Government Mandates Don’t Lower Health Care Costs – Pacific Research Institute

Government Mandates Don’t Lower Health Care Costs

Free lunches are often the most expensive meals. And yet, when it comes to the nation’s health care system, the federal government blindly offers free lunch buffets in lieu of policies that would actually address the core problems of the nation’s health care system. An example of this free lunch mentality is the 340B drug discount program.

The 340B program was implemented because the U.S. health care system was, and continues to be, fatally flawed. In this case, the flaws were being manifested through retail prices for pharmaceutical drugs that were too expensive for some patients. In response to this affordability problem, President George H.W. Bush and Congress implemented the 340B program back in 1992.

In effect, the 340B program asks pharmaceutical companies to sell their medicines to covered hospitals and other facilities that serve populations deemed to be vulnerable at discounts of up to 50 percent below market prices.

Should a pharmaceutical company refuse this offer, then the company would no longer be eligible for Medicaid reimbursement on their drugs – an unsustainable proposition for any company. Not surprisingly, most manufacturers have not refused the offer and participate in the program.

The growth of the 340B program has exploded compared to initial expectations. Participation in the 340B program was initially conceived to include 90 hospitals. It now includes 1,700 hospitals. Furthermore, 20 percent of the nation’s retail pharmacies are now a contract pharmacy for a 340B institution.

Supporters of the 340B program claim that, thanks to this program, providers can now offer their patients who previously could not afford their medicines lower-priced care.

Taxpayers allegedly benefit too. Thanks to 340B, patients who would otherwise be receiving taxpayer subsidized care no longer need it. Taxpayers therefore save money.

Hospitals also benefit. Insurance companies reimburse hospitals based on the market price of the pharmaceutical drugs even though the hospitals actual drug costs are based on the discounted 340B program. Hospitals therefore earn a profit on the difference between the market price and the 340B discounted price.

This everybody wins scenario is, of course, just an illusion. Despite its continual efforts to do so, Congress cannot legislate-away economic consequences. Mandating that some hospitals and facilities receive a discount on medicines does not magically eliminate the economic costs of creating the medicines.

As is always the case, when the government mandates that one group receives a benefit, those costs are paid by someone. In the case of the 340B program, the costs of the program are hidden from public view allowing advocates to portray the policy as costless.

The costs of the 340B program exist of course. They are initially imposed on insurance companies and pharmaceutical manufacturers. But, the costs are not confined to just these industries. The costs created by the 340B program are ultimately integrated into the overall health care system and are manifested through rising insurance premiums, declining insurance coverage, declining innovation and productivity (especially for pharmaceutical drugs), and higher medical costs in unrelated segments of the health care system. Perhaps more troubling, the added noise created by the 340B cost shifting worsens the overall functionality of the U.S. health care system.

The 340B program represents an approach to health care reform that asks the government to implement a new policy, and add greater complexity, in response to every adverse symptom of the health care market. This is simply the wrong way to fix the current health care system.

The right way to reform the U.S. health care system is to directly address the causal policies creating the adverse symptoms in the first place. Health care in the U.S. is exceptionally wasteful, unproductive, and inefficient due to impediments such as ineffective insurance markets, tort liabilities that incent defensive medicine, and licensing rules that eliminate competition.

Effective health care reform must eliminate these impediments that are diminishing the incentives for innovation and productivity growth while creating policies that empower patients to control their own health care decisions.

With respect to 340B, a more efficient health care system also creates the necessary environment to help those individuals who need assistance in obtaining health care services.

The U.S. health care system is rife with programs, such as 340B, that claim to be costless means to solve specific ailments of the health care system. In reality, these policies impose ever growing costs on the health care system, worsen its efficiency, and fail to adequately assist those individuals who need it.

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.

Scroll to Top