Though Americans have been burdened by steadily mounting drug costs in recent years, drugmakers have been paid less for their drugs every year since 2017—even before accounting for inflation. Why is that?

The discrepancy is partially the result of profiteering by certain medical facilities that enjoy mandatory discounts unavailable to ordinary consumers. These special discounts generate huge windfall profits for hospitals, clinics, and associated pharmacies, which manufacturers offset by inflating the standard price charged to insurers, taxpayers, and patients.

The carveout was created in 1992, when Congress passed Section 340B of the Public Health Service Act. The bill required drug manufacturers to sell drugs at a substantial discount to hospitals that serve mostly low-income Medicaid patients. Congress intended the legislation “to stretch scarce federal resources as far as possible” and to reduce the cost of delivering health care to low-income communities. In fact, it’s made hospitals more profitable and drugs more expensive for consumers.

Under the 340B program, eligible facilities can claim discounts on drugs that they provide to all patients without regard to patients’ income or insurance status. As they subsequently charge insurers and patients the full price, facilities can claim reimbursements averaging 294 percent of what it costs them to purchase drugs.

The American Hospital Association justifies this arrangement by claiming that hospitals use the profits to provide free and discounted care to the uninsured. But the program only loosely requires hospitals and clinics to subsidize care for the poor, providing effectively no oversight of whether, how, and how much hospitals do so in practice.

This arrangement has become increasingly lucrative. Hospital spending on 340B drugs surged from $12 billion in 2015 to $54 billion in 2022. Assuming that profit margins have remained stable, 340B providers made around $85 billion in inflated reimbursement claims—more than twice the value of free and discounted care that the American Hospital Association (AHA) claims hospitals provided to the uninsured.

In fact, the hospitals reaping 340B benefits aren’t exclusively or even primarily located in poor areas. Initially, only 90 safety-net hospitals in the poorest neighborhoods were eligible for discounts, but after the Affordable Care Act broadened eligibility, the number of 340B claims exploded. In 2019, 2,523 hospitalshalf of all community hospitals in the United States—claimed 340B discounts.

The program’s subsidies have increasingly been directed to hospitals and health-care clinics in more affluent communities, with hospital systems using small facilities located in poor neighborhoods to buy discounted drugs, only to re-sell those drugs to well-insured patients in wealthy areas. A Wall Street Journal study found that 88 of 111 rural referral centers claiming 340B discounts weren’t located in rural areas, while over 80 percent of the centers claiming to serve poor communities didn’t treat enough low-income patients to be eligible for 340B. Remarkably, 340B hospitals provide less charity care than non-340B hospitals.

The 340B discounts actually drive up costs by encouraging hospitals to administer branded rather than generic drugs. The GAO found drug costs were substantially higher at 340B hospitals than non-340B hospitals, even when accounting for facility characteristics and patient-health needs. Those incentives have led many hospitals to buy up independent cancer clinics to capture profits from oncology drugs, increasing charges to patients even as the cost of procuring drugs has been reduced.

Policymakers struggle to trace the magnitude, destination, or effect of 340B funds, which makes the program hard to reform. A recent court ruling expanded the types of patients for whom providers could claim discounts, inhibiting program administrators’ ability to ensure even relative discounts for low-income patients.

But reform is not impossible. For starters, Congress should require 340B providers to account for claimed discounts and demonstrate that any savings generated are returned to patients or taxpayers. In the long run, given that drugmakers are introducing new drugs with higher list prices to make up for 340B’s mandatory discounts, Congress should phase out the 340B program for new drugs. If not, shameless hospital systems will continue to exploit the provision and raise Americans’ health-care costs.

Photo: EyeMark/iStock


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