The 340B drug discount program is well-intentioned, but must be reformed

Most government support programs provide benefits directly to people, whether it is SNAP (Supplemental Nutritional Assistance Program), TANF (Temporary Assistance for Needy Families), or housing voucher benefits. But when it comes to healthcare, our government provides healthcare benefits by paying institutions, not patients. Shouldn’t funds follow the patient – not the system?

An example of this unique approach are the discounts given to hospitals rather than patients under the 340B drug discount program. The program, which requires manufacturer discounts on most drugs administered in outpatient settings to help safety-net providers, is under intense scrutiny in Congress.

All sorts of adverse incentives arise because the healthcare system prioritizes intermediaries over patients. In a recent piece published in the Journal of the American Medical Association, we argue that reforming the 340B program is a crucial step in shifting American healthcare to prioritize funding patients over institutions. Our research echoes testimony one of us recently gave to U.S. lawmakers on the House Energy and Commerce Committee.

Under 340B, hospitals, or their contract pharmacies, can purchase drugs at significant discounts. Insurers then reimburse these hospitals at full price creating a large revenue source on the spread. The legislative intent is that these revenues expand the capacity of those institutions serving a disproportionate number of at-risk patients.

There is no requirement on how hospitals spend these revenues, leaving the program vulnerable to exploitation. Unsurprisingly, 340B funds rarely serve their intended purposes. The program is inefficient, susceptible to manipulation, and creates disincentives that cause many adverse outcomes.

To start, due to loose oversight, a niche program that was supposed to help a small number of institutions serving vulnerable patients has grown into the second largest government drug discount program. Since serving insured patients generates the revenue bounty, a program intended to serve the poor incentivizes hospitals to treat the wealthy. Several strategies enable this unintended outcome to occur.

340B hospitals actively manage their operations to ensure they meet, without exceeding, the low-income service criteria. They expand satellite facilities into affluent well-insured neighborhoods to increase their 340B revenues. Of course, the intended population does not live in affluent well-insured areas. The discount program also provides one more reason for large hospital systems to purchase independent practices. Doing so transforms more drugs into higher margin 340B prescriptions.

Perhaps worst of all for patients, these games inflate pharmaceutical prices who typically don’t benefitfrom the low 340B prices and consequently pay higher out-of-pocket costs for these drugs.

Hospitals argue that they need the funds generated by gaming 340B to maintain normal clinical operations. However, much of the growth in operational costs are due to growth in their administrative bloat, which has been long outpacing growth in clinical care. These tax-exempt institutions already receive numerous subsidies. If they need another one, they should make that argument to legislators by opening their books and proving that the funds aren’t just going to administrator salaries or other frivolous spending (such as one 340B institution’s recent acquisition of a film studio). Don’t let these institutions exploit a drug benefit program that was meant to benefit patients.

Directly funding patients will help reduce these problems. Giving patients the discount allows them to choose the provider that best meets their needs. This removes the opportunity for hospital conglomerates to game the system. Patients, empowered by this discount, would have institutions competing to offer services tailored to their needs. Instead of catering to wealthy patients, these institutions would focus on providing services such as social work and transportation assistance to poorer individuals.

The 340B program is well-intentioned, but its design—funding institutions over patients—has led to widespread abuse and system manipulation. The program should be reformed with Personal Option principles that empower people with more choice and control over their healthcare. It’s time for lawmakers to focus on funding patients rather than institutions.

Anthony DiGiorgio is an assistant professor of neurological surgery and faculty in the Philip R. Lee Institute for Health Policy Studies at UCSF. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.