Episode 8 - The 340B Program and Hospital Consolidation

Please see below for a full transcript of this episode:

 The Federal 340B program. The B stands for battlefield. Just kidding. But it sure feels like that in today's landscape of litigation and a significant pushback from drug manufacturers. This episode analyzes the 340B program and how health systems are utilizing its benefits to deliver healthcare across regional frameworks.

Welcome to Redefining Health Law, brought to you by the law firm of Parker Hudson, Rainer and Dobbs, LLP. A boutique law firm with offices in Atlanta, Chicago, and Tallahassee. Your host for this podcast is Tara Ravi, a healthcare partner with prior work experience in both clinical research and patient care delivery.

She is an adjunct professor at the Emory School of Law where she teaches corporate health law. Tara leverages her past work experience in the healthcare industry to advise healthcare organizations facing growth related challenges. Although Tara is a partner in the law firm of Parker Hudson, the views expressed in this podcast are Tara's personal views and not the views of the firm or any of the firm's clients, and are not intended to be legal advice.

We hope you enjoy this podcast.

Hi there, and welcome back to Redefining Health Law. It's been a bit of a break since our last episode, during which time we've made significant improvements to our podcast studio and equipment. So I'm back and a huge thank you and much gratitude to my firm Parker Hudson and our amazing business development team who have supported this podcast.

Okay, so back to regular scheduled programming. We're starting this year off with a discussion on the Federal 340B program, which is a drug discount program available to hospitals and rural clinics, and I assure you this won't be our only episode on the 340B program because the discounts available under this program drive many of the trends we see in hospital consolidations.

There's plenty to say about the 340B program and there are some fantastic podcasts that focus only on the program. Instead, today we're going to focus on how the 340B program drives consolidation and can affect you directly as a healthcare consumer.

A little background. The name 340B for the drug pricing program comes directly from Section 340B of the Public Health Service Act. A short summary of the program is that drug manufacturers are required to give certain qualifying healthcare entities drug discounts if those drug manufacturers want their drugs to also be available under the Medicaid program.

Those healthcare entities can then deliver those drugs to its patients and receive reimbursement from the patient's payer source such as Medicaid, Medicare. The program's goal is to help these entities stretch scarce federal resources to serve more low income and uninsured patients, so just walking through the delivery lifecycle, the hospitals get the drugs directly from the manufacturers through the 340B program at a significant discount.

Then those drugs are delivered to patients at outpatient facilities. Typically, you would see like cancer infusion oncology medications that are very expensive. The hospital gets it at a big discount. The patient receives it at the infusion center.

And then the hospital sends a bill essentially to the payer, which could be Medicaid, could be Medicare, and they will receive that reimbursement amount. But because the acquisition cost was so low, the hospital makes a significant more amount of money than they would if they had just bought it from a GPO or directly from the manufacturer.

Six categories of hospitals are eligible to participate in the program. Disproportionate share hospitals, and we'll talk about what that is, children's hospitals, and cancer hospitals exempt from the Medicare perspective payment system, sole community hospitals, rural referral centers, and critical access hospitals, which are very small hospitals located in rural areas.

You can notice these are all very special hospitals. They're all kind of designated to treat patient populations that are both, in rural areas or very vulnerable. Hospitals in each of the categories must be either owned or operated by or under contract with state or local government, nonprofit, or be a public or private nonprofit corporation that is formally granted governmental powers by a state or local government, or be a private nonprofit hospital that has a contract with the state or local government to provide indigent care. And with the exception of critical access hospitals, all hospitals must meet payer mix criteria related to the Medicare dish program.

Those three categories of hospitals, generally what we're seeing is going to have an affiliation with some kind of government authority or government system. And they have to have what we call the Medicare dish program. They have to have a higher payer mix. Essentially, what that means is that you're treating indigent patients for which you're not getting compensated for. You're treating patients that have no payer source that need care, that will never be able to pay you. A specific requirement under the 340B program is you have to have a disproportionate share adjustment percentage greater than 11.75% for the most recently filed cost report.

And like I said, these calculations are very complicated. They're consultants that are used to make those calculations. Those consultants, some of them have their own podcasts. You could go down and learn everything you wanted to learn about 340B, but at its core, the program is supposed to help hospitals who are operating in areas that have need, that patients need to be able to be treated, and this gives the hospital some incentive to move into those areas and provide that kind of care, or at least that's how it was started in the beginning.

One detour I'd like to take just talking about hospital consolidations and policy is we described, I believe it was in episode five, talking about the provider based requirements. The provider based requirements essentially allow hospitals to expand their footprint and obtain hospital reimbursement for facility type services or outpatient services that they provide outside of the main hospital.

There are requirements as to how far that distance can be. So typically your outpatient facility can be maximum 35 miles away from the hospital. There are some exceptions for that 35 mile limitation, and the language in those exceptions, which can be found at 42 CFR 413.65 subsection e, subsection 3 ii they track the exact same requirements that I just mentioned for the 340B program, the hospital categories, those ones saying owned or operated or under contract with the state or local government, private or public nonprofit corporation that is formerly granted governmental powers. That language is the exact same in the 340B eligibility requirements as it is for this exception that allows you to have outpatient facilities outside of the 35 mile radius. Now, when we looked at the provider based regulations when they were first created, there wasn't a lot of explanation as to how to fit in those categories.

And it's interesting to me, this little rabbit hole I've taken you down that the 340B program, has the same requirements and buried in their website they have this section that helps you figure out which category you could fit. And I bring this up because we've had health systems that operate either under an agreement or some other affiliation with hospital authorities that have been created, that have been looking to get outside of this 35 mile radius within the provider based rules.

But they're not quite sure if they precisely fit a category. You can go and look over at the 340B requirements. Typically, these hospitals that are trying to fit outside of the 35 mile provider base are also going to be 340B hospitals, so you can go over and cross reference in the 340B website and find this link, which is going to be impossible to find.

So please just reach out to me and I can send you the link. And it will help you have little bullet points for you to figure out which category you can fit in and if you can fit in. And I think there's a strong argument to say, if you can fit in those categories within 340B, then you're fairly safe under the provider-based requirements.

Of course, you're not perfectly safe unless you submit an attestation, which we could have a whole separate episode on since those might become required at some point. Anyways. Now that we've taken you through this detour, which I don't even know if it was a detour, it's kind of like the main point here. What we're seeing, consolidation. We're seeing hospitals acquiring each other. We're seeing hospitals acquire physician groups. We're seeing physician groups align with each other and then align with hospitals. And a lot of all of this is driven both by financial incentives received because of the 340B program.

For example, a hospital may have more money to be able to go acquire another one or affiliate with the hospital that's not doing so well or they may be driven by wanting to get 340B incentives by maybe acquiring a physician practice or a standalone cancer center.

Now, when I said 340B, the B is battlefield, you know, has a problem with all of this? Well, sometimes the patients, and I'll explain why later, but also the drug manufacturers, they like want to make all the money.

Why should they have to split it with these hospitals just so hospitals can go duke it out, I assure you that the drug manufacturers are working very, very, very hard to limit the amount of reimbursement they're going to lose that essentially they're sharing with other hospitals. So it is a battlefield. The manufacturers are threatening new programs. They don't want to give the discount, they want to give a rebate. They just, I mean, they want to make it complicated.

But for now. There is the push and pull. We do want hospitals to have this discount, or at least the government does, Congress when it enacted this program wants hospitals to have this program to be able to spread their reach into pockets that are desperately needing these healthcare services.

At the same time, there's a bit of a balance between those hospitals using it to their advantage and maybe not just treating those patients, but also trying to come up with like private paid joint ventures, telemedicine, retail concepts, there's a lot of creative ways to use 340B and so, as hospitals are trending more in that direction, you're going to see a lot more pushback from the drug manufacturers and, and you do see a lot more oversight from the federal government. Like I said, there are lawyers who dedicate their entire practice to audits and eligibility requirements for this program because the government is looking at it with more of a spotlight.

Finally, kind of the last interplay between 340B and specifically our episode five, provider based is this concept that the consumer is going to feel when I have a hospital that they're nearby, and then maybe they have a relationship with one of the physician practices and they have an acquisition, you'll quickly see that, that hospital is more likely to convert any aspects of the physician practice they can to an outpatient facility of the hospital. Now I'm going to probably get a notice saying that that same service I was receiving is going to be a little bit more expensive. And some patients don't like that. We want to deliver cheaper, affordable care. Why am I now paying more for the exact same service I was receiving from my favorite doctor who I've seen for 20 years? So that can create some bad feelings.

So, you know, the hospital faces some risk behind that. Now I'll be devil's advocate and support our hospitals over here, but, and I don't even know if that's necessarily devil's advocate. It's just seeing from the other side, the issue of you're not really receiving the same service. I think about it from my perspective. I could receive kind of a local surgery from my physician who owns his own surgical practice adjacent to his office, like right next door, you've seen their independent surgery centers. Or I could go get a surgery at a hospital owned independent surgery center. But do I feel a little bit safer knowing it's a hospital facility? Yeah, personally, like when you flip this service, let's say it's an infusion center and you turn it into hospital based, everything seems the same, and that's intentional because you want to see the same providers, you want to get the same service, but hospitals have a higher standard, so their equipment's going to have to get upgraded.

Their oversight's going to get upgraded. They're going to have immediate transfer and better systems to be able to get you straight to the hospital ED if something goes wrong. So that's the concept. It does become more expensive, but you get more oversight and everything is supposed to be higher quality and, and there's a push and pull. I'm just bringing it up in this episode that this is what's happening. These are the economic factors that are driving. This is what hospitals feel like they have to engage in to be able to compete for patients', resources, real estate. And this is just the status of healthcare right now.

So I appreciate you listening to this summary. We're going to probably hear more about 340B. It's a big topic this year, nationally, not just on my podcast. So we're going to give you some updates and we appreciate you listening. Thanks for sticking with us through the break.

Thanks again for listening to Redefining Health Law. If you haven't already, I invite you to subscribe on your favorite podcast player so you won't miss an episode. And of course, if you have any topics you'd like to hear, please don't hesitate to email us at redefininghealthlaw@phrd.com.

Thanks for listening. We'd love to hear from you. Until next time, I'm Tara Ravi.