Billions at stake as national battle over drug pricing plays out in Missouri

In a battle that pits some of the biggest players in health care against each other, the Missouri General Assembly has come down on the side of hospitals who want unlimited access to discounted drugs for their pharmacies.

On the last day of this year’s legislative session, the Missouri House passed a bill making it illegal for pharmaceutical manufacturers to refuse to supply the discounted medications to qualifying hospitals and health clinics and their contracted pharmacies. 

Pharmacy manufacturers, who are playing defense on similar bills across the country, want Gov. Mike Parson to veto the legislation because the discounted prescriptions are often sold to patients at full retail price. 

The stakes nationally are huge, in a medical market with escalating prescription prices and increasing concentration of medical providers in direct employment by hospital groups. Nationally, pharmaceutical manufacturers sold nearly $100 billion in discounted drugs in 2021 and 2022 through a federal program known as 340B, for the section of law where it is authorized.

With an average discount of about 60%, according to representatives of the drug manufacturers, the wholesale value of the discounted prescriptions over two years is approximately $250 billion. The retail markup adds hundreds of millions more to the total revenue stream.

Much of that revenue goes to the bottom line instead of being passed on or used to cover the cost of care for people who cannot afford it, Nicole Longo, deputy vice president of public affairs at PhRMA, the lobbying arm of the pharmaceutical industry, said in an interview with The Independent.

“We provide tens of billions of dollars in discounts on medicines each year in the hopes that it improves access to affordable medicines for low income patients,” Longo said. “And we’re not seeing that happening.”

In 2023, a federal appeals court ruled that nothing in federal law prevents pharmacy manufacturers from limiting the number of contract pharmacies they will supply with 340B discounted products. But those limits go only so far, the 8th Circuit Court of Appeals in St. Louis ruled when it upheld an Arkansas law – very similar to the bill awaiting action by Parson – that bans manufacturer-imposed limits on contracts.

Though the covered entities cannot squeeze as much revenue out of it as they once could, drug makers need not help them maximize their 340B profits.

– Stephanos Bibas, writing for the 3rd U.S. Circuit Court of Appeals

Many of the restrictions manufacturers are implementing aren’t practical, said Daniel Good, vice president of pharmacy for the Mercy health system. A limitation, for example, to one contract pharmacy per qualified provider – an idea being used by some companies – doesn’t allow Mercy to serve its patients most effectively, Good said.

“Even though we have 58 retail pharmacies, plus specialty infusion pharmacies, there’s not enough of the brick-and-mortar pharmacies that are owned and operated by Mercy to meet the entire footprint that Mercy has,” Good said. “Therefore, we have to have contract relationships with some of those pharmacies in those rural communities in order to meet that need.”

The program

The 340B program was part of a 1992 federal law intended to fix an unintended consequence of changes to Medicaid made in 1990: Pharmaceutical companies stopped giving drug discounts to hospitals serving rural and poorer communities and clinics for people with expensive medical conditions such as AIDS.

It had two components – drug manufacturers had to deliver their products at a discount to eligible providers and eligible providers could only use the program to provide prescriptions to patients they treated directly.

Eligible hospitals were designated as those serving children, those that were the only hospitals in their community, those designated as “critical access hospitals” providing care that would otherwise be absent, and those serving large numbers of indigent patients known as “disproportionate share hospitals.”

Other qualifying providers include federally qualified health care centers – clinics that receive grants to support operations so they can base charges on ability to pay – as well as clinics that serve AIDS patients, black lung victims and other debilitating diseases.

The drugs available at a 340B discount are purchased by the providers and dispensed at in-house or contract pharmacies for outpatient use. The charges paid by patients may or may not reflect a discount from regular pricing, depending on the policies of the individual provider.

The use of contract pharmacies started in 1996, when the Department of Health and Human Services began allowing one contractor per provider as recognition that many providers did not have in-house pharmacies.

In 2010, along with passage of the Affordable Care Act, the allowance for contracts was expanded to allow any number of contracts. That is when use of the program increased exponentially.

The 45 hospitals and clinics enrolled in 1992 grew to 1,191 in 2010 and stands at 2,724 currently, according to data from PhRMA. The number of contract pharmacies grew from 2,321 in 2010 to 205,340 in 2024.

“One disproportionate share hospital in the 340 B program might have 400 contracts with pharmacies across the country and vice versa,” Longo said. “A single CVS that’s on your corner might have 30 contracts with hospitals and clinics, both in state and out of state, through the 340 B program.”

“The lunar surface”

When pharmaceutical companies started pushing back on that growth, the federal department issued an advisory opinion that made it clear it backed unlimited contracting and expected the drug manufacturers to honor them wherever the products were sent.

“The situs of delivery, be it the lunar surface, low-earth orbit, or a neighborhood pharmacy, is irrelevant,” the 2020 advisory opinion, since withdrawn, stated.

In the 2023 ruling that upheld limits on contracts imposed by manufacturers, Judge Stephanos Bibas of the 3rd Circuit Court of Appeals wrote that the department improperly interpreted the intent of Congress.

“When Congress’s words run out, covered entities may not pick up the pen,” Bibas wrote. “Plus, Congress’s use of the singular ‘covered entity’ in the ‘purchased by’ language suggests that it had in mind one-to-one transactions between a covered entity and a drug maker without mixing in a plethora of pharmacies.”

If the case was about whether clinics and hospitals enrolled in the 340B program could use contracted pharmacies at all, Bibas wrote, the ruling would go another way. Because many eligible entities do not have an in-house pharmacy, he wrote, contracted pharmacies have to be part of the program.

But manufacturer-imposed restrictions that allow some use of contract pharmacies are acceptable, he wrote.

“Under the three drug makers’ policies at issue, all covered entities can still use the Section 340B program,” Bibas wrote. “Though the covered entities cannot squeeze as much revenue out of it as they once could, drug makers need not help them maximize their 340B profits.”

Arkansas is simply deterring pharmaceutical manufacturers from interfering with a covered entity’s contract pharmacy arrangements.

– Judge Michael Melloy, writing for the 8th U.S. Circuit Court of Appeals

As the dispute moved through the courts, it also became fodder for state legislatures. Including Missouri. There are 29 states that have enacted bills – including seven this year – that prohibit restrictions on contracts.

Governors in five states – Kansas, Maryland, Minnesota, Mississippi and West Virginia – signed the bill in their states. Virginia Gov. Glenn Youngkin vetoed the bill passed in his state this year.

And while the courts have said federal law doesn’t give Health and Human Services the power to bar manufacturer limits, they have also said that same law doesn’t restrict states’ ability to do so.

In a ruling on a bill passed in Arkansas in 2021, the 8th Circuit Court of Appeals upheld financial penalties on manufacturers who refuse to deliver 340B discounted medications to contract pharmacies.

“Arkansas is simply deterring pharmaceutical manufacturers from interfering with a covered entity’s contract pharmacy arrangements,” Judge Michael Melloy wrote in the ruling handed down in March.

The money

For many providers, the revenue obtained by selling the discounted drugs at standard prices is the difference between staying open and closing. KFF Health News last month reported that many small rural hospitals aren’t willing to take federal payments to transition facilities to a new “rural emergency hospital” model because they would lose access to 340B discounts.

State Rep. Rick Francis, a Perryville Republican  who became CEO of Cape Girardeau-based Cross Trails Medical Center on May 20, said the revenue is vital to his new employer, a federally qualified health center. 

Cross Trails has locations in four counties and 11 contract pharmacies.

“The 340B revenues allow us to cover patients who can’t pay for medicine,” said Francis, who voted in support of the bill when it passed the House. “We have plenty of those who need help.”

But those providers aren’t the main target for the drug manufacturers. Instead, they focus criticism on the disproportionate share hospitals. Those hospitals account for about 80% of all drugs purchased through the 340B program, $41.8 billion in 2022 and $34.3 billion the year before.

The New England Journal of Medicine, in a study published in January, found that hospitals marked up 340B medications by 6.5 times as much as private physicians for infusion treatments.

“This study showed that hospitals imposed large price markups and retained a substantial share of total insurer spending on physician-administered drugs for patients with private insurance,” the study concludes.

Those hospitals should be required to show how they use the money to help the patients that cannot pay for doctor visits and medications, Longo said. 

“They buy low and they sell high,” Longo said. “Patients bear a lot of that cost, and so that’s a major concern of the industry.”

The demands for disproportionate share hospitals to cut prices for patients receiving medications obtained with a 340B discount, or to forgo collection efforts on unpaid bills as a requirement for participation in the program, are hollow arguments, Good said.

Other legal requirements prevent having different prescription prices for people with insurance coverage and those who do not, he said.

But Mercy, realizing that the arguments are having an impact on public perception, identifies the programs it funds with 340B revenue, he said. It supports clinics in St. Louis and Springfield, mobile care vans with mammography screening and other services, and behavioral health care, as well as other services.

“We have very specific services that we can tie directly to the money that is saved from 340B, that we’re able to continue or expand our patient care services in those areas,” Good said.

By putting the focus on disproportionate share hospitals, Good said, the pharmacy industry is trying to politically divide users of the 340B program.

“We want to stick together, and we do believe that healthcare will be stronger if we stay together as a group and we maintain the 340B program, so it benefits all and that we don’t abuse it,” Good said.

The Missouri bill

The legislation awaiting Parson’s action has three main components – a requirement that drug manufacturers deliver medications to all contract pharmacies without restriction, enforcement by  declaring a violation to be an unlawful merchandising practice, and punishment meted out by the state Board of Pharmacy for violations.

Sponsored by Republican state Sen. Justin Brown of Rolla, the bill was pared back from its original language that also targeted pharmacy benefit managers and practices in the private insurance market. Brown did not return calls or messages sent by email to his Capitol office.

During House debate on the final day of the session, state Rep. Tara Peters, a Rolla Republican who shepherded the bill through the lower chamber, said provisions on pharmacy benefit managers were removed to make the bill more likely to pass.

The bill is intended to increase access to prescriptions for Missourians, she said.

“Let’s allow Missourians access to pick up their medications closer to home,” Peters said.

Other supporters focused on the program’s benefits for safety-net hospitals and clinics. 

The bill is needed to block drug makers from limiting when and where a provider can provide prescriptions, supporters said. The revenue realized helps patients by subsidizing high-cost services, such as behavioral health care, as well as supporting clinics that provide free or low-cost services.

“There are aspects of this program that are not as we would wish them to be,” said Rep. Mike Stephens, a Bolivar Republican, “but it is vitally important to the small hospitals, to the FQHCs and to many people who can’t afford medicines otherwise.”

There was only nominal opposition to the bill, which passed 28-3 in the Senate and 133-18 in the House, with only Republicans voting against it.

“It’s a problem, in my estimation, of a federal program that has seen significant increases in utilization and at the same time, there are big players that are directly benefiting in a way that most people would not assume,” one of the opponents, state Rep. Doug Richey, a Republican from Excelsior Springs, said in an interview with The Independent.

The bill’s sponsors played on legislators’ sympathy for people struggling with high-cost care, Richey said.

“When you have somebody get up on the floor, and they talk about patient care, the high costs of healthcare and helping people who are needing help, and then you start having anecdotes that are shared about the suffering and the anguish that people have, there is an emotional component to these types of bills that begins to take over,” Richey said.

Francis said the bill fills in gaps in federal law.

“That said ‘you will make these drugs available to these Missouri clinics,’” Francis said. “What it did not say is that big pharma, you can be in charge of dispensing and determining where you’re going to allow these drugs to go.”