Michigan hospital

A Beaumont Hospital emergency room sign in Trenton, Michigan

(The Center Square) –  Some hospitals abused a federal discount drug program for uninsured people to bilk state taxpayers, according to a new report from the Massachusetts-based Pioneer Institute.

The study found that 340B hospitals can arbitrage discounts to boost revenue, which doesn't necessarily have to be spent providing charity care. Those hospitals, says the Pioneer Institute, also caused an escalation of health insurance premiums.

This especially applies in wealthier areas that allow 340B hospitals to “generate profits by prescribing drugs to patients who have private insurance or Medicare," the study says. 

For example, a hospital could buy a $100,000 oncology drug for $25,000, bill the patient's insurance $100,000, and then pocket the $75,000 at the cost of the person’s insurance company, which artificially raises premiums.

“The program started out to help low-income and uninsured people and now has become this program that’s a gigantic revenue source for hospitals,” co-author Bill Smith told The Center Square in a phone interview. “And many hospitals are targeting higher-income patients who have insurance and have Medicare so they can bill the full drug price that they buy at a discount.”

In the 1970s, drug companies discounted medicine at hospitals that treated high loads of uninsured patients. Smith said the program started with about 500 struggling hospitals.

But in 1992, Congress required drug companies to discount pharmaceuticals for certain hospitals and patients via the 340B program – or else Medicare wouldn't cover its drugs. Some manufacturers discount drugs up to 50% or more of their cost.

The 340B program, named for section 340B of the Veterans Health Care Act of 1992, is administered by the Health Resources and Services Administration (HRSA).

In 2010, the Affordable Care Act expanded the number of 340B hospitals, which soon discovered they could arbitrage these discounts.

The U.S. Governmental Accountability Office says 340B program participation has jumped from nearly 9,700 in 2010 to 12,700 in 2020. The program became a cash cow for hospitals. In 2014, 340B drug sales totaled $9 billion. Just six years later, that amount totaled $38 billion.

“More drug sales happen in the 340B program than in the Medicaid drug program, which has 83 million enrollees,” Smith said.

The study found that the 340B program flushed hospitals with cash, but those hospitals often reduced charity care programs.

“It’s not that the hospitals are making money off this program; it's the fact that they’re making money off this program, and they’re not devoting it to charity care and helping low-income people,” Smith said.

An advocacy group called 340B lists 88 340B hospitals in Michigan, which are often the biggest local employers in Congressional Districts. However the general findings don’t necessarily apply to all 340B hospitals. Some hospitals have increased charitable giving, Smith said.

The report cites a Berkeley Research Group estimate that by 2026, 340B will eclipse gross drug sales of the Medicare and Medicaid program to become the largest federal drug program, despite it not necessarily fulfilling its purpose. 

“More specifically, as the number of 340B sites expanded to 30,000 between 2009 and 2015, there should have been significant improvement in low-income patients’ ability to afford their prescription drugs,” the report said. “But the opposite seems to have happened: at a time of explosive growth in 340B, it became significantly more difficult for low-income populations to afford prescription drugs.”

In 2021, The Center Square reported on a 340B program study that found the profitability for 340B hospitals was 37% larger than the average of all hospitals. Moreover, the sample 340B hospitals provided even less charity care and were more profitable than the average hospital and average 340B hospital.

Medicare cost reports show how much charity care hospitals give, but don’t disclose 340B program revenue.

Staff Reporter

Scott McClallen is a staff writer covering Michigan and Minnesota for The Center Square. A graduate of Hillsdale College, his work has appeared on Forbes.com and FEE.org. Previously, he worked as a financial analyst at Pepsi.