OPINION:
The federal government’s little-known 340B Drug Pricing Program doesn’t directly spend any taxpayer money, and proponents are fond of saying “it doesn’t cost the taxpayers a dime.” Yet its poor design is inflating Medicare spending and depriving the government of tens of billions of dollars in annual revenue, increasing the budget deficit while short-changing the vulnerable patients it is intended to help.
While Congress considers programmatic changes to reduce spending, 340B should be high on the list.
Congress created the 340B program in 1992 to allow hospitals that serve significant numbers of low-income and uninsured patients to obtain prescription drugs at a discount. Government officials thought the program would not affect the federal budget because 340B compels drugmakers to offer discounts to hospitals. It doesn’t involve direct federal purchases.
Over time, however, 340B has grown far beyond its original intent. Starting in 2010, the Affordable Care Act expanded 340B eligibility, allowing thousands more hospitals and retail pharmacies to participate.
Today, more than 2,600 hospitals participate in the program, a far cry from the 90 it was expected to serve in 1992. Nearly 33,000 pharmacies, more than half of all pharmacies in the country, are contracted to 340B hospitals, up from fewer than 1,300 in 2010.
This rapid growth results from poor planning and a lack of guardrails. Although lawmakers expected hospitals to use 340B discounts to expand charity care, the program doesn’t require them to do so. Consequently, many exploit the program to buy drugs at discounts that exceed 50%, then sell them to insurers and patients at much higher prices, pocketing the difference.
Numerous reports and investigations have exposed how hospitals manipulate 340B for profit.
Duke University Hospital profited nearly $70 million from the program in a single year. According to a Wall Street Journal investigation, the nonprofit Cleveland Clinic’s flagship hospital did not introduce any additional aid for patients after joining 340B in 2020, despite raking in more than $130 million in 340B savings that year. Bon Secours Mercy Health, another nonprofit, used 340B revenue from a struggling hospital in Richmond, Virginia, to benefit facilities in affluent suburbs, according to a New York Times expose.
Such practices potentially deprive patients of intended assistance. They also rob the government of billions of dollars in potential tax revenue by shifting income from drug manufacturers, which pay corporate taxes, to ostensibly nonprofit hospitals, which are tax-exempt.
In 2023 alone, drug manufacturers were forced to provide an estimated $70 billion in 340B discounts. An average corporate tax rate of 15% to 20% represents up to $14 billion in lost federal tax revenue annually.
Factoring in state and local taxes, the total hit to government budgets could surpass $17 billion annually, potentially adding up to $200 billion in lost tax revenue over the next decade as 340B expands.
Beyond the loss in potential government revenue it creates, 340B raises health care costs, driving up Medicare spending.
Because 340B discounts are generally proportional to each drug’s list price, hospitals are incentivized to prescribe more expensive drugs to maximize profit. A 2015 Government Accountability Office report found that per-patient Medicare Part B spending at 340B disproportionate share hospitals was double that of non-340B hospitals.
The program also incentivizes hospital consolidation. Once a physician’s office becomes part of a hospital system, its outpatient prescriptions become eligible for 340B discounts, including those for patients with high incomes and private insurance. As a result, hospitals, which receive significantly higher reimbursements from Medicare than independent doctors, now employ more than half of all U.S. physicians. Hospital consolidation has been found to result in higher hospital prices, raising costs for all federal health programs and private plans.
Finally, 340B deprives Medicare of millions of dollars in savings it otherwise would have experienced. The Department of Health and Human Services Office of Inspector General found that when prescriptions are filled at 340B pharmacies, manufacturers provide fewer rebates to Medicare Part D plans, increasing taxpayer costs. The program also limits what Medicare collects from inflation-based rebates because medications discounted under 340B are excluded from those rebate calculations.
The 340B program may have been designed to help poor and uninsured Americans, but it has become a $70 billion backdoor subsidy that enriches hospitals at patients’ and taxpayers’ expense.
As the Trump administration looks for ways to right-size the federal budget, reforming and improving oversight of the 340B program should be at the top of its list.
• Dan Crippen is a former director of the Congressional Budget Office.
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