What To Do About 340B
In 1992, Congress thought it had a brilliant idea to help hospitals that served low-income and uninsured patients. Under the 340B Drug Pricing Program, Congress simply required pharmaceutical companies to sell their drugs to certain non-profit hospitals at steep discounts. Congress felt – presto – this would shore up the finances of safety net hospitals without costing the federal government a penny.
Well, it did not work out as Congress had planned. Hospitals quickly discovered that they could “arbitrage” the discounts – that is, they could buy the drugs cheaply and be reimbursed at a much higher rate from patients who had a commercial insurance plan or were on Medicare – and pocket the generous spread between the discounted price and the insurance reimbursement.
To get an idea of the profitability of the 340B program, one should consider that the average new cancer drug is priced at about $200,000. If a hospital can buy a cancer drug for $75,000 under 340B, then they can bill the Medicare program for $200,000 and come away with a $125,000 profit on one prescription. This is not exactly a program that is cost-free to the federal treasury.
This arbitrage factor has completely distorted the original (and noble) goals of 340B. When hospitals can pocket the spread from an insurance company or Medicare, they have every incentive to treat fully insured patients rather than low-income or uninsured patients.
This is exactly what has happened. In order to bring in fully insured patients and maximize their profits from the 340B program, hospitals have been locating their satellite sites in higher income neighborhoods and buying up community-based oncology practices to secure more profits from cancer drugs. Shockingly, the law that established 340B does not require that these substantial discounts get passed onto patients at the pharmacy counter; many uninsured patients pay full price.
We also know that the 340B program is increasingly serving higher income patients, as many pharmacies that serve 340B patients are located in wealthier neighborhoods. Loopholes in the 340B program have enabled the generation of such significant profits that for-profit chain pharmacies and pharmacy benefit management (PBM) companies have rushed to 340B hospitals and signed lucrative contracts to dispense those drugs to patients. These for-profit entities now dispense the vast majority of 340B drugs and make billions in profits from the program.
This arbitrage opportunity also explains why the 340B program has grown 129.4% over the past five years and sales at non-discounted prices totaled $124 billion in 2023, making it the second largest federal drug program after Medicare. The 340B program will likely eclipse the Medicare drug program in size over the next year or two since annual 340B growth is more than 16%.
So, a program created to serve low-income and uninsured patients is now catering to wealthier, well-insured patients and ballooning the margins of for-profit chain pharmacies and PBMs.
What should be done about this?
The reality is that 340B profits are now baked into the financing schemes of many nonprofit hospitals. Some of these hospitals, which may treat many Medicaid patients and receive paltry reimbursements for their care, genuinely depend upon 340B revenue to keep their doors open. Congress may not have intended to make pharmaceutical companies the financing tools of 340B hospitals, but that is what has occurred.
Because so many vulnerable hospitals depend upon 340B revenue, reform of the program should be approached with the utmost care. Both the House and Senate are currently considering reforms. One modest reform that would not harm vulnerable hospitals would be to provide a little transparency about hospitals’ profits from the program. The federal government, or even state governments, could require individual 340B hospitals to disclose the amount of revenue they have secured from 340B drugs and where they have spent that money. If they took in $50 million from the 340B program, did they spend it on executive salaries or care for the uninsured? Congress has a right to know how the program is functioning, and the only way to discover that is with transparency by individual hospitals.
Right now, there is no requirement that 340B hospitals disclose how much money they have made from the program, or where they have spent those funds. With such transparency, policymakers could ascertain which hospitals were fulfilling the program’s original goals and which hospitals were using 340B simply to line their pockets.
William S. Smith, PhD, is Senior Fellow and Director of the Life Sciences Initiative at Pioneer Institute in Boston
