340B PROGRAM SALES FORECAST 2016 - 2021

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BERKELEY RESEARCH GROUP Executive Summary In February 2016, Apexus made available data on total drug sales through the 340B program from 2005 through 2015. These data revealed that, based on total sales, the 340B program more than doubled in size between 2010 and 2015 and expanded by 66 percent between 2013 and 2015 alone. This rate of growth is unprecedented and reflects the cumulative effect of factors that we believe are likely to continue to drive growth for at least the next five years. Accompanying this growth is additional scrutiny of the 340B program. The Government Accountability Office (GAO) published a study in June 2015 that concluded that the sizeable margins realized by covered entities on 340B purchased drugs were contributing to higher utilization rates of Part B drugs. 1 Since 2012, the Health Resources and Services Administration (HRSA) has conducted audits of covered entities to assess whether they comply with statutory prohibitions against diversion and duplicate discounts. The audit results reveal noncompliance rates that exceed 30 percent 2 and reflect challenges in covered entities’ ability to comply with statutory requirements and HRSA’s administration of the 340B program. In light of the recent growth in 340B sales and existing challenges in administering the program, BRG professionals conducted a study to forecast growth in 340B sales over the next five years. This study builds on the methodology developed as part of our 2014 forecast of 340B program growth. Key findings from our current analysis include: • The 340B program is forecasted to exceed $23 billion in total sales at the 340B price by 2021 and will exceed 2014 Medicare Part B drug reimbursement by 2021. • Statutory 340B chargeback payments by manufacturers will exceed $16 billion by 2021—over five times the branded prescription drug fee mandated in the Affordable Care Act (ACA). 3 • Incremental growth will largely be driven by expanded utilization at existing 340B covered entities through contract pharmacy programs and from practice acquisitions, physician practice affiliations, and patient referrals. • By 2021, contract pharmacy utilization will exceed $6 billion and operate in a largely unregulated environment in which third-party administrators and contract pharmacies establish the operational backbone of 340B eligibility determination and purchasing. • At current staffing levels, the average HRSA auditor by 2021 will be responsible for providing oversight of over 4,000 distinct covered entity and contract pharmacy locations, approximately 30 manufacturers, and over $1 billion in drug sales. 1 U.S. Government Accountability Office, Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals (June 2015), accessed at: http://www.gao.gov/assets/680/670676.pdf 2 BRG analysis of results from HRSA audits of covered entities from 2012-2016, accessed at: http://www.hrsa.gov/opa/programintegrity/index.html 3 Sec. 9008 of the Patient Protection and Affordable Care Act. 340B PROGRAM SALES FORECAST: 2016 - 2021 1
BERKELEY RESEARCH GROUP Study Findings In November 2014, we published a six-year forecast of 340B sales that estimated total prescription drug sales at the 340B price would grow from $8 billion in 2013 to over $16 billion by 2019. 4 However, the program experienced unprecedented growth between 2013 and 2015, and we have revised our 2014 forecast to account for the underlying drivers of this growth. Our 2016 forecast predicts annual program growth over the next six years ranging between $1.1 billion and $2.8 billion, with the majority of the growth occurring over the next three years (see Figure 1). We anticipate the 340B program will reach $20 billion in sales by 2019 and top $23 billion in sales at the 340B price by 2021. The biggest change in our forecast relates to growth in sales attributable to hospital acquisitions of private practices, new physician-hospital affiliations, and expanded hospital referral networks. This growth driver now accounts for a similar volume of growth attributable to contract pharmacy expansion, whereas our 2014 forecast projected a much smaller effect. FIGURE 1: ESTIMATED 340B PROGRAM SALES AT THE 340B PRICE 2016 - 2021 5 TOTAL 340B SALES ($B) $25 $20 $15 $10 $5 $1.0 $16.1 $13.0 $1.1 $1.0 $19.6 $18.0 $1.3 $2.9 $2.1 $20.8 $21.9 $23.0 $1.4 $1.4 $1.4 $5.0 $3.6 $4.2 $1.8 $2.7 $3.5 $4.1 $4.6 $12.8 $12.6 $12.4 $12.2 $12.0 $1.4 $0 2016 2017 2018 2019 2020 2021 Estimated 340B Baseline Sales Utilization Growth / Acquisitions Contract Pharmacies New Covered Entity Enrollments Based on our current forecast, the 340B program will reach $23 billion in total drug sales at the 340B price by 2021, which exceeds the total of Medicare Part B drug reimbursement in 2014 ($22 billion). This comparison may understate the size of the 340B program because we are measuring 340B sales at the statutorily discounted 340B price rather than market prices. The size of the 340B program compared to Part B drug reimbursements is significant because the 340B program is currently administered by HRSA’s Office of Pharmacy Affairs, which operates on an annual budget of approximately $10 million. 6 This pales in comparison to the $733 million in federal administrative budget for Medicare and Medicaid 7 and highlights the challenges HRSA faces in effectively regulating the 340B program. 4 Aaron Vandervelde, Growth of the 340B Program: Past Trends, Future Projections, BRG white paper (November 2014), accessed at: http://www.thinkbrg.com/ newsroom-publications-vandervelde-growth-340B-program.html. 5 340B sales estimates include all 340B program sales, including direct sales and ADAP rebate sales not typically included in Apexus figures. Growth attributable to “New Enrollment” refers to newly enrolling critical access hospitals and hospitals with a DSH eligibility criterion. Baseline estimated 340B program sales are adjusted downward in future years to account for dis-enrolling entities. 6 FY 2016 enacted budget. Department of Health and Human Services, Fiscal Year 2017 Health Resources and Services Administration Justification of Estimates for Appropriations Committees, accessed at: http://www.hrsa.gov/about/budget/budgetjustification2017.pdf 7 FY 2016 enacted budget for Federal Administration. Department of Health and Human Services, Fiscal Year 2017 Centers for Medicare & Medicaid Services Justification of Estimates for Appropriations Committees, accessed at: https://www.cms.gov/About-CMS/Agency-Information/PerformanceBudget/Downloads/FY2017-CJ-Final.pdf 2 340B PROGRAM SALES FORECAST: 2016 - 2021
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340B PROGRAM SALES FORECAST 2016 - 2021

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