The WasteWatcher: The Staff Blog of Citizens Against Government Waste

The Federal 340B Discount Drug Program Needs Reform

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact

Most people have never heard of the federal 340B drug discount program. It was created by Congress in 1992, deriving its name from Section 340B of the Public Health Service Act, and is administered by an equally esoteric division within the Department of Health and Human Services (HHS), the Health Resources and Services Administration (HRSA).

The program requires drug manufacturers that participate in Medicaid to provide heavily discounted outpatient drugs (typically between 20 to 50 percent) to certain health facilities, known as “covered entities,” which provide general health services as well as treatment for specific diseases to uninsured, low-income people who could not qualify for Medicaid or Medicare.  In theory, the entity, or pharmacy it contracts with, is supposed to sell the heavily discounted drugs and pass along the savings to their low-income patients but because of vague language in the statute and regulations, and lack of Congressional oversight, this is not always occurring.

According to both government officials and media reports, the 340B drug discount program has drifted far from its original mission of helping uninsured, indigent people get access to prescription drugs by now enabling hospitals and pharmacies to generate millions of dollars in profit.  Ultimately, it is consumers and taxpayers that pay.

Since the creation of the 340B program 22 years ago, Congress and HRSA have expanded the definition of qualified covered entities.  The most recent change occurred under the Patient Protection and Affordable Care Act (ACA), often referred to as Obamacare, which expanded the types of facilities eligible to participate in the program.  Covered entities include federally qualified health centers, Hawaiian and Native American health centers, Ryan White HIV/AIDS program grantees, Disproportionate Share Hospitals (DSH), free-standing cancer hospitals, children’s hospitals, rural and sole community hospitals, critical access hospitals, and specialized clinics like black lung or tuberculosis clinics.  Covered entities are usually eligible to participate in the program because they receive some sort of federal support, such as a grant, or meet certain government requirements in providing care to the medically underserved.

According to HRSA, the “340B Program enables covered entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  Each year, a covered entity must be recertified by HRSA.  HRSA’s database shows there are approximately 25,000 covered entities.  According to the Government Accountability Office (GAO), the number of hospitals participating in the program has grown from 591 in 2005 to 1,673 in 2011, or approximately one-third of all hospitals in the United States.

In 2010, HRSA wrote regulations to allow covered entities to use a limitless number of pharmacies to fill their patients’ prescriptions instead of just one pharmacy, which had been the norm starting in 1996.  As a result, the number of single pharmacies operating as a 340B contract pharmacy has grown by 770 percent, from 3,785 pharmacies participating in 2010 to 30,046 in 2013.

In February 2014, the HHS Office of the Inspector General (OIG) released a report that found several problems with these new complex contracts between covered entities and pharmacies.  The OIG found that these arrangements can lead to drug diversion (drugs going to ineligible people) and subjecting drug manufacturers to duplicate discounts (occurs when 340B discounted drugs are dispensed to Medicaid patients), both of which are statutorily prohibited.  The OIG believes the “lack of clarity on how HRSA’s patient definition should be applied in contract pharmacy arrangements” is leading to these problems, and that covered entities are not following HRSA’s guidance to conduct robust oversight and independent audits of prescription transactions.

Furthermore, the OIG found that some covered entities simply failed to offer the discounted 340B price to an uninsured patient at their contract pharmacy, which was the point of the program in the first place.  Amazingly, the OIG report also stated that “neither the 340B statute nor HRSA guidance addresses whether covered entities must do so.”  Sadly, if an eligible uninsured patient does not get the discounted 340B price, the patient likely pays the full price for his or her prescription.

The February OIG report is only the latest analysis of the 340B program.  In 2011, the Government Accountability Office (GAO) released a report entitled, “Drug Pricing: Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement.”   The ACA had mandated that the GAO address certain questions about the program, such as the extent to which covered entities generate 340B revenue, how manufacturers’ distribution of drugs at 340B prices affects covered entities’ or non-340B providers’ access to drugs, and HRSA’s oversight of the program.

The GAO said, “HRSA’s oversight of the 340B program is inadequate to provide reasonable assurance that covered entities and drug manufacturers are in compliance with program requirements – such as, entities’ transfer of drugs purchased at 340B prices only to eligible patients, and manufacturers’ sale of drugs to covered entities at or below the 340B price. HRSA primarily relies on participant self-policing to ensure program compliance. However, its guidance on program requirements often lacks the necessary level of specificity to provide clear direction, making participants’ ability to self-police difficult and raising concerns that the guidance may be interpreted in ways inconsistent with the agency’s intent.”

 The GAO also found that 13 (45 percent) of the 29 covered entities it interviewed had profited from the 340B program and 6 (21 percent) did not even report enough information to determine the extent to which revenue was generated.  Furthermore, the GAO found that 18 (62 percent) of 29 covered entities it interviewed “had generated 340B revenue by receiving reimbursement from third-party payers … and most reported that they generated more 340B revenue from patients with private insurance and Medicare compared to other payers.”  In other words, the entities were selling the discounted drugs to privately-insured patients or Medicare patients and pocketed the difference.

The Charlotte Observer wrote a series of stories in 2012 and 2013 about nonprofit hospitals in the Charlotte, N.C.  The newspaper said that the hospitals “are among the most profitable in the U.S.  They have billions in investments and real estate.  Experts say they should do more to lower patients’ rising costs.”  Several stories confirmed that the 340B program is being used by hospitals to increase their profits.  According to the Observer, while the nonprofit hospitals are respected in their community and save lives, the 340B program is helping them in “stockpiling a fortune.”

For example, according to the April 3, 2013 installment in the Observer series,Duke University Hospital purchased $65.8 million in drugs in 2012 through the 340B discount program, which saved $48.3 million.  It sold the drugs to patients for $135.5 million, for a profit of $69.7 million. The profit would have been $21.4 million if Duke had not participated” in the 340B program.

The Observer report also highlighted Sen. Chuck Grassley’s (R-Iowa) dogged tenacity in investigating the 340B program.  He “found that three nonprofit hospitals in North Carolina have made millions from a discount drug program intended to help the poor and uninsured.” 

In a March 27, 2013 letter to HRSA Administrator Mary Wakefield, Sen. Grassley pointed out, “because hospitals who participate in the 340B program have broad discretion as to whom to sell their deeply discounted 340B drugs, hospitals can elect to sell all of their 340B drugs to only fully insured patients while not passing any of the deeply discounted prices to the most vulnerable, the uninsured.  This is contrary to the purpose of the 340B program since much of the benefit of the discounted drugs flows to the covered entity rather than to the vulnerable patients that the program was designed to help” and that the North Carolina “hospitals are reaping sizeable 340B discounts on drugs and then turning around and upselling them to fully insured patients covered by Medicare, Medicaid, or private health insurance in order to maximize their spread.  For example, only 5 percent of the patients who received discounted drugs under Duke University Hospital’s 340B program were uninsured.  The vast majority of the remaining patients who received discounted drugs paid Duke University Hospital full price through private insurance.”

What happened in North Carolina is symptomatic of what is occurring across the nation.  An October 2013 Clinical Oncology News article entitled “340B: Helping Patients or Enriching Hospitals” unwound how the relationships between many 340B qualified hospitals and their contract pharmacies have enabled both to make substantial profits through the program.  The president of Pembroke Consulting, Adam Fein, Ph.D. explained in the article how the growth in the 340B program has created “a new industry of 340B consultants and software vendors seeking to profit from the program.”

Fein explained that after a patient has filled his or her prescription at a 340B contract pharmacy and paid for it with insurance, a software contractor hired by the hospital will go through the electronic prescription data and pick out the prescriptions that will be profitable to convert to a 340B claim.  The hospital will buy the prescription from the pharmacy; the pharmacy will turn over its reimbursement from the insurance company for a small fee; the hospital will replace the inventory that the pharmacy dispensed.  Fein said, “The hospital can then claim a 340B rebate on that prescription even though the insurance company may have already paid full price for it.  This all happens without the patient, third-party payer or manufacturer knowing.”

Adam Fein also said, “There are some legitimate entities that really do require additional financial support.  However, there are also many profitable, large well-funded health systems that are taking advantage of the program by using the funds in ways that can’t be linked in any way to its initial purpose.”

Senator Grassley is also pursuing the actions of thousands of pharmacies that are contracting with 340B hospitals to dispense the discounted drugs.  In a July 31, 2013 letter to Gregory  Wasson, President and CEO of Walgreens, he states, “The original intent of the program was to extend the Medicaid drug discount to the most vulnerable of patients at PHS Clinics, those who are mostly, ‘medically uninsured, on marginal incomes, and have no other source to turn for preventative and primary care services.’”  Grassley discusses a Walgreens’ February 28, 2012 slide presentation entitled, “Innovation Care Delivery Models: Pharmacy and Health Systems Collaborations” in which the company demonstrates ways to “generate revenue from [its] 340B patients” and a Walgreens’ employee’s statement on his LinkedIn account about the 340B program being “a relatively new area within Walgreens and is projected to add a minimum of $250 million in incremental revenue over the next 5 years.”  The senator proceeds to ask the CEO questions such as, “provide a summary of all profits generated as a result of participating in the 340B program as a contract pharmacy” and “covered entities have long argued that the 340B program was intended to assist non-profit safety-net providers to ‘stretch scarce Federal resources’ in serving the underserved population in their communities…why should Walgreens, as a for-profit corporation, financially benefit from such a program?”

The 340B program is expected to grow, in spite of the fact that the ACA was supposed to reduce the number of uninsured.  According to a paper written in early 2014 by Stephen Parente, Ph.D., and Michael Ramlet at the Carlson School of Management at the University of Minnesota entitled, “Unprecedented Growth, Questionable Policy: The 340B Drug Program,” the program will continue to grow as a direct result of the ACA’s Medicaid expansion.  Parente and Ramlet stated, “the statute behind 340B requires all newly-eligible facilities, like ‘sole-community’ hospitals and ‘critical access hospitals’ to cross a threshold set by formula that uses Medicaid enrollees as a key factor.  In other words, more Medicaid patients means more hospitals will qualify for the 340B program.”

It is long past due for Congress to conduct vigorous oversight of the program and HRSA.  Congress must reform 340B so that it serves its original purpose of helping uninsured, low-income people get access to life-saving pharmaceuticals and not be utilized as an ATM by hospitals and pharmacies to expand their profit margins.


Sign Up for Email Updates!Click Here!

View Archives

Posts by Author

Posts by Tag

Big Government (151) Waste (72) Obamacare (70) Healthcare (68) Budget (67) Congress (60) Uncategorized (56) Telecommunications (50) Technology (44) Internet (43) Debt (43) Deficit (42)