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California's drug pricing plan could pare down 340B program


The controversial 340B drug discount program could be looking at a serious trim in California, home to the biggest Medicaid population in the country.

Health clinics and hospitals are monitoring a potentially huge money shift away from hospitals in the program in the wake of Democratic Gov. Gavin Newsom’s sweeping executive order on drug pricing. The new governor’s plan still has plenty of details to be worked out, but currently it would consolidate all the state’s drug purchasers into a single stream. The goal is to pull together hefty negotiating power against pharmaceutical companies.

The 340B program is involved because each state has different rules for how participating hospitals and health clinics collect the steep discounts from drug manufacturers.

The operational details of California’s 340B drug discount program could lead to an overhaul of the program and the profits it fuels for the state’s hospitals under Newsom’s executive order.

The order’s impact stems from the different ways California administers drug reimbursements under Medicaid fee for service versus Medicaid managed care.

The state has tight controls on what hospitals can collect through the discounts under Medicaid fee-for-service, reimbursing them at the provider’s discounted 340B rate plus a small dispensing fee.

But providers have much wider berth in billing Medicaid managed care plans, where the majority of California’s Medicaid population is enrolled. Hospitals and clinics can bill the insurers for their own negotiated rates, typically higher than what they pay under 340B and sometimes leading to thousands of dollars in profits. Provider margins in this case can range from $0 for inexpensive medications to thousands of dollars for pricey specialty drugs like Harvoni and Sovaldi.

Newsom’s order as drafted would move all the Medicaid managed care drugs to Medicaid fee-for-service. Healthcare lawyer Jason Reddish projected this could effectively wipe out the profits for 340B hospitals and clinics and removing contract pharmacies from the chain.

Reddish, who belongs to the firm Feldesman Tucker Leifer Fidell, has been tracking California’s action on 340B closely.

The policy implications and the question of whether lawmakers should impose tighter rules on which hospitals collect the discount money and how they spend it sparked fierce debate in the last Congress. The growing role of contract pharmacies also came under scrutiny in Washington.

But for now that national debate has mostly gone quiet. It’s unlikely Congress will take on a 340B legislative overhaul since the Democrats gained control of the U.S. House of Representatives. Democrats have shown themselves friendlier to hospitals on the 340B issue.

Newsom’s office did not respond to a request for clarification on whether the executive order intended to touch 340B.

But over the past few years state officials have discussed proposals that would similarly overhaul the program. Former Gov. Jerry Brown (D) laid out a significant cut to 340B in his budget proposal last year but hospitals defeated the effort.

Ben Johnson, a senior fiscal and policy analyst for the state’s Legislative Analyst’s Office, noted that the Newsom administration “has not indicated that it is attempting to tackle the 340B issue through its proposed changes to prescription drug payment and purchasing in the state.”

He added however that the Newsom plan provisions could “significantly impact entities that currently utilize the 340B program.”

The Legislative Analyst’s Office last year released analysis urging legislative action on Brown’s proposal, citing the post-Affordable Care Act expansion of both Medicaid and 340B as undermining the state’s ability to capture the savings it is due.

Johnson said the office continues to track 340B spending and will likely publish comments on Newsom’s proposals.

Sarah Hesketh of the California Association of Public Hospitals — a trade group of 21 hospitals that rely heavily on both Medicaid and the 340B program — said her organization is still trying to grasp the structure of the plan. Once they learn more, “we will have a better understanding about the potential impact to 340B and the discounts our providers currently receive,” she said.

Andie Martinez Patterson, who works in government affairs for the California Primary Care Association that represents community health centers, said the group is “definitely monitoring” the plan and has yet to discuss the 340B piece with the governor’s office.

“It’s a great proposal for California to really take the bull by the horns on drug pricing and the increases in cost — we totally support the governor doing that,” Patterson said. “I don’t know that it was intentional that it could totally eliminate the benefits the safety net receives from 340B.”

The California Hospital Association, whose officials helped lead the charge against Brown’s proposal last year, is also waiting for details before drawing conclusions.

One of the state’s considerations in proposing a program overhaul is that a pared-back 340B program will drive more savings back into California’s coffers.

But Patterson argued that 340B funnels much more money in total into the entire healthcare system than the state would necessarily see through higher rebates.

“We fully support Medi-Cal [California Medicaid], and we want it to exist,” she said. “We’re part of that team — it’s not the state’s program, it’s our collective program and 340B helped make us better providers.”

Separately, the California health department is looking at stepping up the role managed care plans and their contract pharmacies would play in 340B program oversight.

In a draft letter the Department of Health Care Services sent around in November, California officials outlined a policy to block the double-dipping into Medicaid and 340B discounts that is prohibited under federal law.

In the department’s proposal, which isn’t yet finalized, contract pharmacies wouldn’t be able to dispense 340B drugs for Medicaid enrollees unless the 340B hospital or clinic, its contract pharmacies and Medicaid managed care plan and the state health department “have established an arrangement to prevent duplicate discounts.”

Managed care plans must also set up a system to identify 340B claims and submit them to the health department.

A spokesperson for the health department said this letter said once the letter is finalized, officials will “review that version in light of the Governor’s Executive Order and pharmacy issues in general.”