Federal 340B Drug Pricing Program Creates Windfall for Hospitals

Published September 24, 2014

NASHVILLE—Hospitals and clinics across Tennessee and the United States are reportedly using a federal entitlement to pad their profits and subsidize other operations, depriving pharmaceutical manufacturers of revenue and jeopardizing future drug innovation.

The program, known as the 340B Drug Pricing Program, passed into law in 1992 and was designed to help poor and uninsured people get prescription drugs. Under the program, drug companies give discounts to hospitals primarily serving poor and uninsured patients.

But hospitals are allegedly using discounted drugs for patients who are not poor or uninsured, and charging them full price.

“Hospitals are purchasing the drugs at these 20-50 percent discounted prices and then they are charging patients the full price, so hospitals are making a profit. It’s not helping the people it was designed to help,” said Sally Pipes, president of the Pacific Research Institute, a San Francisco-based think tank.

Raking in Undeserved Millions

According to a February 12, 2013 article in the New York Times, the practice of buying drugs at a discount while charging insured patients the full price has become lucrative for at least one Tennessee hospital and an oncology practice it is affiliated with.

“When a private oncology practice in Memphis formed a partnership with a nearby hospital in late 2011, the organizations proclaimed that the deal would “transform cancer care” in the region,” the Times article reported.

“What they did not emphasize was that the deal would also create a windfall for them worth millions of dollars a year, courtesy of an obscure federally mandated drug discount program.…

“When the West Clinic teamed with Methodist Healthcare, the huge volume of chemotherapy drugs used by the clinic suddenly qualified for the hospital’s discount, while reimbursement remained the same.”

Lindsay Boyd, director of policy at the Beacon Center of Tennessee, noted 67 percent of the hospitals in Tennessee that are enrolled in the 340B program provide less charity care than the national average of 3.3 percent, suggesting the program has gone well beyond simply helping the poor.

“As we see happen time after time with supposedly well-intentioned federal programs like 340B, what was once intended to directly benefit poor and uninsured patients has turned into a massive redistribution of wealth,” Boyd said. “Hospitals are pocketing the savings that should be passed to needy patients.

Concern over Innovation Incentives

One of the concerns raised over hospitals using discounted drugs for patients for whom the 340B program was never intended is that reducing revenues for pharmaceutical companies leaves less money to invest in drug research and development.

“If these companies haven’t gotten the financial incentive to do what they’re doing, then they’re going to stop, and that’s going to hurt not just the people who are uninsured and low-income. All of us will be hurt,” Pacific Research Institute President Sally Pipes said. “It could be drugs for Alzheimer’s, cancer, diabetes, or Hepatitis C.”

“Only about five drugs out of 5,000 actually make it to human trial, and one of the five makes it to market,” Pipes added. “It costs about $1 billion from the start of an idea to putting a drug through all of the different phases.… If they don’t make a change to this, it’s going to destroy the incentive for the pharmaceutical companies and biologics companies to continue to do research and development.”

Lack of Oversight Cited

Critics point to a lack of oversight for the program as it has expanded beyond its original parameters.

Federal officials, for instance, added pharmacies to the program in 1996. In 2010 the program began allowing hospitals to contract with an unlimited number of outside pharmacies. One in three hospitals in the United States now participates in the program.

Discussing proposed regulations that would rein in abuses, President Obama’s former Secretary of Health and Human Services Kathleen Sebelius told Health Affairs the regulations will “try to codify this delicate balance: staying true to Congress’s intent to extend federal dollars by leveraging these discounts, but also drawing brighter boundaries around which transactions are ‘in’ and which ones are ‘out.'”

Christopher Butler ([email protected]) writes for Watchdog.org, where an earlier version of this article first appeared. Reprinted with permission.