340b is a noble program. But it’s not working as it should for New Yorkers
In 1992, Congress passed a well-intentioned law to help hospitals that served low-income and uninsured patients: the 340B Drug Pricing Program. Under the program, Congress simply required pharmaceutical companies to sell their drugs to certain non-profit hospitals at steep discounts. Congress felt—presto—this would shore up the finances of safety net hospitals without costing the federal government a penny.
Sadly, it didn’t work out that way—and New Yorkers are suffering as a result. Since its passage, bad incentives, hospital consolidation, and arrangements with pharmacies have turned the 340B program into a massive windfall for hospitals, PBMs, and big pharmacy chains—expanding in well-insured communities and reaping tens of millions of dollars in profits.
That’s because hospitals quickly discovered that they could “arbitrage” those discounts and take the money for themselves. The game is simple: buy drugs cheaply that can still be reimbursed at a much higher rate from patients who had a commercial insurance plan or were on Medicare, pocketing the generous spread between the discounted price and the insurance reimbursement.
The result? New York hospitals make 2.8 times more from 340B than they spend on charity care, and 85% of New York’s 340B hospitals fall below the national average for charity care levels. Consider that the average new cancer drug is priced at about $200,000. If a hospital can buy a cancer drug for $75,000 under 340B, then they can bill the Medicare program for $200,000 and come away with a $125,000 profit on one prescription. For both patients and taxpayers, this amounts to highway robbery.
This arbitrage factor has completely distorted the original and noble goals of 340B. When hospitals can pocket the spread from an insurance company or Medicare, they have every incentive to treat fully insured patients rather than low-income or uninsured patients.
This is exactly what has happened. Only 24% of contract pharmacies are located in medically underserved areas, with affluent areas seeing the greatest expansion of the 340B program, as hospitals have been locating their satellite sites in higher income neighborhoods. This means the 340B program is increasingly serving higher income patients. Loopholes in the 340B program have enabled the generation of such significant profits that for-profit chain pharmacies and pharmacy benefit management (PBM) companies have rushed to 340B hospitals and signed lucrative contracts to dispense those drugs to patients. Not to mention that 70% of these pharmacies are large chains, which now make billions dispensing the vast majority of 340B drugs, while independent pharmacies struggle to stay open—putting patient access to care at risk.
All of this explains why the 340B program has grown 129.4% over the past five years and sales at non-discounted prices totaled $124 billion in 2023, making it the second largest federal drug program after Medicare. The 340B program will likely eclipse the Medicare drug program in size over the next year or two since annual 340B growth is more than 16%.
And while hospitals, PBMs, and chain pharmacies reap the benefits, everyone else pays. Employers in New York pay an estimated $445M more in health care costs due to foregone rebates (which reduce the price of medicine) as a result of the 340B program. Looking ahead, there’s a bill in the state legislature that’s estimated to increase health care costs for employers and state and local governments by $138.9M due to additional foregone rebates.
What should be done instead?
One modest reform that wouldn’t harm vulnerable hospitals would be to provide a little transparency about hospitals’ profits from the program. For example, if a hospital took in $50 million from the 340B program, did they spend it on executive salaries or care for the uninsured? New Yorkers and their representatives have a right to know how the program is functioning, and the only way to discover that is by requiring transparency for individual hospitals.
In the meantime, what’s clear is that the program is not working as it intended—and Albany should not be moving forward with aggressive expansions to a program with such glaring issues. That includes legislation like the so-called “340B Anti-Discrimination Act”, which would expand the program without proper guardrails and harm the patients it purports to help.
The reality is that, while originally created to assist a small number of hospitals, 340B has now exploded: it generates billions of dollars for covered entities rather than savings for the folks who need it. It’s up to our legislators to control the damage, properly diagnose the problem, and pursue a smart and responsible path to serve patients instead of profits.
William S. Smith, PhD, is Senior Fellow and Director of the Life Sciences Initiative at Pioneer Institute.
