schumer-8047384In a press conference at Albany Medical Center on Monday, Senator Chuck Schumer deplored what he called a “dramatic cut to upstate New York hospitals,” which he claimed would force layoffs and threaten “critical care services such as cancer treatment, addiction treatment and prescription drug access.”

“NY hospitals stand to lose more than $1.7 billion, Schumer says,” was one of the many headlines coming out of the event.

The senator’s depiction of a complex policy change was alarmist and misleading.

What Schumer neglected to mention is that 20 percent of that $1.7 billion (which is a 10-year figure, by the way) will flow to local Medicare recipients. The “cut” he’s talking about is a reduction in the hefty markups that Medicare previously paid hospitals for drugs that are discounted by law, and that reduction also means lower copayments for patients.

An alternate headline could have read: “Schumer opposes lower drug costs for New York seniors.”

At issue is the so-called 340B program, a federal law dating back to 1992 that requires all pharmaceutical manufacturers doing business with Medicaid to provide 20 percent to 50 percent discounts on the drugs they sell to certain hospitals. Originally targeted to safety-net institutions serving the poor, the program has grown to cover 40 percent of all hospitals.

The rules of the program do not require that the savings be passed along to customers, enabling hospitals to charge a markup and use the money however they like. Medicare in particular previously had a policy of paying its usual reimbursement rates to 340B hospitals, regardless of the discounts, a policy that has cost the federal government billions of dollars a year. Hospital officials insist they have put the proceeds to good use, but they’re also not required to publicly account for how they are spent.

In effect, 340B has become a general subsidy for eligible hospitals with little relation to need and minimal oversight. Meanwhile, there’s evidence that the perverse incentives of 340B have led to overutilization of high-priced drugs and driven up the cost of cancer treatment. There have been widespread calls for reform.

The CMS rule change, finalized in November 2017, reduces how much Medicare reimburses hospitals for drugs obtained through the program, from 6 percent above a benchmark known as “average sale prices” to 22.5 percent below the benchmark. The basic structure of the program, including the mandatory discounts by manufacturers, was left intact.

In effect, CMS is forcing hospitals to share part of their savings with Medicare, as other payers have done previously. As a byproduct, the cost-sharing paid by Medicare recipients—typically about 20 percent of the total—will decline as well.

Avalere has estimated that the Medicare program will save $1.3 billion nationwide this year, and Medicare consumers will save $325 million. In New York, which will see the third-largest impact, Avalere estimated Medicare will pay hospitals $62 million less, and consumers will pay $16 million less.

Schumer used a higher estimate of $1.7 billion in losses to New York hospitals over 10 years, for which his press release did not cite a source.

He said Ellis Hospital stood to lose $23 million—but, again, that’s a 10-year figure, which Schumer used for no evident reason other than making the numbers look bigger. At an average of $2.3 million per year, that would amount to one-half of 1 percent of Ellis’ patient revenue, which was $426 million as of 2017.

Albany Med’s estimated 340B loss, which Schumer put at $11.5 million over 10 years, would equate annually to roughly one-tenth of 1 percent of the hospital’s patient revenues, which were $1.1 billion in 2016.

Schumer could have faulted CMS for not going far enough—for shifting money around rather than directly addressing the program’s core flaws. He could have highlighted the uneven effects of the change, which may present a serious issue for some providers. But to frame modest cost-cutting as a dire threat to every affected hospital—and raise a general alarm about layoffs and service cutbacks—was a disservice to the public.

About the Author

Bill Hammond

As the Empire Center’s senior fellow for health policy, Bill Hammond tracks fast-moving developments in New York’s massive health care industry, with a focus on how decisions made in Albany and Washington affect the well-being of patients, providers, taxpayers and the state’s economy.

Read more by Bill Hammond

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