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Unintended Consequences: How Government Policies Have Increased the Cost of Cancer Care—Part II 340B Drug Discounts Have Fueled the Migration of Cancer Care

Butcher, Lola

doi: 10.1097/01.COT.0000454893.35810.5a


In 1992, Congress approved an arcane public health program designed to give a price break on drugs to a small number of hospitals that served a high percentage of low-income patients. Since then, the program has grown to include nearly 1,700 U.S. hospitals. Because they can buy drugs at steep discounts, those hospitals find cancer care to be a highly profitable business.

But as that “340B” program has grown, it has become controversial, with critics alleging that some hospitals use their drug profits inappropriately—and private-practice oncologists complaining that the program creates an unfair playing field.

Undaunted, hospitals with 340B pricing are lapping up cash-strapped physician-owned oncology practices, which are not eligible for the discounted prices. This propels the migration of cancer care to hospital outpatient departments, which is more expensive for both payers and patients.

“If you want to look at migration broadly, one of the real elephants in the room is the one-third or so of the hospitals that get 340B pricing,” said Barry Brooks, MD, a partner in Texas Oncology. “You can see why they want [to employ] more oncologists. Microsoft would be ashamed of the margins that they are getting—it's staggering.”



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What is 340B?

Thomas L. Whittaker, MD, a former president of the Association of Community Cancer Centers, was a partner in Central Indiana Cancer Centers, a six-site, 17-physician oncology practice in Indianapolis for 20 years.

As independent practitioners, the oncologists had privileges at four hospital systems. When those hospitals started to grow their own cancer care business, they tried to hire Whittaker and his partners. The physicians resisted—and they felt the consequences.

“We were squeezed out of all of them, for all intents and purposes, but especially the one where we had the closest relationship,” he said. “When we wouldn't be employed, they brought in another [oncology] group and successfully whittled away at our business to where we finally decided we needed a local partner.”

In 2011, Central Indiana Cancer Centers was acquired by Indiana University Health (IUH).

Like several other Indianapolis hospitals, IUH participates in the 340B Drug Pricing Program. That program requires drug manufacturers to provide substantial discounts—up to 50 percent—to certain types of organizations, including hospitals that serve a large percentage of poor people.

The discounts are applied to all drugs the hospital uses on an outpatient basis, not just for its uninsured or underinsured patients. Hospitals do not have to pass their savings along to low-income patients or anyone else. Rather, they are allowed to use profits from the “spread”—the difference between the price they pay for drugs and the price that payers and patients pay them in return—however they want.

Not surprisingly, the 340B program has become more desirable in recent years, as hospitals search for profitable oases in a sea that sometimes seems full of red ink. When the 340B program was started, fewer than 100 hospitals were eligible for the preferred pricing. The government has expanded the program repeatedly; between 2005 and 2011, the number of hospitals eligible for 340B pricing nearly tripled.

“Oncology is certainly one of the areas where they have an opportunity to make big dollars, so they really want that in-house,” Whittaker said.

340B hospitals have a big financial incentive to use the program's rules in their favor. The discounted prices apply only to outpatient drugs, so hospitals are incentivized to change treatment protocols and locations to maximize savings. At a 2011 conference, Donna Evans, a pharmacist at the University of Alabama Hospital, said her hospital had done this with various cancer drugs, including melphalan, busulfan, and intravenous immunoglobulin.

Her remarks were publicly revealed when Sen. Charles Grassley, R-Iowa, sent the hospital's president a letter saying: “Altering a patients' treatment from inpatient to outpatient merely to become 340B eligible not only endangers patients but such action violates the intent of the 340B program.”



After a 340B hospital has oncologists on staff, it may use various ways to attract cancer patients away from private-physician practices.

In the Portland market, Brad Perrigo, Executive Director of Compass Oncology, said he sees hospital cancer-navigation programs used to influence patient decision-making about where they will be treated.

“The hospitals are being quite aggressive with influencing where patients go,” he said. “With the navigation systems that they've put into place, they scan imaging and pathology reports, looking for positive cancer diagnoses. And then they engage the patient and schedule with designated surgeons and oncologists.”

Meanwhile, some hospitals pressure the surgeons and other specialists they employ to refer their patients to hospital-employed oncologists. In the Indianapolis area, for example, Whittaker said he found that hospitals started tracking every referral for cancer care or imaging made by their employed physicians.

“Our system here, where we had worked for many years, was unbelievably aggressive at that,” he said. “Their own providers are watched very, very carefully, and they have to go to the principal's office if they aren't towing the line.”



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Link to Cancer Costs

The 340B program enjoyed relative obscurity for its first 15 years, but growth brings scrutiny. The number of enrolled hospitals doubled between 2009 and 2012; and the total cost of 340B drug discounts is expected to grow from $6 billion in 2010 to $12 billion by 2016, according to data from Berkeley Research Group.

The most obvious loser is the pharmaceutical industry, which must extend the discounted prices to customers who would otherwise pay full freight. Ironically, those who pay for cancer care can also be hurt by the program designed to save money.

Rena Conti, PhD, a health economist at the University of Chicago, and Peter B. Bach, MD, MAPP, Director of the Health Outcomes Research Group at Memorial Sloan Kettering Cancer Center, theorize that the 340B program may increase the cost of cancer care for three reasons.

Writing in an article last year in the Journal of the American Medical Association (2013;309:1995-1996), they say the large profits from the spread may prompt oncologists in 340B-affiliated outpatient clinics to prescribe more expensive drugs. In addition, pharmaceutical companies may increase their prices to offset their reduced profits as the 340B program grows.

Thirdly, the program causes a widening disparity between the financial viability of the 340B cancer care program and those who are not eligible for discounted prices. That fuels the consolidation of 340B hospitals and community oncology practices.

“This disparity may also lead to shifting of care out of community-based oncology practices and into hospital infusion suites,” the article said. “These trends will tend to increase total spending.”

A study conducted by Berkeley Research Group backs that up. Its review of 86 hospitals in the 340B project found that Medicare and its beneficiaries paid, on average, $140 more per chemotherapy claim in 2012 than they would have paid if the patients had been treated by a physician-owned practice.

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Differing Views about What the Program Intended

Matthews Hematology Oncology Associates, a four-physician practice in suburban Charlotte, has been closely aligned with Novant Health, one of the two big health systems in the market, for decades.

“We've had a very good working relationship with them, but we have remained independent,” said Lance Lassiter, MD, a partner in the practice. “They have been trying to acquire our practice for many years, but we have been able to remain strategic partners but independent until now. But that is becoming harder each day.”

He rattles off the challenges of operating an independent oncology practice: the high cost of drugs, declining revenues from office visits and chemotherapy infusion services, the challenges of negotiating with insurers, and the risk that insurers will renege on paying for previously authorized services.

“We may have given someone 30, 40, 50 thousand dollars of chemotherapy, and just have to eat that,” he said. “For a big hospital system, it's a small bump. For us, it's just catastrophic.”

Like their peers across the country, North Carolina hospitals have bought many oncology practices in recent years; Lassiter estimates that about 60 percent of Charlotte oncologists are employed by a health system.

Nearly 40 North Carolina hospitals are eligible for 340B drug pricing, which makes chemotherapy administration an attractive business opportunity.

Last year, Duke University Hospital said it saved $48.3 million through the 340B drug discount program in 2012, when it purchased drugs for $66 million. It sold those drugs to patients and payers for $136 million, generating a profit of nearly $70 million. During that year, 67 percent of Duke's 340B drugs were distributed to privately insured patients, while only five percent went to uninsured patients.

“The revenues generated through the 340b program are important to supporting our nonprofit patient care mission, including our ability to provide a substantial amount of charity care and community benefit for low-income and uninsured populations,” Duke said in a statement issued last year.

“Available revenue is reinvested into facilities, technology upgrades, and service expansion that benefit all patients, including those who are financially disadvantaged.”

Duke's 340B profit margin did not sit well, though with Sen. Grassley, who had asked Duke and two other hospitals to report on their 340B participation.

“When I looked at three North Carolina hospitals' use of this program, the numbers showed the hospitals were reaping sizeable 340B discounts on drugs and then upselling them to fully insured patients to maximize their spread,” Grassley said in a news release last year. “If ‘non-profit’ hospitals are essentially profiting from the 340B program without passing those savings to their patients, then the 340B program is not functioning as intended.”



In fact, differing views about what the government intended is at the heart of the 340B controversy. Pharmaceutical manufacturers maintain that the program was created to increase poor patients' access to drugs; 340B-eligible hospitals believe that the program was established to help them stretch their resources, thereby treating as many patients as possible.

That's why Duke and hundreds of other hospitals maintain they are doing good works with the profits they generate through the 340B program, while opponents of the program remain skeptical.

Those who think the 340B program has grown too large—and is unintentionally fueling the migration of cancer care from physician-owned clinics to hospital-owned facilities—are pushing for the government to rein it in.

But the Affordable Care Act expanded the 340B program well after it had become controversial. So the future scope and scale of 340B pricing—and its implications for cancer care providers—are far from clear.

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#2 in a Series

This is the second in a series of articles that show how federal policies intended to reduce cancer care costs have actually increased them.

The series is part of Lola Butcher's year-long Reporting Fellowship on Health Care Performance sponsored by the Association of Health Care Journalists and supported by The Commonwealth Fund.

The first article, in the Sept. 10 issue (, examined how when Medicare changed the way it pays oncologists for cancer drugs, it triggered a migration of cancer care to hospital outpatient departments—where costs are higher.

Next: The Affordable Care Act introduces new payment systems designed to reward health care providers who provide high-quality care at low cost. The most popular—the accountable care organization—is fueling consolidation, which means that more cancer patients go to hospital outpatient departments for treatment, where many will get hit with higher out-of-pocket costs.

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iPad Extra!



PODCAST: Listen on the iPad edition of this issue to Patrick Cobb, MD, an oncologist/hematologist at St. Vincent Frontier Cancer Center in Billings, Montana, tell why his practice folded into a health system.



If you are not yet receiving our iPad issues, download the free Oncology Times app from the App Store today! Visit, search in the App Store, or follow the link

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340B Hospitals: Saints and/or Sinners

Whether the 340B drug discount program is good or bad depends on one's perspective. For a full—and impassioned—review of both sides, check out these websites:

  • is sponsored by Safety Net Hospitals for Pharmaceutical Access, which includes approximately 1,000 hospitals that have 340B pricing; and
  • is sponsored by the Alliance for Integrity and Reform, which includes the Pharmaceutical Research and Manufacturers of America (PhRMA), several pharmaceutical companies, the Community Oncology Alliance, and the Colon Cancer Alliance.
© 2014 by Lippincott Williams & Wilkins, Inc.
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