In 2025, Elon Musk and the proposed Department of Government Efficiency (DOGE) is poised to fundamentally overhaul government spending. They should start with healthcare, where even obscure programs carry multi-billion-dollar pricetags for taxpayers.
Look no further than the 340B drug discount program.
This program, designed to give safety-net hospitals a discount on high-priced pharmaceuticals, has grown out of control. No longer serving the intended purpose of assisting low-income patients access to medications, it raises drug prices for all Americans. Moreover, it is managed by a complex bureaucracy that the investigators in the federal government have found unable to manage the program.
Once a hospital qualifies for the 340B discount, it can resell cheaply acquired drugs–discounts can exceed half-off the list price– at a higher price and pocket the difference. It doesn’t take a financial genius to figure out that this creates a huge incentive for the hospital to dispense expensive drugs to well-insured people. Meanwhile, poor patients, for whom this program is intended to help, are not required to receive any benefit from the drug price arbitrage, and often don’t.
Meanwhile, the threshold to qualify for 340B is incredibly easy to meet, and susceptible to gamesmanship. More than 50,000 hospitals now qualify. Evidence shows that once hospitals have acquired this 340B status, they then establish contracts with pharmacies in affluent neighborhoods to dispense their drugs. They also use this financial leverage to purchase independent practices, as these are not eligible for the 340B program. As a result, “safety-net” hospitals–a designation that now extends to 40% of all hospitals–are buying up oncology centers and making billions off of medicines for cancer.
This program has become a significant subsidy stream to eligible facilities, and taxpayers are getting exactly zero from the 340B drug discounts. These hospitals tend to prescribe more expensive drugs and increase spending for the federal government and private insurers. Furthermore, there is no requirement that money hospitals make on these drugs is used for patient care. There is accountability or transparency for how it is spent.
If it could get worse, it has. The Inflation Reduction Act allows 340B hospitals to also get the prices set by the federal government in Medicare. The agency that oversees Medicare, CMS, has said it won’t take responsibility to eliminate illegal duplicate discounts if a hospital gets both the discounted Medicare price and a second rebate for Medicaid, creating a huge incentive to expand this arbitrage even more.
The 340B program is helping drive high drug prices. When establishing their prices, drug manufacturers consider what they will receive in the net price after discounts and federal government programs like 340B, Medicaid, and Medicare. Anticipating that they will pay out a sizable amount in rebates back to the federal government, they set a high price and then discount to get on the formulary in insurance plans. Both patients with insurance and without end up footing the difference.
True safety-net hospitals serve an essential purpose. However, funding them with drug price arbitrage is not right. Reforms could be accomplished with far more transparent and simple systems such as user fees on industries the government felt should fund these hospitals. But the incentives should match the intent of the program: funding patients instead of systems.
At a minimum, the program needs an increase in transparency. Hospitals should be required to use the drug price arbitrage money to care for low-income people. They could also question participating hospitals on which drugs they are dispensing to low-income people for reimbursement.
There is a lot of waste in healthcare that is hard to find, and even more challenging to remove. But, the 340B drug discount program is glaringly wasteful and fixable. That is a great place to start.
Anthony DiGiorgio is an Assistant Professor in both Neurological Surgery and the Philip R Lee Institute for Health Policy Studies at The University of California San Francisco. His views do not represent the views of his parent institution.
Kirsten Axelsen is a non-resident fellow with the American Enterprise Institute, she is also a consultant to life sciences companies.
