Prognosis Profits

April 23, 2015

Senator: Hospitals profited on drugs for poor, uninsured

An inquiry by U.S. Sen. Charles Grassley found that three nonprofit hospitals in North Carolina have made millions from a discount drug program intended to help the poor and uninsured.

This story was originally published in the Observer on 4/2/13.

An inquiry by a U.S. senator has found that three nonprofit hospitals in North Carolina have made millions from a discount drug program intended to help the poor and uninsured.

Hundreds of U.S. hospitals, including more than 40 in North Carolina, obtain deep discounts on outpatient drugs under a rapidly growing federal program called 340B. The plan requires drug manufacturers to cut prices to hospitals that treat large numbers of financially needy patients.

But U.S. Sen. Chuck Grassley, R-Iowa, says information he obtained from Duke University Hospital, Carolinas Medical Center and UNC Hospitals raise questions about whether the program is functioning as intended.

Last year, Duke University Hospital purchased $65.8 million in drugs through the discount program, which saved $48.3 million. It sold the drugs to patients for $135.5 million, for a profit of $69.7 million. The profit would have been $21.4 million if Duke had not participated.

Carolinas Medical Center has not yet answered Grassley’s questions about how much revenue it has generated from the 340B program.

In response to the senator’s September inquiry, CMC said, “It is very accurately calculate gross or net revenues from outpatient pharmaceuticals due to many factors, including the complicated reimbursement models for pharmaceuticals.”

But the Charlotte hospital said it was able to save about $21 million from its participation in 2011 – up from about $13 million in 2008.

On Monday, Grassley sent another letter, giving CMC until Friday to provide its 340B revenue figures “to enable an accurate comparison” to those already provided by Duke and UNC Hospitals.

“These numbers paint a very stark picture of how hospitals are reaping sizeable 340B discounts on drugs and then turning around and up-selling them to fully insured patients in order to maximize their spread,” Grassley wrote in a letter last week to the administrator of the Health Resources and Services Administration (HRSA), the federal agency that oversees the drug program.

Congress set up the program to offset the cost of treating Medicaid patients, but hospitals can buy discounted drugs for all outpatients, including those with private insurance. Federal auditors and Grassley fear that some hospitals are increasingly using the program for profits, not charity.

About 42 percent of CMC’s 340B patients were covered by commercial insurance in 2011, and about 11 percent were uninsured. The rest were covered by Medicare and Medicaid.

At Duke, about 67 percent of patients who received those discount drugs were covered by commercial insurance companies, which often pay hospitals many times over cost for medications. Only 5 percent of the Duke patients were uninsured.

Nonprofit hospitals are exempt from property, sales and income taxes. In exchange, federal officials expect them to provide a benefit to their communities, in part by providing care to those who can’t afford it. Duke’s savings on discounted drugs were significantly more than the free or reduced-price care the hospital provided during the same year: $35.2 million.

Grassley, Congress’ leading critic of nonprofit abuses, requested information from the three North Carolina// hospitals in September in response to an investigation by the Observer and The News & Observer of Raleigh. Those stories found that large nonprofit hospitals are dramatically inflating prices on chemotherapy drugs – often two to 10 times over cost – at a time when they are cornering more of the market on cancer care.

“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 in his letters to the hospitals.

UNC reported receiving $65.4 million in revenue from drugs bought through the program from 2008 to 2011. UNC officials said they were unable to calculate the profit figures for the drugs.

Hospitals cite benefits

The three North Carolina hospitals say they’ve used savings from the discount drug programs to better serve those in need.

Carolinas HealthCare System, the multibillion-dollar hospital chain that owns CMC, said it passes the savings on to many uninsured patients, including those who visit its community clinics, where uninsured patients are charged no more than $10 for any prescription. Those savings also have helped increase access to cancer infusion centers for the poor and uninsured, the system said.

The system said that it is “an excellent steward” of the discount drug program. Duke said 340B has helped it operate several programs that benefit the needy.

“Revenues generated through the 340B program are important to supporting our nonprofit patient care mission,” spokesman Doug Stokke said. “Available revenue is reinvested into facilities, technology upgrades and service expansion that benefit all patients, including those who are financially disadvantaged.”

UNC said it has invested the 340B savings to provide “free drugs to our thousands of charity care and uninsured inpatients and outpatients and extend limited resources to a broad patient population.”

‘Virtually no oversight’

Hospitals typically save 20 percent or more on drugs bought through the program, experts say. Drugs given to inpatients don’t qualify for the program.

In a 2011 report, the U.S. Government Accountability Office found that the program got inadequate oversight. 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.”

The number of U.S. hospitals participating in the 340B program has increased dramatically in recent years, from 591 in 2005 to 1,673 last year, according to the GAO. Some drug manufacturers have questioned whether all those hospitals need a discount drug program.

In January, a coalition of pharmaceutical organizations published a study that questioned whether the program actually benefited uninsured, poor patients and pointed out how hospitals profit from insured patients who get no benefit from the program.

In his letter, Grassley said the federal oversight agency has “conducted virtually no oversight” and asked whether it is collecting sufficient information “to ensure that covered entities are fulfilling their mission.”

A spokesman for HRSA said the agency would respond to Grassley, but would not comment further.

Grassley has repeatedly questioned whether hospitals and other nonprofits earn their tax-free status. Last year, in response to the newspapers’ five-part series on nonprofit hospitals in North Carolina, Grassley said most of those hospitals need to do more to help poor and uninsured patients.

Carolinas Medical Center spends more than 5 percent of its budget on charity care – a larger percentage than most North Carolina hospitals. But Carolinas HealthCare has filed thousands of lawsuits against patients who don’t pay their bills, and the newspapers’ investigation found that some of those patients appeared to qualify for charity care.

Duke University Hospital spent about 2.5 percent of its budget on charity care in recent years.

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