This year marks the 30th anniversary of a federal hospital program that will go down in the history of public policy as the best example of unintended consequences run wild. Like side effects from medicines, unintended consequences are adverse results that legislators don’t anticipate when they pass laws. Most of the time, the harm is minor, but not with the notorious 340B, the section of the Public Health Services Act that created the program.
The idea behind 340B was to transfer money from drug companies to hospitals, which would use the funds to help low-income, mostly uninsured patients in their neighborhoods. The program has been a colossal failure. Costs have quadrupled since 2015, and impoverished patients aren’t being served. Attempts to repair 340B haven’t worked. The Supreme Court in June struck down, on technical grounds, an attempt to reduce costs. But more drastic surgery is needed. It’s time to fix 340B or kill it.
The plan was too convoluted to work. A hospital in a poor community gets massive discounts from drug manufacturers on the purchase of advanced medicines for out-patients. The hospital then bills insurers for the full list price. The hospital uses the profit — the difference between the two amounts — to assist patients through, for example, “uncompensated care,” that is, free care for people who don’t have insurance or can’t afford to pay.
Hospital profits under 340B are enormous. In a recent article, the New York Times used the example of Keytruda, a cancer drug. A 340B hospital, Richmond (Va.) Community, buys a vial of the medicine for $3,444. The hospital then “charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425.”
Meanwhile, the Times reported, as a way to “supercharge the program,” Bon Secours Mercy Health, the large non-profit chain that owns Richmond Community, has been building “clinics in wealthier neighborhoods, where patients with generous private insurance could receive expensive drugs.” On paper, Bon Secours made “the clinics extensions of poor hospitals to take advantage of 340B.”
Techniques like this have been repeated around the country, and the program has exploded. The number of 340B hospitals, clinics, and other eligible sites has gone from 8,000 in 2000 to more than 50,000 today, and 340B has become “unambiguously the second-largest government pharmaceutical program, based on net drug spending” after Medicare’s drug benefit, writes Adam Fein of Drug Channels, a leading expert on 340B. Drug purchases under 340B in 2021 totaled $44 billion, up from $12 billion in 2015. At list prices, those drugs last year would cost $94 billion. Most of the $50 billion gap, or profit, goes to hospitals, which have scored a windfall.
Poor patients, however, have not. “Under current law,” write Peter Pitts and Robert Popovian of the Food & Drug Law Institute, “providers are under no obligation to reserve the discounts for needy patients or even report what they do with the savings.”
The Times article notes that Richmond Community and its satellites had a profit margin in 2020 of nearly 44%, “the highest in the state,” with the “vast majority” of profits coming from 340B. But the hospital itself has been stripped nearly bare. It “consists of little more than a strapped emergency room and a psychiatric ward.” The piece quotes a former doctor there as saying, “Bon Secours was basically laundering money through this poor hospital to its wealthy outposts.”
Nor is Bon Secours alone. “Participation in the 340B Drug Pricing Program has not been associated with increases in hospital-reported uncompensated care provision,” concluded a study in the American Journal of Managed Care last year. The results of the research, write Sunita Desai and J. Michael McWilliams, bring “into question whether the program is achieving its stated goal of freeing up resources that are devoted to the care of low-income populations.”
In fact, as its benefits flow to higher-income patients, 340B has become counterproductive. A study by Bruce Levinson found that “the ability of people suffering severe economic hardship to afford needed medicines and medical care, relative to the general population, is negatively correlated with growth in the 340B program.”
Even so, the program keeps expanding in new ways. Originally, the government allowed hospitals and clinics to designate outside pharmacies to dispense 340B drugs in only limited cases, but in 2010, rules changed, and within a decade, the number of 340B contract pharmacies soared from 2,000 to 58,000, with retail chains like CVS and Walgreens dominant.
Again, growth was concentrated in affluent neighborhoods. A JAMA study in June found that while one-third of the nation’s pharmacies are now providing 340B drugs, “the share of 340B retail pharmacies in socioeconomically disadvantaged and primarily non-Hispanic Black and Hispanic/Latino neighborhoods declined.”
In addition, a Government Accountability Office (GAO) report said that the expansion “can make it harder to ensure compliance with 340B rules.” And most of the contract pharmacies failed to pass on the full 340B discount to patients.
As a result, 340B has become a profit center for these pharmacies as well. A study by the Berkeley Research Group found that the profit margin for 340B medicines picked up at contract pharmacies was an astonishing 72%, compared with 22% for non-340B medicines.
Legislators should learn a lesson from this disaster. If they want to help poor patients, they should do it simply with vouchers or direct payments. As for 340B itself, at long last, 340B must be reined in. Discounts should go only to hospitals and clinics in vulnerable communities, and all of the profits have to flow to low-income patients, as the original regulation intended. As for contract pharmacies, they need to be located in impoverished areas and required to pass discounts to uninsured patients.
In addition, the government must provide serious oversight. About three-quarters of the audits that were held from 2012 to 2019 found noncompliance, according to GAO. A comprehensive and serious effort at making the program smaller but better targeted is necessary. Otherwise, 340B deserves to fail, overwhelmed by consequences its advocates 30 years ago never intended.
James K. Glassman, a former U.S. Under Secretary of State and fellow at the American Enterprise Institute, advises health care companies and non-profits.
