Grassley's Senate proposal could inject drug discount with the transparency it needs

Grassley's Senate proposal could inject drug discount with the transparency it needs
© Greg Nash

One day in business school, we did a strategy exercise on hospitals: was it better to be nonprofit or a for-profit?

The instructor took us through a (very simplified) cash flow for different procedures at our imaginary hospital, then calculated the bottom line. If the hospital couldn’t make enough of a margin on its portfolio of procedures, we learned it would be better to adjust prices for some patients, or accept a certain number of charity cases, to ensure we didn’t make a profit — because then we wouldn’t have to pay taxes.


Sometimes, the teacher joked, it was more profitable to be a nonprofit.


In a situation like this, a lack of transparency is wonderful for padding your bottom line. It lets you play with your prices, unfairly charging some more than others to adopt a more advantageous price and/or tax strategy. (It’s not wonderful for the people paying.) Compound this with the problems inherent to a third-party payer system — where the patient is the hospital’s product and not its customer — and we open the door to the kind of waste, fraud, and abuse that makes health care more expensive but less effective.

Some health care providers are in open revolt against this problem. The Surgery Center of Oklahoma’s website lists its prices right on its main page.

But there’s only so much a few doctors can do to improve the easily exploited transparency lacuna; lasting improvements are going to have to come out of Washington. And one particularly opaque federal program — the 340B drug discount program — is finally getting the attention it deserves.

Created in 1992, the 340B program was designed to reduce outpatient prescription drug costs, helping hospitals that serve uninsured and vulnerable patients. 340B requires that drug manufacturers give big discounts to hospitals and clinics that qualify as “covered entities” in order to get Medicaid dollars. (It’s like affordable housing for outpatient drugs.)

Under current law, a “covered entity” is one that qualifies to receive certain federal grants or is a nonprofit that meets 340B program standards. A hospital can become a covered entity if serves enough Medicare patients to become a disproportionate share hospital (DSH), but the 340B program relates solely to inpatients and doesn’t measure the amount of care actually provided to uninsured or vulnerable patients.

Furthermore, while the intent was to provide discounted drugs to vulnerable patients, the law doesn’t explicitly require hospitals to use net income derived from 340B to directly benefit these low-income patients with the money they’re saving on drugs. And studies have shown that many 340B hospitals provide little charity care and even shuffle these discounted drugs to off-campus outpatient facilities serving richer communities. A covered entity may even bill drugs at rates above the acquisition cost and actually generate revenue.

Remember how lack of transparency opens the door for waste, fraud, and abuse in a third-party payer system, making health care more expensive and less effective? Well, 340B is a textbook example of that. 

340B was founded with good intentions, but the people who created it seemed to think federal programs should be operated on the honor system. It’s a relatively small program with a big problem, but apparently the cat is out of the bag because the program keeps getting bigger.

The Affordable Care Act (ObamaCare) expanded the types of hospitals eligible to participate in 340B, and the program has been spreading as more entities learn how to exploit the 340B loopholes. From 2014 to 2016, it grew by 125 percent; it now accounts for about 8 percent of total US branded outpatient drugs; and it’s predicted to keep growing from $16 billion in 2016 to $23 billion by 2021.

Luckily, Congress is on the move to correct this. Sen. Chuck GrassleyChuck GrassleySenate antitrust bill has serious ramifications for consumers and small businesses Hillicon Valley: Amazon's Alabama union fight — take two Senate Judiciary Committee to debate key antitrust bill MORE (R-Iowa) has introduced legislation that prescribes to 340B the transparency it needs. The Ensuring the Value of the 340B Program Act will require covered entities to report the total costs of acquisition for drugs collected through the program, plus any revenue earned from third-party payers for those same drugs. Then the government can assess the value of the program by examining the difference in those two amounts.

Senate Health, Education, Labor and Pensions Committee Chairman Lamar AlexanderLamar AlexanderMcConnell gets GOP wake-up call The Hill's Morning Report - Presented by Alibaba - Democrats return to disappointment on immigration Authorities link ex-Tennessee governor to killing of Jimmy Hoffa associate MORE (R-Tenn.) is holding a hearing Thursday to consider Grassley’s bill. We need this reform so that 340B helps the vulnerable populations it was originally intended to serve while keeping taxpayers from being fleeced in this health-care shell game.

Or someone needs to tell my professor to add this scam to his strategy exercise.

Jared Whitley served as press liaison for Sen. Orrin Hatch (R-Utah) and associate director in the White House under George W. Bush. He is an award-winning writer, having won honors from the Society of Professional Journalists and the Best of the West contest.