As healthcare costs rise, Georgia state legislators are looking for solutions. So are families and employers who bear the brunt of price hikes. They all deserve to know the truth about a shadowy federal drug program that is growing fast and pushing up insurance premiums and other costs. That’s why I testified last month at a Georgia House Study Committee on prescription drug pricing.
A takeaway from the hearing at Macon’s Mercer School of Medicine is that too many government “solutions” have only made things worse. That’s particularly true of what is called the 340(b) drug pricing program. This federal policy from 35 years ago has ballooned into a seriously flawed, heavily manipulated price-fixing scheme that mostly benefits big tax-exempt hospital corporations.
It started with Congress attempting to fix a problem that Congress had created. In 1990, Congress enacted a program to fix prices for some prescription drugs. The scheme actually pushed some prices higher, because drug manufacturers already had discount programs for low-income patients. Congress responded in 1992 by creating 340(b), requiring that manufacturers sell certain drugs at extremely low prices to clinics treating very sick, very poor patients.
The program remained small until the Obama Administration expanded it to major hospitals. This looks to me like a way to buy their support for Obamacare. Whatever the reason, 340(b) suddenly began to grow. It is now the second largest federal drug purchasing program and is on track to become the largest—bigger than Medicare Part D—within a few years.
The 340(b) program has no requirement to pass savings along to patients. Before the Obama changes, that made some sense, because the program focused on patients who couldn’t pay. Today, with Medicaid expansion and insurance subsidies, even many of these patients have someone (usually taxpayers) who pays at least some of their medical bills. Other 340(b) patients are not poor at all; they just happen to get care from a hospital in the system. This means that instead of minimizing losses, 340(b) is generating windfall profits.
Eligible hospitals buy outpatient drugs at deep discounts but can—and often do—charge patients or their insurers full price. They may not even tell patients they are covered by 340(b). This is a hidden subsidy that mostly benefits the biggest hospitals, paid for by shadow taxes on drug manufacturing and on everyone who pays an insurance premium.
Atlanta’s Northside Hospital participates is a 340(b) “covered entity.” It had more than $12 billion in revenue last year and paid its top executive about $5 million. While exact figures are not released, one estimate found Northside could make as much as $1.7 billion in profit from 340(b) drug sales.
Tax-exempt hospitals like Northside can use these funds however they want. My research has found providers in places like New York City and Philadelphia bragging about using 340(b) revenues to subsidize woke medicine like sex changes and other “gender care.” Of course, hospitals in conservative states would never admit that, but can claim to use the funds for anything. In fact, the revenues simply flow into their bottom line, helping pay for buildings, management perks, or buying up other providers.
What this program needs is transparency. Hospitals should be required to report on whether they pass 340(b) discounts on to patients and their insurance. The state should investigate how much its own health plans are being overcharged, a cost ultimately passed on to taxpayers. There are also questions about whether 340(b) hospitals push more expensive drugs rather than less costly ones or other treatments.
The biggest drivers of healthcare costs are hospitals and their sprawling networks. Most are tax exempt and receive massive subsidies. Yet many have bizarre spending priorities, including overseas expansions and lavish executive perks, as shown by a recent Save Our States’ report. Too many nonprofit hospitals have drifted from their charitable mission while continuing to receive significant public subsidies and benefits like 340(b) drug pricing.
It is no surprise that big hospitals oppose any changes to 340(b). They oppose even basic accountability measures to keep fraud out of the program. And they want the Georgia General Assembly to endorse 340(b) in its current form. That would be a mistake. The Trump Administration is pushing 340(b) reforms, and Congress is investigating the program’s mission creep. The General Assembly should support that work, not interfere with it.
Trent England is the executive director and founder of Save Our States.
