Dan Crippen was director of the Congressional Budget Office from 1999 to 2003.
In its first report on the effect of the 340B drug rebate program on the budget, the Congressional Budget Office revealed that a previously obscure federal program originally intended to help a few dozen safety-net hospitals has become a multibillion-dollar subsidy for thousands of nonprofit hospitals, raising health care costs for patients (a burden on taxpayers and contributing to the federal deficit), while offering few measurable benefits to patients in need.
The good news is that Congress is already working to solve the problem and in the process can substantially reduce the deficit.
As a former CBO director, I’ve seen how federal programs can skyrocket when well-intentioned policies go unchecked. And that’s exactly what has happened with the 340B Drug Pricing Program that Congress created in 1992 to help safety-net hospitals and clinics care for low-income and uninsured patients.
The program allows qualifying hospitals and clinics to purchase prescription drugs at deep discounts that manufacturers are required to offer by law. The idea was simple: Hospitals would use the savings to expand care for indigent patients.
But in practice, the program has evolved into something very different and much more expensive. Today, 340 billion discounted medications can be sold to any outpatient (including commercially insured) at any price.
Recent CBO analysis shows that spending of $340 billion increased from $6.6 billion in 2010 to almost 70 billion dollars in 2023. During that same time, spending on brand-name drugs in the rest of the market grew only 4% annually.
So what is driving the increase? CBO identifies several culprits.
First of all, the report points to hospital consolidation. Between 2013 and 2021, the number of outpatient clinics enrolled in 340B increased from about 6,100 to nearly 28,000. These “secondary sites” allow hospital systems to fill more prescriptions under the program, even when those sites serve commercially insured patients in higher-income neighborhoods.
Second, contract pharmacies (retail drugstores that dispense 340 billion medications) are driving the dizzying pace of growth. The CBO found that 340 billion purchases made at contract pharmacies grew at an average of 34% annually between 2010 and 2021 to more than 30,000 pharmacies, nearly 60% of all eligible pharmacies. In total, nearly 20% of the program’s total spending growth now comes from discounted medications dispensed through these pharmacies. The problem is that the savings from these drugs do not reach many patients, who still pay their full co-pay over the counter, while hospitals reap the discount as profit.
Third, and most importantly, the program’s incentives are backwards. Because hospitals can pocket the difference between the discounted 340B price and the insurer’s reimbursement, they are financially rewarded for prescribing higher-priced medications. The CBO puts it bluntly: These incentives “lead to higher prices or increased use of drugs and other health care services,” and that translates into increased federal spending on Medicare, Medicaid, and private plans, while costing taxpayers billions.
And the program still lacks basic transparency. There is no requirement that hospitals pass savings on to patients. There is no mandate to reinvest windfall profits into charity care. There is no clear definition of who actually qualifies as a 340B patient. And there are no significant reports on where the subsidies are going.
This type of structural failure can be solved, but only if Congress intervenes. currently there are pending legislation that would restore the integrity of the program without undermining its original mission. And given the CBO report, it could save the federal government money.
Elements of the legislation would finally establish a definition of patient in statute, ensure low-income patients receive the benefit of discounted medications, curb contract pharmacy abuse, and require hospitals to demonstrate how they are spending $340 billion. These are common sense steps to create accountability in a program that has strayed from its original purpose.
The CBO has now done what both Congress and the executive branch have avoided for years: evaluate the size, scope and consequences of a program that was long overdue for reform. With this report in hand, Congress has no excuse to look the other way. If your goal is to reduce healthcare spending and increase tax revenue, reducing the $340 billion in subsidies fits the bill.
