A little-known federal program widely used in Memphis to provide hospitals and health centers that treat the nation’s most vulnerable patients with hefty discounts on outpatient drugs is under scrutiny from Congress, regulators and the pharmaceutical industry.

Shutterstock

The program, known as 340B, requires drug companies to provide 20 to 50 percent off specific outpatient drugs to hospitals and other public health providers that treat the uninsured. While voluntary, drug makers agree to participate in 340B to do business with Medicaid, a federal and state program that helps provide health care for the poor, elderly, disabled and blind.

In Memphis, organizations like Methodist Le Bonheur Healthcare and The West Clinic, an oncology practice, rely on the 340B Drug Discount Program to provide greater access to cancer care for low-income patients and the community. Only hospital-affiliated oncology practices qualify for 340B, which played a role in the partnership between the two organizations in January 2012. Methodist already had participated in the program for about eight years prior to the partnership.

“We’d been doing it, but it was at a much lower level because we had very limited outpatient chemotherapy infusion services happening at our hospital,” said Chris McLean, executive vice president of finance for Methodist Le Bonheur Healthcare in Memphis.

“This isn’t new, but it did expand dramatically when we formed our partnership with The West Clinic.”

The drug discount program also is used extensively in Memphis beyond Methodist and The West Clinic. Data from the Health Resources and Services Administration, an agency of the U.S. Department of Health and Human Services, show that other organizations like Christ Community Health Services Inc., The Regional Medical Center at Memphis, Planned Parenthood Greater Memphis Region and St. Jude Children’s Research Hospital also are enrolled in the 340B program.

But as 340B has ballooned to more than 16,500 participating organizations as of July 2011, about double the number reported in 2001, according to federal data, the program has come under fire by the pharmaceutical industry, which wants to curtain drug discounts and narrow the program’s scope. On the other side, hospitals and other providers of public health services have said they might have to eliminate services without the program. 340B providers have been urging the government to step up its oversight of how drug makers are complying with the program.

One pharmaceutical industry contention is that providers participating in 340B can purchase drugs at the discounted prices from the drug makers regardless of their income or insurance status. Many organizations, including The West Clinic and Methodist, generate revenue through a patient’s insurance reimbursement and Medicare by pocketing the difference between what they pay for the drugs and what they are reimbursed.

A February 2013 report authored by trade groups representing the pharmaceutical industry raised concerns that the program needs additional oversight and transparency and that some providers are using the program to generate revenue, rather than helping poor patients.

The number of hospitals participating in the program nearly tripled to 1,673 in 2011, compared with 591 in 2005, according to a 2011 report by the Government Accountability Office, the investigative arm of Congress. By some estimates, 340B drug purchases could double from $6 billion annually in 2010 to $12 billion by 2016.

“These figures raise critical questions about the growth of the 340B program, how the program has evolved, and whether the changes that have occurred over the years are consistent with Congress’ intent in creating the program,” the authors of the pharmaceutical industry trade report wrote.

Sen. Chuck Grassley, R-Iowa, and other conservatives also are calling for closer scrutiny of the program, which they say suffers from lax rules and regulation. Grassley has asked the agency in charge of the program, the Health Resources and Services Administration (HRSA), about its oversight of the program.

In a May 8 press release, the senator’s office wrote that, “certain hospitals appear to be making sizeable profits from the program at the expense of Medicare, Medicaid and private health insurance.”

“… Congress needs a full picture of how hospitals are using the program and how their uses affect other programs in the health care system,” Grassley said in a prepared statement. “Congress needs to know the extent to which the agency believes it lacks the statutory authority to ensure that hospitals use the 340B program to help the uninsured receive affordable prescription drugs.”

Much of the tension between hospitals and the pharmaceutical industry revolves around the program’s original intent. Hospitals and HRSA say 340B’s scope stretches far beyond providing affordable medicine to uninsured patients. Rather, HRSA says the program, which dates to 1992, allows participating hospitals to stretch scarce federal resources as far as possible, reaching more patients and providing more comprehensive services.

Drug makers and their allies have argued the program has a more narrow scope: to provide discounted drugs to the poor.

Devon Herrick, a senior fellow with the National Center for Policy Analysis, a conservative think tank, says the number of eligible 340B entities has grown as more health care providers have incentives to affiliate with hospitals because of the Affordable Care Act and 340B drug discounts.

“Doctors employed by these hospitals now have access to these 340B discounts,” he said. “Drugs that, say, in the past would have been used by a hospital are suddenly being used by physicians who are affiliated by the hospital – possibly treating patients who aren’t even indigent.”

340B was created to lower costs for the government by shifting funds from drug companies to hospitals that treat low-income people, Herrick said. That’s created tighter profit margins for pharmaceutical manufacturers.

But hospital experts like Methodist’s McLean say 340B makes up a very small portion of revenue for drug makers. “It isn’t like they are selling these drugs to us at a loss,” he said. “Many times they are selling these drugs to us at prices equal or even above what they are selling the same drugs over in Europe and other countries.”

After a federal audit last year, The New York Times reported 271 treatment locations belonging to 85 hospitals were removed from the 340B discount program.

Some hospitals that lost program eligibility are in a perilous financial situation. Carl Martin, CEO of Morehead Memorial Hospital in Eden, N.C., earlier this month told The Business Journal of the Greater Triad Area the hospital posted a $1.4 million deficit at the end of its second quarter in March after losing 340B eligibility.

Lee Schwartzberg, medical director of The West Clinic, and Methodist’s McLean, say they partnered for reasons that go far beyond the discounted drug program, but that 340B provides funding for services that are needed for effective cancer care that are not traditionally funded by insurance carriers or the government. The additional funding provides patients with access to services like navigators, nutritional support, counseling groups, and survivorship programs.

“Our 340B funds are devoted exclusively to improving cancer care in our community,” Schwartzberg said.

340B revenue also is used to directly fund cancer care for indigent patients, who have often foregone treatment because they didn’t have the ability to pay for expensive cancer drugs, he explained. Additional 340B funds contribute to building a comprehensive cancer center for Memphis, which will be jointly administered by the West Clinic, Methodist and the University of Tennessee Health Science Center.

“We’ve always served the uninsured at Methodist, but we never even dreamed that through this partnership we would actually attract some patients that were uninsured because we figured they would have come to us anyway,” McLean said. “But the reality is that they can’t get to us unless they come through a medical oncologist.”

McLean said they’ve found many patients didn’t get their cancer diagnosed until too late because they didn’t know how to access and navigate the system.

“I think like any other program there may be particular instances around the country where the program is not used as intended, but I think our particular situation is completely consistent with the way 340B was designed to be used for a disproportionate share hospital that serves the entire community,” Schwartzberg explained.

Both McLean and Schwartzberg say they aren’t worried about more regulatory scrutiny because they believe their use of the program falls squarely within the program’s guidelines. They say they have called on legislators to make sure 340B program rules are clear and that there are no abuses happening anywhere in the nation. But overall, they are confident they are using the program properly and that it benefits the Memphis community.

“If the entire program changed, that would change things,” Schwartzberg said. “But I think that is very unlikely.”