How Drug Discounts for the Poor Became a Windfall for Hospitals

A program intended to help poor and uninsured patients get prescription drugs has become an unexpected windfall for hospitals.

The program at the center of a new study in the journal Health Affairs was started more than 20 years ago to allow some hospitals to buy medications from drug companies at steep discounts. The intent was to help hospitals care for people who could not afford the drugs or had no insurance to pay for them. But critics say hospitals have taken advantage of the program by selling the drugs they obtain at discounts to insured patients whose health plans reimburse the medicines’ normal prices.

The discount program—known as 340B, after the section of the Veterans Health Care Act that created it in 1992—provides drug discounts to hospitals with a disproportionate share of low-income patients. About one-third of U.S. hospitals now qualify based on their inpatient population, and the number of institutions involved has doubled from 2001 to 2011, according to the Health Affairs researchers.

The drug discounts don’t apply just to inpatient stays. Much of the criticism of the 340B program has focused on outpatient clinics, particularly oncology centers delivering expensive chemotherapy drugs. By opening clinics—or buying existing ones—hospitals that qualify for 340B prices can extend the reach of those discounts. If the patients at those clinics have commercial insurance, the hospital can collect the full price of the drug it bought at a big discount, booking the difference as profit.

Hospitals defend the practice. “Many hospitals use the 340B savings to provide free or reduced-price prescription drugs to vulnerable patient populations, which allows them to provide more patient services and programs,” said Molly Collins Offner, director of policy for the American Hospital Association, in an e-mailed statement. The program helps fund charity care, free vaccines, mental-health services, and other services for the poor, she said.

Drugmakers, which take the direct financial hit from 340B discounts, call that explanation bogus, citing research that suggests most hospitals getting the discount provide less charity care than average. Pharma and biotech companies aren’t the only ones paying. Rena Conti, an author of the new study and a professor at the University of Chicago, points out that when insured patients get discounted medications, those savings aren’t passed on to the insurance company or to Medicare.

Meanwhile, the hospitals and clinics that have joined the program since 2004 tend to serve “communities that were wealthier and had higher rates of health insurance” compared with older participants, the authors wrote. “Our findings support the criticism that the 340B program is being converted from one that serves vulnerable patient populations to one that enriches hospitals and their affiliated clinics.”

U.S. health care is full of cross-subsidies. In most of what they do, for example, hospitals make money on patients with commercial insurance and lose money on Medicaid patients. That means employers and enrollees in commercial plans are paying for Medicaid patients, if indirectly. The 340B program takes money off pharma companies’ top lines and delivers it to hospitals. Some hospitals may use the cash to fund worthy programs for poor patients—the people whom the 340B program was intended to serve—but there’s no safeguard in the policy to make sure that happens.

Conti suggests there ought to be. She says hospitals should have to demonstrate transparently how 340B profits help the poor and uninsured, or they should pass along the savings. “Clearly the program is not intended to go to hospitals’ profit,” she says.

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