This week’s contributor is Paula Chatterjee, a physician and assistant professor at the Perelman School of Medicine at the University of Pennsylvania. Her research focuses on improving the health of low-income patients and evaluating policies related to safety-net health care delivery and financing.
Low-income patients face many barriers to care, one of which is the high cost of prescription medications. The 340B program lets certain hospitals and clinics (like federally qualified health centers) receive discounts on outpatient medications. They can then use those savings to provide medication and additional care for little to no charge to low-income patients. However, policymakers and other stakeholders have raised concerns that the 340B program might not be reaching the patients it was designed to support.
A recent paper in the American Journal of Managed Care by Sayeh Nikpay*, Gabriela Garcia, Hannah Geressu and Rena Conti sheds light on one of the latest examples of 340B mistargeting: so-called contract pharmacies. These are retail pharmacies that fill 340B prescriptions and split the savings with the hospital or clinic. These relationships have been on the rise, with hospitals and clinics arguing they make it more convenient for patients to get their prescriptions. Given their growth, the authors looked at whether contract pharmacies were more likely to open up in areas where low-income and uninsured people live.
They found the pattern was different for pharmacies contracting with 340B clinics vs. 340B hospitals:
The number of counties with a pharmacy contracted with a 340B clinic grew from 20.8% to 64.8% over the past decade. Counties with higher poverty rates were more likely to gain a clinic-contracted pharmacy.
The number of counties with hospital-contracted pharmacies grew much more (from 3.2% to 76.3%), but those counties had fewer uninsured residents and were less likely to be medically underserved.
The researchers acknowledge that counties may be an imperfect geographical area to represent a pharmacy’s market and that they were unable to collect information on how many (if any) 340B prescriptions a pharmacy actually filled.
Nonetheless, their results reveal a mismatch between where the 340B program is growing and where low-income patients live, especially for pharmacies contracting with 340B hospitals. The authors argue that any 340B policy changes should take these differences between hospitals and clinics into account.
Despite decades of policies designed to bolster the safety-net, it remains perennially reliant on a patchwork of subsidies that are often mistargeted.
This study adds to a growing body of work highlighting the opportunity to improve the 340B program so that it achieves its intended goal of improving access for low-income patients.
When a private-equity firm bought a Philadelphia institution, the most vulnerable patients bore the cost.
Lia Logio arrived at Hahnemann University Hospital, in Philadelphia, in March, 2018, two months after it was sold to a private-equity firm. Logio, an internist, had come from Weill Cornell, in New York, a prestigious and well-funded nonprofit hospital, where she was a vice-chair. Hahnemann served mostly low-income patients, but it had a range of medical subspecialties and was the primary teaching hospital used by Drexel University’s College of Medicine. “It felt like they had all the ingredients to do something innovative and creative,” Logio said not long ago. “It seemed like an opportunity to have an economy of scale to do coördinated care for poor, complex patients, which usually doesn’t happen very well.”
Philadelphia is one of the poorest big cities in the United States, with about a quarter of its 1.6 million residents living below the poverty line. Since 1977, when Philadelphia General closed, it has also been the largest American city without a public hospital. Hahnemann, with nearly five hundred beds, occupied a city block on the edge of North Philadelphia, an area that includes several impoverished neighborhoods. A majority of the more than fifty thousand patients that the hospital treated each year had publicly funded medical insurance or none at all; two-thirds were Black or Hispanic.
Because Hahnemann treated so many poor patients, it had significant financial difficulties. But patient outcomes rivalled those of practically any hospital in the country, and the people who worked there were driven by a sense of mission. “The doctors at Hahnemann were there because they wanted to be there,” Logio said. “Hahnemann took care of the people that no one else wanted to take care of.”
Logio regarded for-profit medicine with deep skepticism, but her new colleagues made her hopeful. “Everyone had this tremendous sense of positivity looking toward the future with the new owners,” she said. Hahnemann and another medical center, St. Christopher’s Hospital for Children, had been acquired, for a hundred and seventy million dollars, by American Academic Health System, a company controlled by the California private-equity firm Paladin Healthcare Capital. Joel Freedman, the founder and C.E.O. of Paladin, had managed a sizable hospital in Washington, D.C., and a few smaller ones in Los Angeles. He seemed earnest about his commitment to Hahnemann, buying a large town house in Philadelphia and moving there with his wife and children.
Freedman told Logio and other senior staff that he was considering creating a new center for outpatient care. He talked about opening a pediatric clinic to serve poor families. His staff met with members of each department, asking what equipment they needed. In early 2018, Hahnemann received a deep cleaning, which included scrubbing the grout with toothbrushes. For the previous two decades, the hospital had been owned by Tenet Healthcare, a multinational company that had neglected to maintain the facility. Now, to many staffers, it seemed that, finally, someone was listening to them.
Broad and imposing, Freedman projected the reassuring self-confidence of a serial entrepreneur. He had arranged funding from two institutional investors: MidCap Financial—an affiliate of Apollo Global Management, one of the largest private-equity firms in the country—and Harrison Street Real Estate Capital, another private-equity firm, with some thirteen billion dollars under management. Bloomberg Businessweek has called Leon Black, a founder of Apollo, “the most feared man in the most aggressive realm of finance.”
In May, 2018, the hospital held a banquet at the Logan Hotel, near the Philadelphia Museum of Art. Some two hundred doctors went to hear the new owner speak. Joseph Boselli, a sixty-one-year-old internist who had been at Hahnemann for more than thirty years, and who was now the president of the medical staff, introduced Freedman. “This was the first time that many people had seen him in person,” Boselli recalled. “I told him, ‘Joel, keep it short and sweet.’ ” But Freedman talked for about thirty minutes. Evidently displeased with the financial condition of his new acquisition, he sought to blame the physicians who made up his audience. “He goes on and on about how he doesn’t think doctors are doing their job,” Boselli said. “That they’re not training residents well, not seeing enough patients.”
Still, the medical staff hoped that Freedman would provide the funding Hahnemann needed to survive. David Stein, who was then the chair of surgery at Hahnemann, said, “I don’t think anyone saw the writing on the wall—that by the following summer they’d be closing the institution.”
Hospitals in the U.S. are estimated to be closing at a rate of about thirty a year. Most closures happen for financial reasons, in places where there are relatively few privately insured patients. Increasingly, hospitals are regarded as businesses like any other: at least a fifth of hospitals are now run for profit, and, globally, private-equity investment in health care has tripled since 2015; last year, some sixty-six billion dollars was spent on acquisitions. The industry’s movement into health care has been linked to price hikes, an increase in unnecessary procedures, and the destabilization of health-care networks.
The bad actors of private equity are sometimes accused of destroying American health care. But they are more symptoms than disease. The story of Hahnemann is as much about the structural forces that have compromised many American hospitals—stingy public investment, weak regulation, and a blind belief in the wisdom of the market—as it is about the motives of private-equity firms.
The idea that hospitals should turn a profit is somewhat recent. Pennsylvania Hospital, which is widely considered the oldest in the country, opened in Philadelphia in 1752. Co-founded by Benjamin Franklin, it was conceived as a place for “the reception and cure of the sick poor,” an example that, until the late nineteenth century, almost all American hospitals followed. Philanthropy—and taxes, in the case of public hospitals, like Bellevue, in New York, which opened in 1795—covered costs, and care was provided free.
The model evoked Hippocrates, who believed that, when possible, doctors should forgo fees. But it also reflected the crudity of the era’s health care. Before Pasteur’s germ theory was published, in 1861, hospitals were often unsanitary, as likely to cause infection as to cure it. Doctors relied heavily on a few primitive treatments: leeches, lancets, laxatives, liquor. Anyone with the resources to do so avoided hospitals altogether. As the medical historian David Oshinsky writes, in “Bellevue: Three Centuries of Medicine and Mayhem at America’s Most Storied Hospital,” “There was nothing a hospital could do for the upper and middle classes that couldn’t be done better at home.”
The institution that would become Hahnemann University Hospital, named for the German homeopath Samuel Hahnemann, was founded in 1848, amid advances in medicine that radically improved the quality of care: the stethoscope, blood transfusion, effective anesthetics. As hospitals offered novel procedures, they began to attract paying patients. To accommodate them, hospitals built separate units, with fireplaces and private rooms.
In 1957, a Hahnemann cardiac surgeon named Charles Bailey appeared on the cover of Time, after he’d completed a groundbreaking surgery to correct an abnormality of the mitral valve. Bailey, who attracted patients from around the world, was one of a number of Hahnemann physicians working at the medical vanguard of specialty procedures. In 1958, a Hahnemann administrator noted that Bailey and his team brought in some eight hundred thousand dollars a year.
In the decades after the Second World War, the cost of hospital care rose significantly, spurred by expensive procedures like Bailey’s and by the adoption of medical insurance. After the government began to offer tax breaks for employers who paid for their workers’ health benefits, the number of insured Americans grew to more than sixty per cent of the population. In 1965, the bill establishing Medicare and Medicaid passed, further increasing the number of patients seeking care. Guidelines dictated reimbursement for “reasonable costs,” which, for years, amounted to pretty much whatever providers said they were, and for-profit hospitals sprang up to capitalize on the boom. By the end of the decade, more than seven hundred for-profit insurance companies were offering medical coverage.
For-profit hospitals arrived in Pennsylvania in 1998. Tenet Healthcare, based in Dallas, owned a hundred and twenty hospitals in eighteen states, and that November the company bought Hahnemann out of bankruptcy, along with St. Christopher’s and six other area hospitals. “We promise we will be here for the long haul,” Michael Focht, Tenet’s C.O.O., said at a ceremony held at Hahnemann. “This is not a short-term visit.”
Eight years later, Tenet agreed to pay nearly nine hundred million dollars in fines to the Justice Department for excessive Medicare billing, distributing kickbacks to doctors, and exaggerating the severity of diagnoses in order to inflate charges. Mike Halter, who served as C.E.O. of Hahnemann under Tenet for two decades, told me that Tenet was forced to cut costs, which it did in part by ignoring requests to replace old equipment. Health care “is a very capital-intensive business,” he said. “Equipment has a useful life of five or six years. Facilities need to be upgraded every eight or ten.” A piece of stucco broke loose from the building and damaged a car. In reviews online, patients lamented conditions in the hospital. In December, 2013, a pregnant woman who went for an ultrasound complained of being kept in a cold room with flickering lights. In 2017, a patient reported finding “blood and shit on the floor.” Yet the hospital remained busy. “A lot of patients just didn’t have a choice,” Kevin D’Mello, an internist, said. “This is where they had to go.”
Freedman founded his first investment company with several young investment bankers about thirty years ago, when he was in his twenties. “We had a mentor who taught us how to turn around distressed businesses and acquire companies,” he told me. “For the better part of seventeen years, that was my core business, restructuring insolvent companies.”
By the end of 2011, Freedman and some partners had taken over four struggling hospitals in L.A., where a majority of the patients were Black or Hispanic, uninsured or covered by Medicare or Medicaid, and often afflicted with chronic illnesses. Many of those patients used the emergency room as their primary source of care, and Freedman’s group focussed on making the E.R. more efficient: hiring doctors with expertise in medical coding, in order to maximize reimbursement; pursuing insurers for unpaid invoices; reducing the time patients spent in the E.R. Soon, all four hospitals were solvent.
In 2014, with Paladin, Freedman signed on to manage Howard University Hospital, in Washington, D.C., which that year reported a fifty-eight-million-dollar loss. Paladin cut salaries, benefits, and operating expenses, and two years later the hospital showed an operating surplus of more than twenty million dollars. “We were incredibly successful,” Freedman said. “I’d become passionate about turnarounds in these communities.”
Hahnemann staffers said that Freedman seemed to see reviving struggling hospitals as a reflection of his benevolence. He communicated a mixture of good intentions, sanctimony, and unabashed self-regard. He assured one physician that he and his wife, Stella, were people of deep religious faith. At other times, he boasted about his real estate. In addition to the Philadelphia town house, he owned a home in Hermosa Beach, with views of the Pacific. He was a member of an advisory council at Harvard Medical School, and sat on the board of a health-policy center at the University of Southern California. In 2016, Freedman had received a lifetime-achievement award from a prominent nonprofit for his contributions to reducing racial health-care disparities. “He wanted to look like the hero,” a former senior Hahnemann doctor told me.
Freedman seemed convinced that he was uniquely well suited to sort out Hahnemann’s problems, but there were differences between Hahnemann and the other hospitals he’d helped lead. “He talked a lot about the things that made him successful at Howard,” Jill Tillman, a health-care executive at Drexel College of Medicine, told me. But, unlike Howard, Hahnemann had long been under for-profit management. Tenet, as one of the world’s largest buyers of hospital equipment, enjoys deep discounts and generally excels at controlling costs. “If Tenet couldn’t get any more juice out of it, there was no more juice left to get,” Tillman said.
Freedman also said that he had a plan to address the financial challenges of treating publicly insured patients. Medicare and Medicaid, which account for more than sixty per cent of all U.S. hospital care, often pay less than the cost of treatment: according to an analysis by the American Hospital Association, in 2018 Medicare and Medicaid underpaid the cost of care by a combined $76.6 billion. In an early meeting with Halter, the Hahnemann C.E.O., Freedman explained that, at his other hospitals, he had profited from federal Disproportionate Share Hospital programs, which reward hospitals that serve large numbers of publicly insured patients. “What Joel did not know is that there are caps on Disproportionate Share payments in the state of Pennsylvania,” Halter said. He explained to Freedman that Hahnemann was already at its cap. “He told me, ‘You don’t know what you’re talking about,’ ” Halter said. Only after meeting with the governor’s office and the state Department of Human Services did Freedman accept that Hahnemann would not receive additional payment from these programs.
In April, 2018, Halter retired. In the next eighteen months, Hahnemann and St. Christopher’s went through half a dozen chief-executive and financial officers, most of them dismissed by Freedman with little explanation. Freedman hired battalions of consultants, who specialized in health care, technology, and management. “I would walk down the hall and half or two-thirds of the people I would not recognize,” George Amrom, a former surgeon and long-serving chief medical officer, recalled. “They were all consultants.” Few of them lasted long. “Joel has a twenty-week relationship with people,” a former Hahnemann executive said. “The first eight, you’re a ‘rock star.’ In the middle, you don’t hear from him. The last eight weeks, it’s ‘You’re a nice guy, but I need a rock star.’ ”
Senior physicians and administrators found it hard to plan for the future. Stein, the surgery chair, had been told that his department would be prioritized. He drew up detailed plans for improvement, some of which required no capital investment, and sent copies to each successive Hahnemann C.E.O. But none of them were in place long enough to act. Logio had a similar experience. “I had the same conversation with every single C.E.O.,” she said. “And as soon as the C.E.O. got fired I would have to start over.”
A majority of the hospital’s patients came through the E.R., and Freedman believed that improving the flow of patients, and more precisely documenting the severity of their conditions for insurers, would allow Hahnemann to vastly increase revenue. One day, medical staff arrived at the E.R. to find that the procedures for patient check-in and ordering tests had been altered. Edward Ramoska, who had been a Hahnemann E.R. doctor since 2006, said, “It could potentially have worked for a community hospital”—one with no medical residency. But Hahnemann was a teaching hospital, with one of the largest residencies in the nation. Forty-five residents worked in the E.R. alone. Before an attending physician saw a patient, a resident generally took a medical history and conducted a physical exam. In the new E.R., patients were shuttled between a holding area and examination rooms, often undressing more than once. In addition to exasperating doctors and patients, the arrangement slowed the department’s operations. “They didn’t understand how an academic emergency room works,” Ramoska said, of American Academic Health System.
A physical renovation of the E.R., intended to make things more efficient, was botched. A new door frame was too narrow for wheelchairs. Walls went up on either side of a service window. A space intended for patient examinations was built without a sink, forcing doctors to run elsewhere to wash their hands. In Pennsylvania, alterations to health-care facilities require approval from the Department of Health, which the hospital’s management had neglected to get. Construction stopped and did not resume.
To increase reimbursements, A.A.H.S. hired a team of nurse-consultants to monitor how doctors documented diagnoses. Virtually all U.S. hospitals try to maximize payments from insurance companies, but the new approach struck some Hahnemann doctors as intrusive, if not unethical. The nurse-consultants sometimes second-guessed the diagnoses of residents. “They were thinking about the bottom line, and we were just thinking about the patient,” Christy Johnson, a former resident, said.
Since 2008, American hospitals have been involved in more than a thousand mergers and acquisitions, resulting in large, powerful health systems with influence on the price of hospital care and the reimbursement rates paid by private insurers. These conglomerates generally make up the losses incurred treating poor patients by building referral networks that attract privately insured patients seeking specialized care.
In Philadelphia, Tenet drew few referrals. As the Jefferson and Penn health systems cultivated satellite hospitals, physician practices, and urgent-care centers, including those in wealthy suburbs on the Main Line and in South Jersey, Tenet closed or sold most of its local holdings. Some of Hahnemann’s best-known specialists left for other hospitals. After a group of cardiologists departed, the hospital’s heart-transplant program closed.
If there was an area where Freedman’s ostensible skill set met Hahnemann’s needs, it was the negotiation of partnerships to draw referrals. “He went out and met with various leaders at different facilities,” the former Hahnemann executive recalled. “At one point, there was going to be a relationship with organization X. Next, it would be organization Y. There were always a lot of deals in flux, none of which came to fruition.”
Freedman did not appear to grasp the economics of tertiary care, the specialty practices that generate costly procedures. “He did not understand that if you do away with tertiary care no one’s going to come downtown to Hahnemann,” Amrom, the former chief medical officer, said. “I remember trying to explain to him that one of our largest areas was nephrology. And if you did away with transplant you’re going to destroy nephrology.”
Many insurance companies paid less at Hahnemann than they did at other area hospitals, an arrangement that, according to Halter, Tenet had accepted in exchange for greater reimbursements in the company’s other markets. (Tenet denies having made this arrangement.) Now those agreements could be renegotiated. The insurance companies had an incentive to compromise: if Hahnemann closed, the privately insured patients treated there would go to other city hospitals, where the cost of their care would rise. “You go into Blue Cross and you say, ‘We need some help, and it’s in your best interest to help us,’ ” Halter explained. “ ‘Give us ten million dollars more per year’—versus losing fifty million per year.” Whether Freedman overlooked this tactic or simply struggled to execute it effectively is unclear. “I did initiate a recontracting effort,” he said. “But it was to their advantage to delay.”
In late 2018, Freedman told staff that, by the spring of the following year, the hospital might be profitable. His forecast was based in part on the assumption that increasing in-patient admissions through the E.R. would yield greater reimbursements from insurance companies. But insurers continued to deny many Hahnemann claims, leaving Freedman incredulous. At one point, Tillman, the health-care executive, recalled him telling her, “This is impossible. You’re lying to me!”
Hoping to convince one major private insurer that it had unjustly denied claims from Hahnemann, several doctors arranged a meeting with the company. “We found a few very good cases of patients who could have died if they didn’t get care,” Kevin D’Mello, the internist, who attended the meeting, said. “And the insurance company had rejected admission.”
D’Mello said that the insurance representatives initially seemed receptive. Then, uninvited, Freedman appeared and harangued the representatives, accusing their company of dishonesty. “He said that American Academic would resubmit all claims for the past year, and that they expected the insurance company to pay,” D’Mello recalled. The meeting ended without a compromise on the insurance-claims dispute. (Freedman does not recall the meeting.)
Such erratic behavior was becoming increasingly common. “He would call people stupid,” Tillman said. “He would say they should all be fired, that they were useless.” (Freedman told me that he does not remember using such language, but, he said, “I can express myself with passion.”) In one meeting, a Drexel administrator said, Freedman spoke for ten hours, pausing only for cigarette breaks. He threatened at one moment to close the hospital and the next he fantasized about instituting valet parking. Maria Scenna, a former C.E.O. of St. Christopher’s, told me, “He would speak as the authority on everything.”
Still, Freedman’s anxiety was rising—at least in part because of his obligations to his lenders. Since the 2008 financial crisis, the banks that once financed most leveraged buyouts have withdrawn, and private-equity firms have filled the void. According to an analysis by the Financial Times, some of the largest private-equity companies in the U.S.—including Blackstone, Apollo, and K.K.R.—now do at least as much lending as buying. Riskier deals can involve terms that one prominent New York lawyer, who represents private-equity lenders, described to me as thuggish: “knuckle-dragger” conditions. “If you’re coming to me, that means you can’t get a loan from a bank,” the lawyer explained. “So I can charge you outrageous interest.”
MidCap Financial, the Apollo affiliate, provided Freedman’s group, A.A.H.S., with two loans, representing a commitment of a hundred and twenty million dollars. The loans had nine- to ten-and-a-half-per-cent-effective interest rates—significantly steeper than most commercial bank loans—and were secured by mortgages on Hahnemann’s real estate. (Harrison Street Real Estate Capital, which provided fifty-one million dollars in loans, took part ownership of several hospital-adjacent properties.) These financial obligations, in combination with what Freedman describes as “bad debt,” raised the possibility that he would have to default, and that Hahnemann would go out of business.
Around March, 2019, Scenna said, administrators and executives suggested that Freedman consider filing for bankruptcy. Instead, he proposed gutting the residency program—an indispensable source of physician labor, whose cost was largely borne by federal funding. Eventually convinced that this was inadvisable, Freedman announced the departure of Suzanne Richards, the latest C.E.O. of Hahnemann and St. Christopher’s, and, in early April, the hospital laid off a hundred and seventy-five employees, including sixty-five nurses. Freedman said, “I felt immense pressure every hour of the day—not only from a financial perspective but, more importantly, because of my concern for quality of care.”
A.A.H.S. began closing floors of the hospital, but the execution was fitful. All or part of a floor might close one week and reopen the next, resulting in the frequent movement of patients. “Your patients could end up anywhere,” Steven Kutalek, a cardiologist, said.
One day, with little input from medical staff, the patients in the cardiac critical-care unit began to be moved to the main I.C.U. Cardiology specialists now had to shuttle between the twelfth and the twenty-first floors to see their patients, using elevators that were often broken. “Cardiac patients need specialized equipment—balloon pumps, crash beds, ecmo [a blood-oxygenation machine]—run by cardiac nurses,” Kutalek said. These items were hard to access in the main I.C.U., and it didn’t help that many cardiac nurses had been either fired or reassigned. Paulina Gorodin-Kiliddar, another cardiologist, told me, “I remember one instance where the telemetry monitor for one patient who had a critical event malfunctioned, and it went unnoticed for a while.”
Any savings proved insufficient.In early May, A.A.H.S. received a notice of default from MidCap Financial. In the next seven weeks, Freedman and his executives met with city and state officials to try to find a way to keep Hahnemann afloat. Freedman hoped that the government would provide emergency funding, or that Drexel would buy the hospital. But, according to government officials, they never received the details about the hospital’s finances that they needed to determine how to address its operating deficit, which Freedman estimated at between three million and five million dollars per month.
On June 30th, Hahnemann, St. Christopher’s, and several related entities filed for bankruptcy. A longtime Hahnemann physician says that Freedman told her, “My wife turned the faucet off. She said, ‘No more. We’re not losing any more money, Joel.’ ” (Freedman does not recall saying this.)
One afternoon in July, hundreds of people gathered outside Hahnemann, on North Broad Street. The road was closed to traffic for several blocks, and, in the southbound lanes, white folding chairs had been arranged in rows to face a lectern bearing a blue Bernie Sanders placard. A recently released patient, a Black man with facial scars, held a bag containing medication and personal effects. Doctors in scrubs and white coats looked on from the sidewalk. Sanders had come to speak against Hahnemann’s closure. “If an investment banker like Joel Freedman is able to shut down Hahnemann and make a huge profit by turning this hospital into luxury condos,” he said, “it will send a signal to every vulture fund on Wall Street that they can do the same thing, in community after community after community.”
Sanders was expressing what had become a widely accepted theory. From the beginning, the thinking went, Freedman’s purchase of Hahnemann had been a ploy to acquire the land on which it stood. Situated steps from city hall and the convention center, the real estate had skyrocketed in value. The mile-and-a-half stretch of North Broad between Hahnemann and Temple University, in North Philly, had long been run-down. But now developers were building luxury condos and rentals. To renovate the Metropolitan Opera House, a moldering wreck at North Broad and Poplar, Live Nation spent fifty-six million dollars, then filled the schedule with such acts as Alicia Keys and Sting.
“Everyone and their mother was trying to get that real estate,” Peter Kelsen, a partner at the Philadelphia law firm Blank Rome, told me, speaking of Hahnemann. “I received calls from dozens of different people.” Developers speculated that it could be worth as much as a hundred and twenty million dollars—only fifty million less than A.A.H.S. had paid for Hahnemann and St. Christopher’s and all their assets. Crucially, the site was not part of the bankruptcy. Upon buying Hahnemann, Freedman had put its real estate in a suite of holding companies that were now beyond the purview of the bankruptcy court.
The maneuver was typical of private-equity deals, in which firms can borrow against the assets of the companies they’re buying. Eileen Appelbaum, a co-director of the Center for Economic and Policy Research, a progressive think tank, has written extensively about the influence of private equity. She told me that Hahnemann’s demise reminded her of the retail sector, where hedge funds and private equity have used leveraged buyouts to purchase chains like Sears and Toys R Us, and then stripped their assets, including real estate, en route to bankruptcies. Appelbaum worries that Hahnemann might become a model, encouraging investors to destroy hospitals that occupy valuable land. “It definitely looks as if it was meant to be a real-estate deal,” she said.
The structure of the Hahnemann deal insulated Freedman from much of the potential fallout. As the hospital floundered, staffers said, Freedman told them that, if they couldn’t make the hospital succeed, he would simply turn the property into something else. Freedman denies making such remarks, and, as a strategy for acquiring real estate, deliberately bankrupting a hospital of Hahnemann’s size was likely too messy to be practical. “It’s not the path that anyone would have chosen,” Andrew Eisenstein, the founder of the Philadelphia development and investment firm Iron Stone Real Estate Partners, said. (Iron Stone later acquired two parcels of real estate from companies controlled by Freedman and Harrison Street.)
Freedman told me that he would never have invested millions in the venture if he intended to turn a quick profit and leave. But his leveraged buyout made excellent insurance against his own mistakes.
By May, 2019, when staff at Hahnemann tried to order basic supplies venders had begun to turn them down, saying that the hospital hadn’t paid its bills; by summer, conditions were dire. Surgical equipment was broken. The air-conditioning failed. To stretch supplies, nurses cut up the washcloths that they used on patients. Parts for instruments used to intubate patients and deliver intravenous medicine became scarce. It was difficult to find a pacemaker. Medications ran out. Even the FedEx account was cut off. “It happened so quickly and so horribly,” Lorraine Alexander, a senior nurse, told me. “It was heartbreaking to see, and it was also just mind-boggling—the things that were allowed to happen.”
Bruce Meyer, the president of Jefferson Health, told me that Thomas Jefferson University Hospital began hearing from Hahnemann physicians that the hospital could no longer provide quality care. “We began parking ambulances outside [Hahnemann] in mid to late June, and shuttling back and forth,” Meyer said. Leaders from Jefferson and other Philadelphia hospitals asked for information about Hahnemann’s patient population, to prepare for their arrival. “We never got any of that data,” Meyer said.
Pennsylvania law requires a hospital to provide ninety days’ notice and a detailed closure plan in advance of ceasing operations. But, even before a closure plan was approved by city and state officials, A.A.H.S. frantically tried to empty Hahnemann. At night, private ambulances lined up at the rear of the building, waiting to take patients away—part of what staffers viewed as a reckless effort to discharge Hahnemann’s occupants. “You’d have a census of two hundred and seventy-five at midnight, and the next day at noon it would have dropped to two hundred,” Alexander said. Patients were released without clear plans for follow-up care, and often ended up back in the E.R. within twelve hours. Shanna Hobson, an E.R. nurse, said that a patient who had been prematurely taken off I.V. antibiotics returned with sepsis. Others came back with infected diabetic wounds.
Around that time, Sean Temple, who had been treated at Hahnemann for a heart condition for a decade, went for a routine cardiology appointment. His doctors had just been informed that their practice would be shut down. “They were under the gun,” Temple said. He felt blindsided. “It’s not like I came in and I knew that y’all were shutting down. Who’s gonna pick up where they left off? And when and where?” Months passed without Temple’s seeing a doctor, and he ended up at another hospital with a cardiac emergency. “I felt like a child lost in the park,” he said.
Freedman places responsibility for the execution of Hahnemann’s closure on EisnerAmper, an accounting-and-consulting firm that he hired to manage its finances and, later, the bankruptcy. (EisnerAmper declined to comment.) A report by a bankruptcy-court-appointed ombudsman describes two visits to Hahnemann in July, 2019, when the hospital’s census had already fallen significantly, and after a temporary manager had been assigned by the state. “None of the nursing staff indicated any concerns over diminished care or safety of the patients,” the report reads.
In advance of Hahnemann’s shutdown, on September 6th, city and state officials pledged up to fifteen million dollars to take care of the hospital’s patients. When other hospitals in Philadelphia had closed, a spike in infant mortality quickly followed. To prevent this, Jefferson brought on eight Hahnemann ob-gyns and expanded its obstetric unit. Hospitals across the city hired more staff and adjusted workflow patterns.
Temple and Pennsylvania Hospitals soon saw their E.R. volume increase by about twelve per cent, while at Jefferson, which is only a mile from Hahnemann, volume climbed by twenty per cent, adding almost twelve hundred visits a month. At all three E.R.s, the number of ambulance visits at least doubled. Unable to walk, drive, or take public transportation, patients who arrive in ambulances tend to be sicker and poorer than those who come by other means. Ambulances typically take patients to the nearest hospital. But the E.R.s were now frequently so crowded that the staff requested that patients go elsewhere. Studies of Black cardiac patients have shown ambulance diversion to be responsible for elevated numbers of deaths. Kory London, an emergency-medicine physician at Jefferson Health, told me that the E.R. became the scene of “daily human tragedies.”
Most Philadelphia hospitals use an electronic record-sharing system, but Hahnemann had never taken part in it. Once the hospital closed, doctors at other medical centers had difficulty obtaining records for Hahnemann patients. “There were patients who had complex social histories, who were receiving many kinds of subspecialty care,” London said. “They’d lost heart doctors, kidney doctors, and ended up in our emergency department. We had to understand as best we could what was going on with them.”
Anastasia Cavanaugh, who has a chronic illness, had been seeing doctors at Hahnemann for years. “Knowing who your doctor is, that is one control you have,” she told me. When the offices of several of her specialists closed abruptly, Cavanaugh, who had publicly funded insurance, despaired. “I cried for three days,” she said. By January, 2020, Cavanaugh hadn’t been able to see a doctor since Hahnemann closed. She feared that she’d have to visit an emergency room in flu season—a frightening prospect for the immunocompromised—in order to refill her prescriptions. “I was calling UPenn,” she recalled. “The ‘emergency appointment’ was a month and a half away. It was a very stressful time. I didn’t know if I could get my medications on time.”
In Philadelphia, as elsewhere across the country, people of color have borne the brunt of the coronavirus pandemic. In March, 2020, city officials entered negotiations with Freedman to reopen Hahnemann to house covid patients during an anticipated surge. But Freedman asked for more than four hundred thousand dollars a month to lease the facility—a rate that he said was “very reasonable.” The talks quickly broke down. Responsibility for the care of coronavirus patients fell heavily on the remaining hospitals in the area, including Temple, which converted a seven-story pavilion to a coronavirus clinic, and erected a tent outside the E.R. There have been some hundred and fifty thousand confirmed infections in the city, and more than thirty-six hundred deaths.
“What I feel about this whole event is that it’s moral injury at a corporate level,” Lia Logio, the internist, said. “Health care is supposed to be about taking care of the patients. Helping people to have long, flourishing lives, with limited illness and limited pain. Somehow, it isn’t a priority.”
When I spoke to Freedman by phone last summer, he had returned to California, where he had bought a new eight-thousand-square-foot house south of Los Angeles, with twenty-foot ceilings and a stone spa, for nearly seven million dollars. He was in the midst of two lawsuits with Tenet Healthcare, which he believes misled him about Hahnemann’s financial situation. Freedman estimates that he has personally lost at least ten million dollars on the Hahnemann deal. He was asked to step down from his board position at the University of Southern California. “That really hurt me,” he said.
But St. Christopher’s Hospital had been sold, for fifty million dollars, and MidCap Financial had been repaid in full. Now Freedman was trying to reinvent himself. As we spoke one afternoon, there was an audible breeze on Freedman’s end of the line. The family’s Maltese, Snow, barked in the background. Freedman’s confidence was undimmed. “I’m working on some things that I think could be meaningful,” he said. “I would like to go back to working in health care someday. I have a lot of knowledge. I’ve seen a lot of bad things. Unfortunately, the solutions demand a lot of capital.” ♦
Mercy Hospital & Medical Center in Chicago has secured a nonbinding purchase agreement with Insight Chicago just months before it is slated to close its doors, according to the Chicago Tribune.
Under terms of the deal, still being negotiated, Insight Chicago would operate Mercy Hospital as a full-service, acute care facility. Insight Chicago is a nonprofit affiliated with a Flint, Mich.-based biomedical technology company.
The deal is subject to regulatory approval, but if it goes through, it would keep the 170-year-old safety-net hospital open.
Securing a potential buyer is the latest in a series of events related to the Chicago hospital.
On Feb. 10, Mercy filed for bankruptcy protection, citing mounting financial losses and losses of staff that challenged its ability to provide safe patient care.
The bankruptcy filing came just a few weeks after the Illinois Health Facilities and Services Review Board rejected a plan from Mercy’s owner, Trinity Health, to build an outpatient center in the neighborhood where it planned to close Mercy. The same board unanimously rejected Livonia, Mich.-based Trinity’s plan to close the hospital in December.
The December vote from the review board came after months of protests from physicians, healthcare advocates and community organizers, who said that closing the hospital would create a healthcare desert on Chicago’s South Side.
Mercy said that until the pending deal with Insight Chicago is signed and approved by regulators, it still plans to close the facility. If the agreement is reached before the May 31 closure, Mercy will help transition services to Insight Chicago, according to theChicago Sun-Times.
Insight Chicago told local NPR affiliateWBEZthat it has a difficult task ahead to build community trust and address the financial issues that have plagued the Chicago hospital.
“I think the big main point we want to understand between now and then is the community needs to build trust with the community, and I think to build trust we have to tell the truth and be sincere,” Atif Bawahab, chief strategy officer at Insight, told WBEZ. “And there’s a reality of the situation as to why [the hospital] is going bankrupt and why several safety net hospitals are struggling.”
In its bankruptcy filing, Mercy said its losses have averaged about $5 million per month and reached $30.2 million for the first six months of fiscal year 2021. The hospital also said it has accumulated debt of more than $303.2 million over the last seven years, and the hospital needs more than $100 million in upgrades and modernizations.
Drug companies AstraZeneca, Eli Lilly and Sanofi filed separate lawsuits seeking to preserve their ability to restrict offering 340B-discounted drugs to contract pharmacies.
The lawsuits, filed Tuesday in different federal courts, seek to get rid of an advisory opinion filed by the Department of Health and Human Services’ (HHS’) general counsel that says drug companies must offer 340B drugs to contract pharmacies, which are third-party entities that dispense drugs on behalf of hospitals participating in the program.
The drug companies argue that the advisory opinion contracts the statute for the 340B program, which requires manufacturers to offer discounted products to safety net hospitals and other providers in exchange for participation in Medicare and Medicaid.
“The statute, on its face, does not require manufacturers to recognize any contract pharmacies, much less unlimited contract pharmacies,” the legal filing from AstraZeneca said.
AstraZeneca wants a federal court to declare the advisory opinion didn’t follow proper procedure and exceeded HHS’ statutory authority. The manufacturer also wants a court to declare that companies are not required to offer 340B discounts to contract pharmacies.
The lawsuits come less than a week after the American Hospital Association (AHA) and five other groups and three individual systems sent letters to the drug companies that have halted or restricted sales to contract pharmacies. They wanted the drugmakers to reinstate sending the discounted products to their pharmacies and reimburse facilities for any damages.
AHA and several groups sued HHS to get the agency to clamp down on the drug manufacturers’ moves.
AstraZeneca, Eli Lilly, Novartis, Novo Nordisk, Sanofi and United Therapeutics have taken a range of actions to clamp down on sales to contract pharmacies, which a majority of 340B-covered entities use.
The companies have argued that the discounts do not filter down to patients, but hospital and advocacy groups charge that the discounts are vital, especially as safety net providers operate on thin margins.
“Make no mistake: the boom in contract pharmacies has been fueled by the prospect of outsized profit margins on 340B discounted drugs,”AstraZeneca argued in its court filing.
More than three million American workers lost health insurance coverage this spring and summer from their employers as the pandemic and spread of Covid-19 triggered massive job losses, a new study shows.
In all, there were 3.3 million adults under the age of 65 who lost employer-sponsored health insurance and almost two-thirds of them, or 1.9 million, “became newly uninsured from late April through mid-July,” according to a new analysis by The Urban Institute and funded by the Robert Wood Johnson Foundation. The loss of employer coverage has hit Hispanic adults particularly hard with 1.6 million losing health benefits, Urban Institute researchers said.
And it could get worse.
“With continued weakness in the labor market, researchers conclude federal and state policymakers will need to act to prevent job losses from leading to further increases in uninsurance,” the authors of the report wrote about their analysis, which was derived from 2020 U.S. Census data.
In particular, the analysis underscores the need to expand health benefits, particularly Medicaid under the Affordable Care Act, analysts say. The ACA dangled billions of dollars in front of states to expand Medicaid coverage for poor Americans but 12 states generally led by Republican Governors or legislatures have refused while President Donald Trump and his appointees at the U.S. Justice Department fight led by Republican Governors
“The danger of an inadequate safety net can be seen in the non-expansion states, where the number of uninsured adults has already increased more than 1 million,” Robert Wood Johnson Foundation senior policy advisor Katherine Hempstead said in a statement accompanying the report.
Drugmakers are getting bolder in their bid to restrict access to drugs discounted under the 340B program as legal experts say a lack of enforcement has created a regulatory void.
Hospitals are imploring the Department of Health and Human Services (HHS) to clamp down on several moves by drug companies, including Novartis and AstraZeneca, to limit distribution of certain 340B drugs. But experts say an administration-wide change in what agencies can enforce is likely behind drugmakers’ aggressive moves.
“It is an outrage that these actions are being taken at a time when hospitals are in the midst of their response to the COVID-19 public health emergency, which has further demonstrated the fractured, inadequate state of the prescription drug supply chain,” the American Hospital Association said in a release last week.
Hospitals and 340B advocates are furious that AstraZeneca announced last Friday that starting Oct. 1 it will not offer any discounted drugs to contract pharmacies, which are third-party entities that dispense drugs acquired under the program.
It is the most aggressive move in a fight sparked last month between drug companies against contract pharmacies, which are a popular tool among 340B hospitals.
The back story
In exchange for participating in Medicaid, a drug manufacturer is required to offer discounts to safety-net hospitals that participate in 340B. But the program has been beset with controversy in recent years as drug companies claim the program has gotten too large and patients aren’t benefiting from the discounts.
Eli Lilly decided last month to restrict sales to contract pharmacies of certain formulations of erectile dysfunction drug Cialis. Merck and Novartis also said contract pharmacies would need to submit claims data to avoid duplicate discounts.
We’ve reached out to pharmaceutical companies for comment and will update when we hear back.
Industry advocacy organization Pharmaceutical Research and Manufacturers of America (PhRMA) has previously called for reforms to the 340B program, including to the ability for covered entities to contract with multiple outside pharmacies to dispense drugs that receive 340B discounts. Even though the number of Americans who are insured has risen, 340B is growing exponentially, they said. “Not all 340B hospitals are good stewards of the program,” PhRMA said.
Hospital groups and 340B allies charge that the moves blatantly violate a 2010 guidance released by the Health Resources and Services Administration (HRSA), which oversees the 340B program.
The guidance permits a hospital participating in 340B to voluntarily use a contract pharmacy and outlines the requirements to do so. The guidance also says a manufacturer must still sell a drug at a price not to exceed the statutory 340B price.
But an October 2019 executive order said federal agencies cannot enforce guidance documents unless they are part of a contract amid other exceptions.
HRSA has said that it doesn’t have the authority under the 340B statute to take enforcement action on “requirements that have been established under guidance,” said Emily Cook, a partner with law firm McDermott Will & Emery.
The agency’s current position is that it can only take enforcement actions on clear violations of the 340B statute, she added.
HRSA told Fierce Healthcarein a statementit is considering the issues raised by the manufacturers and “evaluating our next steps.”
Hospitals are hoping HHS steps in and clears up the issue.
If not, then hospitals could either take drug companies to court or lobby Congress to give HRSA more authority over the program.
The advocacy group 340B Health said last week that if the administration refuses to step in then it will “pursue all legislative and legal avenues available to us to defend the safety net.”
Hospitals need to re-examine their 340B contract pharmacy deals to exclude AstraZeneca drugs, according to an article from Brenda Maloney Shafer and Richard Davis of law firm Quarles & Brady.
If they fail to do this, then the contract pharmacy could pay for dispensing and administrative fees for drugs that won’t get a 340B discount.
This is the latest spat over the controversial program. Hospitals took the administration to court after it tried to cut payments under the program by nearly 30%.
Hospitals say revenue from the 340B program is essential, while others contend the original law is being abused.
On August 3, an federal appeals court ruled that 340B hospitals will now be subject to Medicare cuts in outpatient drug payments by nearly 30%, reversing an earlier ruling calling those cuts illegal. The 2-1 decision by the U.S Court of Appeals for the District of Columbia Circuit essentially gives the Trump Administration and the Department of Health and Human Services the legal authority to reduce payment for Medicare Part B drugs to 340B hospitals.
Hospitals that serve large numbers of Medicaid, Medicare and uninsured patients were getting the drugs for a discounted price, but, getting reimbursed at the higher price, HHS pays all hospitals for Medicare Part B drugs. The hospitals, many of which are in the red or operating on thin margins, were using the pay gap in the price difference to cover operational expenses. HHS deemed it inappropriate that these facilities would use Medicare to subsidize other activities and initiatives, and the appeals court agreed.
As per the original 340B legislation, discounts on drugs can range from 13% to 32% off the average retail price for participating providers, but Medicare Part D sets reimbursement in an entirely different way, leading to the significant reimbursement discrepancies – until the ruling, which furthered HHS’ push to narrow the spread between acquisition price and reimbursement.
“The opportunity to exploit this buy/sell differential probably has something to do with the explosive growth there’s been in the number of participating institutions in 340B,” said Michael Abrams, cofounder and managing partner of Numerof and Associates. “According to the data I came across, discounted 340B purchases grew 23% from 2018 to 2019, and currently make up about 8% of the total of the U.S. drug market. So from my perspective this looks like a loophole that’s been used by a small number of large institutions, who in many cases don’t serve that many disadvantaged patients, but nonetheless serve enough to qualify for the 340B program and to purchase the drugs they buy at the discounted rate.”
Groups representing U.S. hospitals would disagree with that assessment, and, in fact, when the appeals court handed its ruling, the AHA, AAMC and America’s Essential Hospitals said 340B hospitals and their patients would “suffer lasting consequences.”
“The decision conflicts with Congress’ clear intent and defers to the government’s inaccurate interpretation of the law, a point that was articulated by the judge who dissented from the opinion,” the groups wrote in a statement. “For more than 25 years, the 340B program has helped hospitals stretch scarce federal resources to reach more patients and provide more comprehensive services. Hospitals that rely on the savings from the 340B drug pricing program are also on the front-lines of the COVID-19 pandemic, and today’s decision will result in the continued loss of resources at the worst possible time.”
President and CEO of 340B Health Maureen Testoni also lamented the appeals court’s decision, calling the cuts “discriminatory.”
“These cuts of nearly 30% have caused real and lasting pain to safety-net hospitals and the patients they serve,” she said earlier this month. “Keeping these cuts in place will only deepen the damage of forced cutbacks in patient services and cancellations of planned care expansions. These effects will be especially detrimental during a global pandemic.”
Abrams contends that much of the confusion and legal wrangling can be attributed to the vagueness of the original 340B legislation, the stated goal of which was to “enable participating institutions to stretch scarce financial dollars.” With little else to go on in terms of the language, those on each side of the issue were able to interpret it in their own way, with participating institutions saying it’s within the bounds of the law to use that revenue stream to enhance their mission – another phrase that’s open to wide interpretation.
“There’s no question this is being put to uses that were never intended,” said Abrams, adding that the profits generated by the buy/sell differential often disappear into balance sheets with little to no accountability.
Hospitals, for their part, feel they’re under siege by HHS at a critical time for the healthcare system’s financial viability. Even before the COVID-19 pandemic, hospitals saw the migration of lucrative inpatient procedures, such as hip and knee replacements, to freestanding outpatient facilities, which in some cases are not owned by the hospital. That represents a significant loss of revenue. Factor in the lost revenue from cancelled or delayed elective procedures due to the coronavirus, as well as patients who are too cautious to enter the healthcare system, and hospitals are hurting. AHA President and CEO Rick Pollack said in July that half of all U.S. hospitals will likely be in the red by the end of the year.
A COMPLICATED PICTURE
Actions by the pharmaceutical industry are also adding to the complication. A recent statement from America’s Essential Hospitals alleges that recent actions by pharmaceutical manufacturers “hinder access to affordable medications for millions of people who face financial hardships and defy clear statutory requirements that they provide drugs to 340B Drug Pricing Program covered entities.”
The manufacturers have threatened punitive actions – including withholding 340B drugs to contract pharmacies – for failing to comply with reporting requirements that Essential Hospitals call “arbitrary.”
“These data requests have no clear link to program integrity,” the group said. “Rather, they seem to be little more than a fishing expedition.”
A concrete example can be found in AstraZeneca’s decision to refuse 340B pricing to hospitals with on-site pharmacies for any drugs that will be dispensed through contract pharmacies. In a statement this week, Testoni of 340B called this action an “attack” on the 340B program that will hurt healthcare institutions as well as low-income and rural Americans.
“We believe that refusing to offer discounts that the 340B statute requires is a violation of federal law,” said Testoni. “We are calling on Health and Human Services Secretary (Alex) Azar to exercise his authority to stop these overcharges before they cause permanent damage to the healthcare safety net.”
Abrams sides more with the appeals court decision, saying that requiring the pharmaceutical industry to sell drugs at a discount comes with significant regulation to ensure they do so – a stark contrast to the lack of regulation around the resulting revenue. Though another appeal certainly isn’t out of the question, Abrams expects participation in the program to shrink back to a level reflecting the size of the target populations.
“This is about helping disadvantaged patients get their drugs, and that should be the driving activity of the program,” he said. “I’m fine with HHS taking this problem on, because it was an abuse that was never intended in the original legislation. It just seems to me that HHS really wants the healthcare sector to deliver care that is more accountable both for efficient use of resources and outcomes.”
One person who disagrees is Circuit Judge Cornelia Pillard, who wrote the dissenting opinion in the appeals court decision.
“The challenged rules took a major bite out of 340B hospitals’ funding,” she said. “Often operating at substantial losses, 340B hospitals rely on the revenue that Medicare Part B provides in the form of standard drug-reimbursement payments that exceed those hospitals’ acquisition costs. 340B hospitals have used the additional resources to provide critical healthcare services to communities with underserved populations that could not otherwise afford these services.”
Hospital groups are pressing Congress to put more money into a relief fund for hospitals and providers, even as labor data showed signs of a turnaround for the health-care industry last month.
Congressional leaders are at a standstill over the next coronavirus-relief package and it could be weeks until lawmakers vote on legislation. Hospital groups have said the $175 billion Congress already approved has been a crucial lifeline to keep hospitals from laying off more staff or potentially closing. Some are worried the money may start to run dry soon.
The coronavirus is prompting many Americans to delay health care, and further funding delays exacerbate the need for assistance, the hospitals warn. Some providers that shed jobs earlier in the pandemic have begun adding them back, but employment levels remain far below where they once were.
“The longer we are in the pandemic the more clear it becomes that this is not going to be a short-term issue,” Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, said.
Leaders of both parties back more federal funding to help hospitals and doctors’ offices stay in business. Democrats proposed $100 billion for the industry, as hospital groups such as AEH sought, in virus-relief legislation (H.R. 6800) the House passed earlier this year. Republicans included $25 billion in their counterproposal.
The Health and Human Services Department has promised about $115 billion of the $175 billion in relief Congress approved this year to help health-care providers offset their Covid-19-related losses, according to agency data. That leaves the industry with about $60 billion left.
The U.S. exceeded 5 million confirmed Covid-19 cases Aug. 9, according to data from Bloomberg News and Johns Hopkins University, more than any other country. Almost 165,000 people in the U.S. have died from the virus.
The health-care industry added more than 126,000 jobs in July, according to data released last week by the Bureau of Labor Statistics. Dentist offices and hospitals, the section of the industry that was laying off tens of thousands of people in April and May, accounted for more than 70,000 of those new jobs.
Still, there were 797,000 fewer health-care jobs compared to before the pandemic, according to BLS.
The virus hit parts of the heath-care industry unevenly. Large health systems such as HCA Healthcare Inc. and Universal Health Services Inc. posted better-than-expected profits for the second quarter of 2020.
Some hospitals that didn’t have much cash-on-hand to start the year are struggling with lower profits and may need added relief if the virus continues to keep Americans from seeking care, industry watchers said.
“No hospital is going to come out of this year better than they were in prior years,” Suzie Desai, senior director for S&P Global Rating’s Not-for-Profit Health Care group, said.
The federal relief funds helped buoy hospitals this year, hospital groups argue. The American Hospital Association estimates that without relief funds, hospitals margins would have been down 15% and could be down 11% at the end of 2020 if the virus continues to spread at its current pace.
The AHA estimated losses for the nation’s hospitals and health systems will reach $323 billion this year.
A federal appeals court has ruled the Trump administration can install nearly 30% cuts to the 340B drug discount program.
The ruling Friday is the latest legal setback for hospitals that have been vociferously fighting cuts the Department of Health and Human Services (HHS) announced back in 2017.
340B requires pharmaceutical manufacturers to deliver discounts to safety net hospitals in exchange for participation in Medicaid. A hospital will pay typically between 20% and 50% below the average sales price for the covered drugs.
HHS sought to address a payment gap between 340B and Medicare Part B, which reimburses providers for drugs administered in a physician’s office such as chemotherapy. There was a 25% and 55% gap between the price for a 340B drug and on Medicare Part B.
So HHS administered a 28.5% cut in the 2018 hospital payment rule. The agency also included the cuts in the 2019 payment rule.
Three hospital groups sued to stop the cut, arguing that HHS exceeded its federal authority to adjust the rates to the program.
A lower court agreed with the hospitals and called for the agency to come up with a remedy for the cuts that already went into effect.
But HHS argued that when it sets 340B payment amounts, it has the authority to adjust the amounts to ensure they don’t reimburse hospitals at higher levels than the actual costs to acquire the drugs.
If the hospital acquisition cost data are not available, HHS could determine the amount of payment equal to the average drug price. HHS argued that hospital cost acquisition data was not available and so HHS needed to determine the payment rates based on the average drug price.
The court agreed with the agency’s interpretation.
“At a minimum, the statute does not clearly preclude HHS from adjusting the [340B] rate in a focused manner to address problems with reimbursement rates applicable only to certain types of hospitals,” the ruling said.
The court added that the $1.6 billion gleaned from the cuts would go to all providers as additional reimbursements for other services.
340B groups were disappointed with the decision.
“These cuts of nearly 30% have caused real and lasting pain to safety-net hospitals and the patients they serve,” said Maureen Testoni, president and CEO of advocacy group 340B Health, which represents more than 1,400 hospitals that participate in the program. “Keeping these cuts in place will only deepen the damage of forced cutbacks in patient services and cancellations of planned care expansions.”
This is the latest legal defeat for the hospital industry. A few weeks ago, the same appeals court ruled that HHS had the legal authority to institute cuts to off-campus clinics to bring Medicare payments in line with physician offices, reversing a lower court’s ruling.
The groups behind the lawsuit — American Hospital Association, American Association of Medical Colleges and America’s Essential Hospitals — slammed the decision as hurtful to hospitals fighting the COVID-19 pandemic. But the groups didn’t say if it would appeal the decision.
“Hospitals that rely on the savings from the 340B drug pricing program are also on the front-lines of the COVID-19 pandemic, and today’s decision will result in the continued loss of resources at the worst possible time,” the groups said in a statement Friday.
A significant rate cut for some medications for 340B hospitals was based on a “reasonable interpretation of the Medicare statute” and can stand, the U.S. Court of Appeals for the District of Columbia ruled Friday.
The 2-1 ruling overturns a district court decision that HHS overstepped its bounds when it cut the reimbursement rate for a certain category of outpatient drugs by 28.5% for hospitals enrolled in the 340B drug discount program.
The American Hospital Association, which challenged the rate cut along with three individual hospitals, did not immediately respond to a request for comment. An advocacy group for 340B hospitals said in a statement it was disappointed in the ruling and that the rate change has “caused real and lasting pain to safety-net hospitals and the patients they serve.”
The decision is another major blow for hospitals, coming two weeks after the same court ruled HHS also acted within its authority when it reduced payments to off-campus hospital outpatient departments.
HHS made the cut to 340B hospital outpatient drug reimbursement in the 2018 Outpatient Prospective Payment System rule, arguing that those hospitals, which primarily serve low-income populations, get the drugs at a deep discount and thus could be incentivized to overuse them.
The cut was from 106% of the average sales price to 22.5% less than ASP. Hospitals immediately sued, but HHS retained the reduction in the 2019 OPPS. The department has said the change would save Medicare $1.6 billion in 2018.
Writing for the court, Chief Judge Sri Srinivasan said the department did indeed have the authority to make the reduction, “so as to avoid reimbursing those hospitals at much higher levels than their actual costs to acquire the drugs.”
He also called the cut “a fair, or even conservative, measure of the reduction needed to bring payments to those hospitals into parity with their costs to obtain the drugs.”
In a partially dissenting opinion, Circuit Judge Cornelia Pillard wrote that she believes the statute only allows HHS to make the change for a specific group of hospitals under a clause that requires the agency to use a certain data set it did not use.