Corporate Welfare and the 340B Drug Program

The 340B drug pricing program has come under criticism. The program provides hospitals with subsidized drug prices for low-income patients, but that savings is not reaching patients. Critics and pharmaceutical companies blame hospitals, and hospitals blame pharmacy benefit managers (PBMs) and others.

Started in 1992, the 340B drug pricing program was intended to help safety-net hospitals serving low-income uninsured patients by providing discounts on high-cost medicines. This program came about after the Medicaid Best Price rule was put into effect, which ended charitable donations of medicines from pharmaceutical companies. The program provides prescriptions at a 25 percent to 50 percent discount for patients at participating hospitals and pharmacies and participation is a condition of a pharmaceutical company’s drugs being covered by Medicare and Medicaid.

The 340B program was expanded multiple times. In 2010 the Affordable Care Act allowed hospitals in the 340B program to contract with multiple external pharmacies to distribute prescriptions, causing a rapid expansion of the program. This has come under criticism as one of the biggest problems in the 340B system, as the portion of contract pharmacies in disadvantaged areas declined relative to more affluent areas. As hospitals utilize more pharmacies in less disadvantaged areas, between 2014 and 2021, the cost of the 340B system grew from $9 billion to $38 billion generating an estimated $17.7 billion in total profits. How can this happen?

Contract pharmacies began spreading to more affluent areas even as early as 2004. The lack of transparency in the system allowed hospitals to increase their profits by expanding into these areas. The profits are generated from “price spreading,” when the 340B drug is prescribed to someone with public or private insurance which reimburses the hospital for more than the 340B price. While some 340B providers are required to use these profits for serving underserved populations, participating hospitals have no requirements on what is done with 340B savings. The profits generated by this program can be substantial. According to one study, the profit margin for pharmacies on 340B drugs is 72 percent compared to 22 percent drugs distributed by non-340B pharmacies.

Effectively, prescription drugs are being subsidize by the government to help the poor, but some hospitals are recovering these costs from insurers and pocketing the government subsidy.

Healthcare providers have argued back that the expansion was intentional to help address the significant amount of care that goes uncompensated and that funds the 340B system generate help many healthcare facilities stay open, including rural hospitals. Additionally hospitals argue that the system is meeting its intended purpose. With discounts from 340B products amounting to only 7 percent of the market, the counter argument is that pharmaceutical companies are just trying to maximize their profits.

Some have also argued it isn’t hospitals profiting from the 340B program, it is PBMs targeting 340B contract pharmacies that siphon away patients’ savings on pharmaceuticals for a profit. Contract pharmacies account for 28 percent of PBM revenue prompting CVS to tell investors that any reduction in 340B arrangements would hurt the company. By one estimate, in 2022 the largest PBMs retained $2.58 billion of 340B program discounts. PBMs go so far as to employ unique contracts or addenda to contracts for 340B pharmacies requiring reduced reimbursement, often called “discriminatory reimbursement,” prompting legislation in several states to protect 340B pharmacies from predatory PBM contracts.

The failure to pass savings to patients combined with the lack of transparency for where 340B savings are going prompted pharmaceutical companies to limit how many contract pharmacies associated with a hospital they would supply, a decision that was upheld in court in January 2023. More than 20 pharmaceutical manufacturers have put restrictions on contract pharmacies demanding tighter eligibility standards and restrictions on profiting from the 340B system. Even the Center for Medicare and Medicaid Services (CMS) rebelled against the 340B system by refusing to pay hospitals more than the hospital paid for 340B drugs through Medicare, saving $1.4 billion for Medicare beneficiaries in 2018. In this case Medicare lost, after the case went to the supreme court and CMS was ordered to pay health care providers $9 billion.

More transparency is needed to ensure that the program serves its intended beneficiaries, low-income patients. Currently it is near impossible to track exactly who is benefiting from the 340B drug discounts.

One solution is to require hospitals and pharmacies to inform insurers of the actual price paid for 340B medications and inform pharmaceutical manufacturers of how much is reimbursed by the insurer. This allows companies to not engage with providers and PBMs that are using spread pricing in the 340B program as a form of corporate welfare.

Additionally, stricter rules on who can receive 340B discounts should be implemented. Despite being intended to help low-income and uninsured Americans afford medicine, there are no requirements that the patient be low-income or lack insurance. Even if a contract pharmacy is in an affluent area the benefits should be reserved for those patients the program is intended to serve.

Lastly, states should consider adopting legislation that prevents predatory contracts between PBMs and pharmacies that take advantage of a program intended to help the needy afford medicine.

Transparency in the cost and reimbursement of 340B drugs would give an indication where the funds from the discounts are going and help ensure those funds go to the people the program is designed to help. Right now, much of it is not going to the intended low-income patients.

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.