I happen to have an inside view of the 340B program, through volunteer work I do with a Federally Qualified Health Center that benefits from it. So here's my take.
1. Your description of it as an arcane, Rube Goldberg way of taxing-without-taxing to pay for community healthcare is completely accurate. I would add that it's also a tax-but-not-a-tax on private health insurance, Medicaid, and Medicare, since no-one is getting cheaper medication because of it.
2. At the same time, hospitals and community clinics have become very dependent on the revenue. Any reform of the program is going to have to figure out some politically palatable alternative. (Economically rational alternatives were left in the dust a long time ago; there are too many vested interests. Everyone knows we have the worst of both worlds, private & nationalized. No-one is ready to change without a fight. Remember when hospitals went to court to not have to disclose prices, and finally complied in the most obnoxious malicious-compliance way they could?)
3. This statement: "Low income people with private, medicaid, spousal, government, or other insurance get the same health care as anyone else" is sadly untrue. Many community hospitals and clinics bill on an income based sliding scale. They also know what sort of insurance you're using, or if you don't have any. Many private medical practices don't even accept Medicaid, and the ones that do have some...shall we say, selection effects, so the community clinics & hospitals are often the only option for Medicaid patients. Yet Medicaid reimburses at a lower rate than private insurance. Many hospitals claim they can't break even on what Medicaid reimburses. (As if costs were inscribed on stone tablets on Mt Sinai.)
It's not unusual for hospitals to shut down their labor and delivery services, for example, once the proportion of Medicaid patients crosses a critical threshold.
I would love to believe in a utopian world where Medicaid patients get the same health care as everyone else. Unfortunately I studied too much economics and I know the incentives. I also have more anecdotes than anyone cares to hear.
Thank-you for attempting to educate this old hermit on the subject of the drug pricing program. As I am slow at digesting complex subjects, I will read your work again over my morning coffee. Hopefully, I will comprehend the subject to a great degree.
The goal of the healthcare system is to provide full employment to spreadsheet jockeys and lobbyists.
I ‘m personally in the 1% doing a fake email job in this industry and that’s my observation working both the private and government side of this for 15 years.
Providers, suppliers, and insurers dance their dance. Sometimes one wins and sometimes one loses (we get paid to try and make sure our clients win more often, but people just like us at the other entities are paid to do the same).
States try to rip off the Feds. The feds occasionally do something back to the states. Shit always tends to end up in the federal balance sheet because it’s the entity that cares the least about its own debt. CBO scores are total garbage and I’d be embarrassed to publish that nonsense.
I worked in a hospital business office for almost 22 years. My reimbursement analyst job was to confirm inpatient payments for accuracy. I never had to drill down far enough to get to this BS. Good. God.
Excellent commentary! To partially answer a question you asked in your piece, one way hospitals know your income is by applying for financial assistance. Non-profit hospitals are required to have a certain amount of financial assistance, based on the size of the hospital. The application requires quite a bit of personal financial disclosure.
Thank you for introducing us to Dan Snow and his Price Points blog. Dan provides a good picture of the impact of outpatient drug and 340B pricing on revenue, but he stops short of discussing their impact on hospital margins, probably because data are not readily available. Since CMS implemented their inpatient and outpatient prospective payment systems many years ago and commercial payers, piggy-backing on CMS reimbursement structures, have pushed hard for years to reduce these rates, hospital margins for these services have decreased significantly.
In contrast, outpatient drugs have become major profit centers for hospitals. Dan's example of a $7K gross margin on Keytruda from commercial payers, augmented to $10K with 340B pricing, is a good example. It doesn't cost anywhere near $7K for hospitals to acquire, store, and dispense the drug; it probably costs less than $700, their gross margin on Medicare patients without 340B pricing. As a result, outpatient infusion therapy has become one of the most profitable clinical services hospitals offer. For cancer hospitals, outpatient infusion therapy can account for the bulk of their net income.
Furthermore, as Dan points out, the margin hospitals earn is directly related to the cost of the drug, giving them an incentive to dispense higher cost drugs and go slow in substituting lower cost drugs like biosimilars.
There was a time when oncologists could administer chemotherapeutic drugs in the private outpatient setting. Hospitals lobbied this out of exitance. And costs soared. The solution is to further complicate, mandate, legislate and and obligate physicians to ever lower reimbursements. This is sure to improve physician quality and morale. (Sarcasm of course.)
Hospitals are about as far from their commitment to the stakeholders as not-for-profits as they can maneuver. No hospital administrators with their growing bureaucracies are suffering from crashing compensation.
The present government run, entitlement driven healthcare system spends as spendthrifts do with ever decreasing amounts of these precious healthcare dollars ever reaching the the very basis of care, a doctor and an individual patient.
Medicare is on its way to insolvency, Medicaid is on its way to insolvency and the ship that will sink first is the most important one, that of the patient and doctor.
Thanks for the description of this program. Obviously, this is yet another market failure that can be resolved only by implementing another government program.
funny how a year ago mr. Cochrane had so much material to write about (so much so he had to go back to the roman empire)… i formulated two hypotheses to explain this: 1. there are no economic news worth commenting or 2. the comments are for sale.
Very insightful into a purposefully complex system of rules.
How about, when one goes into hospital, one submits not only one's insurance documents, but also a FAFSA? :-)
That day is coming. More and more programs are based on income, as if income were stamped on our foreheads at birth.
New literature - "The Riomet Letter", "Of Price And Men", "A Tale of Two Pharmacies", "The Call Of The Bilked".
I happen to have an inside view of the 340B program, through volunteer work I do with a Federally Qualified Health Center that benefits from it. So here's my take.
1. Your description of it as an arcane, Rube Goldberg way of taxing-without-taxing to pay for community healthcare is completely accurate. I would add that it's also a tax-but-not-a-tax on private health insurance, Medicaid, and Medicare, since no-one is getting cheaper medication because of it.
2. At the same time, hospitals and community clinics have become very dependent on the revenue. Any reform of the program is going to have to figure out some politically palatable alternative. (Economically rational alternatives were left in the dust a long time ago; there are too many vested interests. Everyone knows we have the worst of both worlds, private & nationalized. No-one is ready to change without a fight. Remember when hospitals went to court to not have to disclose prices, and finally complied in the most obnoxious malicious-compliance way they could?)
3. This statement: "Low income people with private, medicaid, spousal, government, or other insurance get the same health care as anyone else" is sadly untrue. Many community hospitals and clinics bill on an income based sliding scale. They also know what sort of insurance you're using, or if you don't have any. Many private medical practices don't even accept Medicaid, and the ones that do have some...shall we say, selection effects, so the community clinics & hospitals are often the only option for Medicaid patients. Yet Medicaid reimburses at a lower rate than private insurance. Many hospitals claim they can't break even on what Medicaid reimburses. (As if costs were inscribed on stone tablets on Mt Sinai.)
It's not unusual for hospitals to shut down their labor and delivery services, for example, once the proportion of Medicaid patients crosses a critical threshold.
I would love to believe in a utopian world where Medicaid patients get the same health care as everyone else. Unfortunately I studied too much economics and I know the incentives. I also have more anecdotes than anyone cares to hear.
Thank-you for attempting to educate this old hermit on the subject of the drug pricing program. As I am slow at digesting complex subjects, I will read your work again over my morning coffee. Hopefully, I will comprehend the subject to a great degree.
The goal of the healthcare system is to provide full employment to spreadsheet jockeys and lobbyists.
I ‘m personally in the 1% doing a fake email job in this industry and that’s my observation working both the private and government side of this for 15 years.
Providers, suppliers, and insurers dance their dance. Sometimes one wins and sometimes one loses (we get paid to try and make sure our clients win more often, but people just like us at the other entities are paid to do the same).
States try to rip off the Feds. The feds occasionally do something back to the states. Shit always tends to end up in the federal balance sheet because it’s the entity that cares the least about its own debt. CBO scores are total garbage and I’d be embarrassed to publish that nonsense.
It also ends up raising insurance premiums for the rest of us. Don't forget that part.
I worked in a hospital business office for almost 22 years. My reimbursement analyst job was to confirm inpatient payments for accuracy. I never had to drill down far enough to get to this BS. Good. God.
Excellent commentary! To partially answer a question you asked in your piece, one way hospitals know your income is by applying for financial assistance. Non-profit hospitals are required to have a certain amount of financial assistance, based on the size of the hospital. The application requires quite a bit of personal financial disclosure.
Thank you for introducing us to Dan Snow and his Price Points blog. Dan provides a good picture of the impact of outpatient drug and 340B pricing on revenue, but he stops short of discussing their impact on hospital margins, probably because data are not readily available. Since CMS implemented their inpatient and outpatient prospective payment systems many years ago and commercial payers, piggy-backing on CMS reimbursement structures, have pushed hard for years to reduce these rates, hospital margins for these services have decreased significantly.
In contrast, outpatient drugs have become major profit centers for hospitals. Dan's example of a $7K gross margin on Keytruda from commercial payers, augmented to $10K with 340B pricing, is a good example. It doesn't cost anywhere near $7K for hospitals to acquire, store, and dispense the drug; it probably costs less than $700, their gross margin on Medicare patients without 340B pricing. As a result, outpatient infusion therapy has become one of the most profitable clinical services hospitals offer. For cancer hospitals, outpatient infusion therapy can account for the bulk of their net income.
Furthermore, as Dan points out, the margin hospitals earn is directly related to the cost of the drug, giving them an incentive to dispense higher cost drugs and go slow in substituting lower cost drugs like biosimilars.
There was a time when oncologists could administer chemotherapeutic drugs in the private outpatient setting. Hospitals lobbied this out of exitance. And costs soared. The solution is to further complicate, mandate, legislate and and obligate physicians to ever lower reimbursements. This is sure to improve physician quality and morale. (Sarcasm of course.)
Hospitals are about as far from their commitment to the stakeholders as not-for-profits as they can maneuver. No hospital administrators with their growing bureaucracies are suffering from crashing compensation.
The present government run, entitlement driven healthcare system spends as spendthrifts do with ever decreasing amounts of these precious healthcare dollars ever reaching the the very basis of care, a doctor and an individual patient.
Medicare is on its way to insolvency, Medicaid is on its way to insolvency and the ship that will sink first is the most important one, that of the patient and doctor.
Very sad indeed.
What do nonprofits do with all that extra revenue?
Thanks for the description of this program. Obviously, this is yet another market failure that can be resolved only by implementing another government program.
funny how a year ago mr. Cochrane had so much material to write about (so much so he had to go back to the roman empire)… i formulated two hypotheses to explain this: 1. there are no economic news worth commenting or 2. the comments are for sale.