Federal officials are raising questions about exploding drug discounts under a program meant to fund services for low-income patients, and Ohio’s Cleveland Clinic is at the center of some of them. 

Over a 38-month period ending in June 2023, the massive nonprofit hospital received nearly $1 billion from the program. However, the clinic didn’t cut drug prices for any of its low-income patients, instead plowing the money into its general budget.

Officials at the clinic told congressional investigators that they used the money in other ways to help poor patients. Yet in 2023, the nonprofit hospital had enough money to pay 22 of its executives more than $1 million and another 30 over $500,000 — and still finish the year with nearly $1 billion in “net income.” A private business would call that “profit.”

For its part, the clinic pointed out that its operating income was much smaller than that, and that it spent almost as much on free or discounted care in 2023.

Dramatic expansion

Cleveland Clinic was one of two hospitals to come under scrutiny as part of a U.S. Senate investigation of a drug-discounting program known as 340B. 

It requires drugmakers who want to sell their products to Medicaid patients to also sell them to qualifying hospitals and clinics at deep, legally defined discounts. The hospitals and clinics then sell them at much higher prices and pocket the difference — notionally, to provide care to people who can’t afford it.

When it was created in 1992, 340B was intended to free up money and make federal resources go further for providers who cared for a heavy mix of low-income and underinsured patients. But after the Affordable Care Act passed in 2010 and the 340B rules were changed, the amount of discounts provided under the program exploded — from $5 billion a year to nearly $67 billion in 2023.

That’s not free money, and the discounts to 340B providers are made up by other payers — including the poor, said Antonio Ciaccia, a Columbus-based drug-pricing analyst. 

As the amount of that money grew 13-fold in as many years, the Senate Health, Education, Labor, and Pensions Committee wanted to know whether 340B was really fulfilling the program’s goal to “stretch scarce Federal resources as far as possible.”

The multi-year investigation focused on two hospitals.

“These hospitals were selected for this investigation as a result of media reports alleging abuse of the 340B Program, such as hospitals cutting services to underserved populations and expanding into affluent areas to increase reimbursement rates and subsequent revenue under the 340B Program,” the committee report, which was released last month, said.

The other hospital chain, Cincinnati-based Bon Secours Mercy Health, will be the subject of a separate story. 

Regarding Cleveland Clinic, the Senate report referred to a 2022 Wall Street Journal story. It said the hospital didn’t admit enough Medicaid and low-income patients to qualify under the original 340B rules. But under a quirk in the new rules, it was allowed in as a “rural-referral center” even though it’s headquartered in the middle of a big city.

General funds

In analyzing the data the submitted by Cleveland Clinic, the Senate committee found that between April 2020 and June 2023, the hospital chain received $934 million in benefit from the 340B program. Yet, even though the reason for the program’s existence is to support care for people who can’t do so themselves, Cleveland Clinic didn’t use those funds to directly defray patients’ drug costs.

“Cleveland Clinic… explained that it does not pass 340B discounts directly to patients because ‘there is no dollar-for-dollar, pass-on requirement to patients under the 340B statute’ and the statute ‘was intentionally left general to provide safety-net providers with latitude on how they use their savings in the ever-changing health care industry,’” the report said.

Instead, Cleveland Clinic said it “applies its 340B benefit ‘to the health system’s overall operating expenses and revenues in order to offset the cost of providing health care services to the communities [it] serve[s] and to maintain and invest in programs that enhance patient services and access to care.’”

Cleveland Clinic said it didn’t track the 340B millions after putting them in the revenue pot. But it said it spends huge amounts underwriting care for low-income Ohioans.

In 2023, it provided $261 million in free or discounted care to more than 110,000 patients, a spokeswoman said on background. The clinic is the leading provider of Medicaid services, charity care and mental health services in Ohio, she said.

She also pointed out that in 2024, Cleveland Clinic had an operating margin of $276 million, while it spent $261 million discounting care a year earlier. 

However, that excludes income the tax-exempt nonprofit makes from its sizable investments. When you include that, Cleveland Clinic made $911 million in net income in 2023, Healthcare Dive reported.

Also, those narrow operating margins come after paying out hefty salaries.

According to Cleveland Clinic’s 2023 IRS Form 990, President and CEO Tom Mihaljevic was paid $7 million. That was more than 100 times Ohio’s median household income for that year. 

In all, more than 50 of the top decision-makers at Cleveland Clinic made more than $500,000 as they set and enacted a budget subsidized by hundreds of millions of 340B dollars that are notionally meant to support charity care.

“Cleveland Clinic sets executive compensation in accordance with the process developed by the IRS to ensure that such compensation is determined in a fair and impartial manner taking relevant comparative data into account,” the clinic’s spokeswoman said.

Who pays?

In its response to the Senate report, Cleveland Clinic claimed the 340B program doesn’t cost taxpayers.

“As the cost of providing healthcare continues to rise, the 340B program helps us save resources that would have otherwise been spent on purchasing medications but instead can be directed to providing care, at no additional taxpayer expense,” it said.

However, just as others have to pay the taxes nonprofits don’t, drugmakers don’t simply absorb the tens of billions in discounts they’re required to give under the 340B program, said Ciaccia, the drug pricing analyst. In fact, many of the low-income patients the program is supposed to benefit help pay for it.

That’s because those with private insurance — or who are uninsured — don’t pay for drugs on the basis of 340B discounts. They have to pay based on the inflated prices the clinic and its contracted pharmacies charge in order to generate the program’s income.

Everyone with employer-based insurance also pays because those plans also don’t get the 340B discount — or in some cases even a slice of manufacturer rebates they might get in non-340B pharmacy transactions, Ciaccia said. And, as with so many other things, increased insurance costs are usually passed on to consumers.

Ciaccia added that as with rebates, mandatory 340B discounts give drugmakers an incentive to increase the list prices of drugs — increases that are felt most acutely by those who are least able to pay.

“In recent years, the list prices for drugs have arguably exploded, creating greater and greater pressure for government programs, employers, and sick patients to access medicines — not through actual affordable prices — but instead through negotiated or mandated discounts off of those bloated prices,” Ciaccia said. “Programs like 340B double down on our system’s addiction to discounts, pressuring the list prices of medicines higher. But instead of passing those discounts through, the end payer gets stuck with a bloated tab at the pharmacy counter. One way or another, the bill always comes due.”

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This story is provided by Ohio Capital Journal, a part of States Newsroom, a national 501(c)(3) nonprofit. See the original story here.