The 340B Drug Discount Program was created to help low-income Americans afford medicine. However, due to a lack of transparency, it has become an expensive quagmire in which manufacturers blame hospitals and pharmacies for exploiting the system for extra profit while hospitals defend their 340B revenue as a necessary funding source. While the industry bickers over who is to blame, patients face higher prices and reduced access to medication.
Pharmaceutical companies must take part in the 340B Drug Program if they want their medicines covered by Medicare and Medicaid. However, the program has been accused of numerous problems including encouraging hospitals to exploit the big discounts it provides on drugs by not passing them on to consumers at their associated pharmacies and pocketing the difference in a process called spread pricing.
Spread pricing is effective, driving up hospital profit margins on 340B drugs to 72 percent compared to non-340B drugs at only 22 percent. In turn drug manufacturers raise prices to make up for the loss the hospitals impose on them.
In 2010, new rules let hospitals work with outside pharmacies called “contract pharmacies” to provide 340B drugs, without addressing the spread pricing problem. But instead of focusing on low-income areas, many hospitals set up partnerships in wealthier neighborhoods where the 340B discounts are not needed. This change helped hospitals and pharmacies make more money at the expense of drug manufacturers by rapidly expanding the use of 340B discounts to patients they were never intended for.
Critics on the drug manufacturing side rightly argue that hospitals have expanded their contract pharmacies into affluent areas to increase profits, raising concerns that 340B is primarily enriching intermediaries rather than helping patients who can’t afford medicine. This expansion drove spending on 340B drugs from $9 billion in 2014 to $38 billion in 2021, reaching $66 billion in 2023.
Since 340B profits are based on percentage savings, hospitals have a financial incentive to prescribe the most expensive drugs rather than cost-effective alternatives, further raising prices for patients. Manufacturers argue that the program lacks safeguards to ensure discounted drugs actually reach uninsured or low-income patients, and the rapid expansion of the program in richer areas certainly supports the claim.
Drug manufacturers have pushed back against hospitals and their associated contract pharmacies, particularly in cases where wealthy, insured patients in affluent areas are used to generate 340B discounts instead of the low-income individuals the program was meant to serve. Manufacturers have begun imposing restrictions on which contract pharmacies they will supply, a move thus far upheld by the courts. Manufacturers argue that offering deep discounts to patients who don’t qualify for 340B forces them to raise prices elsewhere to recoup losses, ultimately increasing drug costs for everyone.
Hospitals should not be using a program designed to help low-income patients as a dedicated revenue stream. Hospitals defend their use of the 340B program in this way by citing reduced Medicare and Medicaid reimbursements or claiming these funds are essential to keeping their facilities open. If hospitals truly need financial support, it should come through transparent, accountable funding mechanisms—not by manipulating a drug discount program at the expense of patients, especially those in also in financial trouble.
Introducing transparency measures could require hospitals and pharmacies to disclose the actual price paid for 340B medications and reveal insurer reimbursements, preventing spread pricing. Additionally, restricting 340B eligibility to patients who need it would realign the program with its original intent—rather than allowing it to be exploited. Lastly, state-level reforms could play a crucial role in curbing program abuse and lowering drug costs, especially for the patients the program was meant to serve.
Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.