California Hospitals Try to Block Proposal to Ban Medicaid Providers From 340B

A 340B battle is brewing in California, where Medicaid providers may get banned from using the federal drug discount program if the governor’s budget proposal moves forward.

The scale of Democratic Governor Jerry Brown’s proposal to carve Medicaid out from 340B took hospitals by surprise, said Amber Ott of the California Hospital Association. Providers of all stripes are banding together to block the initiative that would hit almost half of hospitals in a state where roughly one-third of the population, or more than 14 million people, is covered by Medicaid

Ott said hospitals project the change would cost them hundreds of millions of dollars.

California’s legislative effort to curb the 340B program is the most drastic under serious consideration on a state or federal level, although it isn’t new. Delaware attempted a similar ban through regulation, but ultimately the CMS barred the state from implementing it. California providers are riled, saying that it would essentially take money out of California’s system and funnel it into the federal government.

Saving money is a key reason for the proposal, as it would help replenish the state’s General Fund. Federal law prohibits any double-dipping in both the Medicaid drug rebate program and the 340B drug discounts. If a provider collects the 340B discount for the drugs it dispenses to Medicaid patients, the state won’t get the federal rebate.

While the governor’s office has not determined how much it estimates the measure would save, the Department of Health Services projects that the Medicaid prescription drug program would garner $4.1 billion in savings, which would grow if Brown’s proposal carries forward.

Yet hospitals point out that California retained just over $1.3 billion of that estimated $4.1 billion because the federal government pays most of the Medicaid expansion costs as well as its share of traditional Medicaid.

“From policy perspective that’s concerning — that you’re taking hundreds of millions of dollars out of California system and giving two-thirds of it to the federal government,” Ott said.

The California Hospital Association officials said that there isn’t enough publicly available data for them to quantify the exact financial impact on providers, but preliminary surveys project the change would cost hospitals hundreds of millions of dollars.

Sarah Hesketh of the California Association of Public Hospitals — which represents 21 hospitals that are all both disproportionately reliant on Medicaid and enrolled in 340B — said that should providers decide to stay enrolled in 340B to get discounts for their Medicare patients they would continue to be subject to the 340B provider rules banning them from group negotiations for lower drug prices. This would have the unintended consequence of hurting the providers who care for the most Medicaid patients.

“While our competitors could enter into group-purchasing arrangements likely at a cheaper price, we would be paying full price for a significant number of our patients,” Hesketh said.

More than 170 of California’s 400 hospitals get 340B drug discounts from manufacturers as required under current federal law, and the prospect of this change is uniting a vast swath of the state’s provider community as they try to keep the proposal out of Brown’s revised budget that is due in mid-May.

Should they fail there, hospitals will turn to the Legislature. State lawmakers will take up the revised budget and have until June 15 to pass it.

The measure has already had its hearing in the state Senate’s budget health subcommittee and later this month the Assembly’s budget health subcommittee will examine it as well. Their recommendations on the provision, should it make it into the governor’s final budget, will decide whether it becomes state law or not.

The Washington debate around curbing 340B growth has pitted Big Pharma against hospitals. But that isn’t the case in Sacramento, according to Barbara Glaser who lobbies for the California Hospital Association. The proposal came from the Department of Health Services and so far it has united clinics and hospitals to fight against it as a battle of state versus federal interests.

“At a time when our healthcare programs are facing incredible threats at the federal level, stability in state policies and regulations that support California’s safety-net institutions and programs are needed now more than ever. Although the repeal of the Affordable Care Act and Medicaid entitlement reform did not move forward last year, we expect continued pressure to reduce Medicaid costs and disrupt the ACA,” the letter from the coalition that includes health systems, hospital associations, HIV and AIDS groups, the California Rural Indian Health Board, and psychiatric and mental health groups, said.

The reasoning behind Brown’s proposal isn’t only about cost-savings for the state. He and analysts have pointed to the administrative complexity of preventing any double-dipping into both the Medicaid drug rebate program and 340B. Officials note that the complexity has grown since ACA expanded both the 340B program and Medicaid.

Ott conceded that administration did become more complicated with the ACA, which expanded the Medicaid rebate program to managed care plans. One-third of Californians are on Medicaid, and 80% of the state’s Medicaid population is in managed care.

An in-depth report on the proposal by the California Legislative Analyst’s Office recommends that the Legislature seriously consider Brown’s plan, citing the post-Affordable Care Act expansion of both Medicaid and 340B as tangling the state efforts to capture all the savings.

The analysis estimates that about 1,500 provider sites care for Medicaid patients and dispense 340B-discounted medications, and notes that the proliferation of extra middlemen like contract pharmacies add to the complexities.

Last year, California lawmakers ultimately rejected a proposal that would have banned contract pharmacies from dispensing 340B drugs to Medicaid patients.

The latest proposal also aims to prevent any double-dipping and protect the state Medicaid’s program integrity.

While the California Legislative Analyst’s Office said this along with the cost-savings should push the legislature to consider the proposal seriously, it could encourage many Medicaid patients to drop out of the 340B program entirely due to administrative burden. In that case, the study notes, the state might need to consider raising the Medicaid reimbursement rate.

The legislative analyst also looks at potential alternatives to the full carve-out of Medicaid from 340B: a prohibition or limit on contract pharmacies from dispensing 340B drugs to Medicaid patients, as was proposed last year; a prohibition or limit on certain covered entities from dispensing some or all 340B drugs to Medicaid patients; a decision to pay for 340B drugs at cost within managed care; or to maintain the status quo.

It is unclear how many states may follow suit with similar 340B measures, even as Washington lawmakers debate how they want to address the program.

Ohio and Oregon have both banned contract pharmacies from dispensing 340B drugs.

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