Hospitals and pharmacies profit as 340B drives up patients’ drug costs

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The federal 340B Drug Pricing Program is starting to get a great deal of attention—for all the wrong reasons.

The program was started in 1992 with the goal of allowing hospitals and clinics that work with underserved communities to provide outpatient prescription drugs to patients at deep discounts. Now, after 30 years, the program has ballooned—and morphed into a system that is proving anathema to its original intent. With more states getting involved in 340B issues and as pharmacies and hospitals push to grow the program, it’s high time we revisit the original purpose of 340B, why the program has gotten out of control, and what we should do about it.

The morphing of 340B

When the program started in the 90s, it covered safety net hospitals (including some teaching hospitals) along with their outpatient clinics, as well as community health centers. The program expanded under the Affordable Care Act to include children’s hospitals, outpatient cancer center hospitals, and many kinds of rural hospitals with high Medicare patient populations.

At first, the program worked. There was negligible cost to taxpayers and manufacturers absorbed the cost of the program.

But the program’s expansion began to undermine its use.

Prescription medicines purchased under the program amounted to $6.9 billion in 2012, however “in 2021, they amounted to $44 billion, a nearly 16% increase from the previous year, according to the Health Resources & Services Administration (HRSA),” as reported by STAT News. With approximately 12,400 participating entities, “some $38 billion in medicines were purchased under the 340B program in 2020, which was up from $29.9 billion the previous year. In 2016, 340B sales were $16.2 billion.”

Adam J. Fein, Ph.D., CEO of Drug Channels Institute, explains that the increase in sales “make up about 20% of the total gross to net that manufacturers are now paying.” The program “is growing much faster than the total value of the marketplace. Manufacturer sales have grown only 3.9% during this period per year on average.”

Now, drug manufacturers, the federal government, hospitals, and the pharmacy industry are at odds as medical institutions find more ways to get their hands on heavily discounted prescription drugs—averaging around 50%, but sometimes discounted up to 99%—though many of them are not passing those savings to patients.

In addition to the expansion of covered entities in the ACA, a 2010 policy change drove explosive growth in the program. As BIO wrote in a letter to the Arkansas Legislature, “In 1996, HRSA issued guidance allowing covered entities without an on-site pharmacy to contract with a single off-site pharmacy. HRSA’s subsequent 2010 guidance eliminated the one-pharmacy limitation and permitted all covered entities, regardless of whether they maintained an on-site pharmacy, to enter into unlimited contract pharmacy arrangements.”

“There are now 30,000 pharmacy locations in the US acting as 340B contract pharmacies. Up from about 1,300 in 2010,” explains Dr. Fein. “That’s about half of the entire industry.” Dr. Fein found 340B purchases of prescription drugs are about 30% higher than the purchase rates of any other purchasing program, a rate which is increasing every year.

Contract pharmacies are not the only ones taking advantage of these savings and not passing them on to patients. Even though a hospital transparency rule for 340B is in place, as Ted Okon, Executive Director of the Community Oncology Alliance, discussed with AJMC, the organization “found that of the over 1,000 340B hospitals, only 11% were reporting their data. What that showed, though, with that 11% is they’re marking up drugs 3.8 times.”

Similarly, a recent COA survey of cancer hospitals found “only two of the 49 hospitals with compliant reporting data shared cash prices, but for those we found that hospitals charge approximately 3.2 times Average Sales Price (ASP) for commercial plans and charge cash-paying patients 3.0 times ASP.”

“If a hospital is making $350 million, $400 million a year, which some of the top hospitals are in 340B discounts,” Okon said, “getting a fine of $2 million, $3 million a year is the price of doing business.”

The program has become a revenue-generating scheme for hospitals and pharmacies that is ultimately not benefiting the patients it was created to serve. Additionally, the program is increasing the cost of overall healthcare spending. As reported in STAT, “Several studies suggest that the program increases the supply of certain drugs, some unnecessarily so, raises the cost of care, and some recipients pocket the profits rather than reinvest them into improving their care models.”

Why we’re talking about 340B

In the summer of 2020, some drug manufacturers started to push back, five drug manufacturers separately announced that they were limiting distribution of certain 340B Drug Pricing Program discounted drugs to certain contracted pharmacies. The number of manufacturers that made decisions to limit distribution to contract pharmacies has now grown to 18 and litigation between the federal government and drug manufacturers has kicked into high gear.

In one salient example, in July 2022 Merck filed a lawsuit against the Department of Health and Human Services (HHS) in response to receiving a letter threatening civil monetary policies for cutting off 340B contract pharmacies from receiving discounted prescriptions. In their lawsuit, the company stated, “Merck has adopted policies designed to respond to the potential for increased 340B Program noncompliance—such as duplicate discounts and drug diversion—that, as several government reports have found, arises and is at a heightened risk of occurring when covered entities order discounted 340B drugs for shipment directly to third-party pharmacy entities (‘contract pharmacies’).”

Eli Lilly and AstraZeneca filed similar lawsuits, where federal judges ruled in favor of the drug manufacturers and against HHS and the Health Resources and Services Administration (HRSA), which, similar to the Merck action, had started issuing letters in response to the companies’ 340B actions.

Meanwhile, in state legislatures, several bills pushed by 340B grantees and community pharmacies were enacted in 2021 and nine (so far) were enacted in 2022, with 44 bills introduced in 24 states this year.

The legislation is described as being intended to regulate discriminatory PBM reimbursement practices for 340B products. However, the biotech industry is concerned the legislation:

  • Would create a state statutory definition of “contract pharmacy;”
  • Would prohibits the use of pharmacy claims modifiers used to identify 340B claims and help prevent duplicate discounts and diversion, and;
  • Would include manufacturer mandates (e.g., forcing manufacturers to provide discounted products to 340B contract pharmacies).

HB 1881 in Arkansas is a perfect example of this trend. As BIO stated in a letter, “BIO respectfully opposes HB 1881, as it does not help patients lower their out-of-pocket costs, makes it more difficult for the state, payers, and manufacturers to identify illegal duplicate discounts (and waste in the system), and codifies contract pharmacy, a part of the program that has led to inappropriate growth, is not included in the federal statute, and is subject to pending litigation.”

“Preventing payers and pharmaceutical benefit managers (PBMs) from modifying a patient’s copayment based upon a contract pharmacy’s association with the 340B program would prevent lower cost-sharing for 340B-eligible patients,” BIO continued, adding that “disallowing payers to implement differential cost-sharing at 340B contract pharmacies and thus, sharing in savings with patients, is contrary to the spirit and original intent of the federal 340B law, to provide discounted drugs to disadvantaged patients.”

Ultimately, the unchecked expansion of the 340B program beyond its intended scope is setting up a system where hospitals and pharmacies make big profits, leave patients without discounts, and make drug manufacturers and insurers foot the bill. The political posturing will only make biotech’s already risky market even more unstable, while oversimplifying highly complex methodical market manipulations on the part of a variety of actors.

When it comes to problems in systems like 340B, politicians and federal regulators need to start asking, who is really profiting?

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