Wealthy Vendors Hijack Another Federal Program For The Poor

There is a little-known federal program for prescription drugs that is now larger than the federal Medicaid drug program which enrolls more than 80 million patients.  It is called the federal 340B drug discount program.

Never heard of it?  You wouldn’t be the first.  In 1992, Congress required pharmaceutical companies to give deep discounts to certain nonprofit hospitals that were treating large numbers of uninsured patients or otherwise providing charity care in distressed communities.

In the beginning, this program generally worked well.  About 500 hospitals in poor urban and rural areas got access to these drug discounts and it helped them treat the poor and uninsured.

But, as with numerous federal poverty programs, many saw the opportunity to make money from the program.

First, the hospitals discovered that this program could be a cash cow if they dispensed the discounted drugs to patients with good insurance.  Yes, that is correct, the program provides incentives to treat the wealthier, insured population, not the uninsured.  Let’s say a hospital can purchase an expensive drug at an 80% discount, or for $10,000.  If they give that drug to a patient with good insurance, they may be able to bill the insurance company $50,000, or something closer to the market price.  On that one prescription, therefore, the hospital can arbitrage a profit of $40,000.

Because of this profit opportunity, many more hospitals sought to join the program, and Congress obliged them.  Hospitals become eligible for the 340B discounts if 11.75% of their patients are enrolled in Medicaid.  And since the Congress has more than doubled the number of Medicaid enrollees in recent decades, there are now thousands of 340B hospitals that are arbitraging these drug discounts.

Not surprisingly, the program has exploded in size.  Discounted sales of 340B drugs totaled almost $44 billion in 2021.  Had those drugs been sold at market prices, sales would have totaled almost $100 billion.  One economist estimated that hospital profits from the program totaled $40 billion in 2019.

With that much money on the table, many other for-profit vendors rushed into the program.  When the program first began, patients would need to fill their 340B prescriptions at the hospital pharmacy.  In 2012, the federal government, in its wisdom, allowed hospitals to contract with an unlimited number of pharmacies to dispense 340B drugs.  There are now close to 40,000 U.S. pharmacies, most of them for-profit chains like CVS, that dispense 340B drugs. Huge for-profit pharmacy benefit management companies (PBMs) also make astronomical profits from 340B because they own many of the specialty pharmacies that infuse or inject 340B drugs.

In this feeding frenzy for 340B profits, the original goal of the program has been lost¾providing charity care to the poor and uninsured.  As 340B profits have exploded, charity care provided by nonprofit hospitals has shrunken to the point where for-profit hospitals provide more charity care than nonprofits.

This is a familiar story for many federal poverty programs:  the vendors get rich, and the poor take a back seat.

William S. Smith, PhD, is Senior Fellow and Director of the Life Sciences Initiative at Pioneer Institute in Boston