Drug pricing program spiraling out of control

Hospitals exploit charity care to pad their profits

MANY AMERICANS are unfamiliar with the federal 340B Drug Pricing Program, which has grown to become the second largest national drug program, behind only Medicare Part D. While 340B is intended to serve the neediest patients by providing treatments at little-to-no-cost, it has in practice spiraled into a profit-center for bad actors in the healthcare system. Some of the nation’s most prestigious hospitals, pharmacy benefit managers, and pharmacies appear to be using the program to enhance their own bottom lines at the expense of uninsured and low-income patients. Lawmakers must take action to return the 340B Drug Pricing Program to its original intent of providing charity care to the neediest Americans.

The 340B Drug Pricing Program allows eligible hospitals to access discounts provided by biopharmaceutical manufacturers on purchases of drugs administered or prescribed in an outpatient setting. The discounted drugs can then be provided to patients regardless of their ability to pay or their insurance coverage status. The 1992 statute under which the program was established states that program savings are intended to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

However, poor oversight of the program since its creation 30 years ago has empowered hospitals and pharmacy benefit managers to exploit charity care to pad their own profits by capturing the savings intended for needy patients. Under current law, providers are under no obligation to reserve the discounts of such drugs for needy patients or even report what they do with the savings they obtain through 340B. Eligible hospitals, known as “covered entities,” can obtain all 340B medications from a drugmaker at the discounted 340B price and then bill privately insured patients — and even uninsured patients — for the drug’s full list price, helping themselves to the difference as pure profit.

The program has expanded well beyond its intended scope. In 2010, the Health Resources & Services Administration, the agency that oversees the 340B program, opened the scope of the program to allow covered entities to contract with an unlimited number of third-party pharmacies to dispense 340B drugs. The number of contract pharmacies has skyrocketed from fewer than 1,300 locations in 2010 to nearly 28,000 in mid-2020.

The latest data show tremendous  growth in the 340B program. In 2021, total sales of 340B-discounted drugs were estimated to be $44 billion, a nearly 16 percent increase from 2020 and a 127 percent increase over the past five years. Hospitals accounted for 87 percent of the 340B purchases in 2020.

A new report demonstrates the abuse of the 340B program by hospitals and pharmacy benefit managers. The report finds that 72 percent of private nonprofit hospitals had a fair share deficit, meaning they spent less on charity care and community investment than they received in tax breaks. The Lown Institute Hospitals Index calculated “fair share spending” for more than 1,800 hospitals across 275 nonprofit hospital systems by comparing each system’s spending on charity care and community investment to the value of its tax exemption. (Data sources were hospital tax filings from fiscal year ending 2019, the most recent year available for most hospitals.)

Seventy-two percent of private nonprofit hospitals had a fair share deficit, meaning they spent less on charity care and community investment than they received in tax breaks. The combined fair share deficit for private nonprofit hospitals was $17 billion, with individual hospital deficits ranging from a few thousand dollars to $261 million.

The 10 hospitals with the largest fair share deficits accounted for more than 10 percent of the nation’s total. States with the biggest Fair Share Gap include North Carolina, Tennessee, New York, Massachusetts, Michigan, Pennsylvania, and California.

In Massachusetts, two of the largest teaching hospitals in Boston are among the top 10 in terms of fair share deficits.  Mass General has a fair share deficit of $179 million.  For the amount of tax breaks and drug discounts it receives, the hospital spends only 1.2 percent of its total budget on charity care. And Brigham and Women’s has a $142 million deficit, and spends only 1 percent on charity care.

The explosion of revenue for 340B institutions would hardly be problematic if there were also a simultaneous explosion in charity care programs to treat vulnerable patients. But the opposite scenario seems to be the case, as many charity care programs are declining. According to one study, the ability of people suffering severe economic hardship to afford needed medicines and medical care, relative to the general population, is negatively correlated with growth in the 340B program.

A 2018 report from the Government Accountability Office stated that “federal oversight of compliance at 340B contract pharmacies needs improvement,” and that nearly half of hospitals and covered entities do not always provide 340B discounted prices to uninsured and indigent patients.

For too many years, too few policymakers paid any attention to the 340B drug discount program, accepting the false idea that non-profit hospitals and other covered entities were using 340B savings to “stretch scarce federal healthcare resources” in service of our most vulnerable patients.

Patients are paying the price as they fail to realize the benefits of a program that they may not even know exists. Our lawmakers must protect patients from pharmacy benefit managers and large hospitals by returning the scope of the 340B program to its original intent.

Peter Pitts is president and co-founder of the Center for Medicine in the Public Interest. He is a former member of the United States Senior Executive Service and associate commissioner of the US Food & Drug Administration.