May 2018 Edition Vol.11, Issue 5

What’s Trending in 340B

Christina Bennett, MS

The 340B drug discount program, which allows certain safety-net hospitals to purchase outpatient drugs at steep discounts, has been heavily criticized for its unintended impact on community oncology, so much so that reform is underway. At the 2018 Community Oncology Alliance (COA) conference, Aaron Vandervelde, Managing Director, Berkeley Research Group LLC, laid out the latest trends of the 340B program and current legislative and regulatory activity.

Current Trends

In recent years, cancer care has increasingly shifted from the community oncology setting to the more expensive hospital outpatient setting. In fact, in 2008, 23% of chemotherapy claims occurred in the hospital outpatient setting, but by 2016 that number had ballooned to nearly 50%.

“That is more than a doubling,” Vandervelde told the audience, adding that this trend is consistent and is only expected to continue.

He explained that one driver of this trend is 340B hospitals having a financial incentive to acquire community oncology practices due to Medicare Part B oncology drug reimbursement. His analysis represented in Figure 1 shows the trend in Medicare reimbursement and 340B prices for oncology drugs, as well as the profit margin realized by 340B hospitals on oncology drugs for a five-year period. Non-340B hospitals’ drug costs track closely to average sales price (ASP), resulting in a 6% margin compared with the 49% margin realized by 340B hospitals in 2015.

 

“This would be effectively like a practice experiencing an increase in ASP reimbursement from plus 6 percent to plus 15 percent,” Vandervelde said.

Also, Part B oncology drug reimbursement is making up a greater share of 340B hospital reimbursement than in years past. According to the BRG analysis, the 340B hospital’s share of Part B oncology drug reimbursement tripled between 2008 and 2016, whereas reimbursement stayed largely constant at non-340B hospitals (Figure 2). 340B enrolled hospitals receive over one-third of all Part B oncology drug reimbursement. During the same period, the percentage of oncology drug reimbursement to community oncology practices declined from 72% to 49%, while non-340B hospitals’ reimbursement has remained largely unchanged.

The growth in the 340B program is also influencing oncology drug prices because manufacturers are selling an increasing portion of drugs at deeply discounted prices. In fact, the volume of 340B discounts alone has exceeded all the discretionary discounts. The result is manufacturers have been increasing their launch price of a drug to offset the discounts and account for future growth of the 340B program.

In addition, the 340B program is becoming further intertwined with the contract pharmacy market. Hospitals enrolled in the 340B program can have their own outpatient pharmacies or contract with third-party pharmacies, and by having a contract with a pharmacy, the 340B hospital can capture margins on those drugs.

In recent years, there has been a “very dramatic” increase in contract arrangements with third-party pharmacies, Vandervelde said. In the early part of 2010, about 10% of disproportionate share hospital (DSH) hospitals were actively contracting with third-party pharmacies. Today, that number is about 70%.

“This is a complete paradigm shift,” he said.

Also, in 2010, 340B hospitals had on average only two contract pharmacy agreements.

“By 2012 and 2013, the level of sophistication in this marketplace had evolved dramatically,” he said. “There was detailed analysis being done by third parties that would calculate margin on each pharmacy that the covered entity would add to the network.”

Now, 340B hospitals that contract with third-party pharmacies have on average over 15 different relationships, and although retail pharmacies are still the most prevalent contract agreement, recent growth has been concentrated in specialty pharmacy contracts.

“Today, you’ve got over 1200 covered entities that are contracted with multiple specialty pharmacies,” he said. Instead of entities contracting with one location, they contract with six. “It’s a dynamic that we believe is going to continue to play out for at least another three to five years.”

He said the large specialty pharmacies, such as Walgreens, CVS, and Accredo, are “clearly focused” on the DSH hospitals, where a lot of those high margin prescriptions originate.

Reform Underway

Reform of the 340B program is currently underway, and two pieces of legislation, the 340B PAUSE Act and 340B HELP Act, in particular are in the pipeline.

The acts are similar; both would place a two-year moratorium on new DSH hospital enrollments and child site registrations and create reporting requirements. Currently, many of the 340B entities have no obligation to report volumes of 340B purchased drugs, margins associated with those drugs, or how they use those funds.

One difference between these pieces of legislation is the HELP Act would require claims modifiers for claims of public and private payers.

“Today, in the 340B program, if you’re a private payer, there is nothing on a medical claim or on pharmacy claim that indicates whether the drug was purchased at a 340B price,” Vandervelde said. As a result, private payers pay the contracted rate, not the 340B discounted rate. This legislation would create visibility so that payers would know which drugs were purchased at a 340B price.

However, as Vandervelde explained, the two-year moratorium on new DSH hospital enrollments and child site registrations proposed by these acts may not reign in the program. Only about 2% of hospitals are currently eligible but not enrolled in the 340B program, so he thought such a moratorium on new hospital enrollments would have “very little effect” on slowing program growth. Supporting this stance is an analysis showing that between 2008 and 2016 the continuously enrolled 340B hospitals were responsible for a higher percentage of growth in Part B oncology drug reimbursement than newly enrolled 340B hospitals.

Another reason is that although there has been a dramatic increase in the number of oncology child sites, 340B covered entities are moving away from outright acquisitions and more toward less formal agreements that are geared toward driving referrals to the hospital.

“If you have a 340B hospital that already has a number of oncology infusion clinics either on the main campus or perhaps out in the community, you don’t need to add additional child sites to expand the 340B program, you just need more patients,” he said. “If you’re able to create arrangements with other providers in your locality, this particular legislation would have little to no effect.”

On the regulatory front, the Hospital Outpatient Prospective Payment System (HOPPS) final rule went into effect on January 1, 2018 and reduced Part B drug reimbursement from Average Sales Price (ASP) plus 6% to ASP minus 22.5%.

“If you’re a 340B covered entity, and you were enjoying Medicare reimbursement of ASP plus 6 and now that’s getting reduced to ASP minus 22.5, that’s a sizeable reduction,” he said. “Understandably, there’s been a lot of pushback from the hospital community. There’s already litigation that is currently working its way through the courts, and so it’s unclear whether this regulation is going to remain intact or not.”

“The margins in 340B are so high today that even this reduction does not eliminate the profitability in 340B just for the Medicare patients,” he said.

Berkeley Research Group did an analysis to assess the effect the HOPPS final rule would have on the overall margins.

“What the analysis shows is that the reduction in reimbursement attributable to the HOPPS rule would represent about 13% of the overall margin of the 340B program. That’s not a tiny number,” he said. However, such a reduction would not cause entities to leave the 340B program; it would be a gap in the budget. “This budget gap is going to get filled somehow and we think that it’s going to get filled by a renewed focus on contract pharmacy, at least in part, because that’s a very easy area for covered entities to expand.”

Future Outlook

“How big can this thing get?” he asked. The program has structural limits and at some point growth will slow; however, “the numbers tells us that the program can still double and potentially triple in size from where we are today, which we think is $20 billion.”

Because the 340B price is about half the wholesale acquisition price, the future total size is projected to be $120 billion.

That is bigger than Medicare, Medicaid, and effectively everything except for commercial purchases of drugs he said. “I think that raises some very important policy questions around what was the original intent of the program.”

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