Although nearly half of all U.S. hospitals participate in it, few Americans have heard of the 340B Drug Pricing Program. The program was designed to allow health care providers that serve low-income and uninsured patients, such as federally qualified health centers (FQHCs), to buy drugs from manufacturers at significant discounts to offset losses from uncompensated care. However, the program has grown significantly over time to include more than 60,000 clinical sites and accounts for more than $100 billion in discounted spending. Because discounted drugs can be used for all patients — not just those who cannot pay — providers participating in the program can generate revenue from billing discounted drugs to payers, including Medicaid, Medicare, and private insurance. Critics of the program have raised questions regarding hospitals’ use of revenue from the program.
Hospital leaders and the program’s administrators often justify the use of the program to generate revenue by saying that 340B was designed to offset lower payment from government payers, or “stretch scarce federal resources.” This rationale does not appear in the original 340B legislation; where did this language originate? And does the current state of the program match lawmakers’ intentions?
Before 340B, There Was the Medicaid Drug Rebate Program
In the late 1980s and early 1990s, pharmaceutical prices in Medicaid rose drastically. In response, Congress passed the Medicaid Drug Rebate Program (MDRP). This created the “best price provision,” which required that Medicaid receive the lowest prices for drugs compared to those offered to other purchasers. However, many of the best prices at the time were voluntary discounts granted to safety-net providers, such as community health centers, Title X clinics, and the Veterans Health Administration (VA), which depended on these discounts to provide affordable drugs to patients.
As drug manufacturers began implementing MDRP, there was an unintended consequence. They stopped offering discounts to safety-net providers, as these discounts would also have to be applied to Medicaid. As a result, these providers’ small, grant-dependent budgets were quickly consumed by rising drug prices, forcing them to reduce care and leaving them vulnerable to closure. Policymakers started looking for a solution.
Lawmakers Looking to Use Limited Federal Dollars Wisely
Senator Edward Kennedy’s office was the first to respond. In 1991, a staffer made the case for providing relief from rising drug prices for Public Health Service Act–funded (PHSA) clinics, which served low-income patients:
. . . Recognizing that the populations served by PHSA clinics are similar to those covered by Medicaid and that lower drug prices mean that scarce dollars will stretch further, [I propose to] extend the Medicaid discount prices to PHSA clinics which purchase and dispense drugs.
Senator Kennedy agreed and introduced legislation to exempt PHSA-funded clinics from the best-price provision and extend MDRP-like pricing. The legislation gained traction with help from a group of senators who were focused on the VA, which was experiencing similar problems due to the loss of previously received discounts under the Medicaid provisions. Senator Kennedy’s language was incorporated into a VA-related bill, in which lawmakers expressed the goal of “stretch[ing] scarce federal resources as far as possible.”
340B Widens to Cover More Entities, Including Some Hospitals
Although relief for the PHSA-funded clinics was now in sight, bipartisan political compromise had widened the scope of the original legislation. More health care providers asked to be included in the list of entities that would receive drug discounts. Most of these groups represented federally funded clinics, but the most consequential player, the National Association of Public Hospitals (NAPH) (now America’s Essential Hospitals) did not.
While not dependent on federal grants, public hospitals played an important role in the provision of safety-net care. Policymakers reasoned that public hospitals’ reliance on relatively uncertain state and local funding made them similar to the PHSA-funded clinics. Some of NAPH’s member hospitals, however, had recently converted to nonprofits to stay afloat and continue their safety-net mission, and were no longer purely government operated. Therefore, relying solely on public ownership status to qualify hospitals for drug discounts would not reach all targeted hospitals.
Staffers worked with NAPH to craft eligibility criteria that would qualify some 200 NAPH-member hospitals. First, they looked at the defined disproportionate share hospital (DSH) percentage, a measure that dates back to 1985 and was used to qualify hospitals for supplemental payments under Medicare and Medicaid, based largely on Medicaid share of inpatient volume. Second, they required that nonprofit hospitals have a contract with state or local governments to provide care to patients otherwise ineligible for Medicare or Medicaid. This second criterion was necessary because some of NAPH’s member hospitals had recently converted to nonprofit status but retained their original commitments to safety-net care through contracts with local government. The staffers felt that these two criteria were reasonably objective and would not be subject to gaming.
The proposal moved into the Veterans’ Health Care Act of 1992, which would eventually pass and create the 340B program. To secure votes from senators from Virginia and Utah, staffers lowered the DSH percentage eligibility to qualify the University of Virginia and University of Utah hospitals. This change inadvertently qualified additional nonprofit hospitals, broadening access beyond the original target population.
Concerns About Program Growth
As the 340B program continues to grow, it is important to understand its original intent. Congressional investigations, reports, and ongoing litigation have intensified scrutiny of the program. Recent complaints and injunctions of the 340B Rebate Model Pilot Program have invoked the goal of stretching scarce federal resources. Although the 340B program may improve access to services for patients of PHSA-grantee clinics and public hospitals, policymakers are concerned that 340B discourages use of lower-priced, generic drugs; raises costs for employers due to forgone manufacturer rebates; and increases consolidation of health care providers and therefore health care prices. While hospital groups repeatedly argue that the program is operating as Congress intended, the legislative history tells a more nuanced story: the program’s original intent was not to stretch any scarce federal support across all covered entities. It was designed to stretch scarce federal, state, and local grants to PHSA-funded clinics and public hospitals in the wake of the Medicaid drug rebate implementation.
