Community Health Clinics Set to Lose Critical $100 Million Funding Stream

This article was published in partnership with City & State NY.

When New York’s Covid-19 moratorium on evictions ended on January 15, the staff at community health care clinic Evergreen Health had to make a decision. In addition to serving patients who are LGBTQ, HIV-positive, or use drugs at clinics in Buffalo and Jamestown, it runs supportive housing for individuals living with HIV and other chronic illnesses. Evergreen was owed about $20,000 by its tenants. Staff knew that they had to account for this deficit in their budget, but they also knew that stable housing helps chronically ill people stay well. Rather than pursue evictions, the organization used money from a vast but little-known federal initiative, the 340B Drug Pricing Program, to pay off the debts.

That’s not all they’ve done with 340B funds. In May, Evergreen used the money to open a drop-in center for drug users where they can do their laundry, shower, eat a meal, and get clean needles. It also established an in-house dental practice that serves HIV-positive people, which provides a safe place for patients who are fearful of disclosing their status. In total, the clinic brings in about $12 million a year through 340B, using it to support services that aren’t reimbursed by Medicaid, Medicare, and private insurers.

That money could disappear soon.

In April 2023, a long-delayed policy crafted by former Governor Andrew Cuomo will finally take effect and significantly shrink New York’s participation in 340B — a complex pricing scheme that indirectly channels money from pharmaceutical companies. The change will carve out pharmacy coverage from Medicaid managed care plans, instead requiring all Medicaid patients to purchase their medication through the state. Community health organizations across the state — which serve about one in nine New Yorkers, the vast majority of whom are low income and two-thirds are people of color — will lose $100 million annually by one estimate. Thirty-two clinics may have to close altogether.

Governor Kathy Hochul’s administration has promised to make up for budget shortfalls created by the carve-out, community health care clinics told New York Focus and City & State, by providing supplemental per-visit payments to clinics seeing Medicaid patients. The governor’s office declined to comment for this article, and instead directed questions to the state Department of Health.

In an email, Health Department spokesperson Jeffrey Hammond said he anticipated that the carve-out would “result in a more efficient pharmacy reimbursement process, better consumer experience and ensure the most appropriate payment for services.” He added that the department “is working with the impacted groups and is committed to ensuring a smooth transition.”

But community health organizations are deeply concerned that the carve-out will disrupt their services and remain doubtful that the proposed supplemental payments will solve any budget shortfalls they face in 2023 or subsequent years. They’ve been holding rallies in Albany and across the state, calling on Hochul to delay the carve-out once more and find a new solution.

“If the carve-out were to be enacted, it would be a crisis,” said Assemblymember Linda Rosenthal, chair of the Social Services Committee. “It’s essential that we don’t just abandon all these service providers.”

Rare Reliable Funding

The aims of the 340B program were straightforward in intent, if not in execution. Under legislation passed by Congress in 1992, companies that wanted to have their drugs reimbursed by Medicaid were mandated to provide something in exchange: to sell medications to safety net providers at deep discounts.

These providers, who mostly served poor, uninsured, and underinsured patients, benefited twice over. First, health care facilities could buy medications at a much cheaper rate and offer their patients treatments they couldn’t otherwise afford. Second, although they purchased the drugs at a discount, they were reimbursed by Medicaid, Medicare, and private insurers at the regular rate and could use the difference to fund needed services.

If the state came back and said, let’s pay the health center programs what it costs to provide this care, that would be fine. But they’re not doing that.

Over time, community health organizations that serve vulnerable New Yorkers have come to depend on 340B revenue. Jordan Goldberg, the policy director at the Primary Care Development Corp., which invests money in primary care safety net providers across the state, said the clinics she works with rely on 340B for an average of 11 percent of their budget, and for some clinics it’s as much as 40 percent. That money pays for holistic primary services they can’t fund through other means, she said.

For example, when the New York City-based LGBTQ community health organization Callen-Lorde received a batch of monkeypox vaccines in early August, it had to hire nurses to give the shots. Neither insurance companies nor the state would reimburse that expense — so the organization used 340B funds instead.

“High-quality, integrated primary care — the kind of care proven to lengthen lives and reduce inequities at the population level while also reducing overall health care costs — doesn’t fit the traditional insurer model where billing is focused on procedures, not people,” Goldberg said.

What makes 340B funding so critical is its predictability and flexibility, said Evergreen’s chief operating officer, Mike Lee. It was a sentiment that was echoed in interviews with other clinic leaders. The money is a reliable funding stream — a rarity for community health organizations — which isn’t tied to grant cycles or state budgets. With few restrictions, the revenue can flow wherever it’s most needed, including responding to emergencies like Covid-19 and monkeypox as well as covering services that improve patient outcomes but aren’t eligible for reimbursement.

The carve-out was originally written into the budget passed in 2021, along with an agreement to delay its implementation for two years. “If this carve-out happens, Evergreen will look very different than it does today,” Lee said. All the services currently funded through 340B, including the drop-in center, dental care and nutrition support, would have to be scaled back.

He added that every community health care center across the state that serves low-income people is being forced to have these conversations now.

Ballooning Costs

But community health organizations like Callen-Lorde and Evergreen are far from the only beneficiaries of 340B. Over the past 20 years, with the passage of new legislation and changes to the program, more and more medical providers have found avenues into the 340B market, including private hospitals and pharmacy chains. As a result, the overall size of the program has expanded dramatically, from $4 billion per year in drug purchases in 2007–2009 to $38 billion in 2020.

In New York, 340B spending and claims have increased more than 200 percent since fiscal year 2017. This rapid growth has been expensive, the Health Department maintained, largely because medications purchased through 340B are not eligible for rebates otherwise offered by pharmaceutical companies and the federal government. The department previously estimated the total savings would be $166 million in the first year of the carve-out, shared among the federal and state governments.

However, these findings are contested. In 2020, the Menges Group, a Virginia-based consulting firm that studies Medicare and Medicaid programs, was hired by the New York Health Plan Association to perform its own calculations, which it said took into account tax and drug mix complexities that the Health Department overlooked. According to its estimates, the carve-out won’t save New York money; on the contrary, it will cost the state an estimated $154 million in its first year, and $1.5 billion over the next five years.

Staffers in the office of Assembly Health Committee Chair Richard Gottfried, who has pushed to shield community health care clinics from the impact of the carve-out, said they were skeptical of the Menges report’s methodology and findings. They also pointed out that because the carve-out was included in last year’s budget, and expected budget savings tied to its implementation, preventing it now would be very difficult.

As 340B has grown, so have concerns that the program is actually undermining health equity, including by driving hospital-physician consolidation, creating incentives to prescribe high-cost drugs, and transferring money into the hands of health care providers that serve wealthier patients.

In 2021, 78 percent of the nation’s 340B purchases were by private, nonprofit hospitals that generally serve a small proportion of low-income patients. Conversely, only about 5 percent of national 340B purchases were made by community health organizations like Callen-Lorde and Evergreen. But because these clinics have a much greater proportion of their patient population on Medicaid — in many instances around 70 percent — the carve-out will have a far greater impact on their bottom line.

Mary Zelazny, the CEO of Finger Lakes Community Health, which runs eight health centers serving agricultural workers and other poor and uninsured patients, said community health organizations like hers are “a pimple on an elephant’s butt” compared to the bigger hospital systems that make up the bulk of 340B purchases.

She added it was frustrating to be included under the same program — and carve-out — as those big hospitals. “We need a 340B program that is specific to community health care clinics,” she said.

In last year’s budget negotiations, elected officials had discussed setting aside $102 million for 340B providers, with the intent that the money be distributed to make up for budget shortfalls. A similar carve-out went into force in California in January, but the $105 million set aside for non-hospital clinics has yet to be distributed, said Liz Oseguera, who serves as the associate director of policy for the California Primary Care Association. (Applications for funds opened in August.) As a result, member clinics in the association have reported needing to cut service hours, reduce services such as care coordination and health education, and lay off staff.

In recent months, officials at the governor’s office as well as the Health Department have proposed a different solution: providing community health care clinics with supplemental payments for Medicaid visits.

Rose Duhan, president and CEO of the Community Health Care Association of New York State, a membership-based organization of more than 70 clinics with over 800 sites, said it was unclear how each clinic’s supplemental payment rate would be determined or whether the money would actually make up for 340B losses. Supplemental payments for Medicaid patient visits would also need to be approved by the federal government, she said, adding financial uncertainty for clinics.

Lee said he had little faith in Hochul’s latest proposal. “The state continues to push plans that just are not real and genuine solutions,” he said. “So far they have felt more like gimmicks to get us to agree to the carve-out with no real plan or possibility to be actually implemented.”

Duhan argued that instead of offering these supplemental payments, the governor’s office should propose writing another two-year delay into next year’s budget and use the time to figure out a tenable solution. Her member clinics have been exploring alternative approaches to funding primary health care that have been implemented in other states. Under what is called the capitated model, community health care clinics are given monthly, per-patient payments to care for those enrolled in Medicaid and Medicare, which they can then use to address the physical, behavioral, and social needs of the patient.

For Zelazny, the question isn’t whether 340B is the ideal program, but how New York’s community health centers will survive without it. “I don’t think 340B is the best way for us to get services to our patients, but it’s what we have,” she said.

“If the state came back and said, let’s pay the health center programs what it costs to provide this care, that would be fine,” she added. “But they’re not doing that.”