The 340B Drug Pricing Program is failing patients

The 340B Drug Pricing Program has faced renewed scrutiny in Congress and the courts. The most recent attempt at legislative reform, the 340B PATIENTS Act of 2024 that died in the last Congress, aimed to ensure that drug manufacturers provide discounted prices to eligible health care organizations, regardless of how or where drugs are dispensed, including through contract pharmacies. 

While manufacturer compliance is important, such reforms sidestep a critical issue: the lack of transparency and accountability in how hospitals utilize the substantial discount savings. The 340B drug program, though well-intended, has become a revenue-generating tool for hospitals rather than a mechanism to support lowering drug costs for low-income patients.

Why 340B doesn’t work

The 340B Drug Pricing Program, established in 1992 under the Veterans Health Care Act, mandates that drug manufacturers provide outpatient drugs at significantly reduced prices to eligible health care organizations. Known as covered entities, these institutions include safety-net hospitals, community health centers, and clinics that serve a high proportion of low-income or uninsured patients. To qualify, 11.75 percent of a hospital’s patients must be Medicare patients. The program’s primary goal is to enable these organizations to stretch scarce federal resources to treat more patients or offer more comprehensive services.

Eligible entities benefit from discounts typically ranging from 20-50 percent off the non-federal average manufacturer price. The savings are intended to support expanded health care services, such as free or low-cost care for underserved populations. Since its inception, the program has grown significantly, with the number of covered entities tripling over the past decade, amplifying both its impact and related controversies about whether these savings are truly being passed on to the intended beneficiaries.

The mechanics of the 340B Program are straightforward but have complex implications. Covered entities register with the Health Resources and Services Administration (HRSA), the federal agency overseeing the program. Once approved, they can purchase outpatient drugs at discounted prices directly from manufacturers or through wholesalers. These drugs are then dispensed to patients, including those with private insurance, Medicare, or Medicaid.

A key feature of the program allows covered entities to bill private insurers at full market rates for 340B drugs, even though they purchased them at a discount. This practice, known as arbitrage, allows hospitals to retain the difference as revenue. For example, a hospital might buy a drug for $50 under 340B pricing but bill an insurer the full sticker price of $100, pocketing the $50 difference. While this revenue is meant to fund patient care, there is no federal requirement to pass savings directly to patients or to use them exclusively for low-income care, leading to concerns that these profits directly line hospitals’ pockets and indirectly increase the cost of insurance for patients. The $65 billion in profits from 340B drugs now account for slightly over 10 percent of total spending on non-generic drugs.

Covered entities can also register multiple locations as “child sites,” expanding their eligibility for discounts. Additionally, many use contract pharmacies—third-party pharmacies that dispense 340B drugs on behalf of covered entities—to increase access, particularly in rural or underserved areas. However, this has sparked disputes with manufacturers, some of whom argue that contract pharmacies complicate oversight and increase the risk of program abuse.

Why 340B needs reform and how to do it

There is no reason to believe that 340B profits are being used to lower the cost of patient care for low-income Americans. Indeed, data suggests the opposite. A recent essay in the Journal of the American Medical Association shows that 340B hospitals are increasingly expanding into affluent neighborhoods with higher percentages of privately insured patients. Further, if 340B hospitals were utilizing the savings to serve low-income patients, one might expect that there would be an increase in uncompensated care from these hospitals before and after starting the program. Unfortunately, there is no evidence of this occurring. Even worse, some hospitals use 340B savings for non-patient purposes, such as acquiring physician practices or funding capital projects, as highlighted in a House subcommittee hearing.

The abuse of the 340B drug program is similar to the use of provider taxes—an accounting gimmick used to increase Medicaid funding to hospitals FREOPP has previously written about—and represents another glaringly wasteful use of subsidies by the federal government. To address these issues, tighter reporting requirements appear essential to ensure that 340B savings benefit low-income and uninsured patients. Currently, HRSA’s oversight is limited, with audits focusing primarily on preventing diversion (e.g., selling 340B drugs to ineligible patients) and duplicate discounts (e.g., claiming both 340B and Medicaid rebates). However, there is no mandate for hospitals to disclose how they use 340B savings.

Additional reforms should include requiring covered entities to report their allocation of 340B savings annually, specifying the percentage used for charity care, low-income services, or other patient-focused initiatives. Stricter eligibility criteria could also prevent hospitals that primarily serve wealthier populations from participating. For example, limiting 340B status to facilities with a higher proportion of Medicaid, Medicare, or uninsured patients could better align the program with its original intent.

The SUSTAIN 340B Act, a discussion draft released in February 2024 by a bipartisan group of senators known as the Gang of Six, proposed increased oversight and transparency, including user fees to fund HRSA’s monitoring efforts. While this proposal has not become law, it reflects growing bipartisan support for reform. Similarly, state-level actions—such as Maine’s recent legislation requiring hospital reporting—suggest a broader push for accountability that should be reinforced with additional federal reporting requirements.

The 340B Drug Pricing Program is currently a wasteful, abused subsidy program to hospitals that Congress should rein in. Hospitals should be held to tighter reporting requirements, enhanced HRSA oversight, and stricter eligibility criteria to realign the program with its original mission of helping low-income patients afford medication. As Congress debates 340B’s future, prioritizing transparency and patient benefit will be key to restoring its original purpose.