Drugs for the indigent: a proposal to revise the 340B drug pricing program.

• Author: Baer, Connor J.

TABLE OF CONTENTS INTRODUCTION I. THE 340B CONTEXT A. The History of 340B B. The Current Scope and Growth of 340B II. 340B Challenges A. Immediate Problems with 340B 1. Definition and Guidance on the Meaning of "Patient" 2. Hospital Profits B. Fundamental Problems with 340B 1. Authority Structure a. Orphan Drug Exemption: PhRMA Litigation and HHS's Unclear Authority 2. Diverging Interests and the Purpose of 340B III. RETHINKING 340B: A FRAMEWORK A. Proposed Solution 1. Separating 340B from Medicaid 2. Creating New Eligibility Standards and Requirements for Covered Entities a. Patient Eligibility b. Requirements for Covered Entities 3. Authorizing HHS with the Proper Mandate B. Potential Outcomes 1. Potential Benefits 2. Potential Critiques CONCLUSION INTRODUCTION

Everybody, at one point or another, needs medication; not everybody, however, can afford it. With this fact in mind, in 1992, Congress enacted the 340B drug pricing program, (1) a statutory scheme designed to reduce pharmaceutical costs for safety-net medical providers (2) and the indigent populations they serve. Under 340B, pharmaceutical manufacturers are required to offer discounts on certain medications to participating safety-net providers. In theory, the 340B program helps to alleviate part of the financial burden shouldered by medical providers serving indigent populations and creates a low-cost source of pharmaceutical medication for the indigent patients themselves.

Yet despite its intended benefits, the 340B program has proved to be less of a success than Congress originally hoped. To be sure, in the decades since its enactment, 340B has grown significantly. In 2015 alone, branded 340B sales in the United States at wholesale acquisition cost (3) are estimated to total over $15 billion, 5 percent of all outpatient drug sales in the United States. (4) Total 340B expenditures are expected to reach $25 billion by 2019. (5)

The program's size, however, is not so much an issue as is its focus. Some analysts have questioned 340B's integrity and purpose, as safety-net hospitals may profit significantly from their participation in the program. (6) For example, suppose Hospital A qualifies for the 340B program and thus receives a significant discount on certain medications because of its status as a safety-net hospital. Under 340B, rather than pass these discounts on to its indigent patients in the form of lower prices for care, Hospital A may charge its patients full price for the drugs and pocket the difference. In this way, some safety-net hospitals have profited over $100 million per year. (7) Although many safety-net providers undoubtedly need the proceeds, the question left unanswered is whether the indigent patients, for whom the 340B program was arguably created, are receiving any benefit.

Experts familiar with the 340B program recognize this problem, among others. (8) In early 2014, the Department of Health and Human Services (HHS) and the Health Resources and Services Administration (HRSA), the agency tasked with overseeing the 340B program, considered issuing a "mega rule" to resolve the program's internal conflicts and clarify points of dispute. (9) In the summer of 2014, however, a network of pharmaceutical manufacturers and advocacy groups successfully challenged HRSA's authority to publish legislative rules on 340B, ultimately leaving HRSA on shaky ground to issue any substantive regulations. (10) HRSA scrapped the "mega rule" in November 2014, (11) instead publishing proposed "Omnibus Guidance" in the Federal Register on August 28, 2015. (12) Agency guidance, however, no matter how significant, is not sufficient to fix 340B.

A better solution is to rethink the current form of the 340B program. Simply put, 340B needs to be restructured if it is to fulfill the purpose for which it was originally intended. To date, neither Congress, nor the pharmaceutical industry, nor the expansive network of safety-net medical providers has put forth a realistic plan to comprehensively revise the 340B program. This Note seeks to fill that gap. First, this Note proposes a practical framework for revising 340B to best serve indigent patients, while simultaneously alleviating financial burdens on drug manufacturers and safety-net providers. Second, this Note seeks to spur practical and creative discussion and debate among the various interested parties engaged in the 340B program. The proposal outlined herein may provide a foundation for such discussion and, eventually, reform.

This Note proceeds in three parts. Part I describes the history of 340B--its intended purpose, enactment, and implementation--as well as the program's current scope and trending growth. Part II evaluates many of the significant problems in the current scheme, which fall broadly into two categories: immediate and fundamental. Contributing to the former category are the insufficient guidance regarding what constitutes a "patient" under 340B (13) and the growing speculation and criticism over hospitals profiting millions of dollars through 340B discounts. (14) The latter category, though, speaks more to issues at the heart of the program: HHS's lack of authority to properly administer 340B--illustrated through the litigation over the "orphan drug exception" (15)--and the countervailing interests between drug manufacturers and safety-net providers over the purpose of the 340B program and the distribution of the 340B discounts. (16) Part III lays out a practical framework for revising the 340B program: first, unlinking 340B from Medicaid; (17) second, creating new standards for patient eligibility and requirements for covered entities; (18) and finally, granting HHS the proper authority to ensure effective implementation of the new changes and oversee the administration of the 340B program. (19)

1. THE 340B CONTEXT

   1. The History of 340B

      In 1992, Congress enacted the 340B drug discount program under the Veterans Health Care Act of 1992 (20)--codified as Section 340B of the Public Health Service Act (21)--to help certain safety-net medical service providers "stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services." (22).

      Congress originally intended the 340B program to correct an unforeseen consequence of the 1990 Medicaid Drug Rebate Program (MDRP), "which required drug manufacturers to offer Medicaid discounts [in the form of rebates to state Medicaid agencies] on outpatient drugs that would at least match the 'best price' offered to any other buyer." (23) Prior to the MDRP, drug manufacturers had voluntarily offered large discounts to Department of Veterans Affairs (VA) hospitals and other safety-net medical providers serving uninsured and indigent populations. (24) Under the MDRP, however, drug manufacturers were forced to extend rebates to Medicaid "disproportionate share hospitals" (DSHs) (25) and patients, and manufacturers consequently limited discounts to VA hospitals and other safety-net providers not covered by the MDRP in order to save costs. (26) Congress enacted 340B to fix this unintended consequence by preserving the drug discounts manufacturers previously offered safety-net providers. To that end, 340B "imposes ceilings on prices drug manufacturers may charge for medications sold to specified health care facilities," many of which are "providers of safety-net services to the poor." (27)

      For the sake of clarity, the 340B program may be best understood in economics terminology as the interplay between supply and demand: supply from pharmaceutical manufacturers and demand from covered entities and patients. On the supply side, as a condition to receiving Medicaid matching funds under state Medicaid programs or participating in the Department of Defense and VA prescription drug contracting programs, any pharmaceutical manufacturer (28) that sells "covered outpatient drugs" (29) must enter into a Pharmaceutical Pricing Agreement (PPA) with the HHS Secretary to provide certain drugs to "covered entities" at a discounted rate. (30) The definition of a "covered drug" generally includes only certain outpatient drugs dispensed by a "covered entity"; inpatient services are not covered. (31)

      Once a manufacturer has signed a PPA, it is barred from charging covered entities any drug price exceeding a cap set by HHS. (32) This price cap, called the ceiling price, is calculated by subtracting the Medicaid unit rebate amount (33) (essentially a minimum discount (34)) from the average manufacturer price (AMP). (35)

      For example, suppose a drug manufacturer (A-Corp) produces an innovator drug (36) called Rx-A, for which A-Corp receives an average price of $100 from both wholesalers and retail pharmacies. Assuming that the applicable discount percentage is the statutory minimum discount of 23.1 percent for brand-name drugs, the ceiling price that A-Corp may charge covered entities for Rx-A is $76.90. Unsurprisingly, manufacturers are completely free to charge less than the ceiling price if they choose. (37)

      On the demand side, to qualify as a "covered entity" and receive 340B drug discounts, a provider must either receive money from one of ten types of federal grants or qualify as one of six specified types of hospitals. (38) All of the grantee eligibility criteria are specifically tied to certain patient groups that are targeted for special assistance. (39) Hospital eligibility is similarly linked to specific populations: disproportionate share hospitals (DSH, (40)) children's hospitals and free-standing cancer hospitals subject to certain provisions, (41) critical access hospitals, (42) sole community hospitals, (43) and rural referral centers. (44) DSHs were targeted by 340B from its original enactment; children's hospitals were included in 2006, and the other hospital types were added to the program under the Affordable Care Act (ACA). (45) Off-site clinics and other care facilities associated with 340B...