A Bipartisan Regulatory Reform Opportunity: 340B

Despite the rancor, there are many bipartisan opportunities for the divided 118^th Congress. Near the top of the to-do list should be reforming the well-intentioned, but poorly designed, 340B drug discount program.

340B enables qualifying institutions to purchase medicines from manufacturers at steep discounts, generally between 25% and 50% off list price, but sometimes even larger. These discounts are supposed to improve the capacity of the clinics and hospitals serving a disproportionate share of low-income and uninsured patients. More and more, this is not how the program is working.

Instead of subsidizing a small number of clinics and hospitals, 340B has become the second largest drug discount program in the country. Over the most recent 5 years, the value of 340B drug purchases have grown over 22% annually.

A large contributor to this expansion is the Affordable Care Act (ACA) that increased the size of the Medicaid population, a key criterion for determining institutional eligibility for 340B. Consequently, the number of hospitals that qualify for 340B status has exploded.

Adding to these pressures, a 2010 guidance from the Health Resources and Services Administration expanded the number of contract pharmacies a covered entity could work with. The number of contract pharmacies subsequently grew by more than 4,000 percent between 2010 and 2020.

Expanded eligibility, when coupled with the large revenue opportunity 340B offers, has led to the program’s explosive growth. Covered entities earn revenues by pocketing the spread between the drug’s 340B price which is a fraction of the drug’s costs and the payments from well insured patients that reimburse the covered entities for the drug’s full value. Contract pharmacies earn hefty profits by dispensing these medicines and pocketing profit margins as large as 72%!

These misaligned incentives are destabilizing the 340B program while imposing costs on the broader healthcare system.

First, too many covered entities are not serving the program’s intended purpose. Undoubtedly, many covered entities do important work. On average, however, 340B hospitals provide less charitable care than the average institution. Therefore, the program’s explosive growth has undermined its intended purpose of helping lower income patients. Making matters worse, since wealthier areas have a higher share of well-insured patients, much of the program’s expansion occurs in these higher-income areas.

Second, the 340B program creates adverse incentives that increase overall healthcare costs and decrease patient choice. For instance, independent doctor’s practices do not qualify for 340B status. Should a 340B hospital purchase the independent practice, then it becomes part of the 340B covered entity allowing the practice to make purchases at 340B prices. Transforming non-340B purchases into 340B purchases, particularly for oncology practices that utilize expensive treatments, creates a huge revenue opportunity.

Unfortunately, hospital affiliated practices also charge significantly higher costs for the same medical services, which increases overall healthcare costs. Further, patients who would prefer to be treated at independent practices are denied these opportunities, jeopardizing patient quality.

Third, the program’s lax and ineffective oversight enables entities that do not qualify for 340B status to become 340B institutions. This increases the amount of waste and diverts funds from the intended covered entities. Further, the program’s lack of transparency means that there is insufficient information regarding the profits covered entities generated from the program.

Fourth, the explosive growth in the number of contract pharmacies imposes unnecessary costs. Most contract pharmacy locations are part of large pharmacy chains such as Walgreens and CVS. Therefore, the 340B program is, in part, a wealth transfer program between large businesses to the detriment of patients. Worsening the outcome, contract pharmacies often fail to ensure that only the eligible population receives the 340B discount and have mostly expanded to rich neighborhoods not lower income areas indicating they are not targeting the intended population.

Finally, the need to cover the growing demand for 340B discounts, as well as the myriad number of other concessions demanded by industry middlemen – Pharmaceutical Benefit Managers (PBMs) – has driven up the list prices of medicines by nearly 35 percent over the last six years even though the revenues that manufacturers receive (referred to as net prices) have declined by nearly 9 percent over the same period. Consequently, the 340B program increases out-of-pocket drug costs for patients because their expenditures are tied to the inflated list prices. It’s even worse for uninsured patients who, unlike all other payers, must pay the full list prices for their medicines.

Addressing these problems creates a bipartisan reform opportunity.

To address these problems, reforms should impose stricter qualification standards that ensure the generous 340B discounts are only available to those institutions achieving the program’s goals. 340B healthcare providers and hospital systems should have demonstrable evidence that the organization is serving the intended low-income populations before having the ability to purchase medicines at discounted levels.

In particular, the Medicaid qualification requirements should be increased due to the expansion of Medicaid to many middle-class families under the Affordable Care Act passed 13 years ago and the American Rescue Plan passed in March 2021. Additionally, for purposes of the 340B program, hospital expansions and practice acquisitions should only be recognized if these facilities are in qualified at-risk areas and treat a substantial share of vulnerable patients.

Meaningful transparency requirements on 340B covered entities are also needed. These include implementing better verification processes to ensure that only eligible entities receive the 340B discount on medicines. They should also include transparent reporting requirements that detail the profits 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.

When the transparency requirements reveal that a covered entity is not meeting the program’s goals, it should be ineligible for 340B discounts. Further, the 340B discount should only be recognized for expansions and acquisitions if they are in qualified at-risk areas serving the defined at-risk population.

Oversight of contract pharmacies must also be enhanced. Changes should be made so that contract pharmacies are limited to locations where underserved communities live. Further, covered entities should be required to justify their pharmacy relationships with respect to how a proposed contract pharmacy enhances the covered entities’ ability to meet the stated goals of the 340B program.

Reforms should also address the large number of market distortions that are harming patients by ensuring patients directly benefit from the lower 340B prices. Such reforms include capping the out-of-pocket costs for vulnerable patient populations to set nominal payments.

The time has come to hold 340B to a higher standard. Congress can expand access to healthcare for vulnerable patients while imposing as few adverse side effects as possible by rightsizing the program to ensure it targets true safety net providers and the low-income patients that they serve without harming the broader healthcare system.