Unveiling 340B: Who Benefits From the $50 Billion Healthcare Discounts?

$50B in discounts are being spent on a healthcare program you may never have heard of.

40% of US hospitals participate.

All this is because of 340B, a program intended to help safety net providers.

The 340B Drug Pricing Program is now unambiguously the second-largest government pharmaceutical program based on net drug spending.

Yet, unlike Medicare and Medicaid, the 340B program lacks a regulatory infrastructure, well-developed administrative controls, and clear legislation to guide the program.

Some people say it’s a way for providers to abuse the system.

Others say it’s a critical lifeline for many providers.

Let’s dig in to understand this better.

What is 340B?

Established under the Veterans Health Care Act of 1992, the 340B Drug Pricing Program enables providers (covered entities) who serve lower-income patients to purchase medications from manufacturers at a discount — up to half the average sales price.

Providers can then be reimbursed at standard rates for the medications from payers, effectively capturing a larger profit by purchasing medications at a discount and receiving standard reimbursement rates.

The intent of the 340B program is to help providers serving lower-income patients stretch scarce federal resources, enabling them to serve more patients and offer more comprehensive services.

Initially, few hospitals participated until eligibility was expanded for general acute care hospitals in 2003.

Then in 2010, the Affordable Care Act (ACA) expanded the scope of the 340B program to include four additional types of eligible entities: outpatient settings of certain freestanding cancer hospitals, rural referral centers, sole community hospitals, and critical access hospitals.

This expansion also enhanced contract pharmacy arrangements, allowing covered entities to partner with external pharmacies to increase their reach and provide medications purchased through 340B.

As a result of these ACA changes and broader market strategies adopted by large health systems, the 340B program has evolved into a $50 billion-a-year revenue stream.

Again, keep in mind that the goal of the 340B program is intended to help support safety net providers such as FQHCs.

So, Does 340B Help FQHCs?

Yes.

Yet, only when an FQHC and other safety net providers have the necessary resources, staff expertise, and time to manage the extensive documentation and compliance processes of the 340B program can it fully benefit.

Unfortunately, many of the FQHCs do not have the capacity to navigate the complexities of the 340B program.

For those that can leverage it, the 340B program can be a lifeline to FQHCs, helping to increase their margins and provide better care to their patients.

While exact dollar amounts vary by health center, the impact is substantial. For example, one study found that 55% of rural hospitals used 340B revenue to stay open.

Where Things Have Been Going Wrong

While there are many challenges of the 340B program, both directly and indirectly, I have grouped four core problems.

1. Medication pricing.

2. The nonprofit status of health systems.

3. Too few direct funds to safety net providers.

4. Admin complexity of 340B.

Problem #1: Medication Pricing

Pharma companies say they want to reform the 340B program so they can sell their medications at a higher price, as they claim they are losing too much money from the 340B program.

I don’t believe them.

Medication pricing is excessively high, a problem further exacerbated by the lack of transparency in pharmaceutical pricing and the negotiations with pharmacy benefit managers (PBMs).

This opacity creates significant challenges for payers and healthcare providers who are striving to make informed decisions about cost-effective treatments.

This lack of clarity not only hampers the ability of providers to deliver affordable care but also places a substantial financial burden on patients who are often left with high out-of-pocket expenses.

These issues are not unique to the 340B program, but the overarching problem of high medication prices suggests that 340B alone cannot resolve this systemic issue. In fact, 340B actually benefits from this system because providers get reimbursed the higher price.

Problem #2: The Nonprofit Status of Health Systems

Some have argued that at times the 340B program has turned into a slush fund for unintended purposes for some of its participants, particularly large, ostensibly nonprofit hospitals and health systems.

These entities purchase drugs at significant 340B discounts and then charge payers, the uninsured, and cash-paying patients exorbitant markups. The resulting profits bolster the hospitals' financial reserves and provide substantial capital for them to take over and consolidate local markets.

Again, one of the main intents of the 340B program is community reinvestment. However, financial gains for hospitals have not been associated with clear evidence of expanded care or lower mortality among low-income patients.

And as mentioned, not only have these health systems not reinvested this money back into their communities, but they have done the opposite. They have engaged in activities such as consolidation, which has been shown to increase healthcare prices.

This has drawn scrutiny, as some large health systems and for profits PBMs were found to have diverted millions of dollars that should have gone to patient care.

The strategy involves building clinics in wealthier neighborhoods, where patients with generous private insurance could receive expensive drugs, while on paper making these clinics extensions of poor hospitals to leverage the 340B program.

These health system appear to have retained "just enough" of a clinic in a poor neighborhood to qualify for 340B funds.

Problem #3: Too Few Direct Funds to Safety Net Providers

FQHCs and safety net systems have low margins.

Lawmakers knew this, which is why they built the 340B program to fund greater margins in their system.

Yet, this results in perverse incentives to prescribe more medications that are higher priced.

I don’t think that the vast majority of FQHCs and other safety net systems are doing anything malicious here. I do think that the foundational funding mechanism to help fund FQHCs is odd.

The 340B program was most likely the most politically feasible way to secure funding for safety net providers, particularly given the historical context of the Omnibus Budget Reconciliation Act of 1990 (OBRA '90) and the Medicaid Drug Rebate Program (MDRP), which set a precedent for government-negotiated rebates and discounts.

This provides a complex subsidy for 340B covered entities achieved through requirements imposed on drug manufacturers.

Though as a result, not only did policymakers not directly fund FQHCs and other safety net systems, but they also missed the greater issue of regulating medication prices, which is causing significant harm to most Americans.

Problem #4: Admin Complexity of 340B

The administrative burden and intricate regulatory requirements often pose significant challenges.

The 340B program's admin complexity stems from:

• Strict eligibility and compliance requirements.

• Intricate inventory management.

• Frequent audits and reporting.

• Ensuring duplicate discount prohibition.

• Managing contract pharmacy arrangements.

• Lack of pricing transparency.

• Need for advanced technology and data management.

Many FQHCs lack the necessary resources, staff expertise, or time to manage the extensive documentation and compliance processes, thereby missing out on the potential benefits of the 340B program.

This situation underscores the need for increased support and streamlined procedures to help these vital healthcare centers access the benefits they are entitled to, ultimately improving healthcare accessibility and affordability for the populations they serve.

Recent Legislative and Regulatory Environment

I believe we're heading into a situation where regulations will significantly influence the four problems I mentioned above.

As of June 2024, there are a few important things that have been happening on the policy-side for the 340B program.

Recent legislative actions focus on increasing transparency, preventing abuses, and ensuring the program's benefits reach the intended populations.

Here is a brief overview of some policy happenings of the 340B program.

House Energy and Commerce Subcommittee

Congress has launched an investigation into how 340B entities are spending their program revenue. A bipartisan group of six U.S. Senators also released a draft of legislation that intends to provide “clarity, transparency, and accountability in the 340B program.”

The investigation and proposed legislation regarding the 340B have seen some developments, but significant changes have not yet been fully implemented.

ASAP 340B & 340B ACCESS Act

The Alliance to Save America’s 340B Program (ASAP 340B) is a coalition consisting of community health centers, patients, providers, consumer advocates, and leaders from the biopharmaceutical industry. They aim to address perceived issues with the 340B program.

In response, the 340B ACCESS Act, sponsored by U.S. Reps. Larry Bucshon (R-IN), Buddy Carter (R-GA), and Diana Harshbarger (R-TN), takes a comprehensive approach to reforming the 340B program. It addresses concerns of Community Health Centers, including those related to contract pharmacies, clarifying the program's intent, and addressing PBMs.

340B PATIENTS Act, H.R. 7635

Advocates argue that this initiative aims to improve medication access for underserved patients by challenging restrictions imposed by drug companies on how covered entities in the 340B program dispense discounted drugs.

They contend that easing regulations to allow hospitals and clinics (covered entities) to use contract pharmacies for distributing discounted drugs would enhance accessibility.

Advocates also assert that preventing drug companies from imposing limits on these arrangements is crucial to ensuring patients can obtain the medications they need without unnecessary barriers.

Potential (Overlapping) Opportunities to Build in the Space

1. Enhanced Data Analytics Integration:

   • Utilize third-party administrators (TPAs) to collect and analyze data from both covered entities and contract pharmacies.

   • Implement retroactive analysis to determine 340B-eligible prescriptions.

2. Streamlined Procedures and Support:

   • Develop streamlined processes to facilitate easier access to the 340B program benefits.

   • Provide increased support to healthcare centers to navigate complex compliance requirements effectively.

3. Improving Healthcare Accessibility and Affordability:

   • Focus on initiatives that leverage the 340B program benefits to enhance healthcare accessibility and affordability.

   • Target populations served by healthcare centers to ensure they benefit from improved medication affordability and access.

4. Remote Patient Monitoring (RPM) Integration:

   • Integrate RPM technologies to enhance patient medication adherence.

   • Leverage RPM data to optimize healthcare outcomes and patient care management.

Thoughts on Next Steps

I’m not quite sure yet about the right next steps for the 340B program.

What I do know is that the covered entities who truly give back to their communities and who desperately rely on the funds from the 340B program to stay afloat must be able to continue receiving them.

However, if the primary goal of the 340B program is to fund safety net providers, a more direct approach to funding them would be more effective than the current rebate system within the pharmacy supply chain.

This approach could help mitigate the flaws within the 340B program, which are symptomatic of broader systemic challenges in our healthcare system.

In the context of the 340B program, here is what we can also address:

1. The IRS can update Schedule H of Form 990 to make nonprofit hospitals list: how much they save from not paying federal, state, and local taxes (separately); savings from tax-exempt bonds; any money they make from the 340B program, if they use it; and how much they get in charitable donations.

   1. This reporting requirement helps assess whether hospitals meet the criteria for participation in the 340B program and provides transparency regarding their financial benefits and charitable activities.

   2. This will hopefully lead to greater transparency and steps to exclude covered entities that are not meeting the program's intent.

2. Lower drug prices, remove negative PBM practices, and increase transparency.

   1. Implementing a Medicaid fee-for-service pharmacy carve-out, paying pharmacies directly, offers a solution to reduce the influence of for profit PBMs. States can enhance control by developing internal capabilities to manage pharmacy claims and operations, minimizing reliance on PBMs and ensuring more transparent and efficient Medicaid pharmacy services.

All of this is politically challenging. I don’t doubt it.

Yet, if we’re talking about making true change in our healthcare system to make healthcare affordable and accessible, these changes are needed.

I’m always learning. If you have any thoughts, I’d love to hear them.