U.S. Sen. Chuck Grassley, R-Iowa, Congress’ leading critic of nonprofit abuses, has asked three of North Carolina’s largest hospitals to share information about their use of a rapidly growing discount drug program, saying they don’t appear to be passing along the “massive” savings to patients.

Instead, the discounts appear to be subsidizing “bottom line operating margins,” Grassley wrote in a letter that was emailed Friday to the heads of Carolinas Medical Center, Duke University Health System and UNC Hospitals.

The letters cite a recent investigation by the Observer and The News & Observer of Raleigh, which found that large nonprofit hospitals are dramatically inflating prices on chemotherapy drugs at a time when they are cornering more of the market on cancer care.

The newspapers’ investigation found that hospitals are routinely marking up prices on cancer drugs two to 10 times over cost. At the same time, hospitals are increasingly buying the practices of independent oncologists, then charging more for the same chemotherapy in the same office.

More than 40 hospitals in North Carolina – including Carolinas Medical Center and Presbyterian Hospital in Charlotte, Duke in Durham and UNC in Chapel Hill – are able to obtain deep discounts on outpatient drugs under a federal program called 340B. It requires drug manufacturers to provide price breaks to hospitals that treat large numbers of financially needy patients.

Hospitals typically save 20 percent or more on drug purchases made through the program, experts say. Drugs used in the inpatient setting don’t qualify for savings under the program.

Although Congress set up the program to offset the cost of treating Medicaid patients, hospitals can buy discounted drugs for all outpatients, including those with private insurance.

Grassley’s letter noted that Carolinas HealthCare System, the $7 billion nonprofit system that owns Carolinas Medical Center and about 30 other hospitals, “has been generating record surpluses” in recent years.

“If ‘non-profit’ hospitals are essentially profiting from the 340B program without passing those savings to its patients, then the 340B program is not functioning as intended,” Grassley wrote.

He asked the hospitals to summarize the revenue they have received from the program and to explain how they have reinvested the savings for the benefit of uninsured patients.

Hospitals’ responses

In a brief statement, Carolinas HealthCare said, “We appreciate and share Senator Grassley’s interest in controlling healthcare costs in the United States and plan to work with his office directly to review the facts.”

A Duke official said the hospital would “respond appropriately,” while an official at UNC said: “We will work with Sen. Grassley’s office to provide the information he is looking for.”

Nonprofit hospitals get substantial tax breaks. In exchange, they’re expected to provide charity care and other benefits to the communities they serve.

Carolinas Medical Center spent about 5.5 percent of its budget on charity care in 2010 – a larger percentage than most N.C. hospitals. But Carolinas HealthCare has filed thousands of lawsuits against patients who don’t pay their bills, and a previous Observer investigation found that some of those patients appeared to qualify for charity care.

Carolinas HealthCare, the nation’s second-largest public hospital system, has posted average annual profits of more than $300 million over the past three years. The chain has built up more than $2 billion in investments and owns more than $1 billion in property.

In a report last year, the U.S. Government Accountability Office found that the 340B program got inadequate oversight from the Health Resources and Services Administration, the federal agency responsible for monitoring it. The GAO also found that “the 340B program has increasingly been used in settings, such as hospitals, where the risk of improper purchase of 340B drugs is greater.”

Helping the poor?

The number of U.S. hospitals participating in the 340B program has increased significantly in recent years, from 591 in 2005 to 1673 last year, according to the GAO. Some drug manufacturers have questioned whether all those hospitals need a discount drug program.

Grassley, an Iowa Republican, has repeatedly questioned whether hospitals and other nonprofits earn their tax exemptions. Earlier this year, in response to the Observer’s April investigation into nonprofit hospitals in North Carolina, he said most of those hospitals need to do more to help poor and uninsured patients.

A ranking member of the Senate Judiciary Committee, Grassley in March teamed up with three fellow Republicans – Sen. Michael Enzi, Sen. Orrin Hatch and Rep. Joe Pitts – to launch the 340B investigation.

“The intent and design of the program is to help lower outpatient drug prices for the uninsured,” Grassley wrote in his letters to the N.C. hospitals. “It is not intended to subsidize covered entities for providing inpatient services to those who are covered by private insurance, Medicare, or Medicaid.”

Grassley’s letter to Carolinas HealthCare quoted system President Joe Piemont, who told the Observer that prices often reflect the practice known as cost-shifting, in which hospitals charge more for some services to make up for losses in others.

“The drug itself may just be the vehicle for charging for the services that are provided (elsewhere),” he said. “We make literally thousands of trades to have it balance.”

In a message to employees responding to the Observer stories last week, Carolinas HealthCare CEO Michael Tarwater explained: “Decisions regarding the pricing of chemotherapy services – or any other services for that matter – do not take place in a vacuum. Those decisions must take into account literally hundreds of variables that affect our ability to take care of our patients.”

In recent years, he said, the system has “undergone a sustained economic crisis that has significantly increased the costs of charity care, in the context of flat government reimbursement models that, taken as a whole, do not cover the costs of care provided.”

At the same time, Tarwater wrote, “our mission requires a significant investment of resources in education, research, and many vital services that are not self-supporting, such as behavioral health.”

‘Bloated’ charges

U.S. Rep Sue Myrick, R-N.C., questioned whether some hospitals are playing fair with patients.

“Quality medical care is expensive, but cancer patients shouldn’t be ripped off by hospitals that benefit from mandated federal drug discounts,” Myrick, a breast cancer survivor, said in a statement. “Health insurance policyholders shouldn’t be forced to pay higher premiums just because a provider can collect on an artificially bloated charge.”

Government can’t fix the entire problem, she said, “but surely with a major payer like Medicare, we should have some ability to alter the underlying incentives so that there’s more downward pressure on prices, healthy competition for healthcare business, and more transparency for the consumer.”

U.S. Rep. Mel Watt, D-N.C., meanwhile, said the current system allows companies to profit from the poor health of patients and that he – unlike most of the American public – would prefer to see a nationalized healthcare system. He said he would also favor making nonprofit hospitals pay taxes the way for-profit corporations do.

“These things are not nonprofit any more than General Motors is nonprofit,” he said. “They’re getting the benefits of being nonprofit without the obligations.”

News & Observer staff writer Jay Price and Observer staff writer Doug Miller contributed.