Unpacking the 340B Drug Pricing Program, Its Impact on the Pharmaceutical Industry

November 09, 2022 - The 340B Drug Pricing Program has evolved significantly since its establishment in 1992. According to an article published by the Commonwealth Fund, the 340B Program is a federal drug pricing program that allows certain hospitals, clinics, and healthcare facilities to buy drugs at a discounted rate. The discount ranges from 25 to 50%. The program predominantly covers facilities that treat low-income, uninsured, or underinsured patients. While the program was initially created to improve access to medication for low-income populations and reduce uncompensated care costs, it has had unparalleled impacts on the pharmaceutical industry.

The Evolution of the 340B Program

The 340B Program was developed after the enactment of the Public Health Services Act. Initially, the program only allowed discounted drugs to be dispensed through in-house pharmacies. Based on a publication by USC Health Policy, this initial restriction meant that only 5% of eligible facilities would benefit from this act.

It wasn’t until 1996 that the program was amended to allow healthcare facilities to use an external pharmacy to deliver discounted drug costs. At this point, there was a limit on the number of contract pharmacies. Each covered facility could only contract out to one pharmacy.

Over the years, the number of covered entities increased as the program expanded to cover other entities. According to the Commonwealth Fund, between 2000 and 2022, the 340B Program grew from covering 8,100 provider sites to 50,000 provider sites, marking an increase of over 600%.

Additional expansion in 2010 under the Affordable Care Act allowed covered entities to contract out to an unlimited number of pharmacies.

Who and What Is Covered?

As the program continues to expand, many have questioned whom it covers. The HRSA states that disproportionate share hospitals are eligible for the 340B Program. Disproportionate share hospitals are hospitals that predominantly serve low-income or underinsured individuals. The HRSA states that disproportionate share hospitals must fall under one of the following categories: a nonprofit hospital contracted by the government to serve low-income individuals, a hospital-owned or operated by the government, or “a public or private nonprofit corporation that is formally granted governmental powers by a unit of state or local government.”

Based on data from the Commonwealth Fund, in 2021, the vast majority of the covered entity purchases came from disproportionate share hospitals. Additional entity purchases came from other facilities, including but not limited to health center programs, children’s hospitals, rural referral centers, and Ryan White HIV/AIDS programs.

The program will cover almost all self- or physician-administered prescription drugs, excluding vaccines and orphan drugs.

Impact on the Pharmaceutical Industry

The 340B Program has resulted in a loss of profit for many in the pharmaceutical industry, leaving drugmakers and industry leaders frustrated and critical of the program. The Commonwealth Fund states that the value of the discounts from the 340B program in 2021 was nearly $44 billion, a 16% increase from the previous year. Having to provide medications at reduced costs has cut the profit margins for drugmakers.

While the losses for drugmakers and manufacturers have incited criticism, it is thought that pharmacies contracted by eligible entities have profited. The number of contract pharmacies went from 1,700 in 2010 to 31,000 in 2021.

According to an article published by the Kaiser Health Network, “Adam J. Fein, chief executive of the industry research organization Drug Channels Institute, estimates that nearly half the nation’s retail, mail, and specialty pharmacies now profit from 340B: The program, he said, is ‘essentially taking over the pharmacy industry.’”

The same article shares that in an August financial report CVS notes that its profits increased because of its 340B business contributions.

The Pharmaceutical Industry’s Criticism

The pharmaceutical industry has repeatedly criticized the 340B Program, citing the lack of program regulation as a primary concern.

PhRMA states that the program has transformed into something beyond its initial intentions. Like many others on the pharmaceutical side, they argue that providers and facilities have been manipulating this program to increase their profit margins. An article published on the organization’s website claims that larger hospitals will buy discounted drugs and charge patients and insurance companies the same high prices.

Proposals for Reform by PhRMA

Many pharmaceutical industry members are calling for reform to ensure that large healthcare facilities and chain pharmacies are not abusing the program. The first proposed solution by PhRMA is to ensure the patients are being put first.

Additionally, the organization calls for the government to provide more explicit guidelines on who will benefit from the programs. The PhRMA states, “by more clearly defining who is a 340B patient and ensuring vulnerable patients benefit, the program can more effectively help people in need and make it harder for participating hospitals and pharmacies to use it for their own financial gain.”

Additionally, the pharmaceutical industry is calling for additional transparency about how healthcare facilities will be using the discount provided by the 340b program. PhRMA believes that there should be reporting requirements to hold these key players accountable.

Current Legal Conflicts

There are ongoing conflicts between the federal government and pharmaceutical companies, as many drug manufacturers have taken matters into their own hands by refusing or restricting 340B pricing to eligible providers. Approximately 18 pharmaceutical companies are currently restricting 340B pricing to qualified entities.

The HRSA has referred these violations to the Department of Health and Human Services Office of Inspector General (OIG). Most recently, Merck has joined seven other pharmaceutical companies referred to the HHS.

Hospital advocacy groups have commended the federal government for taking action against pharmaceutical companies that have restricted access to 340B-covered drugs. The same groups also recently celebrated a legal battle that ended in their favor when the Supreme Court ruled against a lower reimbursement rate to hospitals that acquired covered drugs.

However, the 340B Program is still pitting pharmaceutical companies up against hospitals and other participants of the federal program.

While pharmaceutical companies may adhere to the drug pricing guidelines for fear of legal or financial ramifications, a consensus between drug manufacturers and program beneficiaries may be necessary to solve ongoing conflicts, prevent future conflicts, and ensure that patients have equitable access to the medications they need.