Another Federal Healthcare Scheme That Fails Tennessee’s Most Vulnerable

Lindsay Boyd Director of Policy, Beacon Center of Tennessee
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If national polls are right and just a third of the people signing up for a plan under Obamacare were actually uninsured last year, the reform has made only a tiny dent in Tennessee’s 866,700 uninsured population. How could a program carrying a $1.8 trillion price tag fail this miserably to deliver on its promise to dramatically expand coverage in its first year?

Perhaps the problem is that Obamacare is simply another federal experiment, which are notorious for being largely inadequate at solving long-term problems and equally infamous for the money they drain from taxpayers’ pockets. Sadly, the issues these programs are meant to address are real for many Americans and they deserve real solutions — particularly in the quest to cure our nation’s broken healthcare system.

Case in point: The 22-year-old federal prescription drug discount program that started as a small, targeted effort designed to lower drug costs for the uninsured. That’s obviously a noble goal. But it has since morphed into a multi-billion dollar corporate welfare scheme for hospitals and big retail pharmacies.

Called “340B,” after the section of the law that created it, this program requires drug manufacturers to sell drugs at deep discounts to hospitals and clinics that largely care for low-income and uninsured patients.

Yet, 340B never actually required those savings to get passed on to patients, and the rules governing which hospitals were eligible for the discounted drugs are relatively vague. A report to Congress dating as far back as 2007 found, for example, “a weak relationship” between one of the criteria used and the actual number of uninsured patients treated at hospitals.

And while the discounts are only intended for eligible outpatients of a hospital or clinic, another 2007 government report found that the definition of a “patient” wasn’t clear either, letting providers interpret the definition “too broadly.”

It didn’t take long for hospitals to realize that this program could be exploited to fatten their bottom lines. Not surprisingly, the number of hospitals participating in 340B tripled between 2005 and 2011. Today, nearly a third of all hospitals can buy drugs at a discount using 340B provisions, and then keep the profits they are able to generate from the program.

A Government Accountability Office (GAO) report found that hospitals providing “a small amount of care to low-income individuals” could nevertheless “claim 340B discounts.” Furthermore, a March study from Avalere Health found that most hospitals getting these discounts provide less charity care than the national industry average – here in Tennessee, two-thirds of 340B hospitals’ charity care is less than the national average of 3.3 percent. At a quarter of 340B hospitals nationally, charity care is just one percent of their patient costs. That means hospitals that never intended to participate in the program are reaping some huge rewards.

A report published in the North Carolina News & Observer found that for certain 340B drugs, hospitals “routinely mark up prices … two to 10 times or more over cost,” and often sold them to insured patients. The New York Times reported last year that 340B had become “a big revenue-capture game” for hospitals. An investigation spearheaded by Iowa’s Senator Charles Grassley found that Duke University hospital boosted its net income by $50 million in 2012 by manipulating the program.

Yet, rather than fix these problems and bring the focus back to the original intent of 340B, the federal Health Resources and Services Administration blindly expanded 340B in 1996 — removing the requirement that hospitals dispense discounted drugs in-house — instead allowing them to contract with outside pharmacies.

In 2009, the passage of Obamacare expanded 340B, and in 2010, federal officials expanded 340B yet again.

This has led to an explosion in the number of 340B contract pharmacies, which went from a little more than 2,000 before the 2010 ruling to more than 40,000 today. In Tennessee alone, there are nearly 1,000 pharmacies benefiting from the program.

By 2016, sales of 340B subsidized drugs are expected to reach $19 billion, up from $5 billion in 2005, according to the Berkeley Research group.

With the program’s loose rules, it’s predictably unclear how often these 340B drug benefits actually reach the low-income and uninsured patients taxpayers are told the program is designed to help. Instead, the drugs are often being sold at full price to patients, with the pharmacies and hospitals pocketing the additional profits, all with government’s blessing.

A U.S. Health and Human Services Inspector General report released this February found that many 340B contract pharmacies “do not offer the discounted 340B price to uninsured patients.” Senator Grassley’s report found one retail pharmacy official saying the program would generate $250 million in new industry revenues for retail pharmacies over the next five years.

Thankfully, Tennessee Senator Lamar Alexander has called on federal officials to fix the 340B program through much needed reform and oversight. Now we need the rest of Congress to support the investigation of this issue and engage as well.

If a relatively simple health care initiative like the 340B program can go so badly off course, is it any wonder Obamacare still isn’t working as expected? If the federal government cannot provide transparency and accountability to the people who fund it, let alone provide the healthcare services it promises to our most vulnerable, taxpayers should ask for their money back.

Lindsay Boyd is the Director of Policy at the Beacon Center of Tennessee.

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Lindsay Boyd