Comprehensive Regulatory Reform From The Bottom Up: The Case Of 340B


Using the ruse of “price negotiation”, the proponents of the Build Back Better legislation are pushing an ill-fated drug price control plan. Patients will bear exceptionally large costs should their idea of government-directed prices become law.

These costs will include lower health outcomes due to reduced access to innovative drugs. They will also include increases in other types of healthcare spending as less drug access would, ironically, increase hospitalizations and use of other healthcare services and could more than offset any potential savings from drug price controls.

Continually turning to this tired and dangerous idea is troubling because the drug supply chain is rife with inefficiencies that if addressed, would meaningfully improve patients’ access to affordable drugs. Reforms to the obscure 340B drug pricing program exemplify the potential benefits.

The 340B dug discount program requires drug manufacturers to sell their medicines to covered entities at steep discounts often in excess of 50%. These lower prices are supposed to help vulnerable populations receive more affordable healthcare and have access to their needed medicines. To ensure compliance, Medicaid will not cover the drugs from any manufacturer that refuses to participate, creating an offer that manufacturers cannot refuse.

Improving vulnerable populations’ access to medicines is clearly important. And the size and scope of the program has exploded. As Drug Channels noted, “discounted 340B purchases were at least $29.9 billion in 2019,” which are up 23% from 2018 and nearly triple the size of the program back in 2014. Thanks to this extraordinary growth, the 340B program has grown to account for more than 8% of the total U.S. drug market and about 16% of the total rebates and discounts that manufacturers provide.”

Simply because the sales volume of 340B drugs is experiencing extraordinary growth does not mean that the program is achieving its purpose, and there is mounting evidence it is not. By attempting to help vulnerable patient populations in such an overly complicated manner, the 340B program creates inefficiencies throughout the broader healthcare system.

These include vulnerable patients not receiving any of the price savings, the abuse of the 340B program by covered entities, increased incentives to prescribe more expensive medicines, a shifting of drug costs on to non 340B patients, and an unwarranted consolidation of medical practices. Due to these inefficiencies, the 340B program worsens the quality of the overall health care system.

In its examination of the program, the Government Accountability Office (GAO) found that the program’s oversight does “not provide reasonable assurance that participating nongovernmental hospitals meet eligibility requirements.”

A study I just completed on the 340B program confirms the GAO’s concerns are well founded. Based on hospital data maintained by the Centers for Medicare and Medicaid Services (CMS), 340B hospitals devoted fewer resources toward charity care than the average hospital. Specifically, while the average hospital devoted 2.0% of their net patient revenues toward charitable care, 340B hospitals devoted a smaller 1.7%. This result directly contradicts the program’s purpose.

Perhaps just as troubling, a program designed to help vulnerable populations has morphed into a subsidy that is bolstering hospital’s bottom lines. The net income (or excess of revenues over costs for non-profit hospitals) was 37% larger for 340B hospitals compared to the average hospital.

While expanding healthcare services to vulnerable populations is a laudable goal, the 340B program fails to serve this purpose. Instead, the program has become an unwarranted subsidy for many large hospitals. And, while there are many policy disincentives that are unjustifiably harming hospitals’ financial viability, the purpose of 340B is not to compensate for these costs. It is past time to reform 340B.

These reforms should require that 340B healthcare providers and hospital systems serve the intended low-income populations, ensure that patients directly benefit from the financial discounts when receiving their medications, and restrict the scale and scope of the contract pharmacy program.

Unlike the lumbering proposals to impose price controls without an understanding of the current healthcare system’s dynamics, reforming 340B directly addresses inefficiencies that harm patients. Replicating this approach across the drug supply chain is the surest way to eliminate the actual obstructions harming patients, increase drug affordability, promote innovation, and improve patient welfare.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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