The 340B drug discount program has followed a familiar health policy trajectory. An intervention that was supposed to ease cost pressures, it instead is producing cascading unintended consequences that are likely raising overall costs. As the editors of the Wall Street Journal noted recently, what changed is that hospitals discovered the program could be used to generate substantial profits with little effort. And, of course, reforms are now hard to advance because of opposition from the major health systems that now benefit substantially from the status quo.
The 340B story actually starts with an earlier policy intervention gone awry, the Medicaid “best price” requirement, which Congress approved in the 1990 bipartisan budget agreement. That policy forced drug companies to extend to Medicaid deep discounts for outpatient prescription drugs based on concessions offered to other payers. In effect, Medicaid was guaranteed the lowest price in the market (on a net basis, after rebates).
Soon after the law was approved, the Veterans Affairs Department said its purchasing leverage with drug companies was at risk because any price concessions it secured would automatically get passed through to Medicaid, too. Federally funded community health centers and public hospitals made similar arguments.
Congress responded quickly by passing the Veterans Health Care Act of 1992, which essentially expanded the Medicaid mandatory price discount program to the VA and other providers of medical services enjoying political support.
For the non-VA providers (primary not-for-profit and public hospitals and federally funded clinics), the law inserted a new section 340B into the Public Health Service Act which forces drug companies participating in Medicare and Medicaid to make their products available at prices below a statutory ceiling. Covered entities also are permitted to push for steeper discounts below the pricing cap. The Health Resources and Services Administration (HRSA) contracts with a vendor to administer most aspects of the program.
In a recent overview of 340B, the Congressional Budget Office (CBO) documents the program’s rapid growth since 2010 and the likely market distortions it is producing.
In 2021, total spending on 340B drugs was $43.9 billion, up from $6.6 billion (expressed in 2021 dollars) in 2010. That translates into an average annual real growth rate of 19 percent.
The number of hospital-associated clinics eligible for 340B discounts has soared in recent years. In 2021, there were 27,700, up from 6,100 in 2013. The extension of a hospital’s eligibility for 340B to its off-site clinics is likely a major incentive (along with others) for major health system purchases of independent physician practices and outpatient clinics.
About half of the nation’s hospitals now qualify for 340B based on the share of their patient census serving lower-income households, which is partly measured by Medicaid enrollment. The ACA’s sizeable Medicaid expansion made many more hospitals eligible to become covered 340B entities.
Hospitals are eager to become 340B eligible, and to expand the reach of the program’s discounts to a maximum number of sites, because of the high profit margins it all but guarantees. Covered entities buy covered products at discounted prices and then charge insurers much more when filing claims for their insured patients. The state of Minnesota estimated 340B facilities earned an average profit of $0.42 for every $1.00 of 340B purchases. HRSA estimates the national average margin to be between 25 and 50 percent.
CBO said several factors make it likely that 340B is pushing net federal spending up rather than down.
The program likely boosts overall consumption of prescription drugs by incentivizing more 340B-covered prescriptions.
The preferential discounting conferred by 340B on some entities comes at the expense of others, including the insurers offering coverage to Medicare beneficiaries through the part D program.
The added incentive for integration of independent clinics into large hospital systems is lessening competition in the market, which is driving up pricing for commercial insurers and employers offering coverage to their workers.
Recently, the Health Resources and Services Administration (HRSA) announced a new pilot program that would allow drug manufacturers to change how they deliver lower prices to qualifying providers by converting up-front discounts to after-purchase rebates. This switch, which is voluntary for the drug companies but not for hospitals who purchase their drugs, is intended to improve program integrity by creating traceable transactions between the manufacturers and the providers benefitting from the discount program. Initially, the plan is limited to the ten drugs selected for Medicare’s price negotiation, but, if it proves successful in improving program administration, it might be expanded in future years to more products.
The core problem in 340B runs deeper than poor oversight. The law requires steep discounts for purchased drugs but does not specify that the savings should be passed on to patients and insurance enrollees, and not hospitals and clinics. Fixing that problem will require more far-reaching reforms.