By: Andrew Pollack 

When a private oncology practice in Memphis formed a partnership with a nearby hospital in late 2011, the organizations proclaimed that the deal would “transform cancer care” in the region.

What they did not emphasize was that the deal would also create a windfall for them worth millions of dollars a year, courtesy of an obscure federally mandated drug discount program.

The program, known as 340B, requires most drug companies to provide hefty discounts — typically 20 to 50 percent — to hospitals and clinics that treat low-income and uninsured patients.

But despite the seemingly admirable goal, the program is now under siege, the focus of a fierce battle between powerful forces — the pharmaceutical industry, which wants to rein in the discounts, and the hospitals, which say they might have to cut services without them.

One issue is that the program allows hospitals to use the discounted drugs to treat not only poor patients but also those covered by Medicare or private insurance. In those cases, the hospital pockets the difference between the reduced price it pays for the drug and the amount it is reimbursed.

That is what happened in Memphis. When the West Clinic teamed with Methodist Healthcare, the huge volume of chemotherapy drugs used by the clinic suddenly qualified for the hospital’s discount, while reimbursement remained the same.

In a report issued on Tuesday, pharmaceutical industry trade groups say that some hospitals have gone overboard in using the program to generate revenue, straying from the original intent of helping needy patients. The report, which was supported by groups representing pharmacies, pharmacy benefit managers and oncology practices, called for the discounts to be more narrowly focused.

Some senior Republicans in the House and Senate are investigating the program, which they say has suffered from murky rules and lax enforcement.

“If ‘nonprofit’ hospitals are essentially profiting from the 340B program without passing those savings to its patients, then the 340B program is not functioning as intended,” Senator Charles E. Grassley, Republican of Iowa, said in letters sent to three medical centers last October.

One reason for the scrutiny is that the program — named after the section in the law that created it in 1992 — now includes one-third of the nation’s hospitals, triple the number in 2005. About $6.9 billion worth of drugs, or about 2 percent of the nation’s total, are sold through the program annually, reducing revenue for the pharmaceutical companies by hundreds of millions of dollars a year.

The industry report says sales could grow to $12 billion by 2016. That is in part because the nation’s new health care law will make more hospitals eligible for the discounts by increasing the number of Medicaid patients they treat, even as the need for the discounts should arguably diminish because fewer people will be uninsured.

Hospitals say 340B was never meant to merely provide cheap medicines to poor people. Rather, it was meant to help the hospitals that treat such patients, and to stretch federal resources. Making money from the spread helps keep the hospitals operating, which in turn helps needy patients, they say.

“If we didn’t have our 340B program, I seriously doubt we could have our outpatient cancer center,” said Burnis D. Breland, director of pharmacy at the Columbus Regional Healthcare System in western Georgia.

Nevertheless, with the program under scrutiny, the organization representing 340B hospitals, Safety Net Hospitals for Pharmaceutical Access, has warned its members to avoid using terms like “increasing profits” and “revenue enhancement.”

A 2011 report by the Government Accountability Office, the investigative arm of Congress, said that federal oversight of the program was insufficient to ensure that hospitals and drug companies were adhering to the rules.

In response, the Health Resources and Services Administration, which oversees the program using an annual budget of only $4.4 million, audited 51 hospitals last year, its first audits since the program began. It also made all hospitals recertify themselves as eligible for the program.

As a result, some 271 treatment sites belonging to 85 hospitals were ejected from the program, said Krista Pedley, the federal official in charge of the 340B program. She said that three hospitals acknowledged receiving discounts for which they were ineligible and were repaying manufacturers.

Some drug companies — Genentech is the only one that has publicly identified itself — are also auditing hospitals or considering doing so.

Previous studies have shown drug companies do not always offer the full discount, though no drug companies are being audited.

“Basically the pendulum has swung so aggressively toward oversight of the hospitals, with little concern about the drug companies,” said Ted Slafsky, president of Safety Net Hospitals for Pharmaceutical Access.

With so much money at stake, the 340B program has given rise to a cottage industry of companies that help hospitals increase their savings, and two big conferences are held each year on the program. The most recent one, in San Francisco last month, drew 800 people and about 50 exhibiting companies.

Some oncologists say the 340B program is one reason that more than 400 oncology practices have become part of hospitals in the last several years. The 340B discounts apply to all drugs, but oncologists use a lot of costly ones, providing a potentially larger spread.

A single oncologist might use $2.5 million to $4 million in drugs a year, according to the Community Oncology Alliance. If those drugs can be acquired for a 25 percent discount, that is a potential profit of up to $1 million.

“It’s the loophole that’s made cancer drugs profitable again,” said Dr. Peter B. Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center and a former adviser to Medicare.

Dr. Lee S. Schwartzberg, medical director of the West Clinic in Memphis, said the 340B program “definitely was a factor” in the decision to form the partnership with Methodist Healthcare.

The hospital and clinic say they will donate $5 million a year from the 340B proceeds to the University of Tennessee, which is building a cancer center with which they are affiliated.

The money is also being used to help pay for nursing and genetic counseling, Dr. Schwartzberg said.

Some prison systems, meanwhile, save on drug costs by making a 340B hospital their official health care provider.

If inmates “become ‘patients’ of the hospital, a ‘win-win’ arrangement can be negotiated with the state, county or city,” said a slide from a 2010 presentation by Safety Net Hospitals for Pharmaceutical Access.

A big increase in the use of 340B occurred in 2010, when the government allowed hospitals to use an unlimited number of neighborhood pharmacies to fill 340B prescriptions. Before that, patients generally had to go to the hospital pharmacy, which can be inconvenient.

The University of California medical centers, which now have 240 pharmacies under contract, expect 35 percent of eligible prescriptions to go through the 340B program this year, up from only 10 percent in 2011, said Lynn Paulsen, director of pharmacy practice standards.

In these arrangements, needy patients typically get the drugs at little or no cost.

But if a patient is insured, the hospital keeps the difference between the reduced price it paid for the drug and the higher price reimbursed by the insurer, and pays the neighborhood pharmacy a dispensing fee.

There are already about 25,000 arrangements between a treatment site and a pharmacy, according to the Health Resources and Services Administration.

“It’s morphed into a big revenue-capture game — how can we get as many 340B prescriptions filled at a 340B price,” said Aaron Vandervelde of the Berkeley Research Group, a consulting firm to pharmaceutical companies.

It is too early to say what, if any, changes will be made by Congress.

Hospitals say that restricting the discounts to drugs actually consumed by poor patients would eviscerate the benefits of the program. The hospitals are hoping the program might be expanded to help balance the federal budget.

Ailing hospitals might garner more sympathy than profitable drug companies. It is perhaps telling that no Democrats have joined the investigation of the 340B program.

“It’s saving the government money, so they don’t have an incentive to change it,” said Carlton Sedberry, senior director at Medical Marketing Economics, a pharmaceutical industry consulting firm.

“It’s making the hospitals money, so they don’t have an incentive to change it.” And patients, for the most part, are unaware of 340B.

“The only people this smacks are the manufacturers.”

Read the article in its entirety here:

Sign up for E-mails, Dateline Magazine, and other ways to stay connected.