N.C. nonprofit hospitals probed on use of drug discounts

Senator says Duke, UNC don’t appear to pass savings to patients

aalexander@charlotteobserver.comSeptember 29, 2012 

Prosperity Preacher

U.S. Sen. Chuck Grassley, R-Iowa


U.S. Sen. Chuck Grassley, Congress’ leading critic of nonprofit abuses, has asked three of North Carolina’s largest hospitals to share information about their use of a rapidly growing discount drug program, saying they don’t appear to be passing along the “massive” savings to patients.

Instead, the discounts appear to be subsidizing “bottom line operating margins,” Grassley wrote in a letter that was emailed Friday to the heads of Duke University Health System, UNC Hospitals and Carolinas Medical Center in Charlotte.

The letters cite a recent investigation by The News & Observer and The Charlotte Observer, which found that large nonprofit hospitals are dramatically inflating prices on chemotherapy drugs at a time when they are cornering more of the market on cancer care.

The newspapers’ investigation found that hospitals are routinely marking up prices on cancer drugs two to 10 times over cost. At the same time, hospitals are increasingly buying the practices of independent oncologists, then charging far more for the same chemotherapy in the same office.

More than 40 hospitals in North Carolina – including Duke and UNC – are able to obtain deep discounts on outpatient drugs under a federal program called 340B. It requires drug manufacturers to provide price breaks to hospitals that treat large numbers of financially needy patients.

Hospitals typically save 20 percent or more on drug purchases made through the program, experts say. Drugs used in the inpatient setting don’t qualify for savings under the program.

Although Congress set up the program to offset the cost of treating Medicaid patients, hospitals buy discounted drugs for all outpatients, including those with private insurance.

Grassley’s letter noted Duke’s profit of $542 million in 2011, a figure cited in the N&O story as its total profit, which includes substantial investment income. “If ‘non-profit’ hospitals are essentially profiting from the 340B program without passing those savings to its patients, then the 340B program is not functioning as intended,” Grassley wrote.

He asked the hospitals to summarize the revenue they have received from the program and to explain how they have reinvested the savings for the benefit of uninsured patients.

“We have received the letter from Senator Grassley and will respond appropriately,” Doug Stokke, vice president of marketing and communications for Duke Medicine, said in a written statement.

A spokeswoman at UNC said the hospital had received the letter: “We will work with Sen. Grassley’s office to provide the information he is looking for.”

Helping the poor?

Nonprofit hospitals get extensive tax breaks. In exchange, they’re expected to provide charity care and other benefits to the communities they serve.

In 2010, Duke spent 3 percent of its budget on charity care. UNC spent 5.2 percent. Both hospital systems, along with others in the region, also routinely turn many patients who can’t pay over to collection agencies.

The number of U.S. hospitals participating in the 340B program has increased significantly in recent years, from 591 in 2005 to 1,673 last year, according to the U.S. Government Accountability Office. Some drug manufacturers have questioned whether all those hospitals need a discount drug program.

In a report last year, the GAO found that the 340B program got inadequate oversight from the Health Resources and Services Administration, the federal agency responsible for monitoring it. The GAO also found that “the 340B program has increasingly been used in settings, such as hospitals, where the risk of improper purchase of 340B drugs is greater.”

Tax exemptions at risk?

Grassley, an Iowa Republican, has repeatedly questioned whether hospitals and other nonprofits earn their tax exemptions. Earlier this year, in response to the newspapers’ April investigation into nonprofit hospitals in North Carolina, he said most of those hospitals need to do more to help poor and uninsured patients.

A ranking member of the Senate Judiciary Committee, Grassley teamed up in March with three fellow Republicans – Sen. Michael Enzi, Sen. Orrin Hatch and Rep. Joe Pitts – to launch the 340B investigation.

“The intent and design of the program is to help lower outpatient drug prices for the uninsured,” Grassley wrote in his letters to the hospitals. “It is not intended to subsidize covered entities for providing inpatient services to those who are covered by private insurance, Medicare, or Medicaid.”

‘Bloated’ charges

U.S. Rep Sue Myrick, R-N.C., questioned whether some hospitals were playing fair with patients.

“Quality medical care is expensive, but cancer patients shouldn’t be ripped off by hospitals that benefit from mandated federal drug discounts,” Myrick, a breast cancer survivor, said in a statement. “Health insurance policyholders shouldn’t be forced to pay higher premiums just because a provider can collect on an artificially bloated charge.”

Government can’t fix the entire problem, she said, “but surely with a major payer like Medicare, we should have some ability to alter the underlying incentives so that there’s more downward pressure on prices, healthy competition for health care business, and more transparency for the consumer.”

U.S. Rep. Mel Watt, D-N.C., said the system allows companies to profit from the poor health of patients and he would prefer to see a nationalized health care system. He said he would also favor making nonprofit hospitals pay taxes.

“These things are not nonprofit any more than General Motors is nonprofit,” he said. “They’re getting the benefits of being nonprofit without the obligations.”

News & Observer staff writer Jay Price contributed.

Alexander: 704-358-5060

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