Hospitals Retain 91% of Profit from Physician-Administered Drugs

September 17, 2019 - Physician practices and hospital outpatient clinics treat a similar number of commercially insured patients needing physician-administered drugs, but hospitals receive a larger share of the gross profits, according to a recent analysis by the Partnership for Health Analytic Research, LLC (PHAR).

The analysis revealed that hospitals collected 91 percent of the gross profit margin while serving just 53 percent of patients receiving physician-administered medications. In contrast, physician offices treated 47 percent of patients in the commercial market and retained just nine percent of the gross margin.

The analysis also showed that hospitals retain more than biopharmaceutical manufacturers for medicines administered in the outpatient setting. For every $100 spent on physician-administered drugs in the hospital outpatient setting, the hospital retained $58, while the manufacturer received less than $42.

“This suggests that hospitals are earning more from administering medicines than the manufacturers who created the medicines and is consistent with recent research published by the Moran Company, which found that in the commercial market hospitals retain 2.40 times their acquisition cost for a basket of 20 brand medicines,” researchers from PHAR stated in the report.

The findings indicate a greater need to level the playing field between physician practices and hospitals, according to Mara Holton, MD, vice chair at the health policy committee at LUGPA, a trade association representing independent urology group practices.

READ MORE: OIG Suggests Lowering Medicare Reimbursement for More Part B Drugs

“The report emphasizes several of the massive advantages accorded to hospitals in the existing healthcare market,” she recently told RevCycleIntelligence.com. “A combination of discounted drug programs, such as 340B, and large variances in allowable charges for pharmaceuticals have provided hugely disparate profits to hospitals for drug administration, far exceeding margins to independent practices and even to the drug manufactures themselves.”

Mergers and acquisitions have also allowed hospitals to leverage policies to produce a higher profit on services like the administration of drugs in the outpatient setting. From July 2016 to January 2018, hospitals acquired 8,000 physician practices and an additional 14,000 physicians left private practice to enter employment arrangements with hospitals, Avalere Health and the Physicians Advocacy Institute reported earlier this year.

The rapid growth of hospital acquisitions spells trouble for physician practices and the healthcare industry at large, Holton stated.

“The data also underscore that hospitals are a leading driver of healthcare spending in the US, and that the skyrocketing rates of hospital mergers and acquisitions further exacerbate this problem,” she explained. “A study in Health Affairs (Cooper et al), demonstrating a rise in hospital prices for inpatient care from 2007 to 2014 of almost three times that of physicians’ cost, further emphasizing the fact that hospitals are a leading driver in the rise in healthcare costs.”

“Failure to address this trend by ‘leveling the playing field’ will inevitably lead to continued decline in competition, decline in patient access and alternatives and the resultant continued uncontrolled rise in costs,” she stressed.

READ MORE: Hospital Prescription Drug Spending to Increase 4.57% in 2020

LUGPA is advocating for the implementation of more site-neutral payment policies to ensure an adequate level of competition between hospitals and physician practices. The association believes that reimbursing practices and hospitals a similar rate for the same service will not only level the playing field between hospitals and practices, but also enable providers to transition to value-based care.

“The inequity of Medicare reimbursement between hospitals and independent practices makes it challenging for independent physicians to compete in the healthcare market. Since independent practices can deliver high quality care at lower costs than hospitals, the barriers that stagnate their ability to compete also present a roadblock to patients’ access to value-based care,” Holton explained.

The association is also calling for changes to the Stark Law, a regulation that prohibits physician self-referral.

“The outdated Stark Law is one of most significant sources of regulatory burden for independent physicians,” Holton stated. “Its restrictions to physician self-referral for Medicare and Medicaid patients complicates care coordination in independent practices and impedes the transition to alternative payment models (APMs) in the independent setting, thereby creating an insurmountable roadblock to innovation.”

Modernizing the Stark Law is key to allowing physician practices to engage in value-based care models and also to “chip away at the competitive advantage given to the large hospital systems that already dominate the market,” Holton added.

READ MORE: Major Health Systems Create New Company to Tackle Drug Shortages

But hospital groups are singing a different tune. While hospitals agree that the Stark Law needs to be updated to support value-based care implementation, the leading hospital association has argued that payment policies are not to blame for drug spending.

The American Hospital Association recently responded to a recent UnitedHealth Group analysis showing that specialty drug spending per person grew 14 percent a year primarily because of hospital administration. The association said in a blog post on its website that the analysis failed to account for critical differences between the hospital and physician office setting while ignoring the real driver between drug spend growth: drug companies.

“The reality is that spending on specialty drugs is driven by high and growing list prices set by drug companies, not hospitals,” the AHA said before citing a Kaiser Family Foundation report from earlier this year that found prices for branded drugs rose 57 percent since 2017.

“Instead of blaming hospitals, the authors of this report should instead keep their attention focused on drug companies who introduce specialty drugs at skyrocketing prices that continue to drive the growth in specialty drug spending,” the association added.

Policymakers have recently targeted drug manufacturers as part of their pharmaceutical spending reform efforts. The Trump Administration, for example, recently finalized a requirement that would make drug companies disclose drug prices in direct-to-consumer advertisements.

But hospitals are arguably just as much of a target with reform efforts. The Trump Administration singled out the 340B Drug Pricing Program in 2018 as a driver behind prescription drug spending growth.

“Some hospitals that receive drug discounts under the 340B program, designed to help safety-net facilities, do not provide meaningful levels of charity care to low-income and vulnerable patients, ultimately pushing up drug prices for patients with private health insurance,” the White House website said.

CMS already modified how hospitals get paid under the program, which helps hospitals stretch federal resources by providing outpatient drug discounts. The 2017 final rule reduced reimbursement to 340B hospitals by $1.6 billion.

President Trump has also said that he wants his administration to update the program by ensuring hospitals paid under Medicare Part B deliver more than one percent of their patient costs in charity care.