Congressional Advisors Criticize the 340B Program

July 09, 2015

McDermott+Consulting

The Medicare Payment Advisory Commission and the U.S. Government Accountability Office criticize the 340B program for overpaying covered entities and incentivizing more costly drugs.

Two congressional advisory panels recently have turned a critical eye toward the 340B program and recommended that Congress consider legislative change to address misplaced incentives.

The 340B program was established to allow certain nonprofit entities to purchase covered outpatient drugs at significant discounts. Because Medicare and Medicaid payment for these drugs is not discounted under the 340B program, covered entities can realize significant margins from drugs purchased at 340B program discounts. Covered entities are not restricted on how they use this additional revenue.

In its June 15, 2015, report to Congress, the Medicare Payment Advisory Commission (MedPAC) examined whether Medicare Part B payments should be adjusted downward for drugs purchased under the 340B program. Because much of the data used to calculate the 340B price is proprietary, MedPAC could only estimate the data points required for its analysis. Despite this limitation, MedPAC estimated the 340B discounts available to covered entities by calculating the difference between the drug’s Average Sales Price (ASP) and MedPAC’s estimated ceiling price. Using this approach, MedPAC estimated that on average the 340B acquisition cost is 22 percent below ASP, and that therefore Medicare is overpaying facilities for their drug acquisitions.

MedPAC concluded that reducing Medicare payment for drugs purchased through the 340B program would save Medicare money. While MedPAC’s recommendation would be controversial and likely opposed by the covered entity community, the proposal could find support among some pharmaceutical manufacturers and lawmakers, who have long complained that covered entities do not always use the drug cost savings consistent with the perceived intent of the 340B program.

In a second report posted on July 6, 2015, the U.S. Government Accountability Office (GAO) found that per-beneficiary drug spending, including spending on costly oncology drugs, tended to be higher in hospitals purchasing drugs through the 340B program. Specifically, the GAO found that in 2012, average spending on Part B drugs in 340B hospitals was nearly 2.5 times the spending in non-340B hospitals. The GAO speculates that financial incentives lead 340B hospitals to prescribe more drugs or more expensive drugs than non-340B hospitals. The GAO recommends that Congress eliminate “the incentive to prescribe more drugs or more expensive drugs than necessary to treat Medicare Part B beneficiaries at 340B hospitals.”

Not unexpectedly, trade associations representing hospitals have already publicly voiced their disagreement with the GAO’s report, stating that the findings in the report are based on faulty analysis. Critics of the 340B program, including pharmaceutical manufacturers, are expected to use the MedPAC and GAO reports, among other critical findings, to push Congress to revise the 340B program through legislative change. These critics may find a receptive audience. The House Energy & Commerce Committee earlier in 2015 held hearings on the 340B program and recently floated draft legislation. While the draft legislation did not include proposals consistent with the MedPAC or GAO recommendations, these proposals could find their way into legislation later this year.

For more information, please contact Emily Cook, John Warren or Eric Zimmerman.

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