Panel Paper: Subsidizing Consolidation? Unintended Consequences of a Federal Drug Discount Program

Thursday, November 2, 2017
Atlanta (Hyatt Regency Chicago)

*Names in bold indicate Presenter

Sunita Desai and Michael McWilliams, Harvard University

Because the government heavily regulates health care and is the single largest purchaser of hospital services in the United States, many of the most salient incentives hospitals face stem from government policies. In this work, we examine how profit incentives embedded in a large but under-explored federal policy unintentionally influences hospital-physician consolidation and other market outcomes in the health care system.

 The 340B Drug Discount Program entitles almost 45% of hospitals to discounts on purchases of outpatient drugs. The drugs, many of which are expensive, specialty drugs (e.g. chemotherapy agents) can be administered to a broad population including Medicare patients for standard reimbursement. Although it is intended to expand access for low-income patients by financially supporting hospitals that disproportionately serve these groups, the 340B Program provides no direct incentive for hospitals to achieve those objectives. Rather, the discounts—reported to be 20%-50% of prices paid by non-340B providers—strengthen the marginal incentive to supply more drugs to insured patients, particularly Medicare patients. We study the effect of these incentives along several dimensions of policy interest including hospital-physician consolidation and drug spending.

 This work makes three key contributions. First, this is the first study to examine the consequences of the 340B Program. Second, while recent work has found hospital-physician consolidation is associated with higher spending but no quality improvements, this is the first study to examine a potential cause of consolidation. Third, we develop a novel measure of hospital-physician consolidation using Medicare claims.

 Our empirical strategy is a fuzzy regression discontinuity that exploits a cutoff in the 340B Program's hospital eligibility criteria to identify exogenous variation in hospital exposure to the 340B drug discount. Eligibility is based on the so-called disproportionate share (DSH) percentage, a federally defined formula that proxies for a hospital's low-income population. We present evidence that assumptions of the regression discontinuity design hold: 1) near the eligibility threshold, whether a hospital is above or below is random and 2) hospitals cannot perfectly manipulate their DSH percentage to become eligible.

 We find the 340B Program leads to hospital-physician consolidation and increased drug spending. The 340B Program leads to an additional 2.25 (s.e.=0.51) oncologists and 0.89 (s.e.=0.51) ophthalmologists working in hospital’s owned facilities, implying 208% and 235% increases relative to the sample mean, respectively. Accordingly, hospitals’ patient volume increases by 56% and 103% in oncology and ophthalmology, relative to the sample mean. Oncology patients treated in 340B facilities have 33% greater spending on outpatient drug administration relative to similar patients treated in non-340B facilities. We do not find evidence that the 340B Program leads to increased provision of care for low-income populations.

 Our findings suggest that the 340B Program is not achieving its goal of expanding care for low-income populations. In addition, it is unintentionally contributing to hospital-physician consolidation and increased drug spending. Given growing evidence of the adverse consequences of hospital-physician consolidation, the Program may be unintentionally weakening the forces that promote price and quality competition in the health care delivery system.