Good Intentions Cannot Justify a Flawed Federal Health Policy

A government program may be the "nearest thing to eternal life we'll ever see on this earth," warned Ronald Reagan – even if it is flawed. 

Section 340B of the Public Health Services Act is a case in point. Enacted over 30 years ago, that law enables certain healthcare facilities, including public hospitals and community health centers, to purchase prescription drugs at discounted prices in order to support underserved communities. As a result, every year, American hospitals receive about $50 billion in federally mandated discounts from drug companies. And drug companies must offer these discounts if they want to participate in Medicaid -- the government insurance program for low-income Americans. 

What could possibly go wrong?

Quite a bit. Rather than investing in services for the poor, hospitals often keep savings from the Section 340B program for themselves since the program is not structured to ensure the discounts actually benefit the underserved. The program also increases Medicaid costs, hurting taxpayers. And it even undermines drug development, since the government's failure to enforce its provisions has resulted in duplicate discounts, making some drugs unprofitable.

In the first year of the Section 340B program, roughly 1,000 hospitals and clinics -- collectively known as "covered entities" -- signed up. But once hospitals realized that nothing in the program actually required covered entities to spend their savings on underserved communities, more than 50,000 covered entities enrolled in the program. In short, hospitals and other covered entities could purchase drugs at a steep discount, resell them at full price, and pocket the difference.

The numbers speak for themselves. A staggering 85% of Section 340B hospitals across the country profited more from the program than they spent on care for the underserved.

In 2022, the New York Times investigated Bon Secours Mercy Health, a large hospital chain which gained its Section 340B status through its acquisition of Richmond Community Hospital, a facility that served a predominantly Black neighborhood. According to the Times, Bon Secours was able to turn its Richmond outpost into the most profitable hospital in Virginia, generating $100 million annually, largely by reselling 340B-eligible drugs to more affluent patients elsewhere. 

Meanwhile, the Times reported that very little of this money was used to care for low-income patients: Richmond Community Hospital had closed its intensive care unit, had no maternity ward, and its imaging machine frequently broke. 

While Section 340B enriches hospitals, it simultaneously hurts Medicaid. A second federal discount program -- the Medicaid Drug Rebate Program -- obligates drugmakers to issue rebates to Medicaid of at least 23.1% of a medicine's list price. But Section 340B prohibits duplicate discounts. Accordingly, drug companies are not obligated to offer a discounted 340B price and a Medicaid drug rebate for the same drug.

Conversely, when the prohibition against duplicate discounts is not enforced -- and according to the State Association of Medicaid directors, it often is not -- it results in increased prices for consumers. Specifically, in 2021, about a quarter of the drug sales that received Section 340B drug discounts also received Medicaid rebates, according to research firm IQVIA. This lost revenue from double-dipping has necessarily compelled drug companies to make up the losses elsewhere. So they raise the prices charged to insurers, who pass the higher costs on to consumers and taxpayers in the form of higher premiums and higher out-of-pocket costs. 

Research suggests that as much as $37.5 billion worth of drugs sold at discounted costs may be subject to double-dipping annually. The Government Accountability Office has repeatedly warned the Secretary of Health and Human Services that this unlawful activity should be a priority, but to date, no action has been taken to address it.

Instead of working to strengthen the law against double-dipping, over 200 lawmakers recently wrote to the Biden-Harris administration, urging it to side with the hospital lobby. Absent from their letter was any meaningful discussion of the underlying issues with Section 340B and how to address them.

That's bad news for patients, taxpayers, and drug companies. The Section 340B program was well intentioned. But it clearly isn't working.

Daniel M. Kolkey is an attorney, a former appellate judge, and is affiliated with Pacific Research Institute, a West Coast think tank.