More 340B Math Showing that the Drug Discount Program Is Getting Unimaginingly Large

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The New York Times is out with the second article in its series about PBMs. This weekend, they tackled the intersection between PBMs and the most important story in American health care (the death of retail pharmacy). 

Much like the NYT’s first PBM story, nothing here is going to seem particularly novel to those watching the space closely. At the end of the day, the story is frustratingly simple: PBMs are not paying independent pharmacies enough to stay open (even as PBMs pay their own corporate affiliates a lot more). 

The PBM counter-argument, as relayed by the reporting, is fascinating: PBMs are in the business of getting prices low, and if that kills independent pharmacies, so be it. 

“There is an inherent tension between the interests of retail pharmacies and the employers, unions and other entities that offer prescription drug benefits,” the Express Scripts spokeswoman told the paper. 

“I think today you would argue that there are more pharmacies than we probably need,” said the new guy in charge of [checks notes] CVS. (The new guy is David Joyner, and his ascension to the CEO seat at CVS happened on Friday.)

I respect the intellectual honesty here of an industry basically confessing to the charges brought by the New York Times. 

But the devil-may-care attitude of PBMs toward independent pharmacies exposes the one hole in an otherwise solid piece. There’s no discussion of what a policy fix would look like. Without intervention, it’s pretty clear where things are headed. That raises questions: Will we get intervention? Can we? What might that look like? NYT leaves those questions unanswered. 

(If you’re interested in the current state of PBM reform, Axios on Friday published a handy -- though, unfortunately, paywalled cheat sheet of all of the pending federal legislation.)

For those of you who don’t check your email on the weekend, HRSA dropped its annual 340B numbers on Friday -- more than $66 billion in sales at discounted prices in 2023 -- and we talked about that in a Very Special Edition of the newsletter on Saturday. 

But I’m not -- not by a long shot -- done with the subject. 

First, a couple of things that caught my eye, beyond the numbers: 

• There’s been basically no media coverage beyond Ed Silverman’s STAT story. I assume we’ll see something of a trickle still to come … releasing things on a Friday is never idea. Still, the lack of quick attention is a rude reminder that even though this is really important, and even though it’s a subject that takes up a lot of my brain space, most reporters still consider this too esoteric a topic for meaningful, continued coverage. 

• As best I can tell, there’s been no reaction from the provider community. Nothing from 340B Health. Nothing from the American Hospital Association. No updates to Ed’s piece with comments. That’s a reminder that these numbers are not convenient for providers, who claim that they badly need 340B dollars but are unlikely to have good answers for what they did with the extra billions in revenue generated in 2023. 

Second, I want to give props to HRSA for releasing drug-specific numbers (and/or whoever filed the FOIA request suggesting that HRSA publish drug-specific numbers). There are a lot of ways to break down the numbers, but one useful way is to see how much 340B compromise of the total U.S. sales for those medicines. Here’s what that looks like:

(10/23/24 edit: The original newsletter had an incorrect figure for Humira. The chart has been updated and now has the correct number.)

Given those numbers, here’s one question I spent part of the weekend pondering: Are hospitals generating more profit from cancer medicines than drug manufacturers are? Here’s my logic, which includes a lot of rough math: 

Merck made $15.11 billion on Keytruda in the United States in 2023. That much is simple.**

340B hospitals mark up cancer drugs by a factor of 3.19*** (per this fantastic NEJM piece from earlier this year****). That gets you to gross revenue of just over $22 billion (!). Back out the $6.905 billion that hospitals spent to acquire the medicines (per the HRSA data), and you get … $15.12 billion in profit. 

Merck, which developed a truly revolutionary molecule that has revolutionized cancer treatment, makes less money from that medicine than the U.S. hospital industry does. 

(The footnotes below make clear that this is a massive underestimate because I’m oversimplifying the math in ways that benefit hospitals. If I had real numbers, I’m quite confident that this analysis would show that hospitals are making a ton more than Merck.)

This is just one thought experiment based on those numbers. There are dozens more, all of which are going to guide folks to the same general conclusion: the 340B program is truly massive. 

You could argue that’s OK. Having a really big safety-net drug program might be something that the country wants and needs. 

But if you’re going to do that -- if your safety net program is going to be the primary payer for oncology treatment in the country, generating billions in profits for hospitals -- you really ought to have a much, much better idea of whether those profits are helping patients. 

** It’s not that simple. I’m treating every dollar of Keytruda revenue as profit, which is not remotely accurate. Providing that medicine to the market carries with it a bunch of costs that are too complex to account for in a Monday-morning newsletter. 

*** I’m being extremely conservative here. The 3.19 figure is the ratio between reimbursement and acquisition cost, but “acquisition cost” in that study is not the 340B price, which isn’t public, but rather the average sales price, which is pretty close to list for these medicines. If I was using the actual 340B acquisition cost, there would be a few billion in extra profits. 

**** Funded by Arnold Ventures. Because if there’s one thing that Arnold Ventures and the drug industry agree on, it’s that hospitals ought to be a lot more accountable on 340B. 

• The NYT piece didn’t get into this, but pharmacists are getting pretty worried that they’re going to take a beating on the “negotiated” prices in Medicare, too. Bloomberg Law has the details on how pharmacies may get squeezed from both the PBM and the manufacturer side.

• Interesting Rand analysis here of drug-pricing proposals. The Rand folks tried to determine if there were policies that might be both feasible and effective. The answer: not really. (There was one idea that checked both boxes: the ultra-sexy topic of “grouping originator biologics and biosimilars under the same Medicare Part B reimbursement code.”) 

• Here’s a STAT story that misses a lot of the nuance about the 340B ballot initiative in California. My theory on this particular effort remains that the actual ballot initiative is meaningless real estate politics, but the underlying mechanism -- the idea that 340B revenue should be directed toward patent care, as a theoretical construct -- is worth keeping a spotlight on.

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