Over the past two decades, Michigan Medicine has grown increasingly dependent on a controversial federal drug discount program, called 340B, to boost its bottom line. Now it’s opened a new delivery pharmacy to protect it.
Like other “safety net hospitals” around the country, the U-M cares for a lot of low-income people on Medicaid, seniors on Medicare, and patients with no insurance at all. To help make up for those losses, the government requires pharmaceutical manufacturers to sell drugs to those hospitals for outpatients at a steep discount—but lets the hospitals bill insurers, including Medicare, for their standard payments.
Pocketing the difference yielded an astounding $571 million for University of Michigan Health in fiscal 2023, up from $482 million two years earlier (see “Drug Overdose?” April 2022). Yet the health system still lost $17.3 million.
In a June press release, University of Michigan Health president David Miller blamed “significant expense pressures related to labor shortages, and revenue increases not keeping pace with inflation.”
With so much money at stake, the 340B program has turned into a battleground between the government, hospitals, and drug companies. In 2018, the Trump administration cut Medicare 340B drug reimbursement, but the hospitals sued, and in June 2022 the Supreme Court ruled in their favor. Although the dollar settlement has not been finalized, the U-M expects to receive a lump-sum payment of more than $70 million. But now Medicare is planning to gradually reduce reimbursement over the next sixteen years, “which will have a negative financial impact” on Michigan Medicine, a health system spokesperson emails.
The headlong growth of the 340B program also infuriates drug companies, because the hospitals’ gain is their loss. Pharma is especially incensed that, over the last decade, a government rule let hospitals extend their buying discounts to private pharmacies under special contracts. Such deals sent $181 million to the U-M in 2021 alone.
Many drug companies reacted by cutting off most of the pharmacy discounts. Michigan Medicine estimates that this has cost the system $163 million, “a loss that is pressuring our ability to meet our clinical, education and research missions and puts our ability to provide care to every patient who needs it … at even greater risk,” the spokesperson writes.
Several drug companies also challenged the pharmacy rule in court. Unfortunately for the hospitals, a federal appeals court ruled in the companies’ favor in January. Two other cases are pending, and this issue also may end up at the Supreme Court.
At least in part in response to the manufacturer rebellion, the U-M has turned a former printing plant in Dexter into a massive outpatient specialty pharmacy. An in-house alternative to the private pharmacy contracts now under threat, the new facility sent out its first prescriptions November 13.
It’s expected to boost annual pharmacy revenue to $600 million. The U-M spokesperson writes that the money “will fund our payroll, pharmaceutical and other supply purchases needed to provide high quality pharmacy care to our patients.”