It has been 30 years since the 340B drug pricing program became law. 340B is one of a series of policies that those of us serving in Congress at the time adopted to address the need for a robust health care safety net to serve patients with low incomes throughout the country.
Two years prior to 340B’s enactment, we approved legislation to reduce payments for drugs under the state-federal partnership known as Medicaid. While the new law reined in Medicaid costs, many of us were concerned that it also had the unintended consequence of increasing costs for providers who served large numbers of patients living with low incomes.
Congress created 340B to address this concern and to provide resources for the safety-net hospitals, health centers, and clinics serving these communities. President George H. W. Bush signed 340B into law as part of the Veterans Health Care Act of 1992 (Public Law 102-585). Today, three decades later, the program continues to play a vital role in ensuring a secure health care safety net. It ensures access to needed care for millions of Americans who live with low incomes, reside in rural areas, and are members of historically underserved communities.
In a committee report accompanying legislation during the 340B debate, Congress described the purpose of the program as follows: “In giving these ‘covered entities’ access to price reductions the Committee intends to enable these entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” Those guiding principles remain the North Star for 340B today.
We created 340B to ensure the safety net, that cares for the uninsured and those living with low incomes or in rural areas of the country would remain strong. Only certain providers are eligible for 340B, including public and nonprofit disproportionate share (DSH) hospitals, sole community hospitals, rural referral centers, critical access hospitals, children’s hospitals, and free-standing cancer hospitals. To participate, hospitals must document that they care for a significant percentage of patients with low incomes who are enrolled in Medicaid or Medicare or facilities that are in rural areas.
A set of providers that receive federal grant funding to support safety-net care also are eligible, including federally qualified health centers (FQHCs) and FQHC “look-alikes,” Ryan White HIV/AIDS clinics, AIDS drug assistance programs, black lung clinics, hemophilia diagnostic treatment centers, family planning clinics, sexually transmitted disease clinics, tuberculosis clinics, Tribal/Urban Indian health centers, and Native Hawaiian health centers. Each year, 340B covered entities recertify their continued eligibility with the Health Resources and Services Administration (HRSA), the public health agency within the Department of Health and Human Services (HHS) that administers 340B.
340B requires manufacturers of covered outpatient drugs to enter into a pharmaceutical pricing agreement with the HHS secretary. The manufacturer agrees to charge a price for covered outpatient drugs that will not exceed an amount determined under the statute (known as the 340B ceiling price). In return, the companies gain access to the lucrative Medicaid and Medicare Part B drug markets.
The 340B discount for brand-name drugs is set at 23.1 percent off the drug’s average manufacturer price (AMP); for generic drugs it is 13.0 percent off AMP. The discount can be larger if the “best price” a manufacturer offers for a drug is lower than the minimum discount. As it did with Medicaid, Congress built in a penalty if a manufacturer chooses to increase the price of a covered drug by more than the rate of inflation. Each time a company hikes its price faster than inflation, the size of the discount increases. This inflation penalty serves as an important curb on manufacturer price increases.
In the three decades since the enactment of 340B, it has proven to be a durable and successful government health program. More than 700 drug manufacturers have participated in 340B, and they deserve tremendous credit for their contributions toward a secure health care safety net. The program has supported covered entities across the country that care for more patients living with low incomes and offer more critical services than other providers, including trauma and burn care, HIV/AIDS care, medication management services, transportation and translational services, and much more.
340B is not without its critics, but many times the criticisms reflect a misunderstanding of Congress’ intent. For example, some critics assert that the intent of 340B is for providers to reduce the price of drugs for their patients. While many providers do, indeed, pass the discounts to patients through free or low-cost prescriptions, 340B is about much more than drugs. It is designed to provide financial resources to safety-net providers that help them furnish comprehensive care that includes, but is not limited to, pharmaceuticals. And a small group of very large drug companies have adopted restrictions on access to 340B discounts for providers that contract with community-based and specialty pharmacies, alleging the growth in these arrangements is inconsistent with the original intent of the program. The HRSA has informed many of those companies that their policies are unlawful and threatened to impose penalties if they do not restore 340B pricing. But several of those companies have filed lawsuits to block the government from enforcing the law that are currently being considered by federal courts.
340B At Work
Published research shows us that 340B continues to provide critical resources to hospitals that make up the nation’s health care safety net. In fiscal year 2020, for example, 340B DSH hospitals provided 67 percent of all uncompensated and unreimbursed hospital care in the US, despite representing only 40 percent of all hospitals. 340B DSH hospitals also provided more than three-quarters (77 percent) of all hospital care for people with Medicaid. Remarkably, even after the onset of the COVID-19 pandemic in 2020, these hospitals increased the amount of uncompensated care they provided even as their operating margins plummeted.
340B hospitals are also an important part of our national efforts to improve health care equity for patients who historically have faced challenges accessing care and achieving positive health outcomes. As found in a study conducted by L&M Policy Research, 340B DSH hospitals play a more prominent role in serving communities of color, who face disproportionate illness burden and barriers to care compared to White patients. The percentage of Medicare patients treated in 340B hospitals that identify as Black (10.3 percent) is 69 percent higher than in non-340B hospitals (6.1 percent) and 63 percent higher than in physician offices (6.3 percent).
The research also found that the percentage of Medicare patients at 340B hospitals who are disabled (16.9 percent) is 37 percent higher than in non-340B hospitals (12.3 percent). People living with disabilities tend to have higher health care costs than other groups. The percentage of Medicare patients at 340B hospitals who are younger than age 65 (17.7 percent) is 37 percent higher than in non-340B hospitals (12.9 percent). To be enrolled in Medicare younger than age 65, a patient must have received disability benefits for at least two years. Those patients tend to have higher medical costs than other groups due to underlying health conditions or because of their need for more aggressive treatments.
Looking back on three decades of experience with 340B teaches us several valuable lessons:
Enactment of 340B was the product of more than a dozen members of the US House and Senate from both political parties and all parts of the country coming together to solve a problem. In the years since, 340B has retained its bipartisan support even in today’s heated political environment. This is evidenced most recently by the 181 House members from both political parties who wrote to HHS Secretary Xavier Becerra urging action against drug companies that are imposing unlawful restrictions on 340B pricing. Both the Trump and Biden administrations have determined those restrictions to be in violation of the law.
340B Helps Finance Care Without Taxpayer Support
Direct discounts from drug manufacturers provide financial resources to hospitals that serve high volumes of patients living with low incomes. Those savings—not taxpayer dollars—help provide more care to patients in need. Covered entities invest 340B savings in a variety of ways to support care for their patients, including free or low-cost prescription drugs, comprehensive care for chronic conditions, and services that help patients get and stay healthy by following their treatment regimens.
Inflation Penalties Help Curb Drug Prices
We incorporated a penalty in the 340B statute for manufacturers that raise the price of existing drugs faster than the rate of inflation. We had written a similar policy for Medicaid two years earlier. When drugmakers raise prices excessively, they pay higher rebates to Medicaid and must offer lower 340B ceiling prices. For drugs whose price increases have far exceeded increases in the cost of living—such as insulin—the 340B price is even lower. Federal regulations require manufacturers to charge a penny for a drug when a manufacturer raises the price of a drug substantially more quickly than the rate of inflation. The penalties also convince some drug companies not to hike their prices in the first place. Independent research found increases in the percentage of drug sales subject to inflation penalties were associated with lower drug price increases, which saved Medicare Part D an estimated $7 billion in drug costs between 2013 and 2017. In passing the Inflation Reduction Act of 2022, Congress recognized the value of such inflation penalties to curb price increases and applied similar penalties to drugs under Medicare.
Rural Hospitals Need Protecting
Congress extended 340B to more than 1,000 very small, rural hospitals as part of the Affordable Care Act of 2010, thanks to the bipartisan efforts of Sens. John Thune (R-SD) and Jeff Bingaman (D-NM). While these hospitals’ purchases represent a miniscule percentage of the drug market, their 340B savings have proven to be invaluable for maintaining access to care in rural areas of the country. Survey data show around two-thirds of these hospitals reporting they likely would have to close if they lost access to 340B savings. Given how many rural hospitals have had to shutter their doors over the past decade, one gets a sense of how much worse things would be for rural health today without 340B.
Oversight Of Drug Companies Improves Program Integrity
In 2010, the HHS Office of Inspector General issued a series of reports finding that some manufacturers were overcharging 340B providers. In response, Congress directed HHS to improve its oversight of drug companies to ensure they are charging covered entities the correct prices and to create tools for providers to verify those prices. We also authorized HHS to impose civil monetary penalties (CMPs) on manufacturers that knowingly and intentionally overcharge providers. Those penalties can be as high as more than $6,000 for each drug claim. In 2017, the HRSA issued regulations to implement the CMPs, and in 2019 the agency launched a secure website to allow providers to verify 340B ceiling prices. In the months and years that followed, the number of drugmakers acknowledging overcharges has skyrocketed. Companies have posted nearly 70 notices over nearly four years reporting overcharges and announcing refunds. The HRSA has found additional instances of overcharges through its annual audits of a small group of drugmakers. In most cases, the companies agree to repay the safety-net providers.
The Next 30 Years
As we consider the role of the health care safety net moving forward, we must acknowledge the critical role 340B has played over the past 30 years. As it did then, 340B continues to ensure that safety-net health care providers have the resources they need to care for patients in need in their communities. As the congressional architects of 340B, we are pleased to see that it continues to focus on hospitals that provide the bulk of care to patients living with low incomes and those in rural areas. The lessons we have learned over 340B’s history demonstrate that it is a successful model that should continue for decades to come.
Henry A. Waxman is a consultant to 340B Health, an advocacy organization that represents more than 1,400 hospitals participating in the 340B drug pricing program.