Neal Masia is an Adjunct Professor of Business and Economics at Columbia University and a consultant and advisor to a variety of healthcare companies. He has a Ph.D. in Economics (specializing in Public Finance and Game Theory) from the University of Rochester. As a health policy researcher, Neal has published various studies on the 340B Drug Pricing Program, which he also teaches about in his classes at Columbia Business School.
Center for U.S. Healthcare Policy Research:
How do you teach 340B, and what is the reaction from students?
Neal Masia:
You need a three-hour lecture to cover 340B in any real detail. Usually, I just explain the program and its origins. In order for students to understand 340B, they first need to understand how hospitals work. We do a week about hospitals – how they work, their finances and policy. Then 340B is the perfect little pivot point into the lecture on drugs, because it’s where they intersect.
As to the students’ reactions, they’ve already gone through a very surprising lecture about hospitals, because there’s a big disconnect between how they perceive hospitals and how they work in practice. They haven’t thought for five minutes about hospitals, other than, if you’re sick, you go to the hospital. There’s a lot of positive feeling toward hospitals. I explain that, despite their importance, they are run like businesses. They are just like any other heavily regulated business trying to maximize profits, whether they are for-profit or not-for-profit.
There are a lot of interesting examples about what happens to hospital prices when there’s consolidation, and how they make decisions. Additionally, there are questions about their relative lobbying capabilities, which are vastly superior to those of the drug industry or doctors, because they’re generally the largest employer in any district and they’re integral to the community.
And then, at the end, I say, ‘Here’s an interesting fact about how hospital financing works – one of their biggest pools of profit is the 340B program. Hospitals have come to be quite reliant on it.’ And from there I can explain how it works.
Their jaws are on the ground. A lot of them ask, ‘How can this be a policy that none of us has ever heard of?’ That’s always the first thing I ask: ‘Who has ever heard of this program?’ Of course, nobody’s heard of it.
‘What if I told you it was a $150 billion enterprise in our economy that two-thirds of not-for-profit hospitals have grown dependent on?’ Then, you kind of explain the Rube Goldberg mechanism that has grown around 340B. It’s obviously a wildly inefficient, untargeted policy. There’s no two ways about that.
I think getting people to understand that these things are managed proactively – they’re not just getting lucky with how they interact with the program – is very eye-opening. It’s deliberate. It’s a strategy.
This is a policy that represents a very significant transfer of money from several groups to several other groups. And there’s never anything like that that doesn’t come with efficiency costs. As a matter of policy, it’s a Rube Goldberg-esque way to do something you could do directly if you wanted to support the hospitals. But we have the 340B program instead. So what does that mean from a policy perspective? And what are the implications for employers, for taxpayers? That’s where I’ve been focused.
Center for U.S. Healthcare Policy Research:
Can you talk about what you tell students about the original scope of the 340B program and how it has developed over time?
Neal Masia:
When the program started in 1992, I think it was 32 hospitals that got access to cheap drugs. They linked the price directly to the Medicaid price, and it was a small program.
Now, it’s over 2,600 hospitals. That was never the program’s intent.
The best analogy I can make is to the Alternative Minimum Tax, which was meant to affect a very small number of very high-income taxpayers – but because of the way it worked out, it came to envelop huge swaths of the economy. And Congress has to fix those loopholes every year.
But with 340B, they don’t fix it, because the affected parties are generally profitable drug companies at the first level. And only recently have people begun to realize – and show through quality research – that others pay the indirect price.
Center for U.S. Healthcare Policy Research:
Can you explain what other types of organizations are indirectly paying for the 340B program?
Neal Masia:
I’ll caveat this by saying: there’s precious little direct evidence about the 340B program because there are no reporting requirements. There’s very little data directly available, so you have to impute the findings. That’s what economists like me like to do.
One way I’ve looked at things is to say, at a local or state level, how much 340B activity do I think is happening? One way to do that is just by counting the number of entities compared to the population. If one county has one 340B entity for 50,000 people, and another has 10 entities for the same number of people – I don’t know exactly what’s happening, but I’m pretty sure 10 is more than one.
Looking through that lens, I’ve shown, for example, that in states with more 340B activity – controlling for other things like income – you see higher overall Medicaid costs. Not just drug costs, but overall Medicaid costs.
Why would that happen? Because 340B leads to decisions that maximize 340B profits as hospitals buy drugs at a low price and sell high, as often as they can.
Hospitals tend to consolidate. I can’t prove that hospitals consolidate because of 340B, but my research shows that consolidated hospitals benefit more from 340B than non-consolidated ones. It’s a lot of circumstantial, but compelling, evidence about one factor leading hospitals to consolidate.
The net result: I’ve been able to show that Medicaid costs are higher when there’s more 340B activity. I’ve been able to show that commercial insurance premiums are higher. Others have shown that drug spending is higher, and that net drug spending increases because some rebates are lost when drugs go through 340B.
I’ve also been able to show that ACA premiums are higher – that paper will be published soon. And I’ve shown the link between consolidation and 340B. You can see that the profit-maximizing behavior is there.
For example, where do hospitals put 340B child sites? That’s something we just did a paper on it. They put them where the rich people are. Why? Because they’re trying to make money.
Now, hospital executives will argue, ‘Yes, so sue me. I am trying to maximize profits. But I’m good. When I have more profits, I give it to the community. That’s the kind of guy I am.’
There’s no evidence to support that. Anecdotally, sure – they’ll point to some stories. But systematically, I’ve shown in other work that retained profits are higher than for non–340B hospitals, or that they’ve grown profits faster.
No matter what, there will always be a set of financially challenged hospitals. There’s 20 percent of hospitals that always lose money. And for those, 340B is like a lifeline. But that 20 percent is probably 5 percent or less of the 340B profits.
Most of the 340B profits go to very rich systems that don’t need 340B. They just like it. They use the money.
What do they use it for? Nobody knows. It’s an impossible question – money is fungible. And since there are no reporting requirements for 340B, there are no limitations on how they use the profits.
It’s just very clear that it’s all made the hospital bottom line bigger.
Center for U.S. Healthcare Policy Research:
Is there any evidence that hospitals are using the 340B profits to provide more charity care, for instance?
Neal Masia:
No. All the evidence points in the other direction, at a systematic level.
Now, I’m talking as an economist who thinks in terms of averages. Are there examples of hospitals that use every penny of profits to do great things in the community? Absolutely. I’m sure those hospitals are very aligned with the original mission of 340B – no question about it.
But for every one of those, there must be more than one other hospital that isn’t. Because when I look at things based on comprehensive statistical review, the average story is that there is no positive impact on charity care.
On average, this is – at best – a wildly inefficient way to run a railroad.
If you hold a legislative hearing on 340B, hospitals will never run out of rural hospital folks to testify. I think it’s important to bifurcate the rural hospitals, for example, and the critical access hospitals that have real problems. Yes, they can benefit from 340B. But that’s not where the policy action should be focused. The problem is with big tax-exempt hospital systems. The law says they can only use 340B drugs on people who are their patients.
Center for U.S. Healthcare Policy Research:
Can you talk a little bit about how hospitals – disproportionate share hospitals – are using child sites and contract pharmacies, and what the impact of that is?
Neal Masia:
They use them to cast a net. They’re looking for as many opportunities as they can to fill prescriptions for people they claim are associated with their health system or hospital.
It’s kind of hospital-specific. They want to cast the net wide enough – with enough contract pharmacies and enough clinics to establish contact with a lot of patients.
It’s going to depend on two things. One is: do I have a medical record of you? Are you my patient? They need to be able to say yes. How loose is that patient definition? That’s a gray area. But I know if I’ve never seen you, I can’t claim you. I have to have seen you at least once.
So if you put up an X-ray clinic somewhere and I go in for an X-ray because it’s the closest one, now I’ve got a record of you. That’s smart business. The point is: I need to get out there and have as many relationships in the community as I can.
And then on the other end, I need you to fill the prescription at a place where I am. If you go to a chain pharmacy, they’ve got a good chance of having a relationship. But if you go to the local independent pharmacy, they might not be in that 340B relationship. Some are, but not as much as the big chains.
So they use child sites to cast the net and identify opportunities to make money off the program.
Center for U.S. Healthcare Policy Research:
What are you seeing about 340B and consolidation?
Neal Masia:
I’ve done work showing that 340B hospitals tend to charge higher prices compared to similarly sized non-340B hospitals. That could be due to a lot of things. One big factor is that 340B hospitals tend to be in systems with more local market power – or ‘market coverage.’
Systems with higher market power definitely charge higher prices. And those same systems are more likely to be in 340B. So are higher prices caused by 340B? I don’t know. But they’re related.
Two things I’ve found for sure:
- If you join a bigger system, it makes that site of care more likely to qualify for and join the 340B program.
- 340B hospitals in big systems profit more than non-340B hospitals in big systems.
So I don’t have a causality story, but there’s a strong connection between 340B and the ability to take advantage of consolidation.
It’s just like I was saying earlier about child sites. Having a more comprehensive health system means I can cast a wider net. I can affiliate my clinics with the right hospitals in my system.
Say two hospitals both have urgent care centers. One is 340B, one is not. You flip the non-340B clinic over to the 340B hospital, and now it qualifies.
That kind of thing really benefits from consolidation.
Center for U.S. Healthcare Policy Research:
So what effects does 340B have on independent doctor practices?
Neal Masia:
Well, it makes a lot of sense, if you’re a hospital, to buy up those practices. They’re like entry points into 340B. You can use those providers to identify 340B patients.
It makes a lot of sense to buy up every oncology practice you can find, or anyone that sells an infused drug – anybody in an outpatient buy-and-bill situation. There’s a lot of money to be made there.
So of course, they’re going to gobble them up. It’s a source of value creation because that independent doctor can’t access 340B on their own. But once they’re part of the hospital system, they can.
In any economic situation, if you’re worth more to an acquirer than you are on your own, what do you think is going to happen? That arbitrage is sitting right there with 340B.
Center for U.S. Healthcare Policy Research:
Let’s talk a little bit about government payers and employers. How does the 340B program impact what government payers or employers are paying?
Neal Masia:
One obvious dimension is site-of-care decisions – where people are getting their care. If you’re a hospital system, and you can tell a patient either, ‘Go get your prescription filled wherever you want,’ or ‘Come to the hospital for your infusion,’ you’re probably going to steer them toward the hospital. It’s more expensive – but you make more money off 340B. So they make decisions around site of care, around how much care people receive. They’re economically invested in a patient’s treatment path in a way that’s not how you’d want to design the system, from a policy standpoint.
Center for U.S. Healthcare Policy Research:
As an economist and researcher, what data would you like to see to better understand the impact of 340B?
Neal Masia:
It’s not just about having more data. I think when there’s this much money involved, there should be accountability for how that money is spent. That, by itself, would help a lot. Transparency around where the money goes – how much each hospital makes, and what they do with it – that would be very useful.
Now, I’m less interested in tracking every nickel. I don’t need a forensic audit. But the entities should have to report basic things. For example:
- Is the discount to the covered entity appropriate? That’s a program integrity issue.
- Who qualifies as a 340B patient, and what’s the basis for that relationship?
- How much money is each hospital making from 340B?
- What are they doing with that money?
Some states are starting to move toward this. And at the federal level, some of this should be accounted for in the budget, because there are real implications. Right now, it’s treated as having no budget impact. But in reality, there is a budget impact – it’s just indirect and hard to measure. If we had more transparency, we could measure it better.
Center for U.S. Healthcare Policy Research:
What are some of the impacts on the federal budget?
Neal Masia:
There are a bunch – and I think you can quantify them, at least in rough terms.
At the most obvious level, if you’re shifting $50 billion of profit from drug companies to tax-exempt entities like nonprofit hospitals, so you lose the corporate income tax revenue. The corporate tax rate is 21%, so that’s about $10 billion in lost tax revenue right there.
Then there’s the impact on employer-sponsored insurance. If you’re making health insurance more expensive, you’re reducing taxable income for employers and employees. That leads to another tax loss – roughly 21% of whatever that reduction is. I’ve estimated that the increase in healthcare costs from 340B is maybe a $30 or $40 billion per year problem, so that’s another $8 billion or so in lost revenue.
If you’re increasing Medicaid costs indirectly, that’s additional federal and state spending. If you’re increasing ACA premiums – which I’ve shown we are – that’s more taxpayer cost. Each of those effects adds up. They’re all in the billions.
And they’re completely invisible to the average taxpayer. But they’re real. People ask why our healthcare costs are so high – well, 340B is a part of that. And remember, it was supposed to be saving money. So it’s kind of upside-down: here’s this ‘great money-saving program’ that’s actually costing tens of billions per year.
Center for U.S. Healthcare Policy Research:
Are there proposals that might better align the 340B program with the original intent?
Neal Masia:
Clearly, transparency is a big piece of it. That’s the obvious place to start: sunshine. Beyond that, I don’t have specific tactical proposals. I mean, I can come up with all kinds of fun policy ideas. But they’d all revolve around the same theme: there’s probably some limit to how much profit a hospital should be making from this program.
To learn more about J&J’s perspective on 340B, visit https://policyresearch.jnj.com/340b
This interview has been lightly edited for clarity. Views expressed in the Expert Insights interview series are those of the interviewees and are not necessarily endorsed by Johnson & Johnson. Dr. Masia has received research funding from Johnson & Johnson.