Recent polling shows most voters believe lowering out-of-pocket costs is the top health care priority for the country. For low-income and uninsured patients, the impact of rising out-of-pocket costs as a barrier to quality care is particularly acute. Policymakers are focused on a potential solution: the 340B Drug Pricing Program, a federally mandated system requiring drug manufacturers to provide steep discounts on medications. This may sound like a money-saver for states, but the opposite is true. Legislators in at least twenty states are actively seeking to remove oversight of for-profit pharmacies in 340B, empowering pharmacies and pharmacy benefit managers to further drive participation; ironically, this will likely drive up state Medicaid costs.
To be sure, the program is complex. The 340B Drug Pricing Program requires manufacturers to provide discounts on drugs sold to “covered entities” (a mixture of hospitals and clinics that receive federal funding) which should help provide affordable medicines to low-income and uninsured patients. These covered entities often contract with for-profit pharmacies (over 200,000 such contracts exist today), using the pharmacies as middlemen to find well-insured patients who have received care from the covered entity and require prescriptions to be filled. When the prescriptions are reimbursed by Medicaid, Medicare, or a commercial health plan, the middlemen and the covered entities share in the profits generated by selling the patients products procured at a deep discount. The program is estimated to have generated at least $100 billion in retail drug sales last year, and roughly $50 billion in profits were shared by the covered entities and their pharmacy middlemen – mostly major chains like CVS and Walgreens.
Our research suggests that the 340B program doesn’t just cost the drug manufacturers big discounts – it also costs states real money by increasing overall Medicaid spending. Medicaid is often the largest line item in a state’s budget, and health benefits for state employees and retirees also require significant taxpayer resources. These higher costs come in several stripes. First, many states allow clinics and hospitals to earn 340B profits on Medicaid managed care patients, in effect giving the 340B entities profits that would otherwise go to taxpayers in the form of Medicaid discounts. A large portion of those profits wind up going to major for-profit pharmacy chains like CVS and Walgreens. Take New York for example. According to a 2020 presentation, the 340B margin available under Managed Care cost the New York Medicaid program over $200 million a year – not accounting for lost rebates. The same presentation showed that the loss of rebates totaled over $800 million over a four-year period and continued to increase year over year. Recognizing this, a few large states, including California and New York, have taken action to recapture the savings for themselves and saved hundreds of millions of dollars.
Perhaps more important in the long run is that the 340B program impacts not only drug costs, but many of the underlying drivers of healthcare costs. Researchers have shown that use of the 340B program leads to more expensive care choices – for instance, moving cancer care into hospital outpatient settings or encouraging the use of the treatments with the biggest 340B discounts. My own recent work shows that holding other drivers of costs constant, overall Medicaid costs per enrollee go up significantly as 340B activity increases, costing states and the federal government billions of dollars per year in increased Medicaid costs.
At least twenty states have introduced or passed legislative proposals that seek to expand the program and protect the operations of pharmacies in 340B, for example by prohibiting manufacturers from placing data reporting requirements on 340B sales. The instinct to protect 340B is politically obvious – mandating drug discounts for entities treating low-income patients has great appeal. However, 340B has become a very big business, with billions or perhaps tens of billions of profits per year shared between large, profitable health systems and their for-profit pharmacy partners, with no requirement that any share of those profits be shared with the low-income patients that policymakers are trying to protect.
While 340B profits may help smaller clinics and hospitals cope with the rising tide of near-term Medicaid losses and shortfalls, ironically 340B is contributing significantly to the pressure those clinics and hospitals are facing. Expanding 340B will likely do the reverse of what policymakers want – it will constrain health budgets rather than expand them.
While the 340B program is not a line item in any state’s annual budget, it is a major indirect driver of increased healthcare spending. Lawmakers seeking to provide efficient care to low-income patients may wish to reconsider their enthusiasm for 340B.
Neal Masia is an Adjunct Professor of Business and Economics at Columbia University, CEO of EntityRisk Inc and former Chief Economist of Pfizer.
Neal Masia , 2024-06-14 18:03:03
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