Medicaid “Fix” Will Worsen 340B Crisis

Congressional Republicans are under pressure to find savings to make the math in their budget reconciliation package add up.

Medicaid, which accounts for just under 10% of federal spending, has become an obvious target. But instead of addressing the flawed incentives driving the program’s unsustainability, the Trump administration is pushing for a “most favored nation,” or MFN, policy on drug pricing.

The idea is to peg Medicaid reimbursement to what other developed countries pay for prescription drugs. Those prices are lower because foreign governments maintain price controls on prescription drugs.

This isn’t reform. It’s a gimmick. It attempts to import foreign price controls to generate budgetary savings on paper. Its consequences will ripple throughout the healthcare system—distorting markets, enriching the hospitals that already abuse the flawed 340B drug discount program, and sapping biopharmaceutical innovation.

The 340B program was created to help hospitals and clinics serving low-income and rural populations buy medicines at steep discounts. Over time, it’s morphed into a profit center for large health systems.

These hospitals aren’t required to pass savings on to patients. Instead, they buy discounted drugs and resell them—often to Medicare or privately insured patients—at full price and pocket the difference.

The size of 340B discounts is tied to the Medicaid rebate formula. So when Medicaid prices fall—as they would under MFN—340B discounts would deepen automatically.

For every dollar a manufacturer loses on Medicaid, it could lose up to two more through 340B. What looks like a budget win would become a multiplier of government-mandated losses—with no real benefit to the low-income patients these programs were meant to serve.

To offset mounting losses, manufacturers would raise prices in the commercial market. Meanwhile, hospitals would continue marking up discounted 340B drugs—and billing insurers and employers for them at full price. That markup would act as a hidden tax on patients, small businesses, and anyone with private insurance.

Hospitals are already leveraging 340B’s perverse incentives to enrich themselves at ordinary Americans’ expense. They purchase outpatient clinics and partner with retail pharmacies—not to reach more underserved patients but to expand 340B eligibility and their revenue. Many of these pharmacies operate in affluent suburbs, far from the communities 340B was intended to help.

The numbers speak for themselves. Discounted purchases under 340B grew from $4 billion in 2009 to almost $54 billion in 2022. Yet the majority of participating hospitals provide less charity care than they generate in 340B profits.

MFN would only accelerate these trends.

MFN would also put drug access and innovation at risk. Under current law, manufacturers must participate in both Medicaid and 340B in order to access Medicare Part B, which covers doctors’ services and outpatient care. But Medicaid already forces manufacturers to offer steep rebates. The “Best Price” rule requires them to match the lowest price they’ve given any other buyer. Then, if a drug’s price has risen faster than inflation since launch, an additional “inflation penalty” rebate kicks in.

Today, the average Medicaid discount exceeds 50%. For some drugs, it’s over 100%—meaning the manufacturer must pay the government every time the drug is dispensed.

These “negative prices” are not hypothetical. They’re real. MFN would make them more common by anchoring Medicaid to the lowest prices in countries where governments set prices without regard for how much it costs to develop a new drug—or the negative impact that such controls have on innovation.

Facing this math, some manufacturers may choose to exit the Medicaid and Medicare markets altogether. That would leave Americans with access to fewer treatments—and would mean fewer dollars to reinvest in the next generation of cures.

It’s one thing to criticize foreign governments for freeloading off American innovation. It’s another to adopt their pricing practices, which have gutted research investment within their borders.

There are better ideas for generating savings in Medicaid. Rep. Chip Roy, R-Texas, has been leading the charge for block grants or per-capita caps, stricter eligibility verification, and reducing the federal match rate for able-bodied enrollees to that in force for Medicaid’s legacy population.

These are the kinds of reforms that would restore fiscal sanity without stifling innovation or rewarding market manipulation.

MFN reinforces the worst incentives in 340B, shifts costs to patients and employers, and threatens the long-term health of both public programs and private enterprise. It’s a budget sleight-of-hand wrapped in bad economics.