340B Drug Pricing Program costing employee health plans $5B per year
“Hospitals realized they could buy heavily discounted drugs and resell them to insured, middle-class patients at huge markups.”
By Dan Crippen
An obscure, supposedly free federal program is blowing a hole in state budgets — by depriving state governments of billions in corporate tax revenue and inflating costs for their public employee health plans.
The culprit is the 340B Drug Pricing Program, which Congress established in 1992 to help safety-net hospitals. Once enrolled, qualifying hospitals and clinics and their partner pharmacies — collectively called “covered entities” — can purchase medicines directly from drug manufacturers or wholesalers at roughly 50% discounts.
Congress expected only about 90 hospitals to participate. Today, more than 2,600 hospitals are enrolled.
This explosive, unintended growth is the result of the program’s lax requirements. Covered entities are not required to expand charity care or even report how they use their 340B earnings.
Hospitals realized they could buy heavily discounted drugs and resell them to insured, middle-class patients at huge markups. In some cases, hospitals have charged cancer patients nearly ten times what they paid to acquire the drug.
The opportunity to upcharge patients has proven irresistible and fueled the program’s bloat. In 2023, covered entities purchased $124 billion worth of medicines — but only paid $66 billion, meaning they received roughly $58 billion in discounts.
Numerous audits have revealed that many hospitals use the funds to subsidize expansion in affluent neighborhoods, rather than support low-income or uninsured patients.
This perverse behavior harms state taxpayers. Because most 340B hospitals are technically non-profits, their earnings aren’t taxed. As a result, states collect about $3.5 billion less in corporate income tax and other tax revenue than they otherwise would. That’s money not available for public health, education, infrastructure, or employee benefits.
The 340B program hurts states in other ways, too.
The program incentivizes hospital systems to acquire independent clinics — which don’t qualify for 340B — and designate them as “child sites” that subsequently become eligible for 340B.
This leads to higher healthcare spending, since care at hospital-owned sites is more expensive than at clinics and independent practices.
Care at 340B hospitals tends to be more expensive than care at competing hospitals, too. The average per-patient prescription spending at 340B hospitals is 150% higher than non-340B hospitals.
All told, large employers and their workers spend over $5 billion more per year on health care as a result of 340B. Every extra dollar that businesses spend on health care is a dollar that’s deducted from their taxable income.
The program also inflates costs for state employee health plans. Utah recently found that its Public Employees Health Program is losing out on $3.9 million in rebate savings due to 340B.
Some state lawmakers are unwittingly compounding the damage by making it easier for pharmacies to contract with 340B hospitals and clinics.
Instead of boosting care for poor patients, 340B drains public resources while enriching large hospital systems. Reform is desperately needed.
Dan Crippen is the former Director of the Congressional Budget Office. This piece originally ran in RealClearHealth.
