A regulation driving healthcare costs & harming patients

340 B is a disaster

It is my pleasure to introduce this guest column by Anthony DiGiorgio. Dr. DiGiorgio is a neurosurgeon at UCSF. This essay argues that there is a better place to lower health care spending than physician salaries. We must examine 340b. What is this program? Why is it a scam? Anthony walks you through this unusual provision that every doctor should know about.

Vinay Prasad MD MPH

A regulation driving healthcare costs & harming patients

Anthony M DiGiorgio, DO, MHA

A little-known regulation significantly contributing to rising healthcare costs in America is the 340B drug discount program. Doctors should know about this obscure program, especially since we are often blamed for driving healthcare expenses. 

Doctors aren't the driver of healthcare costs. Our salaries are approximately 8% of healthcare spending. Hospital charges, on the other hand, are over 30%. Hospitals are accounting for progressively more of the cost of care, that money fueling the massive growth in hospital administrators and a doubling of CEO salaries every decade. Add in pharmaceutical costs and that accounts for nearly 40% of all national healthcare expenses.

Nevertheless, Medicare is reducing physician reimbursement by 8% in 2023 in an effort to rein in costs. Private insurers, following that lead, are cutting rates as well. Rather than implementing this ill-advised policy, regulators should focus on the 340B program that is inflating hospital and drug costs and siphoning money from both public and private insurance to large hospital corporations.

340B allows hospitals to purchase pharmaceuticals at a massive discount. A well-intentioned piece of legislation meant to help hospitals care for disadvantaged patients, it has morphed into a program that is significantly inflating national healthcare expenses.   

To qualify for the 340b discount, a hospital must treat a certain proportion of low-income, publicly insured patients, achieving the disproportionate share (DSH) designation. Hospitals found that this DSH designation & 340b discount are an excellent source of revenue. This works because hospitals aren’t mandated that they then sell that discounted drug to a low-income patient. They can sell it to a privately insured or Medicare patient at a huge profit. Furthermore, despite originally specifying that drugs purchased under 340b be distributed via the hospital’s in-house pharmacy, beginning in 2010, 340b hospitals were allowed to sell drugs through contract pharmacies, such as CVS or Walgreens. Hospital corporations partner with pharmacy corporations, distributing discounted drugs at a massive markup, keeping the revenue. 

Medicare is required to reimburse medications for 6% over the average sale price (ASP+6). This creates a direct pipeline for Medicare dollars to flow into hospital coffers. Part of the problem with 340b is the lack of transparency, obscuring much of that revenue stream. In 2016, as 340b use was accelerating, one study found that Medicare gave hospitals $3.7 billion on drugs purchased through the 340b program, for an estimated $2.5 million in annual profits per hospital. This is effectively a direct hospital subsidy from Medicare. 

This mandatory drug discount also has an inflationary effect on pharmaceutical prices. The drug companies collectively gave nearly $50 billion in discounts in 2021. They offset this by increasing the list price of the drugs. A higher list price means that even a large percentage discount leaves the company with a decent revenue. However, many patients have a co-insurance that is directly tied to the list price, not the discounted price. Additionally, as mentioned, Medicare is mandated to reimburse 6% more than the average sale price as well. 

Because this discount is available to 340b hospitals and not private practice clinics, it gives a competitive advantage to hospital-based clinics. Small, independent oncology groups can’t compete with clinics affiliated with 340b eligible hospitals. Affiliated clinics buy their drugs at a massive discount, reaping huge profits. This extra capital allows hospitals to purchase those independent clinics, increasing consolidation, which, in turn, increases spending. There’s ample evidence that consolidated healthcare markets drive down physician salaries and worsen patient care. It increases the cost to private insurers, which pass it on to patients by charging higher premiums. The concern over consolidation is great enough that the Biden Administration has stepped in to combat it. 

The net benefit of this program might still be debatable if there was evidence 340b was fulfilling its original intent: helping low-income patients. This is not the case. Many hospitals treat just enough Medicaid patients to get their 340b eligibility, but no more. This program has fueled an explosion of new eligible hospitals and contracted pharmacies. These institutions expanded into wealthier neighborhoods and areas with more privately insured patients. The later entrants were also more likely to avoid counties with lower income levels and more uninsured patients. The hospitals didn’t increase care for underserved populations or increase their rates of uncompensated care.  This is a program that was aimed at helping low-income patients. It has instead morphed into a revenue stream for hospitals. 

Hospitals claim that the money they make off 340b goes to good causes. It expands services that they could not otherwise afford. However, these non-profit hospital corporations are already exempt from taxes, and they receive many other generous taxpayer subsidies. If the hospital needs more money, they should apply for a grant, appeal to voters, or cut costs, not game a well-intentioned regulation. 

Fixing 340b won't be easy. The supreme court recently ruled that CMS (Centers for Medicare and Medicaid Services) cannot reduce how much money 340b hospitals get from Medicare without going through the legislative process. This can be done while keeping the noble intent of the act.

Congress should ensure that the discount goes to hospitals that are truly dedicated to low-income patients. The discount could be structured so that it follows the patient, regardless of the institution they utilize. Allowing a hospital to keep part of the discount could incentivize them to care for more low-income patients. Alternatively, the discount could be proportional to the number of Medicaid/charity patients a hospital treats, instead of an all-or-nothing discount once an arbitrary threshold is met. 

Importantly, the program needs increased transparency. Medicare and private insurance premiums are being used to cover the 340b associated revenues and high pharmaceutical prices. The taxpayers deserve to know where this money is going. Mandating a publicly accessible balance sheet on drugs purchased through a federal program would not be unreasonable. Put the data out there for researchers and policymakers to review. 

Doctors need to advocate for these improvements to 340b. The program diverts billions of dollars from private and public insurers to hospital corporations. It drives up pharmaceutical costs and increases consolidation. It increases insurance premiums and copays. With all that, there’s little evidence it is fulfilling the intent of the original legislation. Doctors know that continued cuts to physician reimbursement will worsen patient access to care. We should instead take aim at 340b.