340B medical Oncology Practices and Hospitals – Time to Bail Out?

340B medical Oncology Practices and Hospitals – Time to Bail Out?

340B Medical Oncology Practices and Hospitals – Time to Bail Out?

November 20, 2017

Wes Chapman

Time to Bail Out of 340B?

On November 1st, CMS announced sweeping changes in the reimbursement of 340B eligible drugs, “Today, the Centers for Medicare & Medicaid Services (CMS) finalized two Medicare payment rules moving the agency in a new direction by putting patients first and ensuring that payments support access to high quality, affordable care.” (emphasis added) One can only infer that the prior policy – specifically the prior application of 340B drug reimbursement policy – did not put patients first, or promote access to high quality or affordable care. Clearly this is both a major policy shift and repudiation of 340B. How did we get here, and what does it mean for current 340B participants?

The 340B program was created in 1992, allowing certain safety-net facilities to purchase discounted drugs for use in the outpatient setting at significantly reduced prices – typically 20-50% discounts from prices available to other providers. Eligible facilities have been gradually expanded over the years, and include free-standing children’s and cancer hospitals, rural hospital and referral centers, critical access hospitals, and sole community hospitals and clinics that serve large proportions of low-income, vulnerable patients. The program was subsequently expanded to include disproportionate care, non-profit hospitals (DSH).

340B – The Robin Hood of Pharmaceutical Purchasing?

The 340B program has had a disproportionate impact in medical oncology, where drugs, often very expensive drugs, are purchased by hospitals and re-sold to patients. Participants in 340B have been very aggressive in purchasing private community oncology practices, leading to a major industry reconfiguration. DSH hospitals have been particularly aggressive in the pursuit of profit through 340B, accounting for 75% of the 609 medical oncology practice acquisitions in the last few years. It is possible for a DSH hospital to increase its service line margins in medical oncology from 10% up to 40% simply through purchasing a private medical oncology practice, and moving it into 340B.

Unfortunately, this has produced very few benefits for patients in terms of cost savings or quality improvements. According to Jeff Vacirca, MD, Community Oncology Alliance, CEO, New York Cancer Specialists, the 340B program has been out of control in the hospital sector. “This was a small-scale program to ensure patients in need did not fall through treatment cracks, and was intended to be done at a contained number of safety-net hospitals, but what we’ve seen is that this has mutated into a grossly abused profit generator now for nearly half of the nation’s hospitals.” Similarly, a recent industry report has suggested that “Patient copays are calculated on the reimbursement price—not what the hospitals paid—so patients and payers do not share in the cost-savings. Instead, when 340B hospitals charge the full price to patients with private insurance or Medicare Part B, they generate profits that they can then use as they wish, from funding charity care to CEO bonuses.”

The specific change in policy is pretty simple, CMS measures drug pricing for Part B using the average sale price (ASP) for drugs based on quarterly market data. Medicare allows a 6% margin on drugs sold under Part B. Participants in 340B have been allowed to charge Medicare the same 6% margin, even though they buy the drugs at a mandated discount from ASP, typically 20-50%.  This subsidy from pharma to 340B recipients is opaque to the consumer, who never benefits from the discount. The new policy, which goes into place January 1st, 2018, reduces the reimbursement to 340B recipients from ASP plus 6%, down to ASP minus 22.5%, reflecting their average cost of drugs (ASP minus 28.5%).

To illustrate how 340B works, imagine the average sales price of a drug is $100. Under current law, Medicare would pay the provider $106 and the beneficiary would pay $21.20. Under this new proposal, Medicare would instead pay $77.50 and the beneficiary would pay $15.50. Total savings to Medicare and the beneficiary for that drug would be $34.20. Aggregate savings to the government should total at least $1.0 billion next year.

The 340B program has grown very rapidly of the last several years, to $16 billion, or around 5% of the total drug market in the US, through more than 38,000 individual hospitals and clinical locations.

Part B Drug Reimbursement to 340B Enrolled Hospitals

(Source: BRG Healthcare white paper)

Unfortunately, the availability and use of the 340B discount seems to be associated with greater cost per Medicare beneficiary. In a recent study The Government Accountability Office (GAO) has found 340B participation to be associated with higher Medicare expenditures: in 2012, average spending per Medicare beneficiary at 340B hospitals was more than double expenditures at non-340B hospitals, and this difference was not explained by patients’ health status.

The cost differential in 340B hospitals extends broadly into cost of care delivery for hospital outpatient care. In a recent retrospective study of over 6,600 patients, conducted by the consulting firm Xcenda, over the course of one year, the cost of care for patients undergoing chemotherapy across all three tumor types studied (Breast, lung and colon) was 59.9% higher in the outpatient hospital setting than in community cancer practices. This totals $90,144 more per year per patient for identical treatment. Per patient per month, this comes out to $20,060 in the hospital outpatient setting vs $12,548 in the community cancer center setting (P<.0001).

Outpatient Care Cost are Dramatically Lower in Community Care Settings

The extremely high cost differential of 340B hospitals will challenge as Medicare moves in value based care reimbursement programs, beginning in 2018 through the MACRA/MIPS (MIPS) program. MIPS will become the operational standard in 2018 by which CMS evaluates: 1) The quality of care delivery, 2) Cost of care delivery, and 3) future rate increases/decreases for individual physicians and practices. With very few exceptions, MIPS will be applied to all physicians in the US providing care to Medicare beneficiaries, and will eliminate the former programs of Meaningful Use, PQRS and Value Based Purchasing. Going forward, MIPS will be the single interface through which CMS regulates reimbursement. MIPS is a zero-sum program, in which penalties are extracted from low performing practices, and commensurate bonuses are given to high performing practices. MIPS has two salient design features which make it an extremely powerful tool for physician practice success or failure:

  • Physicians (and other providers) will be benchmarked to all other participating comparable providers according to four criteria:
    1. Quality, 50% of 2018 score, formerly PQRS;
    2. Cost, 10% of 2108 score, formerly value based purchasing;
    3. Advancing care information, 25% of 2018 score, formerly meaningful use; and
    4. Improvement activities, 15% of 2018 score, new category.
  • Based on 2018 performance, CMS will publish standings of physicians and group practices in 2019, and adjust payment up or down by up to 5% in 2020 (plus the ability to gain up to 10% bonus payments for exceptional practices). Bonus amounts increase to 7% for 2019 performance, and 9% for 2020. Including special bonuses for exceptional performance (good or bad), it is contemplated that bonuses reach up to 27% for 2022 payment.


In short, MIPS ensures that high quality, low cost practices are rewarded with extra reimbursement and recognition, while all other practices are penalized in both financial and reputational terms. Success under MIPS is critical for practices interested in growth and financial success. 340B hospitals face the dual challenge of operating under lower 340B margins, while simultaneously reducing total costs to succeed under MIPS.

MIPS Cost Scores Will Hurt High Cost Practices

For 340B hospitals engaged in medical oncology the challenge is clear; live with lower margins and simultaneously reduce total cost while continuously improving quality, or suffer the reductions in future reimbursement and lower published value ratings. Hospital management of physicians is frequently tied up in complex Co-Management Arrangements (CMA’s), whose underlying measurements are being upended by MIPS. In many cases it will make most sense to divest acquired medical oncology physician practices, rather than take the risk of completely restructuring the employed physician compensation and operations.

For physician groups at 340B hospitals, this is a good time to consider alternatives. Hospitals will be immediately challenged by 340B changes and MIPS, and may find it difficult to maintain existing compensation and employment agreements. Exiting the hospital now may allow medical oncology practices the time and flexibility to respond to the challenges of MIPS and perhaps reap the benefits in the future. Being tied to the very high cost of care in a hospital may make this impossible, and result in low MIPS scores for individual physicians or groups, which may negatively impact future employment prospects.

340B created enormous distortions in the delivery of medical oncology care in the US. Perversely, very high cost organizations reaped disproportionately high margins, based on government mandated subsidies, provided exclusively by private industry. The impact on independent oncology practices was immediate and negative. To fully benefit from the opportunity of 340B, participating institutions increased their cost basis and financial/operational risk by buying and expanding their employed physicians. The new rules which go into effect January 2018, threaten the viability of these operations, and the new MIPS rules add an additional layer of risk and operating challenges, with substantial and long lasting negative potential impacts. From a strategic perspective, it is imperative for both 340B medical oncology institutions and their employed physicians to consider independent strategies to mitigate looming risks.

Wes Chapman
Written by Wes Chapman

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