340B for Dummies

Today’s newsletter is a topic I’ve had on my to-do list since the day I started Drugstore Cowboy. Every week I think about finally tackling it and resign to the fact that it’s just too much to take on. But I can’t put it off any longer. Last week, PhRMA launched a campaign to educate the public on 340B in the hopes of leading to reform, and it inspired me to finally take the plunge. 

If “340B” doesn’t mean anything to you, then take a deep breath. This is going to make you angry. Today, we learn about one of the most blatantly corrupt programs in all of American Healthcare. Don’t let the boring name fool you, 340B is an $81 Billion arbitrage machine that allows hospitals to play Reverse Robin Hood, stealing from the poor (or really, everyone) and giving back to themselves.

Buckle up…

The 340B Drug Pricing Program was created by Congress in 1992.

The idea sounded reasonable enough:

If certain hospitals and clinics serve large numbers of low-income or uninsured patients, drug manufacturers should be required to sell outpatient drugs to them at steep discounts. 

These qualifying hospitals are called “covered entities.”

Of course, drug manufacturers needed a reason to play along, so 340B established that if they wanted their drugs to be covered for the millions of people on Medicare and Medicaid, they would need to give discounts to the “covered entities”.

In theory, those hospitals would then use the savings to:

Simple enough.

But there’s one incredibly important detail that was left out of the program:

There is no legal requirement that hospitals pass those discounts directly to patients.

That sentence is the entire story.

If you’ve learned anything from reading Drugstore Cowboy, I hope it’s that anytime there is a loophole to be exploited in American Healthcare, the big boys will find a way to exploit it.

340B is no different.

Here’s the easiest way to understand 340B.

Imagine a drug costs $1500, but under 340B a hospital that serves an underprivileged area gets to buy it discounted for $100.

Then, instead of charging the patient the discounted $100 price, the hospital bills their insurance company $1500 for it anyway.

Then the hospital keeps the difference. And all along, the patient has no idea.

That’s the business model.

Studies estimate the average 340B hospital discount is around 57%, with some drugs discounted over 90%.

Some medications are literally sold to hospitals for a penny under what’s known as “penny pricing.”

But insurers and patients are often still charged rates based on the normal market price.

That difference between acquisition cost and reimbursement becomes profit.

As crazy as that sounds, it’s actually not illegal. That’s all kosher.

And once healthcare systems realized that, the entire program exploded.

Even given everything above, there was still a limit to the growth of 340B. The program could only reach as far as the hospitals that were part of it. But in 2010, everything changed. That’s when federal guidance dramatically expanded the use of “contract pharmacies.”

Before that change, hospitals generally had limited pharmacy relationships closely tied to their local patient populations. Basically, some local pharmacies could qualify to partner with 340B hospitals to access the discounts for patients of the hospitals.

After a 2010 program update, covered entities were effectively allowed to use an unlimited number of outside pharmacies with very little oversight.

The result?

Absolute chaos.

Contract pharmacy arrangements exploded from ~3,000 in 2010 to more than 220,000 by 2024. That same year, 340B contracted entities purchased $81 Billion worth of drugs!! And that number is at the discounted prices!!

That is not normal healthcare growth.
That is gold-rush behavior.

Just look at those charts above.

Today:

Some pharmacies are located over a thousand miles away from the hospital they supposedly serve.

Let me repeat that:

A hospital can profit from prescriptions dispensed through pharmacies located hundreds or even thousands of miles away.

At some point, it becomes difficult to argue this is about local safety-net care.

This is where the story goes from “convoluted healthcare policy” to “what the hell are we doing here?”

A recent analysis found the average profit margin on 340B drugs dispensed through contract pharmacies was approximately 72%.

For comparison, a normal pharmacy margin on brand drugs is around 3–4% if we’re lucky.

As a pharmacy owner, those numbers are almost comical to read.

My readers already know that independent pharmacies routinely survive on razor-thin margins while PBMs squeeze us into dust. I’ve shown you my own books. On many brand drugs, we actually lose money.

Meanwhile, some 340B systems are generating margins that would make a hedge fund manager blush.

According to the same analysis:

Healthcare is a business.
Healthcare is a business.
Healthcare is a business.

I feel like I should tattoo that on my forehead at this point.

You didn’t think the PBMs were going to sit this one out, did you?

Of course not.

According to that report, 44% of all 340B contract pharmacy arrangements now involve pharmacies owned by the “Big Three” PBM conglomerates:

The same companies I’ve spent the last year calling the Mafia of American Healthcare found a way to monetize 340B too.

There are more than 94,000 340B contracts involving pharmacies owned by the “Big Three”.

These vertically integrated giants now participate in the program from nearly every angle imaginable:

The ecosystem became so lucrative that major corporations and private equity firms started aggressively investing in 340B infrastructure itself.

At this point, the program resembles a financial derivatives market more than a charitable healthcare initiative. It has created its own industry.

That’s the multi-billion-dollar question.

Supporters of 340B will tell you the savings help hospitals provide charity care and support underserved populations.

And to be fair, I’m sure some hospitals genuinely use portions of the money that way.

But here’s the reality:

There is shockingly little transparency showing where most of the money actually goes.

That’s not my opinion.
That’s the central criticism surrounding the program.

And the data gets uglier the deeper you dig.

A recent Milliman analysis comparing 340B hospitals to non-340B hospitals found 340B hospitals consistently generated dramatically higher outpatient drug spending, even after adjusting for crucial differentiators.

Commercial outpatient drug spending per patient:

That’s roughly 3x higher.

The report explicitly states these differences could not be explained by:

Now, to be fair: This study was commissioned by PhRMA, the trade organization who launched an anti-340B campaign last week that inspired this piece.

But even accounting for that bias, the broader trend is hard to ignore.

340B hospitals appear to consistently administer a much higher proportion of expensive drugs.

And when hospitals can buy drugs at enormous discounts while still billing at full reimbursement levels, the incentive structure becomes pretty obvious.

This is the core issue.

340B increasingly rewards volume and spread capture.

The more expensive the drug:

That creates incentives misaligned with giving patients cheap and effective healthcare.

The Milliman report even notes that lower-cost biosimilars appear to be used less frequently at 340B hospitals.

Why?

Because cheaper drugs generate smaller spreads.

Once again: follow the incentives.

At some point, we have to acknowledge the philosophical contradiction here.

Many hospital systems argue:

…while simultaneously building massive profits buying drugs cheaply and monetizing the reimbursement spread at the expense of their patients.

That contradiction is fascinating to me.

340B effectively turned parts of the hospital system into pharmaceutical arbitrage traders.

And because the program became so financially important, hospitals now aggressively defend it in Washington.

And who can blame them?

If someone handed your organization access to 72% margins and billions in profit, you’d probably hire a lobbying team too.

A recent Wall Street Journal editorial discussing a federal court opinion described 340B as “a scam on taxpayers.”

Strong language, but the underlying criticism is impossible to dismiss.

Federal Judge Daniel Traynor wrote that the program “meant to help American poor is being abused to provide a windfall to hospital conglomerates and participating pharmacies.”

He also noted cleanly what I state above:

That’s the whole story.

The patient often sees no direct discount at all. In fact, the end result is increased drug prices for everyone since manufacturers have to raise prices to cover what they lose from the growth of 340B.

That’s why this program makes so many people angry once they fully understand it.

The optics and the economics are moving in opposite directions.

I’m not writing this because I think every hospital executive is evil. At the end of the day, they run a business. None of this is against the law. In fact, it’s as by-the-book as it gets.

I’m writing this because I think the American healthcare system is unbelievably good at turning the best intentions into opaque financial machines when incentives get misaligned.

340B began as a safety-net program.

Today:

That should concern everyone.

Because as I’ve said countless times before, once healthcare incentives detach completely from transparency and accountability, the system stops behaving like medicine and good old fashioned American greed takes over.

340B is supposed to mean:

“Hospitals get cheaper drugs for poor patients.”

The reality is much messier.

That doesn’t mean every part of 340B is evil.
But it does mean we should stop pretending this is still a charitable side program.

An $81 billion market with 200,000+ pharmacy arrangements and 72% margins is not charity anymore.

It’s a full-blown industry.

And like every other corner of American healthcare, it became one the moment people realized how much money was sitting on the table.

I started writing Drugstore Cowboy because I believe the more people know about what’s happening behind the scenes, the better chance we have to change it for the better. Most of the things I write about are incredibly difficult to understand, but 340B is staring us all right in the face. We need to demand more from our lawmakers and get the program under control.

Healthcare is complicated. 340B is not. And now you know.

Giddy up.

Alec Wade Ginsberg, PharmD, RPh
4th-Gen Pharmacist | Owner & COO, C.O. Bigelow
Founder, Drugstore Cowboy