The U.S. health care system needs systemic reforms that comprehensively address the problems of declining quality and rising costs. Alas, beneficial systemic reforms will not be implemented any time soon. There are still opportunities for Congress to implement tailored reforms that can help address these problems in the near term. One such opportunity is reforming the out-of-control 340B drug pricing program (the federal drug discount program created under the Veterans Health Care Act of 1992).
The intent of the 340B program is to subsidize the cost of medications prescribed by health care providers who serve large numbers of uninsured patients, many of whom are low income. Under the program, pharmaceutical manufacturers are required to provide discounts between 20 percent and 50 percent of the costs for outpatient drugs that are sold to specified clinics, hospitals, and contract pharmacies (covered entities). Offering these discounts is a de facto requirement because Medicaid will not pay for drugs from any manufacturer that does not participate in the 340B program.
The 340B program has gotten off track in recent years. The federal statute governing the program provides limited guidance regarding how it is administered, and it does not require covered entities to provide the discounted drugs solely to people who are truly in need. And, because covered entities can prescribe the discounted medicines to anyone who receives medical care at their facilities, including patients who have insurance and pay full price for the medicines, the 340B program creates a very large regulatory-driven profit opportunity.
Here is how it works.
The covered entities purchase drugs at the 340B discounted price, but are reimbursed for a large percentage of these sales at the full price of the medicine. The covered entities will then pocket the difference as a government protected profit.
By exploiting this loophole, many covered entities have turned the 340B program into an important profit driver. Making matters worse, as documented in a 2015 report by the Government Accountability Office, providers are also incentivized to prescribe the most expensive drug possible since the more expensive medicines generate larger gaps between the 340B price and the medicines’ full price.
This profit-generating mechanism has caused the 340B program to explode in recent years, transforming the program from a safety net for the vulnerable, into a significant portion of the prescription drug market. In 2016 alone, the program was responsible for over $16 billion of drug purchases, or 5 percent of the entire drug market.
The scope of the 340B program is now so large that it is impacting the broader health care system. For instance, in response to the misuse and revenue losses from the ever-expanding 340B consumer, non-340B consumers are bearing extra costs as prices on the non 340B drugs are rising at a faster rate to subsidize the losses incurred from the sales of 340B drugs. The higher non-340B prices force these patients to pay higher medication co-pays and face higher out of pocket costs.
As another example, the U.S. Oncology Network has cited the unrestrained growth of the 340B program as a contributing factor to the unwarranted consolidation of community oncology practices. Due to this consolidation, health care costs are rising faster because more cancer patients are being transitioned from lower cost physician-office settings to the higher cost hospital settings.
Unless the 340B program is reformed, these problems will continue to grow. At bare minimum, Congress and the Administration should update the law so that it clearly defines who qualifies for the 340B discount; which should only include those patients who are truly in need. This would ensure that the subsidized drugs would only benefit the intended patients, and it would prevent hospitals, pharmacies, and providers from exploiting the program. Non- 340B patients would also benefit since drug prices would no longer reflect the cross subsidies necessary to offset the loss of revenue caused by the abuse of the 340B discount program.
340B may be a well-intentioned government program, but due to the limited oversight and poor implementation, this little-known program has experienced expansive growth that, in contrast to its intent, raises the average prices of prescription drugs and distorts the broader pharmaceutical market.
The market distortions created by the complex web of regulations has led to negative consequences for health care consumers. Policymakers from both sides of the aisle should be able to agree that eliminating the abuses of the 340B program, which are unnecessarily driving up health care costs, is a reform worth passing.