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Federal health officials say a controversial program that allows hospitals to purchase drugs at deep discounts needs some fixing.

The Centers for Medicare and Medicaid Services, or CMS, worry hospitals are playing fast and loose with what’s known as the 340B program by buying more expensive drugs than they have to, putting the squeeze on Medicare recipients.

Back in the early 1990s when the program was created, certain hospitals were buckling under the weight of low-income and uninsured patients. The 340B program offered these hospitals a sweet deal: Hospitals could buy certain drugs, like for cancer, at 20 percent to 50 percent off, charge privately insured or Medicare patients the full rate and pocket the savings.

“The assumption is that these hospitals will use the difference from that sale to funnel money back into safety net operations,” said Vanderbilt University economist Sayeh Nikpay. “Things like running a discounted drug program or running a free HIV/AIDS clinic.”

That’s the kind of thing happening on the west side of Chicago at Mount Sinai hospital. Like lots of so-called "safety net" hospitals, Mount Sinai primarily serves uninsured and low-income patients. The hospital says the $5 million it got last year from the 340B program went to things like getting patients important medication for free.

That’s what happened with a 29-year-old woman who was treated for a rare infection that stretched from her throat to her chest. Her physician, Dr. Ihab Aziz, said she walked out with the specialized medication she needed.

“Without appropriate antibiotics, the infection would spread and she will have septicemia, which is organ failure from infection, and she will die,” he said.

This, arguably, is how the program is supposed to run, and many hospitals say this money helps them provide essential services to their neediest patients. But the revenue gained from 340B are enticing, maybe too enticing.

“We believe that entirely too many hospitals are gaming the system,” said Stephanie Silverman, the spokesperson for a coalition of organizations, including drug companies who provide the discounts.

Silverman argues there’s a design flaw in 340B; it incentivizes hospitals to prescribe the most expensive drugs to as many full-pay patients as possible.

“We see hospitals doing all sorts of things to try and maximize how many 340B dollars they get,” said Silverman.

A report from the Government Accountability Office, the congressional watchdog, suggests 340B hospitals buy fewer generics than other hospitals.

Research from the University of Chicago shows hospitals have gone on buying sprees, scooping up oncology practices and outpatient clinics, often in wealthy communities. Critics say one reason they’re doing that is to get access to even more of those full-pay patients.

One question, said Vanderbilt’s Nikpay, is what hospitals are doing with that pile of cash.

“There’s very little oversight of the program, so no one has been checking to see if the savings are actually being used to subsidize care to those uninsured and underinsured patients,” she said. There’s nothing in the program that requires or even incentivizes hospitals to pipe revenue back to low-income patient services.

CMS estimates seniors are paying nearly $200 million a year more in drug copays than they have to.

“Seniors shouldn’t be paying these inflated drug prices in a way that comes right out of their pockets,” said CMS Deputy Administrator Demetrios Kouzoukas. CMS has proposed to allow hospitals to keep getting discounts, but cut Medicare’s reimbursement rate by $900 million a year.

That could mean cheaper copays for seniors and relief for drugmakers if the change forces hospitals drop out of 340B. But it could simultaneously hurt the hospitals that depend on this money, and their patients who have few options could be hurt.

Tom Nickels, the executive vice president of government relations with the American Hospital Association, flatly disagrees that there’s any gaming going on. He said before anything is cut, it’s time for some facts.

“Let’s have people disclose information. Let’s audit and move on from there,” he said.

For its part, CMS said any money diverted from 340B will be redistributed to hospitals in other ways. No additional details have been provided. The public comment period closes in September. A final decision is expected later in the fall.

Follow Dan Gorenstein at @dmgorenstein