Earlier in this blog series regarding pharmaceutical marketing challenges, we addressed the myriad pricing pressures, supply and demand factors, and policy uncertainty that make up a phenomenon IQVIA calls the “big squeeze.” We touched on the role of payer controls and patient cost sharing. In this post, we’ll tackle another factor that is fueling costs, increasing risks, and adding to the squeeze for manufacturers: 340B discounts.

The 340B Drug Pricing Program was launched in 1992 to give Medicaid-like discounts on outpatient drugs to indigent patients who don’t qualify for or could not enroll in Medicaid. To participate in Medicare and Medicaid, pharmaceutical manufacturers must provide 340B discounts to qualifying entities. The program was originally designed to allow scarce resources to go further in providing access to outpatient medications for needy populations. The well-intended original aim of the program served for several decades to provide expanded access to many of those who need it most. However, trends over the past decade have caused many to challenge whether the program has moved beyond the original intent.

Participating 340B hospitals and clinics are known as “covered entities.” To qualify for participation, one of the requirements is that the entity have a sufficient Medicare disproportionate share hospital (DSH) adjustment percentage. Qualifying entities must have a DSH adjustment percentage greater than 11.75 percent for the most recent cost reporting period ending before the calendar quarter involved. Because there are no restrictions on how covered entities can use 340B profits and the bar to qualify is relatively low, the incentive to qualify is high. As such, qualifying for 340B covered entity status is one of the market dynamics that has fueled health system consolidation over the past decade.

Originally, outpatient pharmacies and clinics of covered entities were the mechanism by which drugs were delivered to patients via 340B. This acted as a limit to which pharmacies could participate and mitigated program growth. More recently, “contract pharmacies” were added to increase the covered entities’ reach using chain, independent, and mail-order pharmacies. This second mechanism is one of the factors that has led to program expansion.

How do these two dynamics converge?

Since 2010, there has been a 50% increase in the number of covered entities, a 700% increase in the number of unique covered-entity sites, and a 1,500% increase in the number of unique contract pharmacies. For example, some large teaching institutions have gone from having a half dozen or so contract pharmacy relationships in 2010, to 500+, or even as many as 1,000 contract pharmacies they can push business through today. In the most recent data from 3Q21, there are now a staggering +181,000 covered entity/contract pharmacy relationships in total. It’s no wonder we have seen such explosive growth in program utilization.

Not surprisingly, in 2020, the industry hit a record $80 billion in 340B program sales – a 76% increase from $46 billion in 2017. That’s even higher than the prescription sell-in for all of Medicaid ($65 billion in 2020). The program growth represents a significant amount of orchestration on behalf of covered entities and contract pharmacies to expand their networks and increase the amount of product moving through the 340B channel.

As the program has swelled beyond its original intent, 340B represents growing financial risk, as well as compliance and regulatory challenges for manufacturers. If those costs and risks were an iceberg, there would be only a relatively small chunk of visible costs above the water line. Visible are the statutory or sub-ceiling discounts granted to 340B-covered entities. Beneath the water line, however, are invisible costs that extend deep. These include:

• Duplicate discounts, where a 340B discount is being applied in addition to the manufacturer paying a rebate (providing a price discount and a rebate on the same prescription)
• Compliance considerations, as industry concern grows that undisputed, and un-owed, duplicate discounts could constitute a kickback to payers
• Diversion, with a covered entity receiving the discounted 340B price even when ineligible for it
• A variety of other costs, including co-pay program impact, brand drug fees, orphan drugs, GPO prohibition, incorrect 340B HRSA records, and repayment to covered entities

Thinking about just the first invisible cost, IQVIA estimates that duplicate discounts across the industry will total $20-25 billion in 2021. To put it another way, of $80 billion in total 340B sales, about one-quarter represents a duplicate discount where a rebate is also being paid. This goes far beyond paying a Medicaid rebate and a 340B discount on the same claim which is statutorily prohibited. Many prescriptions in the Commercial and Medicare channels also have 340B discounts being applied in addition to a rebate.

The second invisible cost causes lost revenue and higher compliance risk. For example, suppose a manufacturer has language within its access contracts that allow it to dispute duplicate discounts. Now suppose the manufacturer is not disputing because they are fearful of the repercussion of losing formulary access with a payer. Does that failure to dispute constitute a kickback? In other words, is the manufacturer essentially paying an additional, un-owed rebate to that payer if it isn’t identifying and disputing the potential duplicate discount?

Given the high costs and risks, why aren’t manufacturers taking duplicate discounts head on?

In most cases, it comes down to a lack of data visibility. If a manufacturer can’t see what’s happening across channels, it’s almost impossible to connect the dots to broadly identify duplication, build the case for a dispute, and do it all within the required timeframes. Until manufacturers apply data and analytics to achieve that visibility, they will continue to navigate around the 340B iceberg in the dark - and risk sinking the ship.

Please feel free to contact IQVIA with questions or to discuss what this could mean for your organization.