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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
Hello, and welcome to A Health Podicy. I'm your host, Rob Lott. It goes without saying that our health care system was not designed according to some master plan. Over the last seventy five years or more, we've seen countless policymakers create and implement countless programs, rules, and regulations aimed at addressing various shortcomings of our system. And then, of course, every new change has its own consequences, sometimes creating new problems or different flaws that, of course, require additional solutions.
Rob Lott:It is constant, and it is just the nature of public policy in the real world. Now what's less common but not unheard of are those instances when two policies crafted separately but existing in parallel seem to invite a direct and stark conflict with each other. It does happen, and it leaves observers with questions as simple as, what were they thinking? That is just one of the questions we'll ask on today's episode of A Health Odyssey. I'm here with Doctor.
Rob Lott:Saye Nikpeh, Associate Professor in the Division of Health Policy and Management at the University of Minnesota School of Public Health. Together with her co authors, Mikayla Reinke and Elizabeth Watts, also of the University of Minnesota, she has a new paper in the January issue of Health Affairs. It sets things up nicely with its title, quote, When Safety Net Programs Compete, colon, Medicaid three forty b and the battle over drug discounts. Now I have to admit, they had me at that word battle. It's rare that that term shows up in the title of a health affairs article, so I'm hoping we can really lean into it.
Rob Lott:Listeners, just imagine the tension, the plotting, the stealthy maneuvers undertaken by the stories players. That's what's in store on today's episode of A Health Odyssey. So don't turn that dial. And Doctor. Nick Vey, welcome to A Health Odyssey.
Sayeh Nikpay:Thanks for having me. And let me just say, I am so thrilled to get to talk to you about this topic. It has been something that I have thought about every day now for several years and has been incredibly surprising to me and just shocking that more people don't know about this policy interaction. So very happy to talk to this audience about about this.
Rob Lott:Awesome. Well, I I can't wait to dig in. One quick programming note for our listeners. We are actually recording video, so folks can continue to listen where they normally listen to their podcasts using their normal podcast platform. But if you want to watch us talk, you can do that on Health Affairs YouTube channel.
Rob Lott:Check it out. And let us know what you think. It's an experiment. We're trying it out and we want to see how folks like it. But for now, doctor Nick Vey, let's dig in.
Rob Lott:And maybe we can start with a brief description of the two programs, that you you're describing as being in conflict. Can you tell us a little bit about sort of how they were envisioned and maybe who their benefits were intended to flow to?
Sayeh Nikpay:Yeah. Let's talk about the Medicaid drug rebate first, because that's an older program and sort of how this all started. So Medicaid drug rebate was created in 1990. What was happening was that Medicaid was really the largest single payer for drugs at that time. I think it was about 10% of the market.
Sayeh Nikpay:And a number of state sorry. Not state. Federal policymakers were concerned that the federal government wasn't getting the best deals out there for drugs. And so there were many different attempts to try to come up with some mechanism to reduce costs for Medicaid programs. And what ended up eventually happening was the modern day Medicaid drug rebate program.
Sayeh Nikpay:The idea was that manufacturers would be required to either pass to pass the better of a flat percentage discount, or if it was better, the best price available in the market. And by doing that, it would essentially ensure that Medicaid, you know, this major safety net program, which wasn't as big at the time, would be getting the best prices, and that would save money for the federal government and for states. And that was a good thing. And so this policy, got implemented in around 1991, and since that time has has, you know, saved a lot of money for states by defraying the cost. I believe there were about $50,000,000,000 in in Medicaid rebates in 2022.
Sayeh Nikpay:That's the last you know? So it was reducing gross Medicaid spending on drugs by about half. Now the way they work is that a patient who's covered by Medicaid gets a prescription. They go to their preferred pharmacy wherever that is. They fill a prescription.
Sayeh Nikpay:The pharmacist contacts Medicaid and says, hey. Missus Jones has filled the prescription. Will you reimburse us? Medicaid reimburses at some agreed upon rate. It's these days, it's often what's called the the NADAC.
Sayeh Nikpay:It's sort of based roughly on acquisition costs plus a dispensing fee. And then the patient walks off with their meds, and the pharmacy gets their payment. And then the Medicaid agency takes the record from that transaction, and it it aggregates it, on a regular basis and sends a message to the manufacturer of the drug that missus Jones filled, at that pharmacy saying, hey. Missus Jones is covered by Medicaid. She used this prescription.
Sayeh Nikpay:We paid x dollars. Please send us a rebate that you owe us. And that defrays the cost of Medicaid after the transaction has occurred for states. Okay? So the benefits of this go directly to the states, which pay less for their drug costs, overall, which can help bolster the Medicaid program by allowing it to offer more benefits or cover more people.
Sayeh Nikpay:And it also benefits the patients who are on Medicaid because those patients, because they're covered by Medicaid, they pay either nothing or they pay nominal cost sharing for those drugs. So that's that's the story with the Medicaid drug rebate program.
Rob Lott:Okay. Great. Now let's switch to the 340 b drug discount program.
Sayeh Nikpay:Yes. So let's talk about three forty b. Okay. So in order to understand three forty b, you have to think about Medicaid drug rebates. And I think not a lot of people understood this, but three forty b only exists because one of the impacts of the Medicaid drug rebate was that after those best prices got passed out to Medicaid, got pushed through to Medicaid, anyone who was getting one of those best prices, and in in a lot of cases, it was safety net providers, the VA, think about FQHCs, large public hospitals, your title 10 clinics that are providing penny price birth control, that type of stuff, All of those best prices essentially disappeared over overnight, meaning, you know, the next time the the contract the price contract had to be negotiated.
Sayeh Nikpay:And that created this affordability crisis where all of a sudden, all of these payers, not just SafetyNet payers, HMOs, private hospitals, everyone was saying, hey. We were getting these discounts. We're not getting them anymore because Medicaid's drug rebate program has you know, the manufacturers are saying, well, we don't want the best prices out there. We wanna we're gonna raise them because we don't want Medicaid to incentive
Rob Lott:to keep it higher in order to avoid paying a big rebate to Medicaid. Is that right?
Sayeh Nikpay:You got it. Exactly. Exactly. So medic so policymakers were trying to do something to fix this problem because in the case of, say, like an FQHC, at this time, you know, there's a fixed budget. And if you were spending $3 yesterday on out of every 100 on drugs, and today you're spending $6, that's $3 less you could have spent on doing something else, screenings, food programs, whatever it is.
Sayeh Nikpay:Right? So policymakers came in with this little teeny tiny program that was meant to it got passed actually not even with its own authorizing legislation. It was part of a VA bill, and it basically made some slight changes to the Medicaid drug rebate program. It removed three forty b prices as well as VA prices from three forty b best or from the Medicaid best prices. But then it also created this program that says you can essentially buy at the price that Medicaid buys if you are certain types of safety net providers.
Sayeh Nikpay:And that original list was, you know, your kind of federal grantees, think your federally qualified health centers, the newly created Ryan White program, you know, all of these different grantees, and then also some hospitals as well. And it was expected to be sort of a small number. So okay. So what happens when, you know, three forty b is used? So go back to missus Jones.
Sayeh Nikpay:Pretend she is she's still covered by Medicaid. What happens is she goes to her provider, same provider. She gets her prescription. She, fills it at her favorite pharmacy. And if that pharmacy is either owned by a three forty b covered entity or has a contract to dispense three forty b drugs with the three forty b covered entity, then what will happen is the three forty b covered entity now I'm glossing over a lot of complexity here, but we're gonna we're gonna do it.
Rob Lott:The short version. Yep.
Sayeh Nikpay:So that covered entity or the pharmacy acting on its behalf is gonna go to its shelf called three forty b drugs. It's gonna pull a drug off that three forty b shelf. That drug was bought with the discount that Medicaid would have received as a rebate already applied. Because the key difference between these two programs is that the Medicaid drug rebate is a post transaction price concession. The three forty b discount is a pre transaction price concession.
Sayeh Nikpay:So pharmacist grabs a bottle from the three forty b shelf, dispenses it to missus Jones. Missus Jones goes on her way, takes her medication. The, you know, the pharmacist says to Medicaid, hey. Reimburse me. This the far the state does.
Sayeh Nikpay:And then the state gets the record of the transaction. And it looks at the transaction, and it says, wait a second. Someone else already used the price concession that I was planning on using. And so now when I'm compiling this list of all the drugs that I'm gonna go to that manufacturer and say, hey. You owe me a rebate.
Sayeh Nikpay:I can't put this drug on the list because the three forty b provider already bought, already used that price concession upfront when they put that drug on their shelf in the pharmacy. And so the benefits of three forty b come from or they're derived from the difference between that discounted price that they that the pharmacy or the covered entity sorry. I'll say the hospital, for example, bought that drug at and the reimbursement that they received for Medicaid that doesn't reflect the $3.40 b discounts. So that that difference is now going to the covered entity and not coming after the fact to the Medicaid agency as a, you know, as a as a a rebate to lower costs of Medicaid.
Rob Lott:Got it. So the benefits go to the the covered entity, the the contract pharmacy, as opposed to back to Medicaid.
Sayeh Nikpay:That's right.
Rob Lott:Correct me if I'm wrong here, not to further muddy the waters, but is it true that, a three forty b entity can purchase that drug at the lower price, but then could also sell it to someone who's covered by commercial insurance, for example?
Sayeh Nikpay:That's right. So in addition to that benefit, that spread that would have gone to Medicaid, in addition to that being a benefit for the providers that are participating in 340B, there is also a benefit that comes from being using those discounted drugs on patients regardless of the type of coverage they have. So a Medicaid drug rebate can only be used on a Medicaid patient because, you know, the state can't use a Medicaid drug rebate to generate rebate revenue on a non Medicaid patient. In the case of three forty b, you can generate three forty b revenue on the Medicaid patient, also on the Medicare patient, also on the commercially insured patient, and in some cases also on uninsured patients as well. GAO has found in some contract pharmacy arrangements, uninsured patients end up paying full price sometimes for for $3.40 b discounted drugs.
Rob Lott:Wow. Great. Well, a really complicated situation, and that's sort of our starting point. I wanna dig into sort of what do we do about it. Before we do, let's take a real quick break, and we'll be right back.
Rob Lott:And we're back. I'm talking with doctor Saye Nikpe about her paper in the January issue of Health Affairs, When Safety Net Programs Compete. And she just told us all about the sort of conflict between Medicaid drug rebate program, the 340B program. And so let's go forward. What do we do about it?
Rob Lott:I guess maybe the first step is to realize that both of these programs have grown significantly since they were created. Can you briefly just tell us a little bit about what went down there?
Sayeh Nikpay:Yeah. So Medicaid has grown. We all know, right, the size of the Medicaid program since the late eighties, early nineties has basically tripled. Medicaid has become this incredibly important cornerstone of the safety net covering of a huge share of births in this country, many, many low income children, people up the income scale. So Medicaid is this, like, workhorse of the safety net that's tripled in size.
Sayeh Nikpay:The three forty b program has also expanded greatly, and the reasons are sort of twofold. One is that under the Affordable Care Act, there were new types of hospitals that could become eligible for this program. So the grantees that I was talking about, you know, that were really harmed by the rising drug prices after the Medicaid drug rebate, That group has basically stayed the same. They've been eligible since the very beginning. And some hospitals originally were eligible, but the number of hospitals has sort of slowly creeped up over time.
Sayeh Nikpay:And then we had this sort of explosion in 2010 when the Affordable Care Act said, okay. Not just the original hospitals that were intended, which lawmakers sort of talked about, you know, public hospitals, nonprofit hospitals that have government contracts that meet certain, you know, low income care thresholds. The Affordable Care Act said, let's just make an six different types of hospitals now are eligible, and it's based really on just your payment designation. So all the critical access hospitals, sole community, rural referral, all children's hospitals, and all, like, stand alone cancer hospitals. And so then all of them started participating.
Sayeh Nikpay:And you combine that with, the second thing, which is that the three forty b program has greatly expanded through regulatory decisions. HRSA, the agency that's tasked for the moment at least with regulating three forty b, made a decision to allow covered entities to have not just one of those pharmacies that they have a contract with that missus Jones might fill her prescription at, but an uncapped number. And so hospitals, you know, providers participating in the program, many of them went out and established many different contract pharmacy relationships with pharmacies all over the country. And so that's also increased the size of the program.
Rob Lott:Wow. Okay. So I live in Illinois, and I believe that there's a law in front of the legislature proposing to limit the number of contract pharmacies that an entity can engage with. And this is such a a big deal for the stakeholders involved that I'm getting flyers in the mail from various associations telling me to call my state rep to tell them to oppose it or to support it. And my sense is that this is sort of part of a broader universe of actions that states may be taking to try to navigate this conflict.
Rob Lott:And I'm wondering if you can say a little bit about some of the strategies, that that states are taking, to figure this out.
Sayeh Nikpay:So contract pharmacies in particular particular create a really chaotic situation for Medicaid. Think about all of the wonderful researchers who've done all this work on churn. Right? A Medicaid patient at one point in time during the year may not be a Medicaid patient or a Medicaid, you know, beneficiary at another point in time. Medicaid is just very difficult for an external provider, external entity like a pharmacy to figure out and and to verify that people are eligible for Medicaid.
Sayeh Nikpay:And so what a lot of oh, and let me also say that when people you know, thirty years ago, the vast majority of people when they got Medicaid had a card that was like, you're on Minnesota's Medicaid or you're on Illinois' Medicaid program. Today, a Medicaid beneficiary may not actually realize that they, you know, on a daily basis that they have Medicaid because their card has Blue Cross Blue Shield on it or, you know, UCare is a actually, scratch that because I actually don't think UCare offered these plans. But, you know, their their their plan Medicaid has
Rob Lott:managed care organization.
Sayeh Nikpay:Medicaid managed care. That's right. So lots of chaos in terms of figuring out who is eligible for Medicaid and who is not. So what a lot of states have done, and this was actually something that we did not consider in the paper because the vast majority of states have done this, most states basically say, you can use three forty b discounts on Medicaid patients at contract pharmacies, but we're not paying. And the reason is it's just way too risky.
Sayeh Nikpay:And so in that case, in most states, contract pharmacy has been sort of carved out of Medicaid. Now there's always exceptions to the rule, but mostly contract pharmacy is taken off the table.
Rob Lott:So tell us about some of the other strategies that states are using.
Sayeh Nikpay:Yeah. So put yourself in the mindset of like a state procurement director or a state Medicaid pharmacy director. He or she, their, you know, absolute overarching goal is to try to use Medicaid resources wisely. And part of that is trying to preserve those savings that would have come from rebates because they are going to dramatically lower the cost of providing drugs to patients who are covered by Medicaid. And so faced with this situation where, you know, missus Jones sometimes her drugs are coming back to the state and we can go and get rebates on them.
Sayeh Nikpay:But sometimes they're you know, that price concession is staying with the covered entity. A state Medicaid director wants to see the legislature or the, you know, the administrative body make one of kind of two decisions. So the first is you can simply tell covered entities that they may not use three forty b drugs at all in Medicaid. Again, you can't you can't stop people from using three forty b drugs, but Medicaid does control, you know, whether things get reimbursed. And so a Medicaid agency can say, we're just not reimbursing for three forty b drugs.
Sayeh Nikpay:If you want Medicaid reimbursement, you're gonna have to use non three forty b eligible drugs. So that's one way. And that And
Rob Lott:can clarify? It's is it that we're not reimbursing any of those drugs or we're not reimbursing at that rate, at that lower price?
Sayeh Nikpay:No. We're not reimbursing Medicaid, three forty b drugs, period. Okay.
Rob Lott:And
Sayeh Nikpay:so if you want to be reimbursed for those drugs by Medicaid, you should use non three forty b discounted drugs so that when the transaction comes to that director, he or she can know with relative certainty that, like, yes, I can put this on the rebate list, and I can get a rebate. The other action and I should say, those we call three forty b carve outs. We found in our paper that about four states are using this type of strategy. But then there's another kind of strategy, and that is to require that the state reimburses based on actual acquisition costs. And actual acquisition costs that reflect that $3.40 b price.
Sayeh Nikpay:So in 2017, there were some state before 2017, there were some states that had rules that said, we're gonna pay based on acquisition cost, including the three forty b price. So if you pull that drug off the shelf, you paid $50 for it, and we would have reimbursed you a $100 if it was a non three forty b drug. We're gonna pay you, like, $50 with a $5 dispensing fee or something like that. So what these other what happened in 2017 is that the federal government said, you know what? This should just be the policy for fee for service across the board.
Sayeh Nikpay:And they created this policy called the covered outpatient drug rule that basically says for any fee for service drug, three forty b covered entities are gonna be paid based on that actual acquisition cost policy. What you've seen since then is that a number of states have leveraged that policy by taking their Medicaid pharmacy benefit, which used to be run through Medicaid managed care, and moving it back into fee for service. And that is the safe harbor that essentially allows you to benefit from the actual acquisition cost policy.
Rob Lott:Gotcha. And when you say you, you're referring to the state?
Sayeh Nikpay:Sorry. Yes, I am taking on the Medicaid pharmacy director role. I should aspire to be one one day. I never will, but it's a really complicated job.
Rob Lott:Yeah. Wow. Okay. So we've got this competition, this battle, and states are trying to figure out ways to protect their resources. What are hospitals doing and covered entities doing to protect what they see as sort of an important source of resources on their end under the 340B program?
Rob Lott:Is there a sort of backlash or response to the response?
Sayeh Nikpay:There has been. So if you the the kind of easiest case to to case study for this is to look at what happened in New York and in California. So we, as part of this project, reviewed almost 700 different policy documents, everything from state plan amendments to, you know, session law to, you know, executive order executive orders. And in New York, they passed legislation to essentially make this change, to move their pharmacy benefit out of Medicaid managed care and put it in fee for service to benefit from actual acquisition cost. And what happened there is that the covered entities, which include, you know, the vast majority of hospitals in New York, plus many safety net providers that often operate on shoestring budgets said, you can't do this to us.
Sayeh Nikpay:This is gonna cause us to go under. There was a lot of, you know, a concern. And what ended up happening is that the state of New York had to make payments to those providers for a certain number of years to make them whole based on what they lost. Right? Because they're losing that spread that they would generate from that transaction.
Sayeh Nikpay:It's now going to those benefits are now going to the state. And so, you know, there was a lot of backlash. Same with backlash in California. They used an executive order to do their Medicaid acquisition cost policy. And, you know, covered entities, they'd say they need this money, and I'm sure they're doing things with it.
Sayeh Nikpay:Some cases, it's, you know, directly lowering the cost of care for patients. Some cases, maybe it's not even related to that. But you do have to ask, you know, is the, you know, the goal of the Medicaid drug rebate program was to reduce costs for for patients. Right? And and for states that provide care to those patients for free.
Sayeh Nikpay:Three forty b was sort of the the kid's sister to the Medicaid drug rebate program. You really have to ask which one of these parties in this battle should win. And I think that is a question that's gonna have to be asked on a state by state basis because, you know, it's a there are major trade offs here.
Rob Lott:Yeah. Well, that's a great sort of encapsulation of the conflict here. Do you think we are doomed to a perpetual battle back and forth, one party responding to the other, each trying to find a new policy runaround of the previous policy intended to run around the previous policy, or is there a is there a way out of this back and forth?
Sayeh Nikpay:So I think there is a back and forth. And part of that so if you had interviewed me about this, I don't know, two years ago, right, before one big beautiful bill, I would have said that states likely were sort of going to have the upper hand in kind of trying to claw back some of these savings for the states. But today, I think if you're a state policymaker, you're looking at some of your hospitals who and your and your your core safety net providers, those public hospitals and federally qualified health centers, and they're telling you we're toast. Right? Medicaid is gonna contract.
Sayeh Nikpay:We depend on Medicaid for, you know, reimbursements, but also we depend on this, you know, spread that we generate off of the Medicaid program. Don't take it away from us. And I think those arguments have become more compelling in the presence of of the major contraction that we're about to experience.
Rob Lott:Great. Well, the next phase for us to to follow and hopefully to study, and we'll see what happens next. Doctor. Sayeh Nikhay, thanks so much for talking with us today. I had a great time.
Sayeh Nikpay:Thank you very much.
Rob Lott:To our listeners, to our viewers, thanks for tuning in. If you enjoyed this episode, tell a friend, leave a review. If you're watching on YouTube, smash that subscribe button, and, of course, tune in next week. Thanks, everyone. Thanks for listening.
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