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. 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. 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. 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. 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.) 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health & Human Services and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. 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.

Summary: 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. 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. 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.