The 340B Drug Pricing Program was created with a narrow and defensible purpose: to allow safety-net healthcare providers to buy medicines at steep discounts to better serve low-income and uninsured patients. Instead, a series of regulatory decisions and structural loopholes has transformed the program into a revenue stream for large hospital systems. What began as targeted relief for vulnerable communities now operates as a pricing strategy — one that often bypasses the patients the program was meant to help.
The strategy is straightforward. Hospitals buy drugs at a 25 percent to 50 percent discount through 340B, bill insurers at full price, and keep the difference. This is a far cry from the program’s original intent of supporting low-income and uninsured patients.
In North Carolina, 340B hospitals charged the North Carolina State Health Plan for Teachers and State Employees more than five times what the hospital paid for drugs, pocketing more than $13,000 each time the prescription was filled.
In 2001, the Health Resources and Services Administration (HRSA) clarified that hospitals could register off-site outpatient facilities as affiliates under 340B; before, this facility had to be on-site to participate.
This decision opened the door to expansion well beyond safety-net responsibilities. Since 2004, the program has shifted from supporting vulnerable patients to generating taxpayer-supported revenue for hospitals in affluent areas. By including clinics, physicians’ offices and other outpatient facilities that serve larger shares of insured patients, hospitals created opportunities to capture the pricing spread.
Then, HRSA began allowing multiple contract pharmacies per participating hospital. That change significantly expanded the program’s reach. Now, a contract pharmacy dispenses a drug, bills the insurer at the negotiated rate, and the pharmacy later replenishes the inventory at the 340B price — splitting the margin with the hospital. The result was explosive growth. From 2010 to 2021, drug purchases through the program rose from $6.6 billion to $43.9 billion.
In each case, savings intended to make medicine more available for the neediest patients often do not reach them. That outcome is predictable given the 340B statute does not require hospitals to pass discounts on to low-income or uninsured patients. It does not even require hospitals to report how the savings are used.
Meanwhile, of participating hospitals, more than two-thirds provide less charity care than the national average. More than one-third of participating hospitals spent less than 1 percent of their operating costs on it.
Examples of hospitals absorbing the discounts are not hard to find. Bon Secours Mercy Health reportedly generated more than $100 million annually from the program in some years, using those revenues to expand into wealthier communities. In one instance, a single vial of cancer medicine sold for nearly $22,000 more than its acquisition cost.
In another case, the Cleveland Clinic realized more than $933 million in 340B discounts from April 2020 to June 2023 that it did not pass directly to its patients.
The 340B program was not always this easy to game, and it doesn’t have to be. Enforcing stricter limits on which facilities may participate and how discounts may be used would reduce incentives to take advantage of the system.
Outpatient facilities and contract pharmacies should be required to demonstrate that they meaningfully serve underserved populations. Hospitals and affiliated facilities in affluent areas should not qualify. Pharmacies should be prohibited from replenishing drugs at 340B prices after dispensing them at full price. Any discount should be limited to the amount directly passed on to the patient at the point of sale.
When 340B drugs are dispensed, hospitals and pharmacies should be required to pass the savings through to reduce patients’ out-of-pocket costs — and only for low-income and uninsured patients.
Finally, hospitals should be required to report publicly how 340B funds are used, including revenues generated through affiliated facilities and contract pharmacies. Any retained funds not passed through to patients should be required to be directed toward care for low-income and uninsured populations.
The current framework allows hospitals and their affiliates to convert discounts intended to help vulnerable patients into unrestricted revenue. Without structural reform, the incentives to exploit the program will persist. If 340B is to remain defensible, it must once again function as a true safety-net program, not a subsidy for hospital expansion into affluent markets.
