What It Will Take To End The Battle Over 340B

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A recent congressional hearing on 340B is the latest iteration of a standoff between two pillars of the healthcare industry—hospitals and pharmaceutical manufacturers—both of which have powerful lobbies in Washington D.C. The longstanding conflict revolves around a program that was launched in 1992 when Congress empowered the Centers for Medicare & Medicaid Services (CMS) to encourage pharmaceutical companies to reduce their outpatient drug prices for hospitals that serve low-income populations. The discount currently ranges from 20-55%.

The intended beneficiaries of the legislation were those delivery organizations that cared for uninsured and low-income patients. While it was framed as ‘encouragement’ to discount, compliance with the program was a condition of participation in Medicare. Given the size of the Government insurance program it clearly had a coercive element at its inception; today that element carries even greater weight.

While the program was relatively small in scope in 1992, it has ballooned in size. As I’ve written in previous columns, the program hit $5 billion in 2014, growing to $30 billion in 2019 and north of $54 billion today. 340B saw a 47% compound annual growth rate in the five years between 2014 and 2019. That growth rate does not correspond to similar growth in the number of uninsured or low-income patients. It does, however, correspond with the passing of the Affordable Care Act (ACA) of 2010,one purpose of which was to provide government subsidized healthcare insurance to Americans who didn’t have it. The ACA liberalized the 340B program in that contract pharmacies who had a relationship with a qualifying healthcare system could take advantage of the drug discounts. In 2010, roughly 1,300 contract pharmacies operated in the program. Today, there are 30,000. While contract pharmacies can buy drugs at the program’s 20-55% discount, there is no requirement that they sell them to low-income and uninsured customers, or that they account for who their customers are.

In the June 4th hearing, politicians expressed support for the continuance of the program, but differed on whether stricter regulation is needed to ensure it’s not exploited. The conflict has simmered for decades, as I’ve written elsewhere. But it’s risen in importance on the congressional stage recently since the U.S. Court of Appeals ruled in May that pharmaceutical companies can limit distribution of discounted drugs in the 340B program.

Why has 340B grown to such proportions? It’s transitioned from a program designed to lower drug costs to the underprivileged, to a dependable revenue stream for hospitals that subsidizes their core operations. Healthcare executives admit as much. During the recent 340B hearing, one hospital CEO testified that because government payers chronically underpaid them for services, “we rely on 340B savings to fill the gap.” “340B,” he continued, “is the difference between us operating on a razor-thin positive margin or an unsustainable deficit.” 340B has become a life raft for healthcare delivery organizations struggling to make ends meet, even though this was never the intent of the program as conceived in 1992. And since hospitals are exploiting 340B because of larger industry problems, congressional solutions that don’t address underlying causes will fail.

Amendments to 340B would not solve the underlying problems that make it necessary: the way we pay for things. Hospitals over-rely on 340B because they struggle to control the cost of care and continue to operate on a transaction model. Myriad factors stand between providers and economic sustainability. Insufficient accountability for outcomes means that payment is often disconnected from care quality. Lacking a clear line of sight to costs and outcomes, patient-consumers struggle to comparison shop for non-emergent care. And with third party payers usually picking up the bill anyway, patients and providers have lacked incentive to make cost conscious decisions. Vertical integration has given enormous control to commercial insurers who are incented to restrict access to needed care, often adding bureaucratic complexity and cost to an already unwieldy system.

Viable solutions require the whole ecosystem to change. As I outlined in my book Bringing Value to Healthcare, costs can only decrease with a business model shift that aligns payment with quality outcomes. But the transformation must be system-wide, not piecemeal. As I noted in another column, healthcare is a complex web of large, interconnected market segments: healthcare delivery, payers, pharmaceutical and medical device companies, pharmacy benefit managers and more. Changes in any part of the system have ripple effects on the other segments, as well as on the total cost of care and overall health outcomes. And legislative efforts can make things worse when they take too narrow of an approach or fail to anticipate long-term consequences.

Providers know they can’t survive without subsidies from drug manufacturers. Often nonprofits, they’ve been subsidized because they are believed to provide a valuable service that touches all of us. Doing so, however, has rewarded inefficiency and failed to hold organizations accountable for performance. Pharmaceutical companies—who must maintain profitability and bail out providers—increasingly believe they are being taken advantage of.

Divisions over 340B are a cacophony of noise in the system that keeps us from dealing with the fundamental issue: how to get to better health outcomes with lower total cost of care, while creating an environment where innovation in pharmaceutical products and innovative approaches to care delivery can flourish.

Pharmaceutical companies provide value to the American consumer. Their products save lives. But if they don’t get paid appropriately, capital will dry up. Real solutions to the 340B conflict require changes to the whole healthcare ecosystem and the payment structures that sustain them.

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