A health care program meant to help vulnerable communities has ignited intense controversy in recent years, but most of the focus has been on hospitals. A new study finds that federally supported clinics are exploiting the system, too. 

Called 340B for a section of a 1992 law, the program had good intentions, but its design has encouraged maximizing profit over helping patients in need. Many of the 55,000 hospitals and clinics in the program have become heavily dependent on 340B. They have a huge incentive to leverage the flawed structure to resell as many discounted drugs as possible to insured patients, not the low-income, uninsured Americans who were supposed to be the beneficiaries. 

The program has quintupled in seven years, and a large part of that growth came from “grantees,” such as clinics that treat HIV/AIDS, sexually transmitted diseases and hemophilia. But in most discussions of 340B, the role of these grantees has been ignored — until now, with the release of a study that shows grantees earn far bigger profit margins from 340B than hospitals. 

First, understand how 340B works: Hospitals and grantees buy prescription drugs at a big discount and are then reimbursed by insurers, including Medicare and Medicaid, at the full price of the drugs. The difference, or profit, has become a major revenue source for providers. For example, in a 2022 annual report, one Florida 340B clinic reported that 94 percent of its $300 million in revenue stems from such 340B savings. 

The deficiencies of 340B, now the second-largest prescription drug program after Medicare,  have been documented for at least a decade. “The financial benefits of the 340B discounts are accruing almost entirely to hospitals, clinics, and physicians; and patients’ out-of-pocket costs and total cost of care are being increased,” concluded a 2013 article in JAMA by Rena Conti of Boston University and Peter Bach of Sloan Kettering.  

But 10 years ago, clinic participation was just in its infancy. Recently, a study by Eleanor Blalock for the Berkeley Research Group found that grantees now account for $21 billion in reimbursements and the grantees’ profit margin is much higher than that of hospitals — an incredible 73 percent, compared with 25 percent to 50 percent for hospitals. 

Overall, drug purchases under 340B in 2021 totaled $45 billion, and reimbursements were an estimated $110 billion. Most of the $65 billion gap goes to hospitals and grantees and to the contract pharmacies that these providers use to dispense outpatient medicines.  

Some 80,000 pharmacies now have arrangements with grantees — a figure that has tripled since 2017, producing profits estimated at $10 billion annually; 91 percent of the pharmacies are part of just three large for-profit chains: CVS, Walgreens and Wal-Mart.  

Just who are these clinics and pharmacies serving? New research, published in the peer-reviewed American Journal of Managed Care found that 91 percent of pharmacies weren’t even in the same zip code as the grantee that contracted with them and that the average pharmacy’s zip code had household incomes 33 percent higher than that of the zip code of the grantee.  

The role of 340B grantees has been largely overlooked in the past, but it’s now time to take serious action to remedy a government program run amok. Fixing the program would not be difficult. To begin, grantees need to account publicly for how they are spending their windfall from 340B discounts — especially because, unlike hospitals, about 70 percent of the grantees’ drug margin is attributed to public payers, mainly Medicare and Medicaid.  

The use of far-off contract pharmacies in much wealthier neighborhoods could be reined in through regulation or legislation. Conti and Bach recommended a decade ago that discount rates apply “only to those patients who are poor and uninsured” rather than to anyone treated at a 340B hospital or grantee institution.  

They also suggested that hospitals and grantees “be required to pass on their savings from drug purchases to patients and their insurance providers, including Medicare,” or, better yet, have insurers “recoup some 340B profits from hospitals and physicians and pass those profits back to their beneficiaries.” 

This system could be much simpler than the 340B contraption. An IQVIA study last year found that using a “340B discount card” reduced patient out-of-pocket costs by 93 percent, but such cards were only used in just 1.4 percent of 340B claims.  A new study by a small Kansas hospital system looked at a program where 340B treatments for chronic obstructive pulmonary disease were given directly to patients, saving them $335 a month. The result: “A significant reduction in the composite mean number of all-cause hospitalizations and emergency department visits,” saving $1,013 per patient. 

The House Energy and Commerce Committee has advanced legislation with new requirements that both hospitals and grantees would have to report “by location the total number of patients who receive 340B drugs by payer, payments, total cost and savings.” This is a step in the right direction. 

Advocates for people living with HIV/AIDS and other conditions addressed by grantees have special reason to support 340B reforms. In an opinion piece in POZ, two such advocates, Brandon M. Macsata of the ADAP Advocacy Association and Guy Anthony of the Black, Gifted and Whole Foundation, stressed that “stronger accountability and transparency are urgently needed so that the [340B] program can begin to work as intended, and patients don’t continue to be left behind.”  

Their concern is that, if reforms are not enacted, a government program that is so poorly implemented could trigger political action to pare it back or end it entirely. “Inaction will — not could but will — very soon have serious ramifications on the care that our community receives,” they wrote. 

It’s clear that if 340B is ever fixed, policymakers must direct reforms not merely at hospitals but also at grantees. 

James K. Glassman, a former American Institute fellow and undersecretary of State, advises health care companies and nonprofits.