The American healthcare system is without a doubt a very complicated mess, and it seems to get more complicated every year. One program in particular is an example of such complications - the 340B Drug Discount Program. This program was established in 1992 to provide discounts on pharmaceuticals to safety-net providers, who in turn, would pass these discounts on to underserved patients. The system is complicated in a way which permits hospitals to game the system to make large profits at the expense of patients.
Like many government programs which start with good intentions, the purpose of the program was to reduce the costs of drugs for patients. Unfortunately, hospitals and the middlemen responsible for distributing these discounts have found a way to turn a profit by pocketing 340B savings and selling the drugs at a higher price. Profits and private enterprise are great, but the government should not create a system which funnels profits to one special interest group at the expense of others. In this case, hospital systems are the culprit.
Hospitals are using the rules of 340B program to pocket the savings that rightfully should be passed on to the customer. The result is higher drug prices for consumers when the program was set up to pass on savings to patients.
Because the program is a money maker, it has grown quickly as hospitals consolidate and invest in qualifying out-patient clinics. These clinics are called Child Sites, because the family-owned clinics are being absorbed into the network of hospitals - making each entity which serves patients qualify for the 340B program. This new massive system of hospitals and clinics grants them the right to partner with contract pharmacies to dispense drugs obtained at a discounted price to a larger pool of patients, generating massive profits.
From 2000 to 2020, the number of covered entity child sites grew from 8,100 to 50,000, with branches of 340B hospital systems comprising over 60% of the sites. As of 2022, nearly 32,000 pharmacy locations were identified as contract pharmacies – comprising more than 50% of the entire pharmacy industry. Simply put, the more child sites and contract pharmacies a 340B hospital partners with, the more profit they’re able to generate.
Let’s use a case study to fully grasp how 340B diversion impacts patients.
Let’s say you are a cancer patient, prescribed nivolumab by your local oncology clinic. Since the clinic is owned by a 340B hospital system, it’s able to acquire the nivolumab for the discounted price of $5,992 but charges $16,736 per claim. Splitting the financial windfall with the contract pharmacy it partners with, your 340B covered entity and the pharmacy benefit manager (PBM) that owns that contract pharmacy earn an average profit of $10,744 per claim at the expense of your health – while increasing healthcare costs across the system as manufacturers seek to remain profitable as well.
Unfortunately, this scenario is a grim reality for patients across the country. A North Carolina State Treasurer report found that 340B hospitals billed cancer patients – ranging from teachers to federal employees and retirees – on the State Health Plan 5.4 times the discounted acquisition cost of their cancer drugs. The worst part is patients don’t even know they’ve become a pawn in this shell game.
The 340B Program was originally intended for vulnerable populations – sick patients who do not have the financial resources to obtain expensive, life-saving therapies. However, as hospitals and their contract pharmacies rapidly consolidate, covered entities are expanding their footprint into wealthy, suburban communities and receding from underserved ones. Why? Because hospitals and PBMs can drive a higher profit margin from patients in a wealthier ZIP code. As exemplified in this Avalere study, 61% of child sites are in a different ZIP code than their main 340B disproportionate share hospital (DSH).
As our country and legislators grapple with the question of how to lower healthcare costs and support the patients that need help the most, it is a huge disservice to ignore the lack of transparency in 340B – a $124 billion program that now calls almost every American one of its patients. It is the second largest drug program in the United States after Medicare Part D.
For the sake of needy patients across the country, policymakers must reform this broken program to not only be more transparent but more accountable. It’s time Congress and the Washington bureaucrats appointed to oversee 340B provide American patients with some visibility into one of the federal governments’ largest healthcare programs.
Peter Mihalick is former legislative director and counsel to former Reps. Barbara Comstock, Virginia Republican, and Rodney Blum, Iowa Republican.
