What started as a well-meaning safety net program has morphed into yet another federal case study in unintended consequences: a drug discount program that lets billion-dollar hospital systems exploit discounts meant for the poor while rural emergency clinics are left to fail. The 340B Drug Pricing Program is a classic example of how a good idea—helping the poor access medicine—gets hijacked when government intervention meets bad incentives and zero accountability.
The 340B program was created after the Medicare Best Price Rule inadvertently eliminated charitable drug donations. Previously pharmaceutical companies had donated or provided discounts for medicine as charity for hospitals serving poor communities. However, once instituted, the rule required drug companies to sell medicine to Medicare at the lowest charitable rates. Any company that had previously donated medicines would be required to charge Medicare $0 if they continued to donate.
The 340B Drug Pricing Program sought to fix this first unintended outcome by requiring manufacturers grant discounts to hospitals serving large portions of low-income patients. The program takes into account Medicaid and certain Medicare beneficiaries receiving financial aid that a hospital serves to determine if it is eligible.
But this system has so little transparency that, while well intended, the 340B program is often misused. Large hospital systems routinely generate revenue from fully insured patients who should be ineligible for 340B discounts. Once a hospital receives the discounted drugs it is not required to disclose how the savings are used. Hospitals are free to sell the discounted drugs at normal price through a network of their partner pharmacies in affluent areas and pocket the discounts as revenue. There is not even a requirement that the savings be passed to the patient.
From 2010 to 2020 contract pharmacy arrangements grew from about 1,300 to over 30,000. More than half of contract pharmacies are in areas with significantly higher income than the hospital’s location. The abuse of the system has caused its costs to balloon from a $2.4 billion program to $63.3 billion one between 2005 and 2023.
While hospitals in rich urban areas treat the 340B program as a piggy bank, poor rural hospitals struggle to serve high numbers of entirely uninsured patients. These hospitals are locked out of the 340B program entirely.
The large urban hospitals can get into the 340B program relatively easily by seeking out the patients they need. Because they can qualify based on the number of Medicaid and low-income Medicare patients they treat, a hospital can buy specialty clinics to attract additional 340B eligible patients.
Meanwhile, rural emergency hospitals (REHs) are not included on the list of 340B eligible hospitals. REHs were created to replace failing rural hospitals that could not maintain inpatient treatment with 24/7 emergency care. These hospitals are known for treating a particularly high proportion of uninsured patients. Uninsured patients do nothing to qualify a hospital as a Disproportionate Share Hospital, leaving the hospitals and their uninsured patients to face the full cost of their drugs.
Fixing the program isn’t difficult, assuming Congress is willing to act. The first step would be to include REHs in the 340B program, which one bill currently in the house would do. However, that is only the first step.
Congress must also introduce transparency into the system. Who the discounts are intended for, and whether they receive them should not be left to faith. Patients and insurers need to know if they are being claimed to get discounted drugs and if those savings have been passed to them. Discounts should be allowed only if the medicine is going to a 340B patient and is directly passed on to that patient.
By closing the loopholes that allow large systems to game the program and by extending access to truly underserved rural hospitals, Congress can restore the 340B program’s original mission. With the right reforms, 340B can serve the patients it was intended to, instead of serving hospitals with the resources to game the system.
Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.
