340B Program Costs Exceed Earlier Estimates

Costs under the 340B program have ballooned far beyond earlier estimates, based on certain aspects of the program that have not been looked at closely.

Ted Okon

Key Takeaways

  • Independent oncology practice spending on drugs is flat while 340B hospital spending is climbing rapidly.
  • Contract pharmacy arrangements are proliferating as a result of 340B profit potential.
  • Critics say 340B draft revisions address need for stronger patient definition but not contract pharmacy loophole.

Costs under the 340B program, which allows many medical facilities to profit from government protected drug discounts designed to aid the uninsured and underinsured, have ballooned far beyond earlier estimates, based on certain aspects of the program that have not been looked at closely, says a report by the Berkeley Research Group and commissioned by the Community Oncology Association (COA).1

The report was made public this week as many authorities are poring over details of a voluminous 340B draft revision document that tightens the standards on when healthcare institutions can qualify for drug discounts under the program.

“Hospitals enrolled in the 340B program received 58% of total Medicare Part B hospital outpatient drug reimbursement in 2013, and over 60% of Part B reimbursement for oncology drugs, up from 43% and 47%, respectively, in 2010,” the Berkeley report says.

The findings show that growth in unfocused spending is soaring, large medical institutions and contract pharmacies are becoming enriched, and smaller independent oncology practices are at an increasing competitive disadvantage, says Ted Okon, executive director of COA.

For independent oncology practices not participating in 340B, Part B oncology drug reimbursement declined 5% during the 2010 to 2013 study period, whereas 340B hospitals realized a 123% increase and non-340B hospitals saw a 31% increase, according to the report.

Hospitals Are “Intentionally” Using More Expensive Drugs

The 340B program allows outpatient drug providers to get manufacturer drug discounts of up to 50% while obtaining full reimbursement from Medicare and private payers. The goal is to deliver drugs to needy patients at affordable prices while also allowing medical facilities to plow purchase savings back into their facilities and programs to help indigent or underinsured patients further. What is happening instead is that institutions often pocket the spread between the purchase discount and the reimbursement without benefiting needy patients, critics of the program say.The Berkeley report confirms a finding by the General Accountability Office that 340B certified hospitals are “using more drugs and more expensive drugs” in order to maximize their gains, Okon said.

The problem is partly that Disproportionate Share Hospitals that receive subsidies for helping the needy are not held to high enough standards of accountability and transparency, Okon said.

A May 2015 report by the Medicare Payment Advisory Commission stated that 340B covered entities and their affiliates spent over $7 billion to purchase 340B drugs in 2013, three times the amount spent in 2005.2

Stephanie Silverman, spokeswoman for the group reform effort AIR340B, commented that the revisions are promising in that they represent an attempt to reconnect the program with its original mission. “It’s been a huge issue to be able to tie the benefits of 340B back to patients, who are vulnerable and in need. I think that’s the most promising part of the document,” she said.

However, there is no attempt in the revisions to curtail the exponential growth of contract arrangements between 340B hospitals and pharmacies, which often serve affluent communities and have little legitimate involvement with the 340B program, Silverman said. In addition, it’s not clear that pharmacies are extending the drug discounts to indigent or underinsured patients or that they are properly tracking to ensure that patients presenting prescriptions have obtained them from 340B providers, she said.

Figure: 340B Covered Entities Contracting With Retail Pharmacies and Mail Order / Specialty Pharmacies

The number of 340B covered entities contracting with retail pharmacies and mail order/specialty pharmacies has soared to over 3000 this year from less than 1000 in 2010, according to the Berkeley report. Pharmacy contracts were allowed under the program in order to extend drug discounts to poorer regions, but many pharmacies taking advantage of 340B operate in affluent areas, Silverman said.

“That problem wasn’t even touched upon in the draft guidance,” Silverman said. “We think it’s a real challenge to the long term sustainability of the 340B program and a very serious part of why the program isn’t working as it was intended to.”

Silverman also fears that institutions that violate the guidelines could get away with a slap on the wrist rather than a penalty that scares them into reforming their practices. “Entities that violate these new draft guidelines are allowed to reenter the system pretty quickly. The guardrails around violators aren’t particularly tight,” she said.

Hospitals Say Penalties for Noncompliance Are Draconian

The draft revisions to 340B would require a clearer audit trail for drugs prescribed under 340B and provide for disqualification of an institution from the program on the basis of a single error or diversion in the use of 340B privileges. In addition, the document provides a six-point qualification test for determining whether a patient is eligible for participation in 340B and whether the health institution is entitled to the drug discount.Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, a safety net group, countered that the penalties for noncompliance are very severe in that a hospital could lose its 340B status on the basis of a single infraction.

Beth Feldpush

“You would need to keep auditable records of all prescriptions for five years. You have to keep proof that each patient met that 340B definition. The consequences for misplacing just a single record are that the hospital could be deemed by HRSA ineligible from the point in time of the missing record all the way up to the present. And you would have to pay back not just that one manufacturer for the savings on that one prescription, but all manufacturers for savings during that period, including for all the distributions you documented properly,” she said.

An open comment period is under way through October 27, after which the Health Resources and Services Administration (HRSA) may elect to publish the changes or subject them to further revision.

Feldpush said members of the hospital community are concerned that many needy patients may lose the benefit of the 340B program based on the draft revisions. “In fact, we’re concerned that the agency is overstepping its statutory guidelines,” she said.

Under current guidelines, clinics must be listed on Medicare hospital cost reports to participate in 340B, “but now the guidance goes one step beyond and says the clinic must have Medicare costs listed, which means the clinic must be seeing Medicare patients. Many of our hospitals have pediatric clinics, and so the way we interpret that is that none of these pediatric clinics would be considered 340B clinics,” Feldpush said. “I’m hard pressed to understand why HRSA has suddenly taken the position that low income children no longer deserve access to discounted drugs.”

The revisions would add significantly to the administrative challenges of participating in 340B, such that some institutions might be forced to abandon involvement, she said. An example is the audit trail that would be required to demonstrate that the right prescriptions were discounted. “It’s one thing for the pharmacist to be able to look up the patients’ insurance status and another thing for the pharmacist to ensure each prescription meets the new multipoint test in the guidance, which demands information the pharmacist likely wouldn't have,” Feldpush said.


  1. Vandervelde A. 340B growth and the impact on the oncology marketplace. Berkeley Research Group. 2015. http://www.communityoncology.org/pdfs/BRG_COA_340B-Report_9-15.pdf. Accessed September 15, 2015.
  2. Medicare Payment Advisory Commission. Overview of the 340B drug pricing program. 2015. http://www.medpac.gov/documents/reports/may-2015-report-to-the-congress-overview-of-the-340b-drug-pricing-program.pdf?sfvrsn=0. Accessed September 15, 2015.