HHS flags 340B spread pricing, consolidation concerns

A new report from the HHS' Assistant Secretary for Planning and Evaluation says the 340B Drug Pricing Program "has expanded beyond its original intent," prioritizing profit over patients.

The report raises concerns about the program's growth in both participation and costs, as well as the unintended incentives that allow hospitals to pad their margins through duplicate discounts with Medicaid and contract pharmacies.

Drugmakers, payers and even government officials have sought to address these concerns, most recently through rebate programs that require participating hospitals to pay full price for eligible drugs before receiving the required discount.

However, hospitals have opposed these models, arguing they create massive cash-flow strains and administrative overhead while giving pharmaceutical companies control to weaponize the approval process to delay or deny discounts. They maintain that the 340B program is a critical lifeline for safety-net providers, enabling them to invest program savings in services for vulnerable patients that would otherwise lose money.

Congress created the 340B program in 1992 to ensure safety-net providers could continue to provide certain outpatient drugs to patients regardless of cost  following a price increases set off by a Medicaid drug rebate program at the time. These providers, called covered entities, receive discounted prices on eligible drugs based on the number of low-income and uninsured patients they treat.

Initial participants were mostly disproportionate share hospitals, federally qualified health centers and certain specialized clinics and programs. However, ASPE reported that the program has grown significantly from less than 100 hospitals at the start to about 66,000 covered entities by 2025.

This has largely been driven by hospitals' use of contract pharmacies, third-party pharmacies that enter into agreements with providers to dispense medications on their behalf. ASPE reported that over 31,000 contract pharmacies now participate in the program, compared to 1,300 in 2010.

Alongside program participation, program costs have also increased substantially, according to ASPE. The agency stated that 340B purchases now outpace net Medicare Part B and Medicaid spending on prescription drugs, trailing just Medicare Part D expenditures.

340B drug sales also increased from $12 billion in 2015 to $81 billion in 2024, the agency said.

The report indicated that this growth is linked to incentives that prompt prioritizing "spread," defined as the margin between discounted prices and the reimbursement rate that covered entities receive for administering the drugs.

"340B's original intent was to give covered entities drug discounts so any revenue from the difference between that cost and standard reimbursement rates could be used to provide services to the low-income and uninsured patients," ASPE stated. "However, this feature of 340B allows covered entities to leverage spread pricing to generate greater revenue by using higher-priced drugs, increasing drug utilization, and lowering rates of uptake for cheaper generics and biosimilars, all to maximize spread."

Program safeguards have also failed, the report suggested. For example, FQHCs are required by law to reinvest 340B revenue to benefit their patients. However, non-FQHCs, which comprise the majority of current 340B participants, don't have an equivalent requirement, ASPE said.

This "outsized revenue," as ASPE put it, "may incentivize consolidation and anticompetitive behavior in the health care market, which has negative implications for health care affordability."

But a change in how Medicare reimburses hospitals for 340B drugs could right-size the program once again, according to an analysis included in the ASPE report.

The CMS proposed this summer to reduce Medicare outpatient reimbursements to hospitals for 340B drugs from the average sales price of the product plus 6% to ASP minus 33.4%.

"With the current reimbursement rate of ASP +6%, hospitals are incentivized to increase their spread by overusing high-cost drugs, seeking Medicare insured patients to increase reimbursement, and drive consolidation through take-up of child sites," ASPE wrote.

"In addition to mitigating spread-chasing behaviors that ultimately inflate premiums, reducing the reimbursement rate would also have a direct effect on lowering out-of-pocket costs for Medicare beneficiaries, who under Medicare Part B, typically pay 20 percent of the OPPS reimbursement amount as their coinsurance," the agency continued.

Hospital groups are highly critical of the proposed cut, which would take effect in 2027. But CMS defended the pay change, citing a survey it conducted on outpatient drug acquisition costs.

Jacqueline LaPointe is an Executive Editor at Xtelligent Healthcare Media, covering revenue cycle management, healthcare payers, health policy, and health IT since 2016.