Drug discount program padding hospital profits


Improving vulnerable populations’ access to medicines is clearly important. But something is amiss when a program that is supposed to improve access to healthcare has turned into a cash cow for hospitals.

Yet, that is what has happened to the obscure 340B drug discount program. Too many hospitals across Massachusetts and the US are qualifying for large 340B financial subsidies while not providing greater access to care for the intended population. In Massachusetts, 340B hospitals include some large institutions such as Beth Israel Deaconess Medical Center, Baystate Medical Center, Lowell General, and Massachusetts General Hospital.

The 340B dug discount program requires drug manufacturers to sell their medicines to qualifying hospitals and other select providers (called covered entities) at steep discounts that are often more than 50 percent off. To ensure compliance, Medicaid will not cover the drugs from any manufacturer that refuses to participate.

The steep discounts create a profitable subsidy for many hospitals. According to a study I just completed on the 340B program, the net income (or excess of revenues over costs for non-profit hospitals) was 37 percent larger for 340B hospitals compared to the average hospital. Based on 340B’s lucrative financial structure, the profit out-performance makes sense.

To see why, take cancer drugs as an example. A study by the Community Oncology Alliance estimated that hospitals’ reimbursement for 340B cancer drugs is nearly four times larger than their costs of acquiring the drugs. As the alliance notes, such a huge mark-up over costs creates a “truly remarkable” profit opportunity for 340B hospitals when they treat patients with cancer.

These lower prices are supposed to help vulnerable populations receive more affordable healthcare and have access to their needed medicines. However, there is mounting evidence that the 340B program fails its primary purpose and creates inefficiencies throughout the broader healthcare system.

Based on my analysis of the hospital data maintained by the Centers for Medicare and Medicaid Services, 340B hospitals devote fewer resources toward charity care than the average hospital. Specifically, while the average hospital devotes 2 percent of its net patient revenues toward charitable care, 340B hospitals devote a smaller 1.7 percent. This result directly contradicts the program’s purpose.

Consistent with my findings, two large 340B hospitals in Boston (Massachusetts General Hospital and Brigham and Women’s Hospital) are among the 10 hospitals with the largest national “fair share deficit,” according to the Lown Institute Hospitals Index. The fair share deficit refers to the gap between the value of a hospital’s tax exemptions and the dollar amount it spends on charity care and other community investments.

These trends demonstrate that the 340B program boosts the profits of hospitals while failing to improve vulnerable populations’ access to healthcare. Yet, despite these failings, the program has exploded.

As Drug Channels documented, “discounted purchases made under the [340B] program totaled at least $38 billion in 2020—an increase of 27 percent over the $29.9 billion for 2019.” In fact, the program has been increasing at a 27.1 percent annual rate since 2014. Thanks to this extraordinary growth, the 340B program now accounts for approximately 16 percent of total US drug sales. Due to these discounts, along with other supply chain disincentives, branded manufacturers now only receive 49.5 cents of every dollar spent on drugs, according to a 2022 Berkely Research Group study.

Then there is the problem of contract pharmacies, which are one of the prime drivers of the program’s explosive growth. Since 2013, more than 94,600 new contract pharmacy arrangements have been created, yet contract pharmacies worsen the problems of ineffective oversight and abuse and misuse of 340B.

340B’s growing inefficiencies create unintended consequences for the broader healthcare system. They include vulnerable patients not receiving any price savings and sometimes even paying more due to the incentive to prescribe more expensive medicines, covered entities abusing the 340B program, a shifting of drug costs on to non 340B patients, and an unwarranted consolidation of medical practices. Consequently, the quality of the overall health care system suffers.

It is past time to reform 340B.  That should include requiring 340B healthcare providers and hospital systems to serve the intended low-income populations, ensuring that patients directly benefit from the financial discounts when receiving their medications, and restricting the scale and scope of the contract pharmacy program.

Expanding healthcare services to vulnerable populations is a laudable goal. But the 340B program fails to serve this purpose. Instead, it has become an unwarranted subsidy for many large hospitals.

Wayne Winegarden is a senior fellow in business and economics at the California-based Pacific Research Institute and director of the institute’s Center for Medical Economics and Innovation. The institute says its mission is to champion freedom, opportunity, and personal responsibility.

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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