November 2017 Edition Vol.11, Issue 10

340B: Good Idea Gone Rogue, Reform Prevails

By Christina Bennett, MS

Critics of the 340B Drug Discount program have been calling for reform for years to enhance transparency and oversight and stop the unintended effects, but little has been done. Created in 1992, 340B allows safety-net hospitals and clinics that serve large proportions of low-income, vulnerable patients to access drugs at significantly reduced prices. These safety-net hospitals and federally funded clinics are eligible to purchase discounted drugs for use in the outpatient setting only, and include free-standing children’s and cancer hospitals, rural hospital and referral centers, critical access hospitals, and sole community hospitals.

340B has been the subject of significant policy discussions, and the United States Government Accountability Office (GAO), among other associations and experts, are voicing concern that the program lacks the oversight needed to ensure the program is working as intended.1

According to Jeff Vacirca, MD, Community Oncology Alliance, CEO, New York Cancer Specialists, the 340B program has been out of control in the hospital sector. “This was a small-scale program to ensure patients in need did not fall through treatment cracks, and was intended to be done at a contained number of safety-net hospitals, but what we’ve seen is that this has mutated into a grossly abused profit generator now for nearly half of the nation’s hospitals.”2


Dramatic Growth

More than 38,000 healthcare facilities and their satellite sites are currently receiving 340B discounts, nearly double the number from 5 years ago.1 Drugs purchased at 340B discounts range from 20% to 50% off the acquisition cost and providers are reimbursed higher than what they actually paid for the drug.3 Purchases of 340B drugs have grown from $0.8 billion in 2004 to $16.2 billion in 2016, and now account now for 5.0% of the total U.S. drug market.4 Hospitals are the primary users of the 340B program.

340B hospitals purchase drugs at the discounted price for use in the outpatient setting and then mark up the drugs to the full price for patients regardless of insurance status and payers. According to a 2014 report from the Office of Inspector General, two-thirds of 340B disproportionate share hospitals (DSH) do not offer the discounted price to uninsured patients.5

“The program lowers the acquisition cost of drugs to pharmacies and/or physicians in hospitals—it has no impact on what people pay,” said Rena Conti, PhD, an associate professor of health policy and economics at the University of Chicago.

Patient copays are calculated on the reimbursement price—not what the hospitals paid—so patients and payers do not share in the cost-savings. Instead, when 340B hospitals charge the full price to patients with private insurance or Medicare Part B, they generate profits that they can then use as they wish, from funding charity care to CEO bonuses.1

Dr. Conti explained that the federally qualified clinics and other types of public health clinics under 340B have reporting requirements that essentially ensure the revenue generated flows back to vulnerable patients, but DSH hospitals do not face that same requirement.

A study showed that since 2004 the number of DSH hospital outpatient clinics has grown exponentially and tend to serve wealthier communities than their DSH hospital parent.6

The authors suggest that the expansions among 340B DSH hospitals run counter to the program’s original intention. Anecdotal evidence shows that 340B hospitals are turning away low-income, uninsured patients.7

“While the intent of the program is to use incremental revenue to provide for uncompensated care, because it is not statutorily mandated, many programs are not using the additional profit from the program to provide care for these patients,” said Debra Patt, MD, Texas Oncology.

Dr. Patt observed that frequently unfunded patients are turned away from hospitals that benefit from the 340B program. For example, she knew of a low-income, uninsured breast cancer patient denied care by a local hospital that participates in the 340B program.

“Queues and denials of service are common. In cancer care, the time delay can allow a patient’s disease to progress from curable to incurable. Unfortunately, we see this problem all the time,” said Dr. Patt.


Poor Compliance

The Health Resources and Services Administration (HRSA), who oversees the 340B program, was described as weak by the GAO because HRSA relies on 340B health facilities and manufacturers to ensure their own compliance with the rules of the program.1

HRSA conducts about 200 audits per year, but according to Tim Murphy, who recently resigned from Congress and was Chairman of The Subcommittee on Oversight and Investigations, the audits have uncovered between 63% and 82% of noncompliance with program requirements since 2012. “That is a concern,” he said.

Noncompliant facilities are not directly penalized because HRSA does not have such authority. HRSA posts the audits’ results publicly, and it is the responsibility of manufacturers and health facilities to reconcile discounts that were inappropriately received.

At a hearing before The Subcommittee in October, three DSH hospitals served as witnesses to how the 340B program is used.8 Although not mentioned in the hearing, those three witnesses—Johns Hopkins Hospital, Mission Hospitals, Inc., and Northside Hospital, Inc.—had been audited in 2016 and were found noncompliant.9

All three had diverted drugs, meaning 340B discounted drugs had been dispensed at ineligible sites or the prescription had originated from an ineligible site.9 HRSA advised the hospitals to repay the manufacturers for discounts inappropriately received.9


Fueling Drug Prices

“One worry we have here is that as the program grows in scope and in scale, manufacturers have an incentive to basically make up the difference in the discounts that they provide by inflating the list price,” said Dr. Conti, who co-authored an article in the New England Journal of Medicine explaining how reforming the 340B program is one way to bring down drug prices.10

The percentage of drugs sold at a discount is proprietary information that pharmaceutical companies typically keep private. Nonetheless, in 2016, Genentech publicly disclosed that 340B discounted drugs accounted for about 18% of their volume for the first half of the year. This figure was up slightly from 2015 and expected to continue at a “moderate rate.”11

Dr. Conti explained that inflated list prices potentially perversely increase the revenue that 340B providers make off discounted drugs and increases the payment for patients and insurers.


Driving Cancer Care to Hospitals

With about 600 community oncology practices having been acquired by hospitals since 2008, the 340B program is often cited as one reason community oncology practices are being acquired by hospitals.12 About three-fourths of acquisitions of community oncology practices were by 340B hospitals.13

To date, however, much of the evidence to support this trend is anecdotal or strongly suspected from experts. A recent study attempted to answer, at least in part, this question by looking at whether the expansion of the 340B program under the Affordable Care Act contributed to such integration.3

The authors examined whether practices in counties with newly eligible hospitals were more likely to become vertically integrated than practices in counties that did not. The authors wrote that there was “little evidence” supporting the claim that the 340B program drives vertical integration.

However, Sunita Desai, PhD, an assistant professor of health policy at the NYU School of Medicine and a health economist, explained the study had major limitations.

“Most of the increase [in newly eligible hospitals] after 2010 was critical access hospitals. These are small hospitals and not necessarily the types of hospitals you would expect to be engaging in consolidation. I think it’s possible that the method could be missing some of the effect of the 340B program by just focusing on those hospital types,” she said. She explained she would expect DSH hospitals to be the entities acquiring oncology practices.

“We still need to understand what really is driving this vertical integration,” said Dr. Desai.

What is clear is 340B hospitals do have an economic incentive to acquire community oncology practices. When acquired, these clinics become part of the outpatient setting, where incredibly expensive cancer drugs can be acquired at as high as 50% discounts and then sold at full price to well-insured patients. Also, acquiring oncology clinics, even in wealthy communities, does not affect the hospital’s 340B eligibility because it is based off inpatient characteristics. An associated effect of these acquisitions is that cancer care is shifting from community oncology practices to the hospital setting, in particular, 340B hospitals.

“Community oncologists provide just as good if not better care, and we keep the cost for our patients down. That’s our goal. Lower costs, higher quality,” said Dr. Vacirca.

A recent white paper showed that the average cost of cancer care per month was consistently lower in the community oncology setting than the hospital setting across several cancer types.14

“We have got to deconsolidate these large hospital centers that have risen costs so much,” said Dr. Vacirca.


The Beginning of Reform

In Dr. Patt’s opinion, there are many things that are good about the 340B program, but it needs to have better oversight to make sure that those funds actually go into the care of the poor and underserved. She expressed concern that if the program was eliminated entirely, hospitals who truly benefit and serve the poor would be harmed.

Experts have numerous recommendations, such as applying 340B discounts only to vulnerable patients, requiring drug discounts to be passed on to these patients, and changing 340B eligibility criteria for hospitals to a more representative measure.15,16

To curb the misuse and stifle rising drug prices, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule earlier this year that would reduce hospital reimbursement for certain Medicare Part B drugs from an average sales price (ASP) plus 6% to ASP minus 22.5% in 2018. The reduced price was the Medicare Payment Advisory Commission’s estimated minimum discount that hospitals receive for 340B drugs.


CMS Final Ruling on 340B

After receiving public comments on the proposed rule, CMS released their ruling on November 1: Hospital reimbursement for certain Medicare Part B drugs would be reduced to ASP minus 22.5% in 2018.17 Three hospitals were exempt from this rule: rural sole community hospitals, certain cancer hospitals, and children’s hospitals.

Community Oncology Alliance was quick to applaud the rule in a press release, stating, “This final rule is good for patients and taxpayers and represents an important first step in stopping abuse of the program by some hospitals.”18

As a result of the final rule, Ted Okon, MBA, Executive Director of Community Oncology Alliance, said Medicare Part B beneficiaries will be paying less for drugs. CMS estimates $320 million in savings for 2018 copayments.17

“What I believe CMS feels is by reducing this enormous profit incentive for these hospitals is that they will be less inclined to gobble up oncology practices,” said Mr. Okon. He explained that slowing the shift of cancer care to the hospital setting saves the Medicare program as well as beneficiaries money.

As a result of this rule, CMS projects paying $1.6 billion less for drug benefits, and because the rule is being implemented in a budget neutral manner, the $1.6 billion will be distributed across non-drug items and services among 340B and non-340B hospitals.19

“Those 340B hospitals that are getting a cut are actually having some of that come back in terms of greater reimbursement for services,” said Mr. Okon.

The American Hospital Association (AHA) fervently opposes CMS’s rule, stating, “We strongly urge CMS to abandon its misguided 340B rule.”20  On November 13, 2017, the AHA, along with two other associations and three hospitals, filed a lawsuit against the U.S. Department of Health and Human Services. The lawsuit argues that the final rule violates the Social Security Act and “therefore, should be set aside under the Administrative Procedure Act as unlawful and in excess of the HHS Secretary’s statutory authority,” according to an AHA press release.21

Mr. Okon pointed out, “At this reduced reimbursement rate of ASP minus 22.5%, hospitals are still going to be profiting enormously and disproportionately off of cancer drugs and other specialty medications.” The reason, he explained, is that 340B discounted drugs are commanding upwards of 50% discounts.

The CMS rule is the first action to reforming the 340B program. Even with this rule, Mr. Okon said, “There’s still enormous profits in the program, and what needs to be done is have greater transparency and accountability.”



  1. Update on Agency Efforts to Improve 340B Program Oversight (GAO-17-749T) Washington, DC: US Government Accounting Office; 2017.
  2. Community Oncology Alliance. 340B Drug Discount Program: A Good Idea Gone Bad. Accessed October 18, 2017.
  3. Alpert A, His H, and Jacobson M. Evaluating The Role Of Payment Policy In Driving Vertical Integration In The Oncology Market. Health Affairs. 2017;36(4):680-688.
  4. Fein A. Challenges for Managed Care from 340B Contract Pharmacies. Journal of Managed Care & Specialty Pharmacy. 2016;22(3):197-203.
  5. S. Department of Health and Human Services, Office of Inspector General. Memorandum report: Contract Pharmacy Arrangements in the 340B Program, OEI-05-13-00431. February 4, 2014. Accessed October 18, 2017.
  6. Conti RM and Bach PB. The 340B Drug Discount Program: Hospitals Generate Profits By Expanding To Reach More Affluent Communities. Health Affairs. 2014;33(10):1786-1792.
  7. Community Oncology Alliance. The 340B Drug Discount Program in Review: How Abuse of the 340B Program is Hurting Patients. 2017.
  8. S. Energy and Commerce Committee. Hearing: Examining How Covered Entities Utilize the 340B Program. October 11, 2017. Accessed October 15, 2017.
  9. Program Integrity: FY16 Audit Results. Health Resources and Services Administration. Accessed October 18, 2017.
  10. Conti R and Rosenthal M. Pharmaceutical Policy Reform — Balancing Affordability with Incentives for Innovation. New England Journal of Medicine. 2016;374;703-706.
  11. YTD September 2016 Sales. Roche. Accessed October 18, 2017.
  12. Community Oncology Alliance. 2016 Community Oncology Practice Impact Report: Tracking The Changing Landscape of Cancer Care. 2016.
  13. Community Oncology Alliance. Community Oncology Practice Impact Report The Changing Landscape of Cancer Care. 2014.
  14. The Value of Community Oncology: Site of Care Cost Analysis. 2017.
  15. Fong W. 340B Drug Pricing Program Reform. JAMA Oncology. 2016;2(3):403.
  16. Nikpay S, Buntin M, and Conti R. The 340B Program: Mandatory Reporting, Alternative Eligibility Criteria Should Be Top Priorities For Congress. Health Affairs Blog. October 10, 2017.
  17. CMS Finalizes Policies that Lower Out-of-Pocket Drug Costs and Increase Access to High-Quality Care. Accessed November 3, 2017.
  18. COA Applauds CMS on 340B Reforms in Final Medicare Rule. Accessed November 3, 2017.
  19. CMS Issues Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System and Quality Reporting Programs Changes for 2018 (CMS-1678-FC). Accessed November 3, 2017.
  20. Statement on Final CY 2018 OPPS Rule. Accessed November 3, 2017.
  21. Hospital Groups File Lawsuit to Stop Significant Payment Cuts for 340B Hospitals. Accessed November 13, 2017.

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