The Unintended Consequences of the 340B Drug Discount Program

The 340B drug discount program has followed a familiar health policy trajectory. An intervention that was supposed to ease cost pressures is instead producing cascading unintended consequences that are likely raising overall costs. As the editors of the Wall Street Journal noted recently, what changed is that hospitals discovered the program could be used to generate substantial profits with little effort. And, of course, reforms are now hard to advance as of opposition from the major health systems that now benefit substantially from the status quo.

The 340B story actually starts with an earlier policy intervention gone awry, the Medicaid “best price” requirement, which Congress approved in the 1990 bipartisan budget agreement.That policy forced drug companies to extend to Medicaid deep discounts for outpatient prescription drugs based on concessions offered to other payers. In effect, Medicaid was guaranteed the lowest price in the market (on a net basis, after rebates).

Soon after the law was approved, the Veterans Affairs Department said its purchasing leverage with drug companies was at risk as any price concessions it secured would automatically get passed through to Medicaid, too. Federally funded community health centers and public hospitals made similar arguments.

Congress responded quickly by passing the Veterans Health Care Act of 1992, which essentially expanded the Medicaid mandatory price discount program to the VA and other providers of medical services enjoying political support.

For the non-VA providers (primarily not-for-profit and public hospitals), the 340B program was intended to allow them to stretch limited federal resources by purchasing outpatient drugs at lower prices. The program’s reach expanded over time,and today it includes a wide array of hospitals,including many large and financially healthy systems.