States Differ in Responses to 340B Program Abuse

Published January 21, 2025

Widespread and longstanding abuse of a federal program designed to provide prescription drugs to low-income patients has prompted lawmakers in Minnesota and Michigan to try to rein in the 340B program in the absence of significant reforms by the federal government.

Minnesota recently enacted a law requiring covered entities to begin providing annual reports with data related to their 340B prescription drug purchases in 2024 to the state’s Department of Health (MDH).

A lively debate over 340B is underway in Michigan, where two bills attempting to protect the program failed to reach the governor’s desk before the 2024 legislative session ended on December 31. The legislation, sponsored by Democrats, who controlled both legislative chambers, would have prohibited drug companies from denying access to certain drugs in the program.

The bills, HB 5350 and SB 1179, were fiercely opposed by businesses and groups that advocate cutting government waste.

Unintended Direction

Enacted in 1992 and administered through the Health Resources Services Administration, the 340B Drug Pricing Program requires manufacturers participating in Medicaid to sell drugs at a steep discount between 20 and 50 percent to “covered entities” such as federally funded community hospital centers.

The goal was to make medications more affordable for people with limited means. In practice, large hospitals and hospital chains often prescribe drugs they have bought on the cheap to well-heeled patients who pay higher, market rates, enabling hospitals to profit handsomely from the spread.

Reform Calls

In a November 24 blog item, Citizens Against Government Waste President Thomas Schatz said large hospitals and contract pharmacies “have enriched themselves by siphoning off the money that is supposed to help patients.”

Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group, launched a nationwide campaign in 2023 calling for 340B reform.

“There is clear evidence many hospitals are exploiting loopholes in the 340B program, driving up costs for patients, employers, and taxpayers in the process,” the organization stated in an October 3 blog item.

“They prescribe more expensive medicines and are less likely to prescribe biosimilars,” PhRMA wrote. “They are driving provider consolidation, buying up smaller hospitals and physician practices. And they significantly markup medicine prices.”

Explosive Growth

The program has ballooned far beyond its original mission, says Merrill Matthews, a resident scholar at the Institute for Policy Innovation.

“While hospitals were the initial target for 340B, participating entities have expanded,” said Matthews. “Thousands of clinics also participate in 340B, as do retail pharmacies that contract with participating hospitals and clinics. The number of participating contract pharmacies grew from 789 nationwide in 2009 to 32,500 today.”

Spending rose just as dramatically, says Matthews.

“With many more hospitals and pharmacies participating in 340B, spending exploded from $6.6 billion in 2010 to $43.9 billion in 2021, according to the Congressional Budget Office—a nearly sevenfold increase in a decade,” said Matthews.

Minnesota Report Released

The Minnesota Department of Health released its first report on the matter in November 2024 under the state’s new law enacted that same year.

“Minnesota providers participating in the federal 340B Drug Pricing Program earned a collective net 340B revenue of at least $630 million for the 2023 calendar year,” the report states. “Based on national data, MDH believes this figure may represent as little as half of the actual 340B revenue for Minnesota providers.”

The state’s “largest 340B hospitals benefited most from the 340B program, representing 80 percent—more than $500 million—of the statewide net 340B revenue,” the report states. “Conversely, Safety-Net Federal Grantee clinics generated the least net 340B revenue.”

Other findings include a “sizeable volume of net 340B revenue was generated from Minnesota Health Care Programs—Medical Assistance/Medicaid and Minnesota Care—totaling about $87 million,” and “payments to contract pharmacies and third-party administrators were over $120 million, representing approximately $16 out of every $100 of gross 340B revenue generated paid to external parties.”

Concerns in Michigan

The Michigan Health Purchasers Coalition, Michigan Manufacturers Association, and other business groups  sent a letter to state lawmakers criticizing the state’s 340B program and citing illegal activity.

“340B provides strong incentives for hospitals to acquire independent outpatient physician offices in wealthy and better-insured areas than the parent hospital, designate them as ‘child sites,’ and maximize profits by tapping into employers and working families they insure,” stated the letter. “340B encourages hospitals to establish networks of external retail chain and mail-order pharmacies—a practice not grounded in statute.”

The letter urged lawmakers to oppose HB 5350 and SB 1179 because “the proposed legislation represents a step backward and would exacerbate 340B’s upward pressure on costs without improving access or affordability for low-income patients.”

Hospital Moneymaker

Hospitals profit from the program while consumers pay higher prices, says Jarrett Skorup, vice president for marketing and communications at the Mackinac Center for Public Policy.

“The federal 340B law shifts money from drug manufacturers to hospitals,” said Skorup.

“Everyone else must pay higher prices for drugs, to enable some hospitals to spike their revenues,” said Skorup. ‘There is little evidence that this law helps low-income residents or leads to more charity care. In Michigan, hospitals lobbied hard to extend that program to pharmacies with which they had contracts. That would have made it even more wasteful.”

Congressional Responsibility

Congress has responsibility for the 340B program, and President Donald Trump has promised greater attention to government waste with the formation of the Department of Government Efficiency (DOGE), the independent advisory commission headed by Elon Musk and Vivek Ramaswamy.

Musk and Ramaswamy met with members of Congress during the lame-duck session and are expected to pursue numerous legislative and administrative actions to eliminate waste, which could include 340B reforms.

Bonner Russell Cohen, Ph.D., ([email protected]) is a senior fellow at the National Center for Public Policy Research.