If the road to hell is paved with good intentions, Washington has turned federal prescription drug policy into an eight-lane highway construction project that too often takes taxpayers for a ride.Congress created the 340B program to give hospitals that serve low-income and uninsured patients access to steep discounts on prescription drugs. But because the law never spelled out how providers should use the savings, this program has devolved into a wasteful form of welfare for large hospital systems. Needy patients are left behind while hospitals cash in. Helping hospitals pay for drugs that vulnerable patients depend on is a perfectly valid cause. The problem is that lawmakers failed to clearly define who qualifies as a 340B patient and then looked the other way as billions of dollars flowed through an opaque system devoid of accountability. Any serious attempt to preserve this important lifeline for hospitals needs to start with codifying a clear definition of a 340B patient and establishing basic transparency requirements.
To participate in Medicaid and Medicare, pharmaceutical companies must sell their drugs to qualifying hospitals at heavily reduced prices — typically 25% to 50% below wholesale rates. Yet, insurers and government health programs continue to reimburse hospitals for these treatments at nondiscounted market rates. The lack of any statutory safeguards means providers can pocket this spread as pure profit. When the government provides incentives as lucrative as these, explosive growth is hardly surprising. From 2012 to 2024, annual drug purchases through 340B skyrocketed from $6.9 billion to $81 billion. That’s more than an 11-fold increase — a growth rate that has even outpaced Medicare Part D, the federal government’s biggest prescription drug benefit.340B’s distortions cost taxpayers dearly. The “buy low, sell high” reimbursement structure encourages hospitals to prescribe more costly brand-name drugs since these products generate larger margins than generics. In 2023, nearly 90% of all drugs purchased through 340B were branded medicines, whereas outside the program, they represented around 78% of sales. Employer-sponsored insurance plans, federal health programs, and state-employee healthcare plans ultimately bear the costs of this distortion. The financial incentives that lead hospitals to prescribe more expensive drugs are also driving consolidation throughout the healthcare sector. Hospital systems quickly realized they could boost their 340B revenue by acquiring independent physician practices that administer outpatient drugs. Once these clinics are folded into a 340B-eligible hospital system, the treatments they provide become far more profitable. Hospital markets already suffer from a stunning lack of competition, and 340B aggravates the problem. In 2022, nearly half of all metropolitan areas across the country had just one or two hospital systems controlling the market for inpatient care, and, by 2024, nearly 80% of physicians nationwide were employed by hospitals or other corporate entities. Less competition allows hospitals to charge higher prices. 340B’s runaway growth was largely enabled by shortsighted regulatory decisions. Before 2010, hospitals that lacked an in-house pharmacy were allowed to partner with a single outside pharmacy to dispense 340B drugs. That changed when the Obama administration issued guidance allowing 340B hospitals to contract with an unlimited number of outside pharmacies. That move opened the floodgates — the number of contract pharmacies surged from approximately 1,300 in 2010 to more than 25,000 by 2020.Removing this cap dramatically expanded the reach and profitability of 340B. Yet, Washington failed to impose basic transparency requirements to track where prescriptions were filled or how patients were benefiting. This resulting black box increasingly channels prescriptions into affluent and well-insured areas to maximize revenue, drifting even further away from 340B’s intended purpose. MEDICARE’S NEW MONEY-SAVING IDEA COULD LAND PATIENTS IN THE ERReform is long overdue. Fortunately, the Trump administration has rolled out a pilot program to assess whether 340B’s current model of upfront discounts should be replaced by a rebate system. Under this approach, hospitals would pay the full list price at the point of purchase and then receive a payment from the manufacturer. By creating an auditable transaction trail, a rebate system would reduce the risks of duplicate discounts between 340B and other federal health programs.Congress needs to step in and establish basic guardrails to ensure savings benefit vulnerable patients rather than the bottom lines of consolidated health systems. Until then, these distortions will continue to recklessly inflate health spending.Alex Ciccone is policy and government affairs manager at National Taxpayers Union.
