The 340B Drug Pricing Program: Charity Discounts or Profiteering?

This exploitation of certain specialties for profiteering under 340B is consistent with a 2015 report from the Governmental Accountability Office that found significantly higher oncology costs at 340B sites compared to those that did not qualify for discounted purchasing. This disparity was not explained by differences in health status between the two populations.

Does this mean that 340B-qualifying outpatient clinics are dispensing drugs at a higher rate, or that they’re treating patients with more expensive remedies? The data suggests it could be both. This 2018 study saw volume as a driver of higher costs—the probability of a patient receiving cancer drug administration in a hospital outpatient department grew by 7.8 percentage points in 340B markets compared to traditional markets.

The use of expensive drugs to drive greater profits also fuels program exploitation. This 2016 study found that three novel Hepatitis C treatments (priced at $74,760, $54,600 and $26,400) had 30%-41% of their claims prescribed by 340B organizations, much greater than the overall 14% 340B prescribing rate for all Medicare Part D drugs. Higher list prices means larger total discounts, and more discounts means greater profits.  

340B is often cited as necessary for hospitals and health systems to combat exorbitant drug prices and support charitable healthcare initiatives for the poor and underserved. But to what extent does it actually bolster health equity and motivate charitable care?

The literature indicates that those who benefit most from 340B might need it the least. A 2014 study found that, since 2004, hospital-affiliated clinics that registered for the 340B program favored wealthier and more insured communities. 340B hospitals achieve this by acquiring outpatient clinics in more affluent areas, which still qualify for the CE designation of the parent hospital. This allows clinics to deliver 340B drugs to fully insured populations regardless of the surrounding demographics. Additionally, hospitals that wouldn’t typically qualify for 340B may adjust their population burden to meet the required metrics for enrollment.

Hospital enrollment in 340B has been shown to induce no change in the provision of uncompensated care compared to unenrolled providers. While 340B hospitals may offer some increased benefits following enrollment, they are typically offset by reductions in other community-oriented initiatives.

Legal Challenges

The sheer amount of capital flowing through the 340B market has led to contentious legal clashes between providers and drug manufacturers.

At its inception in 1992, 340B-enrolled hospitals and grantees were only allowed to distribute discounted drugs at a single, in-house pharmacy. This was an unrealistic expectation as less than 5% of CEs had access to an in-house pharmacy. To expand distribution capability, HRSA widened guidelines in 1996 to allow CEs to engage with one contract pharmacy (CP) if they did not have an in-house pharmacy available.

Under the ACA of 2010, HRSA altered pharmacy contracting regulation by allowing CEs to have relationships with an unlimited number of CPs. CP usage skyrocketed as a result—from 2010 to 2024, CP arrangements increased by over 12,000% to more than 210,000. In 2023, more than 33,000 unique locations acted as 340B CPs, serving a total of 9,585 CEs.

Increased CP utilization widens patient access to discounted drugs, which substantially reduces pharmaceutical manufacturer profits. In the summer of 2020, drug producers began announcing restrictions on CP usage to combat inflating 340B discounts. HRSA responded to these restrictions in 2021 by issuing letters of violation to participating manufacturers, citing 340B statute provisions. Manufacturers responded by suing the agency, arguing it was acting beyond its authority in issuing these violations.

In Sanofi-Aventis U.S. LLC v. HHS, the court found in favor of the drugmaker on the grounds that the HHS lacked rulemaking authority on setting the number of CPs drug makers are required to deliver to. A similar decision was reached in Novartis Pharmaceuticals Corp v. Johnson, finding that the 340B legislation does not prohibit manufacturers from limiting the distribution of discounted drugs by contract pharmacies.

These rulings incentivize more restrictive practices from drug manufacturers. As of July 1, 2024, Novo Nordisk only allows their drugs to be distributed at two CPs per CE, and requires that CPs register with the company on their online platform. As other manufacturers follow suit, the administrative burden increases substantially for smaller, safety-net hospitals and providers who may lack the resources and manpower to comply with each manufacturer’s individual system.

Despite the uptick in restrictive behavior by drug manufacturers, states may still enforce laws that protect the ability for CEs to contract with an unlimited number of CPs. In May of 2021, the state of Arkansas passed Arkansas Act 1103, stating that pharmaceutical companies may not prohibit pharmacies from contracting with any CE. Pharmaceutical Research and Manufacturers of America (PhRMA) sued the Arkansas Insurance Department in PhRMA v. McClain. The new Arkansas law was upheld and deemed constitutional, citing the idea that the 340B statute did not preempt Arkansas’s legislation—meaning that the two statutes did not conflict with one another. Although drug manufacturers won at a federal level, this court decision reveals individual state reform as an avenue for lawmakers to protect CEs’ access to CPs.

Court disputes over 340B pricing expanded to government bodies in 2018 and 2019 when the CMS reduced reimbursement rates for 340B drugs from 106% to 77.5% of the cost, citing provider savings as justification for decreased compensation. The American Hospital Association (AHA) sued the HHS, arguing that the government overstepped in making budget cuts. In its 2022 ruling on American Hospital Association v. Becerra, the supreme court found that the HHS had exceeded its statutory authority in varying the reimbursement rates for 340B hospitals, and later ordered the government to provide a lump sum backpay for underpayment in the years 2018-2022.

More recently, rebate models have become a weapon with which drug manufacturers hope to exert increased control over 340B drug distribution. Instead of cheaper prices up front, drug manufacturers want to issue refunds to providers after purchase that would be predicated on proof of proper delivery. Drugmakers argue such a rebate system would protect program integrity. Similar to more restrictions on CPs, though, it is likely that such systems would exacerbate the administrative burden of marginalized healthcare entities.

Several legal fights have already begun surrounding attempted rebate models. In August of 2024, Johnson & Johnson (J&J) announced it would be establishing rebate systems for the purchase of its drugs Stelara and Xarelto through 340B. In September of the same year, HRSA ordered J&J to “cease implementation” of the rebate model or lose its purchasing agreement with the federal government. J&J scrapped its proposed rebate model that same month, but then filed a lawsuit against HRSA in November, citing HRSA’s orders as unlawful. Other drug manufacturers took similar action—Eli Lilly, Sanofi, and Bristol Myers Squibb all sued HRSA over the implementation of their own forms of rebate model.

Although these legal battles are ongoing, it’s clear that any definitive rulings will have a widespread impact on the healthcare industry. Regardless of its merits, the provisions of 340B reverberate deeply throughout the American healthcare system— shaping not only the financial landscape but also the accessibility of care for millions of Americans.