Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals
Published: 2015-06-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Approximately 40 percent of all U.S. hospitals participate in the 340B Drug Pricing Program, and the majority of 340B discounted drugs are sold to hospitals. Medicare reimburses hospitals for Part B drugs under a statutory formula regardless of the prices hospitals paid for the drugs. Stakeholders have questioned the increase in hospital participation in the 340B program, and the implications for Medicare and its beneficiaries, especially regarding cancer care; and whether certain of the program's hospital eligibility criteria target hospitals appropriately.
GAO was asked to review hospitals' participation in the 340B and Medicare programs. This report (1) compares 340B hospitals with non-340B hospitals in terms of financial and other characteristics and (2) compares spending for Medicare Part B drugs at 340B hospitals, for all drugs and for oncology drugs, with spending at non-340B hospitals. To examine hospital participation using the most recent data available, GAO analyzed 2008 and 2012 data from HRSA and CMS to compare characteristics and Medicare Part B drug spending for 340B hospitals and non-340B hospitals.
section_title: What GAO Found
paragraphs: Certain providers, including hospitals that serve a disproportionate number of low-income patients, have access to discounted prices on outpatient drugs through the 340B Drug Pricing Program, which is administered by the Health Resources and Services Administration (HRSA) within the Department of Health & Human Services (HHS). In 2012, these hospitals—referred to as 340B disproportionate share hospitals (DSH) because they are eligible for the program based on their serving a disproportionate share of low-income patients and other specified criteria—were generally larger and more likely to be teaching hospitals compared with non-340B hospitals. They also tended to provide more uncompensated and charity care than non-340B hospitals; however, there were notable numbers of 340B hospitals that provided low amounts of these types of care. For example, 12 percent of 340B DSH hospitals were among the hospitals that reported providing the lowest amounts of charity care across all hospitals in GAO's analysis. Overall financial margins for 340B DSH hospitals tended to be lower compared with non-340B hospitals, which could be attributable, in part, to the tendency for 340B DSH hospitals to provide more uncompensated and charity care.
GAO found that in both 2008 and 2012, per beneficiary Medicare Part B drug spending, including oncology drug spending, was substantially higher at 340B DSH hospitals than at non-340B hospitals. This indicates that, on average, beneficiaries at 340B DSH hospitals were either prescribed more drugs or more expensive drugs than beneficiaries at the other hospitals in GAO's analysis. For example, in 2012, average per beneficiary spending at 340B DSH hospitals was $144, compared to approximately $60 at non-340B hospitals. The differences did not appear to be explained by the hospital characteristics GAO examined or patients' health status. The Centers for Medicare & Medicaid Services (CMS), which administers the Medicare program, uses a statutorily defined formula to pay hospitals for drugs at set rates regardless of hospitals' costs for acquiring the drugs. Therefore, there is a financial incentive at hospitals participating in the 340B program to prescribe more drugs or more expensive drugs to Medicare beneficiaries. Unnecessary spending has negative implications, not just for the Medicare program, but for Medicare beneficiaries as well, who would be financially liable for larger copayments as a result of receiving more drugs or more expensive drugs. In addition, this raises potential concerns about the appropriateness of the health care provided to these beneficiaries. HRSA and CMS have limited ability to counter this incentive because the 340B statute does not restrict covered entities from using drugs purchased at the 340B discounted price for Medicare Part B beneficiaries and the Medicare statute does not limit CMS reimbursement for such drugs.
In commenting on a draft of this report HHS noted some concerns with GAO's conclusions and suggested that further analysis may be needed to examine patient outcomes and differences in health status. GAO believes its methods appropriately support its conclusions as further discussed in the report.
section_title: What GAO Recommends
paragraphs: Congress should consider eliminating the incentive to prescribe more drugs or more expensive drugs than necessary to treat Medicare Part B beneficiaries at 340B hospitals.

section_title: Letter
paragraphs: The 340B Drug Pricing Program requires drug manufacturers to sell most  outpatient drugs at deeply discounted prices to certain providers and  other entities—commonly referred to as covered entities—in order to  have their drugs covered by Medicaid. Entity eligibility for the program is  defined in statute and includes certain hospitals that serve a  disproportionate number of low-income patients. Participating hospitals,  referred to as 340B hospitals, benefit from lower outpatient drug prices  and may also benefit from the revenue generated when they are  reimbursed by Medicare and other payers at rates that exceed the  discounted prices the hospitals pay for outpatient drugs. The 340B  statute does not specify how covered entities should use the savings or  any resulting revenue associated with the discounts.
Currently, approximately 40 percent of all U.S. hospitals participate in the  program, and the majority of 340B discounted drugs are sold to  hospitals. Some members of Congress and certain stakeholders, such as drug manufacturers, have raised questions about the increasing  number of hospitals that participate in the 340B Program. They question  whether certain of the program’s hospital eligibility criteria appropriately  target hospitals for participation. They contend that participating hospitals  do not necessarily use the program and program revenues to help  vulnerable patients, such as low-income uninsured patients, and that the  program gives hospitals incentives to maximize the revenue that they  earn through it. In contrast, they contend that nonhospital entities that are  eligible for the 340B Program on the basis of their participation in  qualifying federal programs must operate within the rules of those  programs, so there is some assurance that those entities will use the  program, including any revenue generated through it, to help the  vulnerable patients they serve. Other stakeholders, such as organizations  representing 340B hospitals, emphasize that participating hospitals are  safety net providers that serve more low-income, uninsured, and  underinsured patients than other hospitals. Such stakeholders contend  that the program is intended to allow hospitals to use the revenue they  generate through the 340B Program to help them cover their operating  costs and make up any financial losses, as well as to implement  programs to benefit vulnerable patients.
Another issue raised by stakeholders, including groups representing  independent oncology practices and oncology providers, is that hospitals’  participation in the 340B Program might contribute to a recent trend in  hospital acquisition of oncology practices. Because independent  outpatient oncology practices are not eligible for the 340B Program, they  cannot obtain oncology drugs at the 340B discounted rate. Some  stakeholders argue that 340B hospitals are acquiring independent  oncology practices, in part, to expand their outpatient base for 340B  oncology drugs and thus generate higher revenue for these drugs. They  assert that this trend has negative implications for payers and patients,  including the Medicare program and its beneficiaries, because payments  for services provided in hospital outpatient departments are generally  higher than they are for services provided in free-standing community  outpatient facilities. However, these stakeholders note that a variety of  other factors could contribute to these acquisitions.
You asked us to examine hospitals’ participation in the 340B Program  and the potential implications for Medicare and its beneficiaries. In this  report, we (1) compare 340B hospitals with non-340B hospitals in terms  of financial and other characteristics and (2) examine how Medicare   Part B drug spending at 340B hospitals, for all drugs and for oncology  drugs, compares to spending at non-340B hospitals.
For both of our research objectives, we examined 2008 and 2012 data  from the Health Resources and Services Administration’s (HRSA) 340B  Covered Entity Database to determine which hospitals participated in the  340B Program. We focused our analysis on one of the six hospital types  eligible for the program—disproportionate share hospitals (DSH)— because DSH hospitals account for the majority of drug purchases under   To be eligible for the 340B Program, a DSH hospital  the 340B Program.must be a general acute care hospital that serves a disproportionate  share of low-income patients—as generally indicated by a Medicare DSH  adjustment percentage greater than 11.75—and that meets other  specified criteria. We compared characteristics and payments for these  hospitals with those for two groups: non-340B DSH hospitals (hospitals  that received DSH payments but did not participate in the 340B Program)  and all other non-340B hospitals. We excluded from all analyses   the following types of hospitals: (1) hospitals located outside the   50 states and Washington, D.C., (2) hospitals that were not acute care,  (3) hospitals paid under a Medicare system other than the prospective  payment system (PPS), and (4) hospitals that participated in the 340B  Program on the basis of one of the other five hospital eligibility  categories. We also excluded outliers and hospitals for which data were  missing or inconsistent. We also spoke with stakeholders, including  officials from three groups representing drug manufacturers, three groups  representing 340B hospitals, and two groups representing independent  oncology practices and providers, to obtain their views on these issues  and the 340B Program generally.
To compare financial and other characteristics of 340B hospitals with  non-340B hospitals, we used 2012 Medicare hospital cost report data  from the Centers for Medicare & Medicaid Services (CMS). We examined  characteristics such as hospital size, teaching status (major teaching  hospital, other teaching hospital, or nonteaching hospital), ownership  type (public, nonprofit, or for profit), location (urban or rural), DSH  adjustment percentage (high or low), and provision of charity care and  uncompensated care (high or low). We also examined whether hospitals  with higher DSH adjustment percentages provided larger amounts of  charity care and uncompensated care. We used the cost report data to  examine hospitals’ financial characteristics by calculating four types of  hospital financial margins: (1) total facility margin, (2) total Medicare  margin, (3) inpatient Medicare margin, and (4) outpatient Medicare  margin. In addition, we determined whether hospitals received the  following Medicare payment adjustments and the size of each  adjustment: (1) DSH adjustment, (2) indirect medical education (IME)  adjustment, (3) direct graduate medical education (GME) payment,   (4) outlier case adjustment, and (5) Medicare-dependent hospital (MDH)  classification. All of these adjustments apply to a hospital’s inpatient  payments. Only the GME and outlier case adjustments apply to a  hospital’s outpatient payments. There were 925 340B DSH hospitals,  1,461 non-340B DSH hospitals, and 567 other non-340B hospitals in our  cost report analysis.
To examine how Medicare Part B drug spending at 340B hospitals, for all  drugs and for oncology drugs, compares with this spending at non-340B  hospitals, we used CMS’s 2008 and 2012 Medicare claims data  combined with CMS’s 2008 and 2012 Medicare hospital cost report data.  For each year, we calculated per beneficiary Part B drug spending for  separately payable outpatient drugs for each hospital that served at least   To examine oncology drug  one outpatient beneficiary during the year. payments specifically, we identified separately payable Part B oncology  drugs by Healthcare Common Procedure Coding System code. For each  year we then calculated Part B oncology drug spending per Medicare  oncology beneficiary for each hospital that received any of these  payments. For both the overall outpatient drug and the oncology drug  spending analyses, we examined whether there were differences in   Part B drug spending between 340B DSH and non-340B hospitals that  could not be explained by factors outside of the 340B Program, such as  hospital teaching status or patient health status. To examine differences  in patient health status, for each year we calculated an average risk  adjustment score for each hospital, based on the risk scores of the  hospital’s outpatient population or outpatient population that received an  oncology drug, specifically. We excluded payments for vaccines because  they are not eligible for discounts under the 340B Program.
To assess the reliability of the data we used in our analysis, we reviewed  related documentation, interviewed officials from HRSA and CMS, and  performed appropriate electronic data checks. This allowed us to  determine that the data were sufficiently reliable for our purposes.
We conducted this performance audit from March 2014 to June 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: 340B Program
paragraphs: The 340B Program, which is administered and overseen by HRSA, within  HHS, is named for the statutory provision authorizing it, which was added   Eligibility for the program is  to the Public Health Service Act in 1992.statutorily defined and is limited to entities that participate in specified  federal programs and hospital types that meet certain eligibility criteria.  A clinic or other site affiliated with a hospital, but not located in the main  hospital building, is eligible to participate in the 340B program if it is an  integral part of the hospital, which HRSA has defined as a reimbursable  facility, included on the eligible hospital’s most recently filed Medicare  cost report.participate in the qualifying federal programs are not eligible to participate  in the 340B Program.
Independent physician-based practices that do not  Covered entities may use 340B drugs for patients whether or not they are  low-income, uninsured, or underinsured, and covered entities may  receive payments from health insurers, such as Medicare, that are higher  than the drug’s discounted price, generating revenue through the  program. A statutory pricing formula determines the 340B price of a   drug. The amount of the 340B discount ranges from an estimated 20 to   50 percent off what the entity would have otherwise paid.
Throughout calendar year 2012, there were 10,622 unique covered  entities that participated in the 340B program—an increase of 20 percent  since 2008. Approximately half of the increase in unique covered entities was among entities that became eligible for the program based on  expanded eligibility criteria enacted by the Patient Protection and  Affordable Care Act in 2010. The remaining increase was among entity  types that were eligible for the program in both 2008 and 2012, including  340B DSH hospitals. In 1992, the House Energy and Commerce  Committee estimated that approximately 90 DSH hospitals would have  been eligible to participate in a 340B Program, had it been in effect at that  time. In 2012, 1,057 DSH hospitals participated in the program.
section_title: Medicare Payments to Hospitals
paragraphs: Medicare pays most hospitals through both the acute care inpatient  prospective payment system (IPPS), which is covered by Medicare   Part A, and the outpatient prospective payment system (OPPS), which is  covered by Medicare Part B. Under these systems, Medicare pays  providers a predetermined rate for a given service that is expected to  cover the costs incurred by efficient providers. Within the OPPS, certain  services, including most Part B drugs, are paid separately.
Payments under the IPPS are adjusted to account for the beneficiary’s  clinical condition and related treatment costs relative to the average  Medicare case and payments under both the IPPS and the OPPS are  adjusted for the market conditions in the hospital’s location relative to  national conditions. Hospitals may receive additional payments if they  qualify for certain adjustments, such as:
DSH adjustment: The DSH adjustment generally provides  supplemental payments for inpatient services to hospitals that treat a  disproportionate number of low-income inpatients. To qualify for this  adjustment, a hospital’s disproportionate patient percentage—the  share of low-income patients treated by the hospital—must generally  equal or exceed a specific threshold level determined by a statutory  formula. The amount of the DSH payment adjustment varies by  hospital location and size.
GME and IME adjustments: Medicare reimburses teaching hospitals  and academic medical centers for both the direct and indirect costs of  their residency training programs. GME payments cover the direct  costs of resident training, such as salaries and benefits, for both  inpatient and outpatient services. The IME adjustment applies only to  inpatient services, and reflects the higher patient care costs  associated with resident education. The size of the IME adjustment  depends on the hospital’s teaching intensity, which is generally  measured by a hospital’s number of residents per bed.
Outlier case payment: The outlier case payment protects hospitals  from large financial losses due to unusually costly inpatient and  outpatient cases. A hospital’s costs for the case must exceed a  certain threshold amount and additional payments are based on a  percentage of the costs above this threshold.
MDH classification: The MDH classification allows small rural  hospitals for which Medicare patients make up a significant  percentage of inpatient days or discharges to receive adjustments to  their IPPS rates. To qualify as an MDH, a hospital has to meet  various criteria regarding location, size, and patient mix.
section_title: Medicare Spending for Part B Drugs
paragraphs: In 2012, the Medicare program and its beneficiaries spent a total of   $6 billion for Part B drugs in the hospital outpatient setting. Part B drugs  are typically administered by a physician or under a physician’s close  supervision in physicians’ offices or hospital outpatient departments.  Under the OPPS, Medicare reimburses all hospitals for separately  payable Part B drugs at rates determined by a statutorily defined formula  regardless of the price the hospital pays for the drug. Medicare pays   80 percent of the payment rate for Part B drugs and the beneficiary is  responsible for the remaining 20 percent. Typically, Part B drugs are  provided with a physician service, which is also paid for by both Medicare  and the patient. In general, spending for Part B drugs and other services  has a financial impact on Medicare beneficiaries because monthly Part B  premiums are set to cover 25 percent of total Part B expenditures.
section_title: 340B DSH Hospitals Were Generally Larger and Had Lower Total Facility Margins, but Higher Medicare Margins Compared with Non- 340B Hospitals
paragraphs: In 2012, 340B DSH hospitals were generally larger and more likely to be  teaching hospitals—especially major teaching hospitals—compared with  non-340B hospitals. Although 340B DSH hospitals tended to have lower  total facility margins compared with non-340B hospitals, they tended to  have higher total Medicare margins. Lower total facility margins among  340B DSH hospitals could be partly attributable to the tendency for these  hospitals to provide more charity care and uncompensated care  compared with non-340B hospitals, although there were notable  exceptions. Higher total Medicare margins among 340B DSH hospitals  could be partly attributable to the receipt of more Medicare payment  adjustments by these hospitals.
subsections: section_title: 340B DSH Hospitals Were Generally Larger and Many Provided More Charity Care and Uncompensated Care Compared with Non-340B Hospitals, with Notable Exceptions
paragraphs: Compared with non-340B hospitals—including both non-340B DSH  hospitals and other non-340B hospitals—340B DSH hospitals in our  analysis tended to be larger in terms of annual total facility revenue,  annual Medicare revenue, and the number of inpatient beds in 2012.The differences between 340B DSH hospitals and non-340B hospitals  were most pronounced among major teaching hospitals, and among the  279 major teaching hospitals, 189 (or nearly 70 percent) were 340B DSH  hospitals (see table 1). Further, the median DSH adjustment percentage  among 340B DSH hospitals in our analysis was twice as high as the  median DSH adjustment percentage among non-340B DSH hospitals— 18 percent compared with 9 percent. Among major teaching hospitals,   the median DSH adjustment percentage was over three times as high— 28 percent compared with 8 percent.
Compared with non-340B hospitals, in 2012, 340B DSH hospitals  generally provided more charity care and uncompensated care, as a  proportion of total facility revenue—although there were notable  exceptions. In addition, we found that higher DSH adjustment  percentages were often, but not always, associated with provision of  greater amounts of charity care and uncompensated care by hospitals.  Across all hospitals in our analysis, as hospitals’ DSH adjustment  percentages increased, the average amount of charity care and  uncompensated care they provided, as a proportion of total facility  revenue, generally increased. (See fig. 1.)
The median amount of uncompensated care provided by 340B DSH  hospitals was 1.4 percentage points greater than the median amount  provided by non-340B DSH hospitals, and 3.6 percentage points greater  than the median amount provided by other non-340B hospitals. The  median amount of charity care provided by 340B DSH hospitals was   0.8 percentage points greater than the median amount provided by non- 340B DSH hospitals, and 1.4 percentage points greater than the median  amount provided by other non-340B hospitals. (See table 2.)
However, there were notable numbers of 340B DSH hospitals that  provided low amounts of uncompensated care and charity care. For  example, while we found that 340B DSH hospitals tended to provide a  larger amount of charity and uncompensated care compared with non- 340B hospitals, 12 percent of 340B DSH hospitals in our analysis were  among the hospitals that provided the lowest amounts of charity care. We  also found that 14 percent were among the hospitals that provided the  lowest amounts of uncompensated care across all hospitals in our  analysis. Additionally, among 340B DSH hospitals, the median amount of  uncompensated care provided by major teaching hospitals was less than  the median amount provided by all hospitals in the group, despite the fact  that the major teaching hospitals in this group tended to have the highest  DSH adjustment percentages. Additionally, nearly one quarter of 340B  DSH hospitals that were major teaching hospitals provided low amounts  of uncompensated care. (See table 3.)
section_title: 340B DSH Hospitals Generally Had Lower Total Facility Margins than Non- 340B Hospitals
paragraphs: Compared with non-340B hospitals, 340B DSH hospitals in our analysis  generally had lower overall financial margins in 2012, as measured by  their total facility margins. Specifically, the median annual total facility  margin among 340B DSH hospitals (3.7) was 1.8 percentage points lower  than the median annual total facility margin among non-340B DSH  hospitals (5.5), and 3.3 percentage points lower than the median annual  total facility margin among other non-340B hospitals (7.0). This finding  was generally consistent when we looked at hospitals by characteristics  such as teaching status (major teaching, other teaching, or nonteaching),  ownership type (public, nonprofit, or for profit), and location (urban or  rural). The lower total facility margins among 340B DSH hospitals could  be attributable, in part, to the tendency for 340B DSH hospitals to provide  a larger amount of charity care and uncompensated care, as a proportion  of total facility revenue, compared with non-340B hospitals.
section_title: 340B DSH Hospitals Generally Had Higher Medicare Margins and Received More Medicare Payment Adjustments Compared with Non-340B Hospitals
paragraphs: Compared with non-340B hospitals, 340B DSH hospitals in our analysis  generally had substantially higher (i.e., less negative) total Medicare  margins and inpatient Medicare margins in 2012 (see table 4). The  median annual total Medicare margin that year among 340B DSH  hospitals was -2.7, which was 4.6 and 13.3 percentage points higher than  the median annual total Medicare margin among non-340B DSH hospitals  and other non-340B hospitals, respectively. Similarly, the median  annual inpatient Medicare margin among 340B DSH hospitals was 0.2,  which was 7.8 and 22.1 percentage points higher than the median annual  inpatient Medicare margin among non-340B DSH and other non-340B  hospitals, respectively.
The higher total Medicare margins and higher inpatient Medicare margins  for 340B DSH hospitals may be attributable, in part, to the amount of  Medicare payment adjustments they received. The 340B hospitals in our  analysis were more likely to receive Medicare payment adjustments and  receive higher payment adjustment amounts compared with non-340B  hospitals, which resulted in increased Medicare revenue for these  hospitals. For example, in 2012, 340B DSH hospitals were more likely  than non-340B DSH hospitals to receive three of the five payment  adjustments we examined—IME, GME, and outlier case (see table 5).
Additionally, in 2012, 340B DSH hospitals received higher payment  amounts, as a proportion of total Medicare revenue, for four of the five  payment adjustments we examined—IME, GME, DSH, and outlier case  adjustments—compared with non-340B hospitals (see fig. 2).
Despite their participation in the 340B Program, 340B DSH hospitals in  our analysis generally had lower outpatient Medicare margins compared  with non-340B hospitals. In 2012, the median annual outpatient Medicare  margin among 340B DSH hospitals was 1.8 and 1.7 percentage points  lower than that of non-340B DSH hospitals and other non-340B hospitals,  respectively. Lower outpatient Medicare margins among 340B DSH  hospitals were likely due to a variety of factors. One potential factor is that  there are fewer Medicare payment adjustments for outpatient services.  Among the five payment adjustments we examined, only two—GME and  outlier case—apply to outpatient payments.
section_title: Per Beneficiary Part B Drug Spending Was Substantially Higher at 340B DSH Hospitals, Which May Reflect Financial Incentives to Prescribe Outpatient Drugs
paragraphs: In both 2008 and 2012, per beneficiary Medicare Part B drug spending,  including oncology drug spending, was substantially higher at 340B DSH  hospitals than non-340B hospitals. This indicates that, on average,  Medicare beneficiaries were prescribed more drugs, more expensive  drugs, or both, at 340B DSH hospitals. The differences we found did not  appear to be explained by the hospital or patient population  characteristics we examined. Because Medicare pays hospitals at set  rates for Part B drugs regardless of their costs for acquiring them, there is  a financial incentive at hospitals participating in the 340B program to  prescribe more drugs or prescribe more expensive drugs to Medicare  beneficiaries. The substantially higher spending at 340B DSH hospitals  may reflect a response to this incentive.
subsections: section_title: Per Beneficiary Part B Drug Spending Was Substantially Higher at 340B DSH Hospitals Compared with Non-340B Hospitals
paragraphs: Among the hospitals in our analysis that provided outpatient services and  whose 340B status did not change between 2008 and 2012, on average,  per beneficiary Medicare Part B drug spending was substantially higher at  340B DSH hospitals compared with non-340B hospitals in both 2008 and  2012. For example, in 2012, average per beneficiary spending at 340B  DSH hospitals was $144, compared to $60 and $62 at non-340B DSH  and other non-340B hospitals, respectively. (See fig. 3.) Because  Medicare reimbursement rates for Part B drugs at all of the hospitals in  our analysis were based on the same fee schedule, this indicates that, on  average, Medicare beneficiaries at 340B DSH hospitals were prescribed  more drugs or prescribed more expensive drugs, or both, than  beneficiaries at the other hospitals in our analysis.
The spending differences between 340B DSH hospitals and non-340B  hospitals remained even after we accounted for teaching status,  ownership type, or location (i.e., urban or rural). For example, among both  teaching and nonteaching hospitals, average per beneficiary Part B drug  spending was much higher at 340B DSH hospitals than at non-340B  hospitals. (See fig. 4.)
Further, these differences were not explained by the factors we examined  that might disproportionately affect hospitals that treat higher proportions  of low-income patients. For example, among hospitals with high levels of  charity care or high levels of uncompensated care, and among hospitals  with a high DSH adjustment percentage—all indicators that these  hospitals treat a higher proportion of low-income patients—Part B drug  spending was much higher among 340B DSH hospitals in both 2008 and  2012. (See fig. 5.)
Additionally, the differences we found were likely not explained by the  health status of the outpatients served. Specifically, in 2008 and 2012, the  health status of outpatient beneficiaries was generally similar at 340B and  non-340B hospitals. For example, in 2012 the average risk score—a  measure of relative health status—of these outpatient beneficiaries at  340B DSH hospitals was 1.50, while it was 1.45 at non-340B DSH  hospitals and 1.36 at other non-340B hospitals. Risk scores are based  on overall health care spending and are not limited to drug spending.  However, the difference between the risk scores of beneficiaries treated  at 340B DSH hospitals and non-340B hospitals relative to these hospitals’  Part B drug spending suggests that the substantially higher spending at  340B DSH hospitals may not be explained by differences in patient health  status.
The relatively higher Part B drug spending at 340B DSH hospitals  potentially could, in part, reflect a tendency for some beneficiaries to  receive all of their Part B drugs in a hospital outpatient department  instead of a physician’s office. To the extent this occurs, some of the  higher spending at 340B DSH hospitals may not be associated with  increases in overall Medicare spending for Part B drugs. However, we  found that, in 2012, among patients who received Part B drugs in hospital  outpatient departments, the percentage of patients who only received  drugs in that setting—meaning that they did not receive any Part B drugs  at a physician’s office—was only slightly higher at 340B DSH hospitals  (59 percent) compared to non-340B DSH hospitals (54 percent), and  other non-340B hospitals (54 percent). Moreover, when we limited our  analysis to patients who only received Part B drugs in a hospital  outpatient department, the substantially higher spending at 340B DSH  hospitals persisted. Specifically, in 2012, average per beneficiary Part B  drug spending for these patients was $2,743 in 340B DSH hospitals,  compared to $1,295 in non-340B DSH hospitals and $1,634 in other non- 340B hospitals.
section_title: The Average Number of Oncology Patients Served Increased for All Hospital Groups from 2008 to 2012, but Increased the Most at 340B DSH Hospitals
paragraphs: Among the hospitals in our analysis that provided outpatient oncology  services and whose 340B status did not change between 2008 and 2012,  all three groups of hospitals served more oncology patients in 2012  compared to 2008. (See table 6).
For both years, average per beneficiary Medicare Part B oncology drug  spending was highest at 340B DSH hospitals. Higher average per  beneficiary spending at 340B DSH hospitals compared to non-340B  hospitals persisted regardless of teaching status or patient health  status. For example, in 2008 and 2012, the health status of outpatient  oncology beneficiaries that received a Part B drug was similar at 340B  and non-340B hospitals. In 2012, the average risk score of these  outpatient oncology beneficiaries at 340B DSH hospitals was 2.29, while  it was 2.11 at non-340B DSH hospitals and 2.14 at other non-340B  hospitals. Risk scores are based on overall health care spending and  are not limited to oncology drug spending specifically. Nevertheless, the  difference between the risk scores of beneficiaries treated at 340B and  non-340B hospitals relative to these hospitals’ Part B oncology drug  spending suggests that the substantially higher Part B spending at 340B  DSH hospitals may not be explained by differences in patient health  status. Because Medicare reimbursement rates for Part B oncology drugs  at all of the hospitals in our analysis were based on the same fee  schedule, this indicates that, on average, Medicare beneficiaries at 340B  DSH hospitals were prescribed more oncology drugs, or prescribed more  expensive oncology drugs, than beneficiaries at the other hospitals in our  analysis.
The average number of oncology patients served increased among all  three of our hospital groups between 2008 and 2012, but 340B DSH  hospitals saw the greatest increase in such patients served (83 to 120, or  45 percent). The increase across all three hospital groups in the number  of oncology patients served may reflect recent trends in oncology  treatment, such as where patients are treated, and could be due to  multiple factors, including factors outside of the 340B program. For  example, stakeholders that we spoke with noted that there is a larger  trend toward integration in the health care industry. However, 340B DSH  hospitals were much more likely to treat oncology patients compared with  non-340B hospitals. In addition, there was a 5 percentage point increase  from 2008 to 2012 in the percentage of 340B DSH hospitals that treated  oncology patients, while the increases for non-340B DSH and other non- 340B hospitals were 1 and 2 percentage points, respectively.
section_title: Differences in Per Beneficiary Part B Drug Spending at 340B and Non-340B Hospitals May Reflect Responses to Incentives in the 340B and Medicare Programs
paragraphs: Medicare uses a statutorily defined formula to pay hospitals at set rates  for drugs, regardless of their costs for acquiring them, which CMS cannot  alter based on hospitals’ acquisition costs, and the 340B statute does not  restrict covered entities from using drugs purchased at the 340B  discounted price for Medicare Part B beneficiaries. Consequently, there is  a financial incentive at these hospitals to prescribe more drugs and more  expensive drugs to Medicare beneficiaries in order to maximize the  revenue generated by the difference between the cost of the drug and  Medicare’s reimbursement. The substantially higher per beneficiary  Medicare spending for Part B drugs at 340B DSH hospitals, which did not  appear to be explained by hospital characteristics or patient health status,  may reflect responses to this incentive. Unnecessary spending has  negative implications, not just for the Medicare program, but for Medicare  beneficiaries as well, who would be financially liable for larger  copayments as a result of receiving more drugs or more expensive drugs,  and higher Part B premiums that reflect the increases in Medicare  spending for those drugs. Moreover, there are potential concerns about  the appropriateness of the health care provided to Medicare beneficiaries  if it is overly influenced by financial incentives to prescribe outpatient  drugs.
section_title: Conclusions
paragraphs: Certain providers, including hospitals that serve a disproportionate  number of low-income patients, have access to discounted prices on  outpatient drugs through the 340B Drug Pricing Program. Currently,  approximately 40 percent of all U.S. hospitals participate in the program,  including approximately 1,000 DSH hospitals. Because DSH hospitals  account for nearly 80 percent of all 340B drug purchases, it is important  to understand the characteristics of the population that is served by these  hospitals in order to evaluate the impact of the 340B program on hospitals  and their patients. We found that 340B DSH hospitals generally provided  more charity care and uncompensated care compared with non-340B  hospitals. However, there were notable exceptions to this pattern.  Specially, 12 percent of the 340B DSH hospitals reported providing  relatively small amounts of charity care and 14 percent reported providing  relatively small amounts of uncompensated care.
The financial incentive to maximize Medicare revenues through the  prescribing of more or more expensive drugs at 340B hospitals also  raises concerns. Our work suggests that 340B DSH hospitals may be  responding to this incentive to maximize Medicare revenues. On average,  per beneficiary Medicare spending on Part B drugs in 2008 and 2012 was  substantially higher at 340B DSH hospitals compared with non-340B  hospitals—yet we did not find that these differences could be readily  explained by hospital characteristics or patients’ health status. While  hospitals may be financially benefitting—which is not inconsistent with the  legislative design of the 340B Program—this poses potentially serious  consequences to the Medicare program and its beneficiaries. Not only  does excess spending on Part B drugs increase the burden on both  taxpayers and beneficiaries who finance the program through their  premiums, it also has direct financial effects on beneficiaries who are  responsible for 20 percent of the Medicare payment for their Part B drugs.  Furthermore, this incentive to prescribe these drugs raises potential  concerns about the appropriateness of the health care provided to  Medicare Part B beneficiaries. Absent a change in financial incentives,  potentially inappropriate spending on drugs may continue. While limiting  hospitals’ Medicare Part B reimbursement for 340B discounted drugs or  eliminating the 340B discount for drugs provided by hospitals to Medicare  Part B beneficiaries could diminish the incentive to prescribe more drugs  or more expensive drugs than necessary at 340B hospitals, CMS and  HRSA are unable to take such actions because they do not have the  statutory authority to do so.
section_title: Matter for Congressional Consideration
paragraphs: To help ensure the financial sustainability of the Medicare program,  protect beneficiaries from unwarranted financial burden, and address  potential concerns about the appropriateness of the health care provided  to Part B beneficiaries, Congress should consider eliminating the  incentive to prescribe more drugs or more expensive drugs than  necessary to treat Medicare Part B beneficiaries at 340B hospitals.
section_title: Agency and Third Party Comments and Our Evaluation
paragraphs: We provided a draft of this report for review to HHS and received written  comments that are printed in appendix I. Because of the focus on 340B  hospitals in this report, we also provided 340B Health (formerly Safety  Net Hospitals for Pharmaceutical Access) an opportunity to review a draft  of this report and we have summarized the comments we received below.  HHS and 340B Health also provided technical comments, which we  incorporated, as appropriate. Following is our summary of and response  to comments from HHS and 340B Health.
subsections: section_title: HHS Comments
paragraphs: In its comments, HHS stated that our examination of Medicare Part B  outpatient drug spending is a useful initial analysis of differences in  spending between 340B DSH hospitals and non-340B hospitals. HHS  also noted concerns related to some of our conclusions; however, we  believe our methods and findings were robust and appropriately support  our conclusions, as discussed below.
First, HHS noted that although we examined differences in per beneficiary  spending by hospital type, we did not examine differences in patient  outcomes or quality. HHS acknowledged that higher spending for Part B  drugs at 340B hospitals could represent unnecessary or excess spending  for these drugs. However, HHS stated that it is also possible that a higher  volume of physician-administered drugs could lead to better clinical  outcomes. While we did not attempt to evaluate health outcomes as part  of our analysis, we have no evidence to suggest that non-340B hospitals  had an incentive to provide a lower volume of Part B drugs than required  to achieve positive clinical outcomes. In particular, we believe that  because Medicare reimbursed all hospitals in our analysis—including  non-340B hospitals—based on the drug's average sales price plus a fixed  percentage above the drug's average sales price, non-340B hospitals  would have no incentive to underprescribe Part B drugs.
Second, HHS questioned our interpretation of the differences between  the average risk scores among the three hospital groups (1.50 for 340B  DSH hospitals vs. 1.45 and 1.36 for non-340B DSH and other non-340B  hospitals, respectively). HHS believes that the differences in risk scores  could represent a meaningful difference in the health status of  beneficiaries. We acknowledge that the differences in risk scores could  represent a difference in the health status of the beneficiaries served by  each hospital group. However, we believe that the relative difference  between the risk scores and the per beneficiary Part B drug spending at  340B DSH and non-340B hospitals indicates that the substantially higher  spending at 340B DSH hospitals may not be explained by differences in  patient health status. For example, based on the risk scores, overall  health care spending for beneficiaries who received Part B drugs at 340B  DSH hospitals in 2012 would have been expected to be, on average,   3.4 percent higher than overall health spending that year for beneficiaries  who received Part B drugs at non-340B DSH hospitals. In contrast,  spending for Part B drugs at 340B DSH hospitals was substantially  higher—140 percent higher—than spending at non-340B DSH hospitals.  While the spending expectation from the risk scores applies to overall  health care spending, not just Part B drug spending, the relative  percentage differences suggest that the higher spending at 340B DSH  hospitals may not be explained by differences in patient health status.
section_title: 340B Health Comments
paragraphs: 340B Health noted several concerns related to the methodologies we  used for our analysis. However, we believe that our methods were sound,  as described below.  340B Health expressed concerns about the methodology we used to  examine the amount of charity care and uncompensated care provided by  hospitals. In particular, 340B Health stated that the data from worksheet  S-10 in the Medicare hospital cost reports that we used for this analysis  are too unreliable to serve as the basis for policy conclusions because the  data are not used by CMS to determine Medicare payments. However,  before we conducted our analysis, we confirmed with CMS that the  agency did not have any concerns about our use of the data in the S-10  worksheet for our analysis. In addition, we performed our own data  reliability assessment and concluded that the cost report data were  sufficiently reliable for our study. The Medicare cost report is collected  annually from all institutional providers that render services to Medicare  beneficiaries. Among other things, these reports contain self-reported  information on facility characteristics, utilization data, and financial  statement data. We used these data to describe various characteristics of  hospitals, including hospitals’ self-reported levels of charity care and  uncompensated care.  340B Health also questioned whether our methods controlled for certain  reasons it might be appropriate for Medicare Part B spending to be  significantly higher at 340B hospitals. For example, they noted that 340B  hospitals are larger, more likely to be teaching hospitals, and more likely  to treat cancer patients or otherwise higher-risk patients. Our analyses  controlled for each of these characteristics. To control for the size of each  hospital, we calculated Part B drug spending at the per beneficiary level.  To control for the effect of teaching hospital status, we examined Part B  drug spending by teaching hospital level (major teaching, other teaching,  and nonteaching) and we found substantially higher Part B drug spending  at 340B DSH hospitals regardless of teaching status. To control for the  possibility that 340B DSH hospitals were more likely to treat cancer  patients, we conducted a separate analysis of Part B spending for  oncology drugs at 340B DSH and non-340B hospitals and found similar  results in spending.
Although controlling for teaching status and conducting separate analyses  of oncology drug spending may have in part controlled for the treatment  of higher risk patients, we also conducted analyses to determine whether  patient health status at 340B DSH hospitals may explain the substantially  higher Part B drug spending at these hospitals. 340B Health expressed  concerns about the methodology we used in this analysis, noting that the  patient risk scores we used were not intended to predict Part B drug  spending—which was a limitation we noted in our report. However, the  risk scores we used are an indication of the expected overall health care  spending for the beneficiaries served by the hospitals in our analysis, and  we found small differences in expected overall health care spending  across the hospital groups. As we noted above, we believe that the  relative difference between the risk scores and the per beneficiary Part B  drug spending at 340B DSH and non-340B hospitals indicates that the  substantially higher spending at 340B DSH hospitals may not be  explained by differences in patient health status. Additionally, in  expressing concerns about the risk score measures, 340B Health referred  to a Medicare Payment Advisory Commission report that questioned the  usefulness of these measures for assessing expected spending for   However, the same report also stated that, on  individual beneficiaries.average, the risk scores are accurate predictors of patient health status,  and for our report, we calculated an average risk score for each hospital  group.  340B Health also questioned whether our exclusion of a group of  hospitals—smaller, mostly nonteaching DSH hospitals that were in the  340B Program in 2012, but not in 2008—from our spending analysis  might have skewed our findings. Our discussion in the report focused on  our analysis of hospitals that participated in the 340B program in both  2008 and 2012 to ensure a like-to-like comparison. However, although we  did not include a discussion of it in the report, we did separately examine  Part B drug spending at DSH hospitals that participated in the 340B  Program in 2012 but not in 2008. For example, we found that, in 2008,  Part B drug spending at these hospitals was similar to spending at other  non-340B DSH hospitals. However, in 2012, after the hospitals joined the  340B Program, Part B drug spending at these hospitals was 53 percent  higher than spending at non-340B DSH hospitals (and among the  nonteaching hospitals, spending at 340B DSH hospitals was 73 percent  higher than non-340B DSH hospitals). Furthermore, although spending  was higher at these 340B DSH hospitals in 2012, the average risk score  of patients treated at these hospitals (1.41) was slightly lower than the  average risk score of patients treated at non-340B DSH hospitals (1.45).  These findings indicate that, like those we included in our report, these  newer participants in the 340B program may have been responding to the  financial incentives in the program.
Finally, 340B Health expressed concern that we did not attempt to review  patient outcomes or otherwise evaluate the quality of care provided to  beneficiaries at 340B DSH hospitals compared with non-340B hospitals  and cited research that found that increased use of outpatient drugs can  reduce spending on health services. However, the research 340B  Health cited was not focused on Part B drugs—which are generally drugs  administered by a physician in a clinical setting—but rather on the effects  of insurance coverage for prescription drugs on medical costs, so is not  directly relevant to our analysis. In addition, as we noted above, while we  did not attempt to evaluate health outcomes as part of our analysis, we  have no evidence to suggest that non-340B hospitals had an incentive to  provide a lower volume of Part B drugs than required to achieve positive  clinical outcomes due to the structure of Medicare’s payment for Part B  drugs.
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section_title: Appendix I: Comments from the Department of Health & Human Services
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, individuals making key  contributions to this report include Gerardine Brennan, Assistant   Director; George Bogart; Lori Fritz; Daniel Lee; Elizabeth T. Morrison;   Aubrey Naffis; and Daniel Ries.