Moody's: Hospitals can gain profits from outpatient specialty drugs, but with major risks

Drugs and money sign
Hospitals are likely to turn to outpatient specialty drugs as new sources of income, but ratings agency Moody's warns of downward pressure on drug prices and 340B. (Getty/ADragan)

As profit margins shrink for other core services, not-for-profit hospitals will increasingly turn to income from outpatient specialty drugs, a new analysis from Moody’s found.

But this shift comes with a high risk for hospitals as scrutiny of drug prices and the 340B drug discount program increases.

The analysis released Tuesday by the ratings agency said that the median cash flow margin for not-for-profit hospitals has declined over several years, decreasing from 9.5% in 2014 to nearly 8% in 2018.

“Income from purchasing outpatient specialty drugs will help ease these margin constraints,” Moody’s analysts said. “Hospitals can make a profit on outpatient specialty drugs, which they can bill separately. By contrast, hospitals need to absorb the cost of inpatient drugs because they are reimbursed a flat fee per admission.”

Safety net hospitals participating in the 340B program are eligible to get even greater margins because they can get such outpatient specialty drugs at a discount.

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Hospitals don’t have many tools to negotiate for better prices on specialty drugs, but 340B-eligible hospitals “receive a much larger discount on the price of eligible outpatient drugs purchased for all patients, regardless of how they are insured,” Moody’s said.

Hospitals shouldn’t rely too much on this source of income, though, as recent regulatory and legislative proposals could put “downward pressure on drug prices and potentially reduce hospitals’ income from the purchase of specialty drugs,” the analysis added.

Moody’s mentions House Speaker Nancy Pelosi’s drug prices plan to give Medicare the power to negotiate for lower drug prices, including for specialty drugs, and to give commercial options the choice to adopt that price. But that plan, which is nearing a vote in the House, has major opposition in the GOP-controlled Senate. 

Other bills in Congress would cap the out-of-pocket costs for Medicare Part D beneficiaries and curb growth on some high-cost drugs.

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But it remains unlikely any of these bills will make it out of Congress and be signed by President Donald Trump.

There is also uncertainty around the 340B program. The agency in 2018 installed a $1.6 billion payment cut to the program. However, a federal judge ruled in May that the cuts were unlawful.

The Trump administration has not been deterred by the court ruling. In the 2020 Outpatient Prospective Payment System rule, the Centers for Medicare & Medicaid Services unveiled more cuts to the 340B program.

Hospitals in 340B don’t just have to worry about the Trump administration, though. Some commercial insurers could continue a trend of reducing reimbursement for drugs purchased by 340B providers, the analysis said.

“In addition, certain [pharmacy benefit managers] are attempting to reduce rates paid for retail specialty drugs purchased by 340B providers or are excluding 340B in-house specialty pharmacies from their drug plan networks,” Moody’s added.