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Critical Access Hospitals Could Benefit from Drug Discounts

Cheryl Clark, for HealthLeaders Media, January 27, 2010

I awoke to the phone ringing very, very early last week – (more than a few people don't realize I live in California and work on Pacific time). It was Benjamin Anderson, CEO of the 24-bed Ashland Health Center in rural Kansas, a critical access hospital I wrote about in a column last month.

Anderson had read the story I posted the day before about the federal 340B program, and how the Senate Finance health reform proposal would, for the first time, allow critical access facilities like his to participate.

That would mean his facility, and about 1,300 other critical access hospitals with fewer than 26 beds, would be able to buy prescription medications for outpatient and inpatient use at discounts as much as 25%.

"I'd never heard of this program before," he told me. "But, I know now I need to know more."

Established in 1992, the 340B program requires pharmaceutical companies to sell discounted drugs to qualifying outpatient facilities run by safety net hospitals–those with certain percentages of uninsured and Medicaid patients, explains Ted Slafsky, executive director of the Safety Net Hospitals for Pharmaceutical Access.

Slafsky's group has worked for years to persuade lawmakers that 340B should be expanded from outpatient use to those medications required for inpatients, and that critical access hospitals should not be excluded as they are now. The Senate Finance bill, if passed with current language, would accomplish this goal.

The savings are potentially huge. Slafsky estimates that some larger hospitals with high inpatient admissions will save up to $7 million to $8 million a year, though the average would likely be closer to $2 million.

What's discounted?
Under 340B, generic and brand name drugs get the discounts, including expensive infusion therapy, AIDS drugs, and pricey biologics. According to a 2007 survey performed by the National Opinion Research Center (NORC) (340B Drug Pricing Program-Results of a Survey of Participating Hospitals) of the 150 rural hospitals participating in the program in 2006, the average monthly savings was approximately $19,700 on total outpatient drugs; some hospitals reported saving an average of 24% of the pharmacy budget.

And, the report noted, savings from the discounts "offset losses from providing pharmacy services, increase and/or improve services at the hospital, offset losses in other departments, reduce medication prices to the patient, and increase the quantity and/or variety of drugs available."

Expansion to inpatient drugs would only improve those savings. And there are administrative benefits too.

Today, hospitals have to maintain separate records for inpatient and outpatient drug distribution, a costly, time-consuming process. But those issues would disappear if the Senate Finance expanded the 340B provision to inpatient medications.

Across the country, but particularly in smaller, rural settings, administrators who know about 340B relish the prospect of saving potentially thousands of dollars on drug purchases. Many community hospitals leaders point out that many of their patient populations are paid under federal programs, so the saving would actually accrue back to Uncle Sam, but at the expense of the drug companies.

"Certainly it would reduce the margin for the pharmaceutical industry if the 340B program were expanded to critical access hospitals, but I'm not sure they'd notice," says R.D. Williams, CEO of Ashe Memorial Hospital, a critical access facility in the Blue Ridge Mountains of rural North Carolina. Ashe gave up its ability to use the program when it converted from a 76-bed down to a 25-bed facility two years ago.

But if Ashe were eligible again, "it would reduce my costs by about $30,000 to $40,000 a year," Williams says.

Multiply that amount by 1,300, the number of critical access hospitals nationwide who would be allowed to participate in 340B and it might appear like a lot of money, Williams says. "But it's really a negligible percentage of the Medicare program."

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