340B: Good intentions in need of reform


It was with great interest that I read Representative Henry Waxman’s defense of the 340B program recently published in Health Affairs Front Point. As a physician dedicated to serving vulnerable populations at a hospital in California, I have an interest in programs aimed at strengthening the health care safety net. By mandating that drug companies give a large discount to covered entities, the majority of which are hospitals with excessive share or critical access designations, the 340B program was intended to provide a financial buffer for institutions like the one where I work . However, the 340B program has been gamed by large corporations to raise revenue. It no longer serves its original purpose.

The program has grown rapidly among hospitals serving wealthier patient populations. 340B hospitals are expanding into more affluent neighborhoods, and they are mindful of payer mix as they move into areas with fewer publicly insured patients. 340B institutions are more likely to avoid counties with lower income levels and more uninsured patients. While Rep. Waxman argues that this revenue is used to increase service lines for low-income patients, the evidence suggests that 340B hospitals have not increased care for underserved populations or increased their rates of uncompensated care. There are many reforms that could preserve safety net funding while curbing abuse of the 340B system.

My hospital, which has an inpatient payer mix of more than 50 percent Medicaid, is an intended beneficiary of 340B. However, we receive the same drug discount as a private hospital that meets the minimum 11.75 percent disproportionate share threshold. A study conducted by Karen Mulligan and colleagues shows that hospitals exhibit strategic behavior to meet this threshold. They found that a greater than expected number of hospitals treated the minimum low-income patients, but no more. Additionally, hospitals that are ineligible for the 340B program regardless of their disproportionate share, such as investor-owned institutions, do not show this large group that treats 11.75 percent low-income. It is true that these 340B hospitals provide valuable community services, but they are already rewarded for that with nonprofit status, which exempts them from an otherwise substantial tax burden.

This is not cross-subsidisation. These are tax-exempt institutions that play a well-intentioned regulation for extra income.

If rural and low-income hospitals need additional subsidies to stay afloat, then this should be discussed in Congress. This is happening now as hospitals lobby for yet another “essential hospital” designation.

Aside from 340B, there are many subsidies for rural and low-income hospitals, especially those with excessive sharing hospital (DSH) and critical access hospital (CAH) designations. At the federal level, programs such as DSH payments and Medicare Low Volume Hospital Adjustment provide tremendous support for safety net hospitals across the country. The Affordable Care Act included subsidies for DSH hospitals through both Medicaid and Medicare. The Federal Office of Rural Health Policy provides grants. There are also many statewide programs for these hospitals, including grant funding for capital investments or operating costs, supplemental Medicaid payments, emergency care grants, and many other state loans or grants.

CAHs already receive favorable funding from the Centers for Medicare and Medicaid Services, which allows them to be paid on reported costs rather than the traditional prospective payment systems. In addition, the Medicare Incentive Program can match up to 75 percent of certain expenses related to technology investments that are aligned with priorities such as strengthening patient safety. Finally, Rural Health Care Connectivity Grants provide start-up funds for telehealth initiatives and Internet access projects aimed at increasing rural access to health care.

It is misleading to say that the 340B program is without cost to taxpayers. By selling the discount drugs to Medicare beneficiaries (who are required to reimburse 6 percent over the average sales price, regardless of acquisition costs), hospitals receive millions of dollars in revenue directly from taxpayers. Additionally, the $50 billion in annual drug rebates the program grants is offset by higher list prices on pharmaceuticals. By giving a competitive advantage to large hospital corporations, the 340B program increases the consolidation of health care, which increases prices, directly affecting taxpayers through their increasing insurance premiums. As mentioned earlier, these 340B institutions also already receive generous tax breaks via their non-profit status and by shifting revenue from for-profit tax-paying drug manufacturers to tax-exempt non-profit hospitals, the program deprives federal and state governments of tax revenue.

Simple reforms can improve fairness and maintain the intent of the 340B program. Since taxpayers both directly and indirectly fund the program, transparency is needed. Simple accounting methods should show where the 340B drugs are resold and how much money hospitals make from the program. Hospitals must publish data on the insurance status of patients receiving 340B prescriptions. Institutional data on what drugs are purchased, the quantity and where those drugs are then resold (while ensuring patient privacy) should be made publicly available by the Health Resources and Services Administration (HRSA). This list should also be maintained with a list of an institution’s drugs purchased under the Medicaid rebate program to ensure no duplicate rebates. If the program really only helps low-income patients, these hospitals should welcome an enforcement mechanism that ensures the revenue goes to services aimed at these patients. Transparency and publicly accessible data will only strengthen the argument that 340B primarily helps vulnerable patient populations.

Hospitals serving low-income patients should also welcome methods that will curb abuse of the program by hospitals and their satellite clinics in more affluent areas. Keeping the inventory of 340B drugs separately tracked, as suggested above, will also help ensure that the 340B discount is not given to an incompetent patient. The HRSA must also track and report eligible contract pharmacies if discounts are passed on to eligible patients. Furthermore, hospitals serving more low-income patients may receive greater assistance by making the discount proportional to total expenditures on Medicaid/charity patients. Finally, consideration could be given to abolishing the program and simply rolling the funds into one of the many other aid programs mentioned above.

As someone who has dedicated my career to working in a safety net hospital system, I want to preserve the intent of the 340B program. Vulnerable patient populations require safety net assistance beyond what the program currently provides. Without harming the original intent of the 340B program, the simple changes mentioned above will strengthen safety net care for the future.

Author’s note

The author receives grant funding from the Mercatus Institute at George Mason University for research on Medicaid and access to care. He received research funding from DuPuy Synthes for a study on spinal instrumentation. He is also a paid neurotrauma consultant for the National Football League.