The Poorly Managed 340B Program Will Be Even Worse With The Inflation Reduction Act
In U.S. healthcare, few policies are as poorly designed as the 340B drug discount program. But despite solid evidence that the program is poorly managed, the government has once again denied being accountable. Instead of fixing the program, they expanded it with the Inflation Reduction Act. This has once again allowed the U.S. Health and Human Services Department to announce that it will not take responsibility for identifying and stopping illegal duplicated discounts that exist already, and are likely to grow as the price setting in the Inflation Reduction Act further expands the 340B program.
Facilities eligible for 340B drug discounts provide care for low-income people who are often uninsured. So, some policymakers likely saw an opportunity to help with the Inflation Reduction Act. But the 340B drug discount program has some big flaws that should have been fixed before making it bigger. First, it doesn’t require the drug discount money is directed to low-income patient care, or go toward paying off their medical debt, or even lower patients’ prescription costs. Second, there is minimal government audit and oversight.
To add to the complexity, there are thousands of contracted entities with business relationships involving health plans, pharmacy benefit managers, pharmacies, and consultants who help them “optimize” their discounts and make money in these transactions. 340B creates a mess of problems, including raising costs for consumers and the health system, driving consolidation of physician practices, and limiting access to care. Now, this disaster of a policy is expanding with the Inflation Reduction Act without fixing any of its problems.
The 340B discount program allows qualifying facilities such as non-profit hospitals or selected clinics, which are eligible because they treat a higher proportion of lower-income people relative to other facilities, to purchase drugs at discounted prices, estimated at 20% to 50%. In practice, this means that when a person seen by a doctor affiliated with a 340B health facility fills a prescription, and they have insurance coverage, where the discounts are typically around 15%, the 340B facility gets paid the higher price by the insurer. So, they keep the difference between the price from the insurer and the 340B discount price. The money the 340B facility gets to retain is based on a percentage of the drug's price; so, the 340B facility receives the most money when their affiliated doctor prescribes the most expensive drugs.
The money the 340B facility receives for each eligible drug prescribed doesn’t have to be spent on patient care. For example, it could be spent on expanding the 340B eligible facility's ability to get more money from the 340B program, such as by acquiring more affiliated healthcare practices with doctors who could prescribe medicines eligible for discounts. Oncology practices are particularly appealing acquisition targets because those drugs are expensive. One doesn’t have to be an economist to understand the profoundly flawed incentives in this system.
The Inflation Reduction Act further expands the opportunity for this arbitrage. Starting in 2026, the government will set the price for ten drugs in Medicare, and those prices will be available to 340B facilities. The drug company must provide the greater of the two discounted prices. The federal government has said the hospitals should not get both discounts but has explicitly said they won’t take responsibility for ensuring they don’t happen or provide a mechanism for dispute, even though there are electronic record systems in place that could reduce the risk of illegal duplication.
If the person being seen by an affiliated physician has insurance through Medicaid, which is for low-income people, the facility is not supposed to get charge the drug company for the Medicaid discount, for a drug they already received at a discounted price. However, the government knows that duplicate discounts happen based on existing audits and has still elected to expand the opportunity for this illegal practice with the Inflation Reduction Act.
The 340B program started its massive expansion in 2010 when more entities became eligible; also, in that same year, covered entities were allowed to develop business relationships with off-site contract pharmacies. Contract pharmacies can be miles away from the eligible facility and not necessarily located in a low-income neighborhood. The pharmacies and the Pharmacy Benefit Managers (PBMs) are profiting from this program. With so much money to be made from 340B drug discounts for eligible entities and their contracted pharmacies, the program has expanded. The Inflation Reduction Act will add fuel to this expansion.
Supporters of the 340B drug discount program emphasize the vital work hospitals engage in to treat low-income people. If this program were designed to achieve that aim, then it might not be so bad. Sensible reforms could be implemented. These include establishing a definition of a patient to receive the discounted drug that reflects a financial need, limiting the ability of entities to acquire practices in higher income areas that the program is not designed to serve, implementing a system that monitors for duplicate discounts, or requiring the money earned from the 340B program is used to deliver patient care to low-income people.
The 340B program is not just a wasteful policy, it is harmful. Program evaluations have noted that it has contributed to higher drug prices, that 340B facilities use higher-priced drugs (which costs consumers more), and that it has reduced competition by fueling consolidation. It is time to put in sensible oversight and reforms to 340B before the Inflation Reduction Act prices in 2026 continue to fuel its growth.
Kirsten Axelsen is a visiting scholar with the American Enterprise Institute and a Senior Policy Advisor to DLA Piper working as a consultant to life sciences companies.
