Could Medicare 340B Payment Cuts Lead Hospitals To Buy At List Price?

Pew Charitable Trusts' Allan Coukell warns the Centers for Medicare and Medicaid Services that its proposal to reduce Medicare Part B drug payments to 340B hospitals may have 'unintended consequences.'

Hospitals participating in the 340B program may find it more cost effective to purchase some prescription drugs at list price rather than at a discount if Medicare's proposal to drastically cut Part B payments for 340B drugs is implemented, according to the Pew Charitable Trusts.

In recent comments to the Centers for Medicare and Medicaid Services, Pew Senior Director for Health Programs Allan Coukell warned a shift to purchasing at list price could be an "unintended consequence" of the proposal. The possible reimbursement change was announced by CMS in its proposed 2018 rule for the Medicare hospital outpatient prospective payment system, released July 13. (Also see "Closing The Spread: 340B Providers Face Sharp Cuts Under Medicare Proposal" - Pink Sheet, 17 Jul, 2017.)

CMS wants to reduce Medicare's drug payments to providers from the current average sales price (ASP) plus 6% rate to ASP minus 22.5%. The change is intended to align Medicare reimbursement more closely to acquisition costs and use the savings generated to otherwise benefit seniors. Hospitals participating in the 340B program obtain discounts on drugs ranging from 20% to 50%, CMS said.

The proposal would not impact the discounts manufacturers are required to provide on the drugs, only what Medicare reimburses hospitals. Nevertheless, the Pew comments suggests a possible indirect impact on manufacturer revenues. "Some potential savings from reduced 340B drug reimbursement could … accrue to drug manufacturers rather than to the Medicare program," he suggested.

A reduction in Medicare payments "may incentivize 340B hospitals to purchase new drugs at the list price rather than the 340B price, as hospital revenue will be greater under this purchasing model," Coukell explained. If a hospital opts to purchase at list price, it would be reimbursed at Medicare's standard ASP plus 6% rate.

The Medicare proposal "may incentivize 340B hospitals to purchase new drugs at the list price rather than the 340B price, as hospital revenue will be greater under this purchasing model."

Medicare is only proposing to reduce payment in cases where a 340B hospital purchases the drug at the 340B price. As a result, 340B hospitals may be "incentivized to pick and choose which drugs they buy at the 340B price based upon the anticipated difference between their costs and the Medicare payment for each drug," he posits.

Under 340B, as in Medicaid, discounts consist of a 23.1% base reduction for innovator drugs plus an "inflation penalty" discount when prices increase faster than inflation. Manufacturers may also be subject to additional voluntary discounts but the Pew analysis focuses only on the statutory discounts.

To illustrate his point, Coukell explains that for a hypothetical new drug with a list price of $100, a hospital purchasing through the 340B program would pay $76.90 (after the 23.1% base discount), and under the CMS proposal, would be reimbursed only $77.50, resulting in hospital income of $0.60.

However, if the hospital bypasses the 340B program and buys at the $100 list price, it would be reimbursed at $106, or ASP plus 6%, resulting in income of $6. The example assumes that the ASP is the same as the list price.

"In this scenario, no savings accrue either to the 340B hospital or to Medicare, and the manufacturer receives a higher payment from 340B hospitals than under the status quo," Coukell pointed out.

For existing drugs with substantial price increases, the incentive to purchase through 340B would be maintained under the proposal "when the inflation penalty produces greater revenues than the standard [ASP plus] 6% revenues," Coukell noted.

However, he pointed out that 340B hospitals would likely choose to purchase at list price three drugs that are among the top six in terms of Part B spending because they have had no or limited price increases and would not have incurred a significant inflation penalty discount.

They include Regeneron Pharmaceuticals Inc.'s Eylea (aflibercept), Genentech Inc.'s Lucentis (ranibizumab) and Genentech's Avastin (bevacizumab). (Also see "Number One With A Bullet: Eylea Takes Top Spot In Medicare Part B Drugs" - Pink Sheet, 2 Aug, 2017.)

For those blockbusters, "the manufacturer would retain the 340B discount and Medicare would continue to pay the hospital at the standard rate of ASP plus 6%," Coukell maintained. He noted the three drugs accounted for over $4bn in Medicare Part B spending in 2015.

The fate of the proposal is unclear. It is strongly opposed by hospitals participating in the program, which claim the reduction in payments would disrupt their ability to treat low-income patients and that it violates the 340B and Medicare statutes.

Manufacturers Focusing On Broader Reforms

The AIR340B Coalition, which represents drug manufacturer concerns, did not submit comments on the proposal. It “places a spotlight on one aspect of the program that needs review and fixing, but does not take the place of the changes needed to refocus the program on safety-net facilities and the patients they serve," a spokesperson for the group said in an email.

The coalition "continues to focus on key policy priorities that our members believe require immediate legislative and/or regulatory action to better align the program with its original intent," the spokesperson added. "Key areas for change include clearly defining a 340B eligible patient, examination of hospital and satellite clinic eligibility criteria and a more rational and legally supportable policy on contract pharmacy arrangements."

Congress has taken steps toward reforming the 340B program but is not expected to move substantive legislation in the near future. The House Energy and Commerce Oversight and Investigations Subcommittee held a hearing on 340B in July. (Also see "340B Reforms: Oversight Hearing Suggests Slow, Piecemeal Approach" - Pink Sheet, 18 Jul, 2017.)

More recently, Energy and Commerce Committee Chairman Greg Walden, R-Ore., and Oversight Subcommittee Chairman Tim Murphy, R-Pa., sent letters to 19 hospitals participating in the 340B program, seeking information on how they use the savings from drug discounts. The Sept. 8 letters are aimed at broadening the committee's understanding of how program savings are calculated and used by covered entities to help patients.