Drug discount designed to help clinics for poor is helping hospitals' bottom lines

When Congress approved a drug discount program two decades ago for clinics that serve impoverished and uninsured populations, the pharmaceutical companies didn't envision that the discounts would be abused by enormous -- and, sometimes, enormously profitable -- hospital chains.

Yet that's what's happening, according to the major drugmakers. Hospitals, on the other hand, say the discounts are working precisely as advertised: helping poor patients receive cheaper medication and, as a byproduct, helping medical providers that operate on razor-thin margins to weather years of flat admissions and oncoming overhaul-driven changes that will further squeeze the industry.

"It's a program that's absolutely essential to hospitals and community health centers," said Ted Slafsky, CEO of the Safety Net Hospitals for Pharmaceutical Access, a Washington, D.C.-based association of 1,000 such hospitals.

Drugmakers say the discounts -- up to 50 percent for certain hospitals and clinics -- need to be revisited. They have some allies in Washington, D.C., including Sen. Chuck Grassley, R-Iowa, who wrote last year that "the intent and design of the (program) is to help lower outpatient drug prices for the uninsured, (not) to subsidize covered entities for providing inpatient services to those who are covered by private insurance (or) Medicare."

That's part of the problem, according to pharmaceuticals -- hospitals are taking the discounts meant to aid vulnerable populations and applying them across the board, pocketing the difference and using the money however they wish. For many large hospital systems, the discounts total tens or hundreds of millions in gross profits.

There are "billions and billions of dollars sloshing around with no accountability and no transparency," said Adam J. Fein, head of Philadelphia's Pembroke Consulting Inc., whose clients are mainly pharmaceutical firms. "That's no way to run a health system."

In February, a report issued by a collective of drugmakers and related associations expressed concern that clinical decision-making may be skewed by hospitals trying to take advantage of the discounts.

Because the discounts are so steep, the size of the program has grown -- about 8,000 "unique" entities participating today, operating more than 16,000 hospitals, clinics and outpatient sites. That's twice the number of facilities that were getting discounts in 1998.

And the number of eligible facilities could spike in 2014, as more patients gain health insurance through the Affordable Care Act. In 2012, U.S. drug purchases made via the 340B discount totaled $7 billion; the figure could hit $12 billion in 2016.

"The intent of the legislation is to help indigent and uninsured patients," Fein said. "Everybody agrees that's the right goal. (But) right now, hospitals are not required to disclose" which patients receive the discounted meds or how the hospitals spend the "saved" money.

Here's how it works: Congress created the program to help uninsured and indigent patients "gain better access to prescription medicines," in the words of the February report. It achieved that by requiring pharmaceutical manufacturers to provide discounts on outpatient medications "to entities that serve high numbers" of low-income patients.

Hospitals -- including children's hospitals, cancer hospitals, state-run hospitals and others - along with family planning centers, rural health centers and free-care clinics can all apply for 340B price breaks.

The entity can then stockpile and dispense the drugs through in-house pharmacies or, more commonly since 2010, through a network of multiple retail pharmacies. When the pharmacy fills a prescription for a patient who was prescribed medication at one of the eligible hospitals or clinics, that transaction is flagged. The hospital or clinic can then keep the difference between the discounted price of the drug and the amount paid by the insurer.

The patient's insurance status doesn't matter; all that matters is that he was a patient at a 340B-eligible entity. And in many cases, the patient and insurer pay the full rate for the medication, while the hospital is the one that gets the cash. There is no guarantee that the discount flows to the patient, according to the February white paper.

Hospitals and clinics say the discounts have become a vital piece of the health care system.

The 340B program "supports charity care programs and helps to sustain the lifesaving mission of these hospitals, including care for a disproportionate share of low-income patients," UPMC spokeswoman Wendy Zellner said.

"This funding is especially critical as reimbursement from other government programs remains under pressure, threatening the ability of health care providers nationwide to sustain their

current level of services," she said.

As for why the pharmaceutical companies are sounding alarms, he pointed to their collective bottom line.

"They are concerned about their profits, and they want to make sure that they continue to meet the demands of their shareholders," Slafsky said. While the $6 billion in outpatient medications purchased through the 340B program sounds like a lot, it's perhaps 2 percent of the total $320 billion U.S. drug market, he noted.

But pharmaceutical groups said it's the hospitals, not the drug companies, that are gaming the system to pad their own bottom lines.

"The 340B program should be used to reduce prescription drug costs for uninsured indigent patients -- not to subsidize covered entities," said Matt Bennett, senior vice president of the Washington, D.C.-based Pharmaceutical Research and Manufacturers of America.

(Reach Pittsburgh Post-Gazette reporter Bill Toland at btoland@post-gazette.com. Distributed by Scripps Howard News Service, www.shns.com.)

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