The Impact of the 340B Drug Pricing Program on Critical Access Hospitals

In 2010, the Affordable Care Act extended the 340B Drug Pricing Program to allow most rural hospitals to acquire outpatient drugs from manufacturers at discounted prices. Under 340B, hospitals can dispense discounted outpatient drugs to almost any patients regardless of insurance coverage. For many urban hospitals, the program enables them to extract additional profit margin from 340B discounts, as Medicare (yet) and private insurers do not condition payment rates on whether a hospital is acquiring drugs through 340B or not. But for the majority of rural hospitals, which belong to a special classification called Critical Access Hospitals (CAH), the effect of 340B is ambiguous.

CAHs receive payment of 101 percent of reasonable costs from Medicare for most inpatient and outpatient services. On the one hand, 340B likely relaxes the liquidity constraints facing CAHs, allowing them to maintain a better cash flow. On the other hand, with cost reimbursement, lower drug costs introduced by 340B lead to lower Medicare payments and less profit margin per drug used. To the extent that CAHs attract more patients by making otherwise expensive drugs more accessible, they can potentially compensate for the loss in revenue. However, CAHs serve communities that tend to have older, less well-off and dwindling populations, which could limit their ability to expand drug-intensive programs. Although close to 80 percent of CAHs have joined the program since the ACA, the net effect of 340B on CAHs and the communities they serve remains an empirical question.

In this ongoing research, I quantify the effects of 340B on CAHs by examining a wide array of outcomes ranging from Medicare outpatient drug utilization to hospital financial performance. I assemble data spanning 2007 – 2013 from Medicare claims, Medicare cost reports, the American Hospital Association Annual Survey of Hospitals, and state hospital financial reports. For patient-level outcomes, my main identification strategy exploits geographic variation in outpatient market share of 340B-eligible CAHs in 2009 - measured in terms of the fraction of outpatient visits captured by these hospitals in an area - as a proxy for new exposure to 340B following the ACA. I use an event-study style difference-in-difference design that flexibly estimates the coefficient of interest for each time interval to trace out the relationship throughout the entire study period. For hospital-level financial outcomes, I use a conventional event study analysis focusing on CAHs ever participating in 340B since the expansion. I also plan to study CAH provision of uncompensated care and other service offerings under 340B.