Pharmaceutical leader Johnson & Johnson recently unleashed a firestorm in Washington after it proposed a change to how it offers discounted prices on two drugs in a little-known, but enormous, federal program that's hurting the low-income patients it was created to help.
That program, known as the "340B Drug Pricing Program," allows certain hospitals—and their affiliated clinics and pharmacies—to access medicines at significantly lower prices offered by pharmaceutical manufacturers.
To help ensure that 340B discounts are being obtained lawfully and benefit the low-income patients they're intended for, J&J proposed offering such discounts as retroactive rebates—rather than upfront discounts—for a subset of 340B hospitals on two of its medicines. This change was intended to help bring much-needed transparency to the 340B program.
Officials at the Health Resources and Services Administration (HRSA), who run the program, blew a gasket. HRSA, whose mission is to provide "equitable health care to the nation's highest-need communities," effectively announced that unless J&J backed down, the agency would kick the drug maker out of Medicare and Medicaid.
J&J has now decided to forgo implementation. But the concerns the company raised are wholly appropriate. Because the alleged behavior of many 340B hospitals is well-documented by government oversight agencies, raises patient and taxpayer costs, and boosts hospital profits, the current iteration of 340B ultimately detracts from the stated mission of the program.
One of 340B's most significant problems stems from the interaction of the program with Medicaid, the joint federal-state insurer for poor and indigent Americans. To have their drugs covered by Medicaid, drug makers must offer at least a 23.1% discount off their regular prices.
Federal law doesn't allow for 340B and Medicaid discounts to be paid on the same medicine. But that seems to be what's happening. Many hospitals and federal grantees are buying drugs at a discount, and state Medicaid programs are collecting hefty rebates for the same medicines given to the same patient.
The problem is only going to get worse as the Inflation Reduction Act is fully implemented and price controls, starting with 10 drugs under Medicare Part D in 2026, roll through the system. The IRA pours fuel on the fire with another government-mandated price, where duplication is illegal. For those keeping tabs, HHS is implementing all three programs, but the various hands are not talking to each other—and not proactively trying to address these issues.
Thanks to the lack of transparency in the program, it's impossible to know just how widespread this double-dipping is. The process of interaction between 340B discounts and Medicaid discounts is opaque, and officials either can't or won't answer the question of how often this abuse occurs.
Hospitals have found new ways to profit off of 340B in recent years. Under the program, hospitals that meet certain criteria (for example, serving a certain percentage of low-income patients) are eligible to buy prescriptions from drug manufacturers at substantial mandatory discounts—as much as half off. Hospitals can then charge insurers a higher price, pocketing the difference.
Health systems should use these savings to provide more charity care. But a loophole in the law means hospitals don't have to use or prove the money is to help the indigent. In practice, many simply keep the savings for themselves rather than passing them along to uninsured or underinsured patients.
Due to increasing hospital ownership consolidation, numerous facilities with little connection to poor communities have become eligible for 340B discounts. Of the nearly 3,000 hospitals in the program, only 35% are located in medically underserved neighborhoods. In fact, 85% of 340B hospitals make more money from 340B than they provide in total charity care.
Abuse of the 340B program doesn't just divert finite resources away from low-income patients. A study from a Columbia University economist found that the program could actually increase taxpayer costs in the long term "by increasing provider consolidation, distorting incentives for efficient care, and impacting overall utilization."
How can this be? For one, 340B incentivizes healthcare facilities to consolidate, leading to less competition and higher patient costs. And when drug makers are forced to hand over improper discounts to hospitals, they may simply raise prices elsewhere to accommodate for the lost revenue.
These distortions have become even more of a concern in recent years, as experts have warned that 340B hospitals could be illegally collecting duplicative discounts for the same medicines. Research firm IQVIA estimated that in 2021, "manufacturers will be responsible for $20-25 billion in duplicate discounts that may not have been owed."
Curiously, congressional outrage hasn't been directed at the parties responsible for this continued malfeasance. Instead, a letter from 189 lawmakers took aim at J&J as a menace to poor communities for attempting to make the discount system more transparent and less susceptible to exploitation, even though the behavior that J&J is attempting to root out is plainly illegal.
Yet, with no government enforcement mechanism in place to stop this multi-billion-dollar money grab, it's no wonder why J&J proposed to substitute rebates for up-front discounts to get a better handle on the problem and prevent redundant payments that raise overall costs.
Genuine congressional oversight would entail determining if unlawful double-dipping is going on and whether officials at HRSA, CMS (which oversees Medicaid), and elsewhere are turning a blind eye. Instead, we got political theater free of any real policy substance.
As it stands, the ongoing abuse of 340B and Medicaid discounts is enriching huge hospital conglomerates at the expense of patients, employers, state governments, poor communities, and taxpayers
Sally Pipes is the Pacific Research Institute’s president, CEO and Thomas W. Smith Fellow in Health Care policy
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