Understanding the Federal 340B Drug Pricing Program and What it Means for the Future of Healthcare

Brian Reid, Head of Corporate Pricing and Public Affairs at Real Chemistry, gives an overview of the 340B Drug Discount Program, a federal regulatory structure requiring drug makers who want to participate in federal programs to offer discounted prices for their products to various kinds of hospitals and clinics.

Transcript

Hi. I'm Brian Reid. I'm a practice leader in the Corporate Pricing and Public Affairs group at Real Chemistry, a global health innovations company. And I'm excited that the Journal of Clinical Pathways has invited me again to talk about a topic that's incredibly important across the health care system. Today, I want to give a little bit of an overview of the 340B Drug Discount Program. Now, it's hard to think of a federal regulatory structure that is more convoluted and in some ways more dull than the 340B Program, but in the last few years, it's really risen in prominence as it's been the center of a handful of controversies, and I want to go over a little bit about what this program is and how we got here.

And the best way is probably to start at the beginning. The program was erected by Congress in 1992, and it was designed to stretch scarce federal dollars as far as possible. Now, that's kind of a squishy goal, and that gets us into some trouble, but we'll get to that in a moment. But here's how the program works: Drug makers who want to participate in federal programs have to offer discounted prices, sometimes massively discounted prices, to varying kinds of hospitals and clinics. This has expanded over time, and now includes large disproportionate share hospitals, rural hospitals, Ryan White clinics, (and) more than a dozen other different kinds of health care entities. They're collectively often referred to as covered entities. These are the folks who have the ability to buy those discounted drugs.

Now, the program isn't particularly specific about how those discounted drugs have to be used. And the way the program's evolved, what's been most advantageous for the covered entities is not necessarily to take the discounted drugs and give them directly to low-income Americans, but to take those discounted drugs, give them to pretty much anyone who walks through the doors, and then often seek full insurance reimbursement from insurance companies. And so the way that hospitals take advantage of this program is they generate revenue based on the spread between the discounted 340B price and what they're able to seek from insurance companies, and that's become a really important source of revenue for hospitals, often in some cases, the difference between solvency and insolvency for hospitals where serving the community is incredibly important and often in low-income communities.

Now, that's the way the program has run for decades. Remember, this started back in the George HW Bush era, but the program has become a flashpoint more recently for a handful of different reasons, and I will really go into three of them. The first is that a few years ago, the government decided to cut the reimbursement in Medicare for 340B hospitals, arguing that these hospitals already got a break on the price of these drugs and it was not the role of Medicare to kind of further enrich the hospitals. Now, this was, for a variety of reasons, counter to the way that statute was set up. The covered entities sued the government, it went all the way to the Supreme Court, and the covered entities won. And so you may see some headlines about now how the government rolls back to re-implement those discounts and make whole the hospitals who got cut reimbursements during the duration of that policy.

The second flashpoint has to do with its giant expansion over the last decade or so. So in 2010, the government changed the rules of the program slightly and said that hospitals could now contract with outside pharmacies. These are your community pharmacies, your chain pharmacies, CVS, Walgreens. And rather than make sure that all of the transactions flowed through the hospital or the covered entity's pharmacy itself, they could now contract with almost any pharmacy they wanted. The change in guidance allowed for unlimited use of contract pharmacies. And not surprisingly, that led to an enormous growth in the program. Because really when it comes down to it, most drugs in this country are not dispensed at hospital pharmacies, they're dispensed at those community pharmacies that you're used to.

What this did was create an enormous explosion in the value of the drugs that were sold through the 340B Program. They went from about $4.2 billion worth of sales in 2009 before this change went into effect. Last year, that was closer to $43 billion, so we're talking about a 10-fold increase in just over a decade. And that really changed this from a sleepy program that no one paid a whole lot of attention to, to a giant portion of our drug supply and drug reimbursement system. So the 340B Program now accounts for a larger share of the drug market than even Medicaid, if that helps puts things in perspective. Now, that giant 10-fold leap had the consequence of attracting the attention of the pharmaceutical manufacturers, who are actually on the hook for providing these discounts. The pharmaceutical industry has argued that it is not really in the letter or spirit of the law to have to supply medicines to this unlimited contract pharmacies. And we are well, well past what the law is supposed to be doing.

And so naturally, the way that they're dealing with that has been through lawsuits. So we've seen more than a dozen legal actions. Technically, they're between the pharmaceutical manufacturers and the government, but they are all around this idea of how pharmaceutical companies have to interact with contract pharmacies. Can they refuse to ship to contract pharmacies? Can they add additional data requirements to contract pharmacies? And the answer there is not entirely clear yet. This is still being legally debated. Again, there are several lawsuits, some are actually in the appellate state, and hopefully, there will be some answers there that clarify exactly how this program is supposed to run.

Now, a lot of that foggy outcome comes from the fact that the statute itself is a little foggy. The original law was not particularly explicit about how the program was supposed to run, who was supposed to benefit, how people were supposed to take advantage of this because there's a lot of different ways to do it. Again, there's the traditional model in which hospitals generate revenue based on that spread between the 340B price and the reimbursed price. But there's also covered entities that actually provide the discounts directly to patients. There's 340B cards that work like drug discount cards. So there's a lot of different ways this can be run and I think the unanswered question is, is there a way that it is supposed to run? So we may get some legal answers to that question. There's also increasing interest in getting some legislative answers to that question.

Now, you can see where everyone's bread is buttered here. The pharmaceutical manufacturers would like to see this rolled back to a time in which this was not a $40 billion government behemoth. On the flip side, covered entities really see the revenue generated by the 340B process as being crucial to their ability to serve communities in the way they need to, and that taking away that money really creates an existential threat to their ability to fulfill their mission. So that conflict seems unlikely to go away in the immediate term, in part because as I mentioned, so much of 340B is shrouded in fog, and that keeps the future similarly cloudy. So it's not obvious what the fix is going to be when it all works out, but in the meantime, we can expect this program to continue to grow, both in terms of the dollars spent and the attention paid to it. Worth watching, and I appreciate you letting me talk to you about it.