A great discussion on a relatively obscure federal drug discount program that clearly has lost its way was written in early 2014 by Stephen Parente, Ph.D. and Michael Ramlet at the University of Minnesota’s Carlson School of Management.  Their white paper, “Unprecedented Growth, Questionable Policy: The 340B Drug Program,” gives an overview of the convoluted program in easy-to-understand terms, discusses the “perverse incentives” it has created, and reveals why Congress needs to engage in vigorous oversight of the program. Why should taxpayers care?  Because of a poorly written law and unclear regulations that allow a broad interpretation of the term “patient,” permit too many organizations to qualify for the program, and provide little control over how the drug savings can be spent, consumers and taxpayers ultimately end up paying for a program that has become nothing more than an ATM for nonprofit hospitals and pharmacies. 

As President Ronald Reagan said in a February, 1981 speech to the nation on the economy, “Business doesn't pay taxes … only people pay taxes.”  In other words, businesses simply pass along their operating costs to consumers.  The same principle applies in the 340B controversy:  costs are being shifted to consumers and taxpayers through higher drug prices, insurance premiums, and taxes. The authors pointed out that the 340B program was established by Congress in 1992 “with the aim to help federally-funded clinics and public hospitals that serve a large uninsured population cover the cost of drugs” and it “requires drug companies to give significant discounts, often ranging from 30% to 50%, to certain health care entities when they fill prescriptions for outpatients.  At the time, the aim of the program was to help maintain outpatient services at hospitals and clinics that served large uninsured populations.”

While the authors explained that Congress’s purpose was to provide “protection from drug price increases” to certain healthcare entities that help indigent populations, that is “not the path the 340B program has taken over the past two decades.”  Due to the exponential growth in the number of facilities that can now participate in the program, thanks in large part to the Affordable Care Act, problems with the program are growing as it also gets more expensive. Amazingly, even though the program was supposed to help health facilities that provided a lot of charity or uncompensated care to many low-income people, the authors discussed a study by Avalere Health that found 267 of the hospitals that qualified for 340B status “reported uncompensated care that is below the 7% average of total revenues identified by the Internal Revenue Service.  Put another way, that means one-third of hospitals receiving major discounts on drugs are counting less uncompensated care than the average nonprofit hospital.  That is a far cry from what the law intended.”

One perverse result of this sloppily written law is that hundreds of nonprofit hospitals and thousands of pharmacies with which they have contracts to provide the discounted drugs to patients “get to hold onto those [drug] savings, and are not required to pass along the reduced drug prices to any patients, whether they have insurance or not.” Another perverse result of the program is that it makes it harder for other healthcare providers that cannot take advantage of the 340B discounts, such as oncology physicians with their own practices and private cancer clinics, to compete with 340B designated hospitals.  As a result, many private doctors’ practices and cancer clinics often end up being purchased by the hospitals.  Their patients are then shifted from less expensive community care to more expensive hospital settings. In addition, speakers at 340B conferences (meetings held for healthcare facilities that utilize the 340B program and other stakeholders) have encouraged hospitals to change their admission processes so more patients are considered outpatients and therefore qualify for the 340B discounts.  The authors cite one incident where a hospital “discharged transplant patients to a nearby townhouse so they could receive expensive drugs at the marked-down 340B price as outpatients.  Of course, these savings were not passed along to the patients, but kept for the hospital.” Parente and Ramlet explained, “The 340B program at hospitals also correlates with higher spending on drugs. 

Even though 340B hospitals make up a third of all hospitals in the U.S., they capture an outsize portion of drug spending, accounting for nearly half of drug spending among U.S. hospitals.  It makes sense that these hospitals would be spending more on drugs than facilities that are not part of the 340B program – the 340B hospitals get a discounted price on the drugs from the manufacturers, but get reimbursed at the regular rate by insured patients.  The 340B hospitals keep the savings between the cost of the drug and the price they charged for it, making them more likely to prescribe more drugs in the future and making them more competitive against other hospitals.” In addition, the authors state that some of the largest growth in the program, approximately 43 percent annually, has come from pharmacy contracts with hospitals.  This is the result of an April, 2010 decision by the Health Resources and Services Administration (HRSA), the agency that oversees the 340B program.  HRSA allowed 340B entities to “contract with multiple pharmacies,” increasing the number participating “in the program by a whopping 161%.  That number is expected to grow, as hospitals and other 340B facilities have a financial incentive to encourage patients to use contract 340B pharmacies, which can purchase the drugs at the discounted price.”

The rapid growth in the drug discount program and questionable financial wheeling and dealing between hospitals and pharmacies at the expense of pharmaceutical companies, consumers, and taxpayers seems to be more about making a profit than helping indigent patients has caught the attention of Senator Chuck Grassley (R-Iowa), Ranking Member of the Senate Judiciary Committee.  The authors cited a letter the senator wrote to Walgreens CEO Gregory Wasson asking for information on the company’s 340B practices.  Senator Grassley questions the motives of the company and reminds the CEO, “The intent and design of the program is to help lower outpatient drug prices for the uninsured.  It is not intended to subsidize pharmacies that team up with covered entities to turn a profit.”

Thanks to researchers like Parente and Ramlet, the 340B issue has caught the attention of Citizens Against Government Waste (CAGW) as well.  Perhaps the program should be eliminated completely, because after all President Obama said one of the three major goals of healthcare reform is to “provide insurance to those that don’t” have it.  But Obamacare has been a disaster and the Congressional Budget Office says it is likely that 31 million people will remain uninsured by 2023 and beyond.

It is time for Congress to conduct oversight hearings on the discount drug program.  Energy and Commerce Subcommittee on Health Chairman Joe Pitts (R-Pa.) said, “Reports prepared by both the HHS Office of the Inspector General and the Government Accountability Office raise important questions about the degree to which the 340B program may be fully accomplishing its core mission of helping the uninsured access prescription drugs.” Since the only oversight hearing on the 340B discount program that CAGW has been able to find occurred in December, 2005, another hearing is long overdue.