340B Makes for Strange Bedfellows | Asembia’s AXS25 Summit

One of the common, somewhat clichéd narratives about U.S. healthcare is that when it comes to money, payers and providers are at each other’s throats, with providers seeking higher payments in one form or another and payers pushing back in various ways.

But according to Milliman’s AJ Ally, RPh, MBA and Maggie Alston, the 340B Drug Pricing Program flips that script and makes strange bedfellows of payers, particularly pharmacy benefit managers (PBMs), and providers, which in the context of 340B are primarily hospitals and other clinics and programs that serve people with low incomes or who don’t have health insurance.

“The payers and the hospitals don't necessarily want to change the status quo,” Alston said. “The opaqueness is helping them, especially in a world of vertical integration, where you've got PBMs, who are owned by the payers, who, in some cases, are affiliated with the hospital systems. We live in a very complicated world of healthcare. And so these two are actually, while they're often at odds, they're kind of aligned on not wanting to change the 340B program.”

Maggie Alston, left, and AJ Ally, RPh, MBA, of Milliman take questions after their presentation the 340B Drug Pricing Program.

Alston, a principal at Milliman, and Ally, an equity principal and pharmacy management consultant at the consulting firm, teamed up at a session yesterday at the Asembia’s AXS25 Summit to explain some of the arcane details of how money flows through the 340B program and how those details factor into the political, policy and legal machinations around the program.

The 340B program, which started in 1992, allows eligible hospitals and clinics to buy drugs from manufacturers at a steep discount from the wholesale acquisition cost (WAC) price. Because payers still pay something approximating the WAC prices, the “spread” between the 340B discounted price and the WAC price creates a sizable revenue stream for hospitals and clinics. The program has grown from a relatively small group of hospitals and clinics and relatively small sums to more than 50,000 “covered entitles” — 340B jargon for hospitals and other programs and providers who are eligible for the program — and large sums. In 2021, 340B covered entities' drug purchases totaled $43.9 billion in 2021 compared with $5.3 billion in 2010, according to information shared by Ally at the Asembia session. The program has also expanded from a relatively small group of pharmacies, physically located in the covered entities, to approximately 30,000 pharmacies that the covered entities contract with.

In seminar-like fashion, Ally guided the Asembia audience through an explanation of how revenue flows through 340B discounts to covered entities. The revenue from the spread on a 340B prescription gets to the covered entities almost immediately and is processed by third-party administrators, which are sometimes businesses owned by one of the three major PBMs: Optum Rx, CVS Caremark and Express Scripts.

“It's a chargeback, which means it's not a traditional rebate in terms of how the spread and the revenue get to the covered entity. It's a chargeback where it's a virtual inventory between the pharmacy and the wholesaler. They just replenish the drug, and then the chargeback happened between the manufacturer and the wholesaler. Pretty simple process. It's almost real time,” said Ally. The immediacy helps with the cash flow of the covered entities, and Ally set it in contrast to the three- to six-month lag between when a prescription is fulfilled and when drugmakers pay conventional rebates to payers.

Ally stressed that from the drugmakers’ perspective, the lower prices that covered entities pay in the 340 program and the rebates they pay to commercial and Medicare payers amount to a “duplicate discount” on the same prescription. Using an example of a drug that is sharply discounted in the 340B program, he said drug manufacturers may lose money on a prescription because they are both receiving little payment from the 340B covered entity (because of the steep discount) and also paying out a rebate on that prescription. Moreover, Ally asserted, drugmakers are largely operating in the dark because there’s no integration of 340B and rebate data.

“You have the 340B process, and then you have the traditional payer, commercial rebate process. They are completely independent of each other. That's the first problem. They're run in parallel, and they don't talk to each other,” Ally said. Theoretically, third-party administrators could help bring the information from the two systems together, but Ally said, “there’s not statutory law that requires them to do it, so they don’t.”

Ally noted PBMs have a vested interest in the 340B programs as owners of some of the third-party administrators and also some of the contracted pharmacies, including specialty pharmacies. According to Ally, the contracted pharmacies collect approximately 15% of the 340B spread in the form of dispensing and other fees. Payers, which include PBMs, also don’t want to see the 340B boat rocked because it might threaten the rebates they receive, according to Ally.

“We have a situation — just to start putting the dots together — where there's really no incentive, by contract pharmacies, by PBMs, and to some degree, by payers, to do anything about duplicate discounts,” Ally said.

What drugmakers have tried to

Drugmakers have made various attempts to deal with what Ally characterized as duplicate discounts. Legal challenges thwarted attempts to limit the number of 340B contract pharmacies. In some cases, they have clawbacked rebates. Most recently, last year Johnson & Johnson proposed paying covered entities rebates on two of its top-selling drugs, Stelara (ustekinumab) and Xarelto (rivaroxaban), instead of using the 340B system. The company scrapped the plan after the Health Resources and Services Administration (HRSA), the part of the HHS with jurisdiction over the 340B program, threatened the company with fines if it went ahead with the plan.

Notwithstanding Johnson & Johnson’s foray and reversal, Ally proposed putting 340B on a rebate footing. “I mentioned there are two different systems that exist today, one, 340B, and one, traditional rebates. Why not align them? Why not take the 340B system, which is a chargeback system today, and make it into a rebate system, like we do today with commercial payers?”

Putting aside whether the Trump administration’s HRSA would go along with that, such a change would likely be strongly opposed by the covered entities. A factsheet on the American Hospital Association’s website says that the “340B Program is not a rebate program.” Changing it to a rebate program “not only violates longstanding federal policy but also jeopardizes patients’ access to drugs, complicates providers’ access to discounts, requires that financially strapped organizations provide upfront financing and await reimbursement, and adds considerable burden and cost to the health care system,” the factsheet says.

Alston noted the political influence that hospitals have, especially at the state level: “The hospitals, for most states, are one of the biggest employers. They have Congress' ears. They have their state legislators’ ears. They have a lot of power in terms of trying to get what they want for 340B and saying, ‘I don't like this change.'"

Alston discussed one emerging subplot in the already complicated tale of the 340B. One of the stipulations of the Inflation Reduction Act (IRA) is that there can’t be duplicate discounts on prescriptions from both the IRA’s Maximum Fair Price (MFP) on drugs and the 340B program. As a result, when the MFP prices for the first 10 drugs in the Medicare Drug Price Negotiation Program go into effect next year, the covered entities will be losing out on a large 340B spread on some of those first 10 drugs.

“It’s a revenue shift for the covered entities, so they're going to be trying to continue to either expand their 340B network or look for other ways to get steerage into their program to try to offset that decrease in 340B that's going to be coming from MFP,” Alston said.