Hospitals Reap Huge Profits from Drug Discount Program

A federal program requiring drugmakers to give big discounts to providers that serve low-income patients is profitable for hospitals, but has little accountability, according to the Pacific Research Institute (PRI).

Under the 340B Drug Pricing Program, drug manufacturers are required to sell medications at steeply discounted prices to hospitals, contract pharmacies, and other covered entities serving Medicaid and uninsured patients says Wayne Winegarden, Ph.D., director of PRI’s Center for Medical Economics and Innovation.

“The 340B program is growing unsustainably and isn’t improving health outcomes for at-risk patients,” said Winegarden, in a PRI news release.

Lucrative Rebates

Hospitals profit from the 340B program by getting drugs at discounted prices and then charging insurance companies and Medicare the full price, which is sometimes nine or 10 times higher, according to a PRI study by Winegarden titled “Good Intentions Gone Awry: The Case of the 340B Program.”

From 2015 to 2021, purchases of drugs under the 340B program increased an average of 23.8 percent each year, or four to five times faster than the overall growth in pharmaceutical spending, according to Winegarden’s analysis. Over the six years, hospitals in the 340B program received $234.5 million in discounts.

The program allows hospitals to dispense discounted drugs to any patient, not just the needy, and doesn’t require providers to improve health, says Winegarden.

“[A] core problem with the 340B program is that covered entities do not need to demonstrate that at-risk patients’ outcomes are improving,” wrote Winegarden. “And, while many covered entities do important work, many entities, particularly too many 340B hospitals, are providing less charitable care than the average institution but are reaping the higher revenues 340B enables.”

‘Pocket Billions’

Former U.S. Rep. Henry Waxman (D-CA), a consultant to 340B Health, an advocacy organization representing more than 1,400 participating hospitals, defended the 340B program in Health Affairs on December 7.

“In the three decades since the enactment of 340B, it has proven to be a durable and successful government health program,” wrote Waxman. “More than 700 drug manufacturers have participated in 340B, and they deserve tremendous credit for their contributions to a secure health care safety net.”

The government-mandated discounts are paid for by others, but don’t necessarily help patients, says Doug Badger, senior analyst for health and welfare policy at The Heritage Foundation.

“It isn’t surprising that someone who advocates for hospital conglomerates that pocket billions from the 340B program and [give] none of that money to their patients would consider it a success,” said Badger. “There is zero evidence that hospitals use government-mandated ‘contributions’ from pharmaceutical manufacturers to benefit anything other than their operating margins.”

Limits Patients’ Options

The 340B program is helpful to health care systems, but limits competition to the detriment of patient care, says Linda Gorman, director of the Independence Institute’s Health Care Policy Center.

“Over time, federal fecklessness distorts the incentives for providers of private care,” said Gorman. “It also increases private sector health care costs. Thanks to 340B, oncology practices cannot compete against hospitals. They either join hospital staff or are frozen out of providing certain treatments. This is enormously inconvenient for patients because they are denied the convenience of getting many oncology treatments in less-expensive physicians’ offices or surgery center equivalents.”

Increasing concentration among providers impacts patients’ access to specialists, says Gorman.

“Patients are hampered in their quest for truly independent opinions on the best care for their case,” said Gorman. “Limiting treatment to hospital staff means limiting treatment to certain clinical pathways approved by a hospital.”

‘Lax and Ineffective Oversight’

Hospitals participating in the 340B program are supposed to serve Medicaid patients, but many do not, says Winegarden.

“Another problem is the program’s lax and ineffective oversight that is enabling entities that do not qualify for 340B status to become 340B institutions,” wrote Winegarden. “Further, the program’s lack of transparency means that there is insufficient information regarding the profits covered entities generate from the program.”

Among the participating entities benefitting from the 340B drug discount program are contract pharmacies, says Winegarden.

“The number of contract pharmacies has grown by more than 4,000 percent between 2010 and 2020,” wrote Winegarden. “Contract pharmacies earn significantly higher margins (an estimated 72 percent profit margin) when dispensing 340B medicines. Unfortunately, contract pharmacies do a poor job of ensuring that the 340B discounts are only provided to the eligible population.”

There is also no correlation between where contract pharmacies operate and the population they’re intended to serve, says Winegarden.

“[T]he expansion of contract pharmacies is mostly occurring in rich neighborhoods, not lower-income areas,” wrote Winegarden.

Not Meeting Goals

Winegarden recommends requiring improved patient outcomes, increasing program oversight, closing contract pharmacy loopholes, and fixing market distortions that increase patient costs.

“They should also include transparent reporting requirements that detail the profit that covered entities, particularly the disproportionate share hospitals, receive and how much charity care the hospitals provide both at the main hospital and all satellite clinics that are also allowed to participate in 340B,” wrote Winegarden. “In those cases where the transparency requirements reveal that the covered entities are not meeting the programs’ goals, those entities should be ineligible for 349B discounts.”

Bonner Russell Cohen, Ph.D. (bcohen@nationalcenter.org) is a senior fellow at the National Center for Public Policy Research.