A new report from the nonprofit public policy organization Pioneer Institute sheds new light on the recent failings of the Federal 340B Drug Discount Program. This 1992-era program was originally designed to provide “comprehensive services” to vulnerable populations by requiring that drug companies sell certain products to eligible healthcare clinics and hospitals at a 20-50% discount.

The report, which was first published on March 22nd and reviews the troubled history of the program, comes amidst national pushback by major pharmaceutical companies like Amgen Inc., and Bristol Myers Squibb to cut off for-profit pharmacies who they say unfairly profit from drugs that were intended for low-income uninsured patients. In response, certain “covered entities” that benefit from the discounts, like the American Heart Association and Ryan White Clinics, have filed lawsuits against the Department for Health and Human Services (HHS) to force them to take action against these companies.

The result has been a messy and protracted legal battle between the two sides where the courts have delivered a conflicting series of rulings on the matter. These mixed rulings indicate the issue is nowhere close to being resolved and the underlying problem of program design flaws, lack of accountability and enforcement mechanisms, and chronic mismanagement, will continue to be reoccurring issues.

Fortunately, the report’s findings offer an important inside look at the current dysfunction of 340B and provide clues as to how to reform it so it can better serve patient and consumer needs.

One of the major takeaways of the report is that, while 340B was first established with noble intentions and a fairly narrow focus, it slowly lost sight of these things. Overseen by the Health Resources and Services Administration (HRSA), an agency within the HHS, the program was initially only open to a select few hospitals and clinics that had a certain percentage of Medicaid patients. In 2005, this number included only 538 hospitals.

Unfortunately, over time the program began to suffer from mission drift, and it grew far beyond its initial parameters. The Affordable Care Act (ACA) of 2010, in particular, played a critical role in expanding hospital participation, as the number of Americans eligible for Medicaid grew substantially. By 2019, 340B had grown to 2,500 participating hospitals, and by 2021, it had ballooned to 15% of all US pharma sales, or the equivalent of $93.6 billion. The Berkeley Research Group projects that by 2026, 340B will be the largest federal drug program in the U.S.

Another key takeaway from the report is that participating hospitals and clinics are now profiting from discounted drug sales by servicing more affluent suburban communities and pocketing the savings. This finding was also observed by researchers at USC, who note that “unlike non-hospital covered entities,” 340B Disproportionate Share Hospitals (DSH) are not required to use generated savings to serve low-income communities. They are also not “required to report how 340B revenues are used.” Furthermore, since 2004 the number of DSH participating hospitals has tended to serve “wealthier and more insured populations,” which runs contrary to the spirit of 340B.

The report also describes other issues such as for-profit and external contract pharmacies reaping large profits from 340B discounts and the trend of hospitals acquiring “community-based physician practices, such as oncology practices” in order to receive similar benefits.

The pure magnitude of the problems facing 340B illustrate the need for significant reforms. The report provides several important recommendations, both at the federal and state level.

At the federal level, the report makes seven recommendations. Among them are “requiring hospitals to report revenues,” requiring “covered entities to spend all revenues from 340B programs on charity care and community programs,” and requiring Congress to define “patient eligibility.” Each recommendation will play a critical role in helping establish long overdue transparency and accountability measures needed for restoring public trust and ensuring the long-term financial sustainability of the program. These reforms will have the added bonus of ensuring that only those patients most in need of the discounted drugs receive them and that pharmaceutical companies remain committed to providing them.

At the state level, the report makes two principal recommendations. First, states should establish a “standard definition” of charity care and 340B reporting that requires “annual reporting” and periodic audits. Such a change will serve the dual purpose of setting an example for the federal government to follow and bring an additional layer of transparency to the program. Second, and closely related, states should require hospitals to report their annual revenue from 340B to “better inform state and federal policy.” This would provide state agencies and legislators with fresh data to use when discussing future policy proposals. All of these recommendations, and the report in general, shine an important light on the immense challenges facing 340B and suggest ways the program can be reformed. It is in the best interest of everyone involved that this occurs so that patient and consumer needs continue to be met.