Flagship Penn hospital to get $86 million, the sixth-highest payout nationally, in Medicare drug settlement

The Hospital of the University of Pennsylvania is in line to receive $86 million from the government under a legal settlement resolving cuts made to a national drug discount program designed to strengthen safety-net hospitals.

The amount for Penn’s flagship hospital in University City amounts to the sixth-largest payout to any hospital in the nation, and accounts for the bulk of the $129.2 million coming to the University of Pennsylvania Health System, according to the Centers for Medicare and Medicaid Services.

The size of the payments makes Penn Medicine, the Philadelphia region’s biggest health system by revenue, one of the nation’s largest beneficiaries of a federal program that gives qualifying nonprofit hospitals steep discounts on prescription drugs administered in an outpatient clinic or taken at home. Known as 340B, after a section of law that created it in 1992, the program’s expansion in recent years has raised concerns about profiteering off an initiative meant to aid the poor.

The program allows hospitals that meet a benchmark for serving low-income patients to buy drugs at discounts typically ranging from 30% to 40%. Hospitals are then reimbursed for the full price from private insurers and the government’s Medicare program, and keep the difference.

Drugs bought through 340B represented $53.7 billion in sales last year at the discounted prices, up from $19.3 billion in 2017, according to the Drug Channels Institute, a trade publication.

The pharmaceutical industry, which loses revenue through the program, has been fighting for ways to keep 340B’s growth in check. That has pitted the influential drug industry against the equally powerful hospital sector.

When the 340B program launched in 1992, it covered 50 hospitals that served a substantial percentage of financially vulnerable patients, plus a larger number of clinics that served low-income patients, according to an opinion piece published in January in the New England Journal of Medicine.

The discount program has exploded in size since the enactment of the Affordable Care Act in 2010 under President Barack Obama. The law, often referred to as Obamacare, expanded the types of hospitals eligible and allowed them to retain the discounts and offer them through a larger number of outside pharmacies.

In January, more than 2,600 hospitals participated in the program, the Government Accountability Office reported. And among them, hospitals deemed by the government to serve a “disproportionate share” of low-income patients — a group that includes HUP, Temple, and Thomas Jefferson University Hospital — accounted for 78% of the purchases under the program, according to Drug Channels Institute.

Drug Channels Institute reported that 340B drug purchases grew at an average rate of 23.6% from 2015 through last year. This compares to a 3.6% annual rate of increase, on average, in overall net drug sales excluding COVID-19 vaccines during that period.

Critics say the rapid growth is a sign that the program has expanded beyond its intended scope, describing 340B as a major source of profits for many nonprofit hospitals. Some pharmaceutical manufacturers have halted sales at discounted 340B prices at certain commercial pharmacies, such as Walmart and CVS, that have 340B contracts with qualifying hospitals and clinics.

“The widespread abuse has led to an environment where they feel they need to push back before it gets further out of control,” said Marc Hixson, CEO of Coeus, a Devon consulting firm with clients in the pharmaceutical and insurance industries.

Hixson and other experts said the law governing 340B allowed for loose regulation and little transparency. Hospitals can get the discount for practically any patient, regardless of their financial need, and they don’t have to pass the discount on to patients.

What’s more, they don’t have to provide any accounting of how they spend the savings, said Ted Okon, executive director of the Community Oncology Alliance.

“It’s a black hole,” said Okon.

Penn Medicine disclosed to The Inquirer that it saved $717 million through 340B in the year that ended June 30.

This is almost as much as the $734 million in cash the nonprofit health system generated during the same period.

But it’s too simplistic to suggest that Penn depends on the 340B program to be profitable, chief financial officer Keith Kasper said.

“Any substantial changes — to insurance contracts, Medicare reimbursement, the 340B program, etcetera — would require adjustments to our operations to ensure our long-term viability,” he said in an emailed statement.

Around the Philadelphia region, Jefferson Health, Temple University Health System, and Cooper University Health Care also have a significant stake in the 340B program. The Inquirer asked each system for details, but Jefferson and Cooper did not provide information.

Temple said its 340B savings in fiscal 2023 was $130 million, up from $23 million three years earlier. The increase was largely due to a change in the way it provides specialty drugs to patients.

The program is financially appealing at a time when many health systems are struggling financially.

Main Line Health, which has lost more the $100 million on operations for two years in a row, has participated in the 340B program through Lankenau Medical Center, which is just outside West Philadelphia in Wynnewood.

This year, Main Line put three outpatient infusion centers that used to operate as part of Paoli Hospital, which does not qualify for 340B, under the Lankenau license. Now the three centers — in Collegeville, Exton, and Paoli — are able to benefit from buying steeply discounted drugs.

Penn provided examples of how it has used 340B savings to benefit the community.

Penn has spent $93 million to create and operate HUP-Cedar, located at the former Mercy Philadelphia Hospital, which Trinity Health Mid-Atlantic planned to close in 2020. Penn’s initiative is part of what is now called the PHMC Public Health Center on Cedar.

The complex at 501 S. 54th St. includes an emergency department operated by Penn, limited inpatient facilities, a new behavioral health crisis response center, plus services from other providers.

Penn said 340B savings also helped to pay for $17.8 million in unreimbursed care in its emergency departments, and $11.2 million in unreimbursed care at the HUP Helen O. Dickens Center for Women.

While Penn’s Philadelphia hospitals are known for advanced treatments that draw patients internationally, they also serve thousands of low-income Philadelphians.

In North Philadelphia, close to half of Temple University Hospital’s inpatients have Medicaid coverage, making it a quintessential safety-net hospital, according to experts. The 340B program provided $130 million in savings on drugs in fiscal 2023, a big part of the government support that Temple receives.

During an investor call last month, an analyst asked Temple officials if they could continue counting on 340B. CEO Mike Young responded that 340B has been taken advantage of over the last 15 years, leaving it at risk for some institutions, but he expressed confidence that the program will remain for hospitals like Temple.

“Both pharma and the government recognize that this is critical to our survival, so we think there will be cutbacks, but not to people like us,” he said.