white bagging. In the white bagging process, a specialty drug is dispensed to the patient by a specialty pharmacy but drop-shipped directly to the provider, such as a hospital pharmacy or a physician office. The provider loses the ability to earn any profit margin on the drug, and must absorb any additional costs of handling and storage.

I have heard stories of major health systems that flatly refuse to sign payer contracts involving white bagging. No surprise, given the dollars involved.

340B: AMAZING BARGAINS

I was pleasantly surprised to see the reporters dig into the 340B drug pricing program. As they write:

“We also reported how many hospitals took advantage of a federal program known as 340B to purchase their drugs at steep discounts - anywhere from 20 to 50 percent. The 340B program was designed so that hospitals could provide drugs to poor or uninsured patients, but there's little evidence that hospitals are passing on the savings to patients. Rather, the hospitals use the program to purchase drugs for all outpatients, including those with private insurance.”

Yes, this is a true, but little-known fact: 340B hospitals are permitted to use drugs purchased at the 340B price for all individuals who meet the definition of a patient, whether or not those patients are low income, uninsured, or underinsured. I describe how this can be done in my economic report on retail, mail, and specialty pharmacies.

The articles sparked at least one Congressional investigation regarding 340B discounts. Here’s an excerpt from Senator Chuck Grassley’s scathing letter to the Duke University Health System:

“One reason Duke University Health System’s huge mark-up of drug prices, as reported by the article, raises serious questions is that it is both a 340B covered entity and non-profit hospital. As such, it receives massive discounts, at manufacturers’ expense, for these drugs. However, when selling these deeply discounted drugs, Duke University Health System does not seem to be passing those savings on to its patients. Instead, the 340B discounts appear to be simply subsidizing its bottom line operating margins. In fact, Duke University Health System has been generating record surpluses—$542 million in 2011. If ‘non-profit’ hospitals are essentially profiting from the 340B program without passing those savings to its patients, then the 340B program is not functioning as intended.”

Ouch.

This inquiry could spread to other channels. Hospitals are allowed to purchase and dispense 340B drugs through retail pharmacies, so 340B pricing can reach a broad set of “eligible patients.” By 2013, the Health Resources and Services Administration (HRSA) projects that more than 14,000 community pharmacies will act as contract pharmacies for 340B entities.

The channel blurring and controversy will only grow.