In 1992, Congress acted to make drugs available at a discount to poor and underinsured patients. As in most cases where the federal government intervenes in areas the Constitution reserves to the states, the 340B program has encountered significant distortions that threaten the good intentions Congress had when setting up the program. It suffers from poor oversight and loopholes that allow hospitals to profit from a program designed to help the poor. The federal government is weighing in on what is happening, which amounts to crony capitalism.
Under the 340B program, if a drug manufacturer participates in Medicaid or Medicare, they need to make their drugs available at a discount to hospitals that serve the patients who do not have insurance or who are needy. Hospitals get drugs from pharmaceutical companies at a discount under the program. A report by the Government Accountability Office (GAO) in June 2015 found significant problems with the way the program is administered. The GAO discovered that “the financial incentive to maximize Medicare revenues through the prescribing of more or more expensive drugs at 340B hospitals also raises concerns. Our work suggests that 340B DSH hospitals may be responding to this incentive to maximize Medicare revenues.”
The report went on to express concern that this practice by hospitals could harm taxpayers, patients, and give rise to poor health care choices by hospitals. The title of the report sums up the problem: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals. Through the 340B program, the federal government has skewed yet another market, set up incentives for inefficiency, and failed to provide the best possible outcome for patients.
Another report by the Community Oncology Alliance in April of this year found more evidence for the problems with the 340B program. The number of hospitals participating in the program had increased by 367 percent by 2014, with the increase starting after the Medicare Modernization Act became law. The reason, according to the report, was that “hospitals soon discovered that the 340B program gave them a loophole that actually allowed them to realize substantial profits from Part B drugs.”
The Washington Times explained how this works in practice: hospitals get the discount drugs via the federal government, then receive reimbursements from Medicare and Medicaid for the full price of the drugs, and thus turn a profit. And the practice can be very profitable. Indeed, the Charlotte Observer reported last year “that Duke University Hospital purchased $66 million worth of drugs through the discount program, saving $48 million. It then sold the drugs to patients for $136 million, making a profit of $70 million.”
The Swine Line, a blog from Citizens Against Government Waste and the Council for Citizens Against Government Waste, has flagged many of the problematic issues involved with the 340B program. Obamacare expanded “the number of entities that can utilize the program,” while a few years earlier, the Health Resources and Services Administration, “expanded the number of contract pharmacies that can participate in the program.” The growth of the 340B program, coupled with the weak supervision of the program, has been the creation of a system utilized by “hospitals and pharmacies to generate millions of dollars in profit and too many low-income patients are not being offered the discounted drugs.” This is typical of the pattern of crony capitalism that thrives inside the Beltway. Congress sets up a program to intervene in a large sector of the American economy, the legislative and executive branches fail to engage in vigorous oversight, and the taxpayers pay the price.
Hospitals should not be permitted to enrich themselves while gaming the 340B system to profit at the expense of taxpayers. The 340B program is well intentioned, but not well designed. It has become a way to help get drugs to the poor at a discount, but has also become a way to help hospitals profit off the altruism of lawmakers. That practice must end.
Peter Weyrich is a conservative activist who has worked for a variety of pro-free market organizations including the Free Congress Foundation and Coalitions for America.