How ObamaCare Hurts Patients

The 340B program was meant to help about 90 hospitals buy drugs to treat the poor. Now 1,675 hospitals qualify.

SCOTT GOTTLIEB

July 30, 2013

President Obama promised to mend the failings in the American health-care system, and yet for cancer treatment, ObamaCare is taking a rotten feature of the old system and making it worse.

The Affordable Care Act expands a program called 340B, which siphons money from drug makers and insurers to subsidize certain hospitals. The program has been expanded as a way to offset some of the cuts that the law imposes on hospitals. One significant side effect: 340B is increasing the cost of cancer care—and harming its quality.

When the program began in 1992, its aim was to support hospitals that cared for many uninsured, indigent patients. Over the years, the program was radically broadened, gradually morphing into a government cash cow that hospitals of every description have learned to exploit.

Under 340B, eligible hospitals are allowed to buy drugs from drug companies at forced discounts of 25% to 50%. The hospitals can then bill government and private insurers for the full cost of the drugs, pocketing the spread. The arrangement gives 340B-qualified hospitals a big incentive to search for patients and prescribe lots of drugs. The costlier the drugs, the bigger the spread. So expensive cancer drugs are especially appealing.

The original legislation creating 340B envisioned that only about 90 hospitals that care for a "disproportionate share" of indigent patients would qualify. But remember, this is a well-intentioned government program handing out money, with the usual result: By 2011, 1,675 hospitals, or a third of all hospitals in the country, were 340B-qualified.

Even flourishing hospitals like the Hospital of the University of Pennsylvania and Duke University Health System feed off the subsidies. In 2011, Duke bought $54.8 million in drugs from the discount program and sold them to patients for $131.8 million, for a profit of $76.9 million—a substantial portion of the health system's 2011 operating profit of $190 million. Only one in 20 patients served by Duke's 340B pharmacy is uninsured. The rest have their prescription costs covered by Medicare, Medicaid or commercial insurers.

Now ObamaCare is encouraging even wider 340B abuses. The new health-care law expands 340B to cover cancer centers, new categories of hospitals and rural health centers. Since one of the ways that hospitals qualify for 340B turns on how many Medicaid patients they serve, ObamaCare's Medicaid expansion will also increase the number of 340B-eligible entities.

To goose the windfall, eligible hospitals are buying private oncology practices so they can book more of the expensive cancer drug purchases at the discount rates. More than 400 oncology practices have been acquired by hospitals since ObamaCare passed. Acquiring a single oncologist and moving the doctor's drug prescriptions under a hospital's 340B program can generate an additional profit of more than $1 million for a hospital. In the process, treatment of the doctor's patients is moved from an office setting to a hospital outpatient department.

As a result, between 2005 and 2011 the amount of chemotherapy infused in doctors' offices fell to 67%, from 87%, according to a new analysis of Medicare billing data done for community oncology groups. The share of Medicare payments for chemotherapy administered in hospitals (as opposed to outpatient oncology practices) increased to 41% in 2011, from 16.2% in 2005.

If these trends continue, the majority of cancer care will soon be delivered by hospitals. When the practice of oncology shifts to outpatient hospital clinics, the care is often less comfortable and convenient for cancer patients—and more costly.

Because the overhead for a hospital is higher than for a doctor's office, a patient treated in a hospital clinic incurs $6,500 more in costs than the same person treated in a private medical office, according to data from the Community Oncology Alliance. Patients who get chemotherapy at a hospital also face an additional $650 in co-pays and other out-of-pocket expenses. The price for infusing the drugs alone rises by 55%, according to an analysis of Medicare data. These inflated prices for cancer treatment inevitably drive up the cost of health insurance.

The Obama team has used informal "subregulatory guidance" to expand the 340B program still further. One big change came in March 2010 "guidance" that allows hospitals to contract with an unlimited number of neighborhood pharmacies to dispense drugs through them. There is no requirement that these "satellite" pharmacies have any geographic tie to the hospital.

This has created an industry of middlemen who build vast networks of pharmacies, all to expand the number of 340B prescriptions that a hospital can capture. There are now more than 25,000 arrangements between such satellite pharmacies and 340B-qualified treatment sites, according to the Health Resources and Services Administration.

The definition of a "covered patient" for 340B purposes is so murky under other guidance that hospitals are able to buy and bill discounted drugs for patients when the hospital merely serves as a conduit and doesn't give direct patient care.

The regulatory loosening has led to a proliferation of abuse. The Health Resources and Services Administration, the federal agency that (nominally) oversees the program, recently audited 340B-eligible hospitals. The agency found "adverse findings" (like discounted drugs diverted or dispensed to ineligible patients) with almost half of the 34 institutions the agency examined.

A separate report by the General Accountability Office shows that the money isn't being targeted for indigent patients, as required. As profits from the program rose, and oversight remained lax, more of the money has instead become a general revenue source for 340B-eligible hospitals.

To combat this sort of gaming, drug makers are tightening how they distribute cancer drugs, to make improper diversion more difficult. This drug-company strategy may stem some of the most rampant abuses, but it adds to the cost and complexity of the pharmaceutical supply chain. It's another way that 340B increases costs.

The 340B program doesn't print free money. The cost of the discounts are foisted onto patients and insurers, who are forced to pay higher prices that drug makers establish to offset the cost of the forced discounts.

One of the rationales behind the Affordable Care Act was that the law would end the gimmicks that distort incentives and drive up costs. In the case of the 340B program and its effect on cancer treatment, the law has only further distorted an already expensive gimmick.

Dr. Gottlieb is a physician and resident fellow at the American Enterprise Institute. He consults with and invests in life-science companies.

A version of this article appeared July 31, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: How ObamaCare Hurts Cancer Patients.