What’s All the Fuss About 340B?

The 340B Program was created to provide medicine to patients who might otherwise not be able to afford it – but drug manufacturers see its current, expansive state as unsustainable. What’s the balance between discounted drugs and patient access, and will the Supreme Court end up with the final say?

What Is 340B?

Named after section 340B of the Public Health Service Act, the 340B Program was established by an act of Congress in 1992. The intent of 340B was to provide price relief to hospitals that disproportionately serve low-income populations:

• Disproportionate share hospitals (DSHs)
• Children’s hospitals and cancer hospitals exempt from the Medicare prospective payment system
• Sole community hospitals
• Rural referral centers
• Critical access hospitals

The program serves these types of hospitals and extends to their “child” sites, which include any “clinic/department/offsite facility that is eligible to participate in the 340B Program because it is an integral part of a hospital that participates in the program, as evidenced by the fact that it is reimbursable on the hospital’s Medicare cost report.”

The 340B Program was considered necessary due to an unintended consequence of the Medicaid Drug Rebate Program enacted by Congress in 1990. Prior to Medicaid rebates, manufacturers would routinely offer substantially lower prices to these hospitals, but the rebate formula required manufacturers to provide a rebate equal to the greater of a fixed percentage of average manufacturer price or the “best price” offered to non-exempt entities. These hospitals were not included in the list of facilities exempt from the best price calculation, so manufacturers stopped offering discounts, and the prices increased.

If a hospital qualifies, it is eligible to purchase drugs at a discount ranging between 25% and 50%. When they dispense a drug under the 340B Program, they are reimbursed at market rates and can use the spread to support their mission, although they are not required to report how they use the windfall. There’s no income limitation for patients receiving drugs purchased under the 340B Program, and they may be covered by Medicare, Medicaid, or private insurance.

What’s the Problem with 340B?

As is the case with many government benefit programs, the number of entities that now qualify for 340B discounts has expanded to the point where 40% of hospitals qualify for reduced-price drugs. Manufacturers argue that everyone will end up paying more if more facilities receive big discounts.

CMS added fuel to the fire in a 2017 Hospital Outpatient Prospective Payment rate rule that slashed Medicare reimbursement for drugs procured under 340B. Hospitals promptly sued and won a victory at the Supreme Court, which ruled that the agency was obligated to survey hospital acquisition costs prior to reducing reimbursement.

Big Growth – and Controversy – for 340B Contract Pharmacies

Contract pharmacies are often used to dispense drugs on behalf of 340B hospitals and their “child” entities. Because of the increasing number of 340B entities and the complexity of ensuring their patrons are properly served, the number of 340B contract pharmacies skyrocketed from 1,300 in 2010 to more than 28,000 today.

Manufacturers have begun to respond to the proliferation of pharmacies by amending their 340B policies – restricting access to 340B to enrolled entities and excluding contract pharmacies. Manufacturers cite diversion and fraud as the rationale for restricting distribution, while insisting this practice is still compliant with 340B rules. HHS has begged to differ, issuing fines to the 17 pharmaceutical companies that have excluded contract pharmacies. The Third Circuit Court of Appeals recently ruled that manufacturers are not legally required to contract with an unlimited number of contract pharmacies.

The issue is not yet resolved, as other federal courts are hearing challenges. The Supreme Court may have to decide this one.

What’s Ahead for 340B

Congress has been involved in trying to come up with a solution, but a bipartisan solution is unlikely with a divided Congress and more high-profile issues on the table. So, the courts will continue to play an outsized role in determining what the 340B Program looks like in years to come.

The need for the 340B Program could have been avoided if Congress had taken the time to consider all the ramifications of the rebate formula it set up in the Medicaid drug rebate scheme – proving that some lessons are learned slowly, if at all.

X Factors for Success with 340B

• Follow the action. The courts will control the immediate future, so put 340B on your watch list.
• Determine your exposure. Are you a 340B contract pharmacy, and how vulnerable are you to rulings supporting drug manufacturers?
• Join a group that supports your position and get involved.