The 340B Program is at a Crossroads

In summer 2020, hospitals were reeling from the COVID-19 pandemic. Personal protective equipment was in short supply. Revenues cratered with the cancellation of elective surgeries. Frontline workers tried not to get sick as they treated waves of infected patients.

Also during that tough summer, five drug manufacturers announced they were potentially ending 340B Drug Pricing Program discounts to hospitals and other types of providers — “covered entities,” in the parlance of the program — for any medications dispensed by contracted pharmacies. Now the number of manufacturers actually or considering restricting discounts has grown to 17, including big names like Johnson & Johnson, Merck, Bristol Myers Squibb, AstraZeneca and Pfizer.

The restrictions have spawned a flurry of lawsuits, 16 so far, mostly manufacturers suing the federal government to vacate its order to comply with 340B discounts.

The program has so many lawsuits that Emily Cook, a partner at McDermott Will & Emery started a 340B litigation tracker. The contract pharmacy issue makes up almost half of the 37 340B lawsuits.

As these legal issues slowly get resolved, hospitals and other providers participating in the program have seen a significant source of funds vanish. 340B Health, a membership group and lobbying organization for more than 1,400 participating hospitals and health systems, conducted a survey of 500 hospitals in March 2022. It showed that larger, mostly urban hospitals anticipate an annual median loss of $2.2 million due to the missing 340B discounts and that 10% of the health systems expect at least a $21 million loss in savings each year. Smaller, mostly rural hospitals expect a median $448,000 loss in savings annually, with 10% of them anticipating at least $1.3 million in losses annually.

Hospitals participating in the 340B program provide 60% of the country’s uncompensated care and 75% of the hospital care for those with Medicaid, according to 340B Health. “These are some of the largest drug companies in the world,” and the restrictions include some of the most important drugs patients rely on, including chemotherapy drugs, says Bharath Krishnamurthy, senior associate director of health policy and analytics at the American Hospital Association (AHA). “Hospitals rely on these relationships they have with community pharmacies to ensure that their patients have access to these drugs.”

Proponents of retaining the discounts say that the loss is harmful to hospitals’ abilities to provide services to individuals with lower incomes and to even keep the health system’s doors open. Critics of the program, most of whom are drug manufacturers, say the program has grown too large, with for-profit pharmacies and health systems reaping profits and not sharing evidence of whether the funds are used to help the intended patients.

Expansion under the ACA

The 340B program was created in 1992 to replace the voluntary discounts manufacturers provided to some safety-net clinics. Pharmaceutical companies that want their medications covered by Medicaid or Medicare Part B must offer 340B discounts, usually 25% to 50% — and sometimes higher — to organizations that participate in the program. Healthcare providers receiving the discount are then reimbursed by payers at normal prices. They pocket the difference, with the understanding that the funds should be used to provide that charitable care for people who are uninsured or underinsured.

In 1996, hospitals and clinics without their own pharmacies were allowed to designate one contracted pharmacy. In 2010, the Affordable Care Act (ACA) allowed entities covered by 340B to contract with an unlimited number of pharmacies to dispense outpatient medications. The thinking was that additional pharmacies would mean greater access for patients in socioeconomically disadvantaged communities. But that change led to rapid growth in contracting pharmacy arrangements under the 340B program and, say the critics, a distortion of what the ACA and the 340B program were trying to accomplish.

The University of Michigan Health System had three pharmacy contracts in 2011. By 2021, that number had grown to 598 contracts. The Cambridge Health Alliance in Massachusetts went from 77 contracts in 2012 to 563 in 2021. Rush University Medical Center in Chicago went from four in 2012 to 468 in 2021.

According to the Government Accountability Office, about one-third of the 12,000-plus covered entities in 2018 had agreements with contracted pharmacies. In 2010, there were 1,300 contract pharmacies. Over the next decade, the number skyrocketed, and by 2021, there were 31,000, according to Kaiser Health News.

The program mushroomed for other reasons. In its early years, not all healthcare organizations knew about 340B, Cook says Also, in addition to allowing an unlimited number of contract pharmacies, the ACA made critical access hospitals eligible to participate, expanding the number of participants. Critical access hospitals, a CMS designation, are smaller hospitals in rural areas.

“This program was really envisioned as a small safety net program, but now more than half of all hospitals in the United States participate,” says Karyn Schwartz, vice president of policy and research for PhRMA, a trade organization representing the pharmaceutical industry.

Why now?

Although the loosening of the rules to allow for an unlimited number of contract pharmacies in the 340B program began in 2010, it took a decade for pharmaceutical companies to decide to restrict the discounts. Why the delay?

“The very short answer as to ‘Why now?’ is that the drug manufacturers are likely to get a more favorable outcome now than they would have if they (had) litigated this probably five years ago,” says Cook. Several recent Supreme Court cases resulted in regulated entities gaining opportunities to challenge federal interpretation of statutes, including a ruling in June in favor of the AHA, which challenged cuts to drug reimbursement to hospitals in the 340B program.

With 340B, “we have a statute that does not have defined terms in it, and it is open to a very wide range of interpretations that have not previously been litigated. And so the parties are now having to turn to the courts to interpret that statute,” Cook says.

The statue’s lack of clear definitions, such as the role of the contract pharmacy and how the funds are spent, is causing many of the problems leading to the current issues. “There are 15 entities listed in the statute that manufacturers are required to provide discounts to, and contract pharmacies are not listed,” says Nicole Longo, senior director of public affairs for PhRMA.

Not everyone agrees. “We think the statute is clear,” says Aimee Kuhlman, vice president of advocacy and grassroots at AHA, adding that it was concerning — and wrong — for the drug companies to eliminate payment discounts for drugs dispensed at contracted pharmacies. The 340B statute doesn’t specifically mention contract pharmacies, but it does say that pharmaceutical companies must provide these discounts to eligible hospitals through pharmacies, says the AHA’s Krishnamurthy. The statute is necessarily broad because when creating the program, Congress recognized that each participating hospital’s situation was unique, so it gave the hospital flexibility to use the savings as they saw fit, he says.

Reporting requirements

The government does not require covered entities to share how they use the 340B funds. “It’s certainly possible they’re spending it investing in more care for low-income communities, but we’ve seen no real evidence of that,” Schwartz says. “I think that the biopharmaceutical industry’s main concern is that we provide tens of billions of dollars in discounts every year with no way of knowing how that money is being used to help patients, and we just have to take hospitals at their word.”

In 2018, the AHA issued 340B good stewardship principles recommending that participating hospitals annually share the estimated savings amount and the services funded with the savings. “As far as any additional calls for mandatory transparency, I think that there is some concern about cherry-picking information that doesn’t necessarily tell the full picture of what hospitals are doing to serve their communities,” Kuhlman says.

Some manufacturers are offering the discount for drugs dispensed at contract pharmacies if the healthcare organization provides additional information not required by the government. “Each manufacturer has its own requirements in terms of what they’re allowing and not allowing and what types of data they want and need,” says Krishnamurthy of the AHA. That might be detailed claims-level data. “For hospitals, the biggest concern is burden. They have to aggregate the data from different vendors that they contract with, (put the data) all together in a format that is different for each manufacturer and then submit (the) data, and then wait to see if there are any issues with the data they’ve submitted and correct that.”

Some manufacturers — Novartis, for example — are offering the discount only for contract pharmacies located within a 40-mile radius of a covered entity, which can be difficult if a patient in a rural area needs specialty drugs. Others have reverted to allowing only one contracted pharmacy to be included, Krishnamurthy says.

The future of 340B

The swarm of controversy and litigation surrounding the 340B program isn’t going away any time soon. At a minimum, the lawsuits are putting a fresh spotlight on the program and raising questions about whether it benefits patients, says PhRMA’s Longo. When measured by the amount of money paid by payers and patients, the 340B program is the second-largest federal prescription drug program after Medicare Part D, and by 2026, it is anticipated to be the largest drug program in the country.

In addition to mandatory transparency requirements, Schwartz would like to see regulatory requirements allowing patients accessing drugs through a covered entity to have access to a sliding scale for purchases, so they don’t have to pay list prices. Not all medication discounts are directly passed on to patients. “As we’re having a broader discussion in the United States about addressing health inequities, it’s even more important to make sure our safety-net programs are working,” says Longo. “We hope that all the stakeholders can come together and find ways to fix the program because the industry continues to be committed to this program. But it needs to work for patients.”

The AHA says that these actions are hurting hospitals and affecting their ability to care for patients. “It’s just a very poor decision of manufacturers to enact these policies and hurt the providers and patients that needed the most,” says Krishnamurthy.

What are contract pharmacies?

The contract pharmacies are not directly covered by the 340B program and do not receive the discounts from the manufacturers themselves. The discounts are given to “covered entities,” such as hospitals and federally qualified health clinics. These pharmacies have contracted with the covered entities. They can dispense the medications for these covered entities and get paid for doing so. If the drug manufacturer does not provide the discount for these pharmacies to dispense, the covered entity receives no financial benefit from the 340B program to use for its charitable care. Pharmacies receive payment for dispensing the medications.