A periodic feature by Cornerstone Research, in which our affiliated experts, senior advisors, and professionals, talk about their research and findings.
We interview Professor Sayeh Nikpay of the School of Public Health, University of Minnesota, to gain her insights into the 340B program, its role in the healthcare safety net, implementation challenges, and related legal matters.
The 340B program is an active area of research and litigation that is top of mind for policymakers and lawmakers. Can you give us an overview of this program?
The 340B Drug Pricing Program is a federal program that allows qualifying providers (also known as covered entities) to buy discounted outpatient prescription drugs and bill insurers to generate revenue to expand care for low-income and uninsured patients. Specifically, this program can generate revenue for covered entities because discounts for prescriptions dispensed to privately insured or Medicare patients are not typically reflected in insurer reimbursement rates for prescription drugs. That is, covered entities can purchase discounted prescription drugs and bill insurers at higher rates that do not reflect these discounts.
The 340B program intends to “enable covered entities to stretch scarce federal resources to reach more eligible patients, and provide more comprehensive services.” In other words, the federal government hopes that covered entities will use 340B revenues to expand care for safety-net patients through programs and services that are typically unprofitable, such as community health improvement, obstetrics, or substance abuse care. However, there is no explicit requirement to do so, and the federal government does not track 340B revenues.
Covered entities that are allowed to participate in the 340B program include hospitals that serve a large proportion of Medicaid or low-income Medicare patients (also known as Disproportionate Share Hospitals), certain types of rural hospitals, cancer hospitals, pediatric hospitals, and various federally supported safety-net clinics such as Federally Qualified Health Centers (FQHCs). Whether covered entities pass on discounts to their safety-net patients remains unknown. While many federally supported clinics are required to provide discounted care on a sliding fee scale, hospital covered entities face no such requirements.
The federal government hopes that covered entities will use 340B revenues to expand care for safety-net patients through programs and services that are typically unprofitable . . . . However, there is no explicit requirement to do so, and the federal government does not track 340B revenues.
Covered entities can only dispense outpatient prescription drugs purchased through the 340B program to “eligible patients.” The Health Resources and Services Administration (HRSA) defines eligible patients to be those who:
- Have an established relationship with the covered entity (e.g., the covered entity maintains the patient’s healthcare records),
- Have received healthcare services from a healthcare professional employed by the covered entity, and
- Have received healthcare services consistent with services that the covered entity typically offers. Eligible patients can receive outpatient prescription drugs purchased through the 340B program at the covered entity’s outpatient clinics (called child sites), in-house pharmacies, or contract pharmacies, which are external pharmacies that contract with the covered entity.
How has the 340B program expanded over time?
Since 2010, the number of drugs dispensed under the 340B program has grown dramatically. Two major program changes led to this increase. First, the Affordable Care Act (ACA) expanded the types of covered entities that qualify for the 340B program. After 2010, critical access hospitals, sole community hospitals, rural referral centers, and freestanding pediatric and cancer hospitals became eligible. This expansion, driven primarily by the participation of critical access hospitals, increased the percentage of hospital covered entities from 10% in 2004 to over 60% in 2020.
Second, the HRSA issued guidance allowing covered entities to establish unlimited contract pharmacies. Before 2010, covered entities without an in-house pharmacy could only contract with one external pharmacy. After the limit was removed, the number of contract pharmacies participating in the 340B program increased more than tenfold. Current 340B revenues are estimated to be over $50 billion.
You are a health policy expert with deep knowledge of healthcare safety-net programs. Based on your research, can you explain why the 340B program has become controversial?
Expanding the 340B program has raised questions about whether it is being used as Congress intended. If hospital covered entities generate significant revenue by dispensing drugs purchased through the 340B program to privately insured or Medicare patients yet fail to increase access and care for safety-net patients, the program is not functioning as intended.
My research finds that the 340B program creates perverse incentives for covered entities. I have used large, nationally representative, administrative datasets to show that:
- Hospitals that begin participating in the 340B program do not meaningfully increase their safety-net engagement.
- The 340B program’s eligibility criteria poorly target safety-net providers.
- Contract pharmacies are less likely to be located in medically underserved areas, or areas with higher uninsured rates.
My research finds that the 340B program creates perverse incentives for covered entities.
Additionally, in one of my recent publications, I show that nearly half of all retail pharmacies have at least one contract with a 340B covered entity. The number of contracts per pharmacy has grown over time. However, these 340B contract pharmacies are less likely to contract with hospitals and clinics that care for many patients who rely on the safety-net. In forthcoming research, I also find a large share of retail contract pharmacies concentrated among the four retail pharmacy chains with the highest market share by prescription volume.
What are some proposed changes that policymakers can enact to help the 340B program better serve its intended purpose?
One proposed change would be to define program eligibility criteria better, so 340B discounts primarily benefit covered entities that serve safety-net patients. For example, the criteria currently used to qualify hospitals for the program are not based on uninsured patient volume, charity care, or community benefit spending. As a result, the same 340B discounts can be provided to hospitals—regardless of their safety-net engagement—as long as the hospital qualifies as a covered entity. Better aligning the program’s eligibility with demonstrated care for the uninsured and charitable care can strengthen the healthcare safety-net and improve access for patients who rely on it.
Better aligning the [340B] program’s eligibility with demonstrated care for the uninsured and charitable care can strengthen the healthcare safety-net and improve access for patients who rely on it.
Another proposed change is to increase transparency and oversight of the 340B program. As I discuss above, 340B hospitals are not required to report revenues generated by the program, nor compelled to demonstrate how they use the generated revenue to expand care for safety-net patients. Because of the lack of transparency and oversight, it is unclear whether the hospital covered entities are using the discounts as Congress intended. Mandating that all covered entities regularly report average prices paid for 340B drugs, their programs’ savings, how the savings are used, and the patients/programs served from the savings would improve oversight and shed light on whether the program is improving care for low-income patients. New legislation passed in both Maine and Minnesota in the summer of 2023 established transparency requirements for covered entities in those states.
The 340B program has been at the center of legal challenges involving drug manufacturers. Why are manufacturers concerned about the program’s expansion?
Manufacturers must provide 340B discounts if they want Medicaid and Medicare Part B patients to use their drugs. Such patients include a large population with chronic illnesses. However, there are challenges associated with accurately tracking and reporting 340B discounts, and manufacturers are concerned that payors will use 340B discounts on patients who have already benefited from another price concession on the same drug.
One way this can occur is through a duplicate discount. The manufacturer sells drugs to a covered entity at the 340B price and later pays a Medicaid rebate on the same drug. While HRSA prohibits this type of duplicate discount, identifying and preventing it from occurring can be challenging due to poor coordination among covered entities, contract pharmacies, and state Medicaid agencies.
There are challenges associated with accurately tracking and reporting 340B discounts, and manufacturers are concerned that payors will use 340B discounts on patients who have already benefited from another price concession on the same drug.
Multiple price concessions can also occur through a “stacked” discount. The manufacturer provides a 340B discount on a commercial claim that also received a rebate negotiated between a pharmacy benefit manager (PBM) and a manufacturer. Although not explicitly prohibited, stacked discounts could violate agreements between PBMs and the manufacturers. They can occur if the patient is privately insured and qualifies as an “eligible patient” as defined by HRSA.
In addition to duplicate and stacked discounts, manufacturers are concerned about drug diversion. Diversion occurs when a 340B discount is used on a patient who does not meet HRSA’s definition of an eligible patient. Drugs dispensed through contract pharmacies are particularly susceptible to diversion, as pharmacists are often unaware whether a patient’s prescription qualified for 340B.
Several legal challenges stem from manufacturers’ concerns over duplicate discounts, stacked discounts, and diversion. Beginning in 2021, drug manufacturers filed six lawsuits that challenged HRSA’s authority to issue warnings and fees in response to the manufacturers’ decision to restrict the availability of 340B discounts for drugs dispensed through contract pharmacies. In these lawsuits, manufacturers claim that the expansion of contract pharmacies has increased duplicate discounts. The trial courts sided with HRSA in four of these disputes and with manufacturers in two. Several appeals are ongoing as a result of these rulings. The Third Circuit Court of Appeals recently sided with manufacturers in one of these appeals.
A recent decision in the U.S. District Court of South Carolina has called into question HRSA’s authority to enforce a patient definition that is more restrictive than that described in 340B’s enabling legislation. This definition requires a covered entity to initiate the services resulting in the relevant prescription. The court’s decision—while consistent with the Third Circuit ruling that HRSA has overreached at times in its regulation of the 340B program—considers the initiation of services irrelevant and takes a broader view of who may be considered a patient. As a result, this decision may increase discounts available for prescriptions previously flagged as diversion (i.e., a primary care covered entity whose patient receives cancer treatment from a different healthcare facility may now be able to use 340B discounts on that patient’s cancer drugs). Notably, several drug manufacturers filed amicus briefs supporting HRSA’s ability to limit 340B discounts on these prescriptions in the South Carolina case. Given these recent decisions, litigation will likely continue to challenge other 340B policies and guidelines that HRSA has implemented, rather than being directly legislated by Congress.
To track and reduce the incidence of stacked discounts, and as a condition to receive discounts, manufacturers have required many covered entities to submit prescription claims data for drugs dispensed through contract pharmacies through a third-party contractor called 340B ESP. The 340B ESP platform is not without its own controversy, however, as covered entities have expressed concerns over reporting requirements and delays in restoring 340B discounts.
Even as pharmaceutical manufacturers take steps to reduce the incidence of diversion, duplicate discounts, and stacked discounts, whether such efforts will be fruitful and how they will affect the size of the 340B program remains to be seen.
List of Further Reading
- Sayeh Nikpay, Melinda B. Buntin, and Rena M. Conti, “Relationship Between Initiation of 340B Participation and Hospital Safety-Net Engagement,” Health Services Research 55, no. 2, 2020.
- Sayeh Nikpay, “The Medicaid Windfall: Medicaid Expansions and the Target Efficiency of Hospital Safety-Net Subsidies,” Journal of Public Economics 208, 2022.
- Sayeh Nikpay et al., “Association of 340B Contract Pharmacy Growth with County-Level Characteristics,” American Journal of Managed Care 28, no. 3, 2022.
- Sayeh Nikpay et al., “Trends in 340B Drug Pricing Program Contract Growth among Retail Pharmacies from 2009 to 2022,” JAMA Health Forum 4, no. 8, 2023.
- Claire McGlave et al., “340B Contract Pharmacy Growth by Pharmacy Ownership: 2009–2022,” Health Affairs Scholar, 2023.
- S. Government Accountability Office, “Drug Pricing: Manufacturer Discounts in the 340B Program Offer Benefits, But Federal Oversight Needs Improvement,” September 2011, https://www.gao.gov/assets/gao-11-836.pdf.
- Adam J. Fein, “Exclusive: The 340B Program Reached $54 Billion in 2022 – Up 22% vs. 2021,” Drug Channels, September 24, 2023, available at https://www.drugchannels.net/2023/09/exclusive-340b-program-reached-54.html#:~:text=Drug%20Channels%20has%20just%20obtained,higher%20than%20its%202021%20counterpart.
- Sanofi Aventis U.S. LLC v. HHS, 58 F.4th 696 (3d Cir. 2023).
- Genesis Health Care Inc v. Becerra et al, Civil Action No.: 4:19-cv-01531-RBH.
- “Hospitals Should Consider Legal and Operational Burdens Imposed by Merck’s Request for Data that there is No Legal Obligation under 340B to Provide,” 340B Health, July 20, 2020, available at https://www.avitapharmacy.com/wp-content/uploads/2021/04/340B-Health.pdf.
The views expressed herein do not necessarily represent the views of Cornerstone Research.
