Pursuit of profits is driving drug companies to break the 340B law

Seventeen drug companies, including some of the world’s largest, are flouting a 30-year-old federal program that supports hospitals serving patients with low incomes and those who live in rural communities. Both the Trump and Biden administrations have deemed these actions unlawful. But these drugmakers continue to ignore the law, sapping resources from the nation’s health care safety net and threatening the health of the patients who rely on it for care.

The program in question is the 340B drug pricing program, named after the section of federal law that created it. Congress enacted 340B in 1992 in a bipartisan effort to provide safety-net providers resources to serve more patients in need and provide comprehensive services they otherwise would not be able to offer. The law requires drug companies to offer discounted prices to eligible safety-net providers on certain outpatient drugs. In return, Congress approved having Medicaid and Medicare Part B cover the participating companies’ products, a deal that has been highly lucrative for drugmakers.

In 2010, lawmakers moved to expand the program to include more than 1,000 small, rural hospitals along with free-standing children’s and cancer facilities.

The 340B program has worked as Congress intended. Hospitals that qualify for the program based on their low-income patient populations — known as disproportionate share hospitals — represent about 43% of all hospitals in the U.S. but provide 75% of hospital care for people covered by Medicaid and 60% of all uncompensated and unreimbursed care. The program also serves as a lifeline for small, rural hospitals that are the only source of care for patients in remote areas. And 340B hospitals accomplish this without expending a dollar of taxpayer money. The resources instead come from the discounts drugmakers provide at the point of sale.

Most manufacturers continue to hold up their commitment to provide discounted pricing to eligible providers. But since July 2020, a growing group of companies has been restricting the required 340B discounts when the drugs are dispensed to providers’ patients through community or specialty pharmacy partnerships. Some of these companies are refusing to provide discounts to these so-called contract pharmacies. Others are tying access to discounts to unlawful demands for patient claims data that are unrelated to the mission of 340B.

These actions are causing tremendous damage to safety-net hospitals and the patients they serve. A survey of 550 hospitals conducted in March by 340B Health, the organization I lead, found that these restrictions by drug companies are causing an estimated annual median loss of $2.2 million for larger, mostly urban hospitals, with 10% of those hospitals expecting their annual losses to exceed $21 million. Among the smaller, mostly rural 340B hospitals, the median annual loss is $448,000, with 10% estimating losses of more than $1.3 million a year. Those losses have more than doubled since we conducted a similar survey in December 2021. Since March, two more major drug companies jumped on the 340B restriction bandwagon, developments that will deepen those losses even more.

What is driving drug companies to ignore the law? As with many of the industry’s actions, the motivation seems to be solely to maximize prices and profits.

Many of the early adopters of these restrictive policies appear to be driven by a desire to avoid penalties mandated by Congress on drug companies that increase the prices of their drugs faster than inflation. The 340B statute requires a minimum 23.1% discount on brand-name drugs. If a company repeatedly hikes the price of a drug, the 340B discount increases. In cases of repeated price hikes, the discount can approach 100%, and the 340B price can drop to a penny per dose.

Insulin is a perfect example of this phenomenon. Between 1996 and 2019, Eli Lilly raised the price of Humalog, its top-selling insulin product, by 1,200%, vastly exceeding inflation. As a result, the 340B price dropped to pennies per dose. The three major insulin makers in the U.S. — Eli Lilly, Novo Nordisk, and Sanofi — were among the first companies to adopt unlawful 340B pricing restrictions. By refusing to honor the 340B price for drugs dispensed at community pharmacies, those companies are circumventing the penalty Congress created, further increasing their profits on insulin and a long list of other products. A senior Eli Lilly executive called these discount restrictions a “tailwind” for the company.

By skirting the inflation penalty, companies also have fewer curbs on their overall pricing behavior. Independent research published in JAMA Network Open has demonstrated that the 340B inflation penalty slows price increases for drugs sold to all purchasers, not just 340B providers. The study looked at 606 brand-name drugs used by Medicare beneficiaries between 2013 and 2017 and found that higher percentages of drug sales subject to inflation penalties were associated with smaller drug price increases. These lower price increases were associated with a reduction in Medicare Part D pharmacy expenditures of $7 billion over the four-year period.

A second factor driving manufacturers to restrict 340B discounts is the burgeoning specialty drug market. Specialty drugs tend to be high priced and treat chronic, potentially life-threatening conditions such as cancer, rheumatoid arthritis, growth hormone deficiency, and multiple sclerosis. Many of the drug companies that recently adopted 340B restrictions sell such drugs, including AbbVie and its top-seller Humira. While they make up a small fraction of the number of retail prescriptions filled, specialty drugs accounted for more than one-third (37.7%) of retail and mail-order prescription spending in 2016 to 2017. Insurers and pharmacy benefit managers (PBMs) often require the use of their own specialty pharmacies, which forces hospitals to use multiple pharmacies for patients covered by each insurer or PBM. Because those agreements involve contract pharmacies, the drugmakers’ restrictions are making it harder for hospitals to obtain specialty drugs for their patients.

The pharmaceutical industry is among the most profitable industries in the world. Between 2000 and 2018, drug companies generated $8.6 trillion in profits. Yet 17 companies — AbbVie, Amgen, AstraZeneca, Boehringer Ingelheim, Bristol Myers Squibb, Eli Lilly, Exelixis, Gilead, GlaxoSmithKline, Johnson & Johnson, Merck, Novartis, Novo Nordisk, Pfizer, Sanofi, UCB, and United Therapeutics — are looking for ways to boost profits even more at the expense of the health care safety net and others could do so if this dispute isn’t settled soon. So far, seven companies have refused to restore discounts and have been referred to the Department of Health and Human Services Office of Inspector General, which will assess whether they should face penalties for “knowingly and intentionally” overcharging hospitals for 340B drugs.

In a filing with a federal court, AstraZeneca said such fines “could amount to hundreds of millions of dollars in potential penalties every month” for that company alone. The OIG should impose fines on all companies refusing to restore 340B discounts. In an industry driven by the bottom line, that may be the only way to convince them to obey the law.

Maureen Testoni is the president and CEO of 340B Health, which represents more than 1,400 hospitals participating in the 340B drug pricing program.