The Federal Program That Keeps Insulin Prices High
Middlemen pocket discounts while forcing patients, employers and Medicare to pay more.
By Adam J. Fein
Sept. 10, 2020 7:10 pm ET
Perhaps the biggest flashpoint in the political debate about prescription drug prices is the cost of insulin. This summer an executive order from President Trump required low prices for some patients, and Eli Lilly last week announced new measures to make insulin more affordable for diabetics. Yet many aren’t aware that a federal program is goosing the price of insulin and other treatments, and keeping the prices high for patients who need these drugs.
Over the past few months the little-known 340B Drug Pricing Program has become the source of intense jockeying over who should benefit from the deep drug discounts—sometimes as much as 100%—that manufacturers provide to hospitals and their pharmacy partners. Drug manufacturers Sanofi, Merck and Novartis are demanding transparency to ensure that their discounts aren’t diverted.
Congress created the 340B Drug Pricing Program in 1992 with the vague goal of helping providers “stretch scarce federal resources” by requiring manufacturers to offer steep drug discounts to certain “safety net” hospitals. But the program includes no clear mandate on how the rebates should be spent. Good intentions have been swamped by middlemen that pocket discounts while forcing patients, employers and the Medicare program to pay more for prescription drugs.
For 18 years, 340B remained a minor, generally uncontroversial part of the U.S. health-care system. But shortly after the Affordable Care Act passed in 2010, the Obama administration announced an expansion: Hospitals could purchase and dispense discounted drugs through an unlimited number of external (or contract) commercial pharmacies.
For years I’ve been studying the economics of the complex and opaque intersection of the 340B program and the pharmacy industry. My analysis has found that since 2010 the 340B program has grown by almost 500% and is approaching the size of the nation’s Medicaid outpatient drug market. The number of external pharmacies in the 340B program has also skyrocketed, from fewer than 1,300 in 2010 to 28,000 in 2020. That means almost half the U.S. pharmacy industry now profits from the 340B program, which was designed as a narrow support to certain hospitals.
Profit margins of up to 100% allow hospitals to pay inflated fees to their pharmacy partners, which can earn margins well above what the patient’s insurance company usually pays. Public companies such as Walgreens, CVS, Walmart, Cigna, UnitedHealth Group, and Kroger have rushed into the 340B business. A booming industry of consultants and technology companies helps hospitals and commercial pharmacies profit from this aspect of the 340B program.
Patients don’t benefit from these discounts. Instead, they are expected to pay their health plans’ full out-of-pocket costs. A patient with a high-deductible health plan must pay the full list price for his medicine. The same sad math applies to seniors in the Medicare Part D program. Seniors taking many expensive specialty therapies must pay 5% of their prescription’s price without discounts—even when the manufacturer has practically given the product away.
Unlike Medicaid, the pharmacy component of 340B doesn’t have—and has never had—a regulatory infrastructure. That’s because the Obama administration’s 2010 notice bypassed the usual rule-making and comment procedures. Consequently, there’s no requirement that hospitals appropriately use the billions in 340B pharmacy discounts, no fair-market-value standards for pharmacies’ fees, and zero transparency around the profits earned by the billion-dollar public companies that dominate 340B pharmacy networks.
Even worse, multiple government watchdogs have found that hospitals often don’t provide discounted drug prices to uninsured low-income patients who filled prescriptions at a hospital’s 340B contract pharmacy. The Government Accountability Office discovered that in a sample of 28 hospitals, 16 (57%) didn’t provide discounted drug prices to needy patients at 340B pharmacies.
Manufacturers can find themselves paying a Medicaid rebate and a 340B discounts for the same prescription. Such double dipping occurs because there is a lack of transparency into claims data that would allow states and manufacturers to apply payment policies correctly. Health and Human Service’s Inspector General in a report last month identified this lack of transparency as one of its top unimplemented recommendations to the agency.
Manufacturers understandably oppose paying 200% in discounts while others in the system make money. Hospitals and pharmacies have fought requests for data that manufacturers need to verify or track 340B discounts.
Congress needs to clean up this mess. The health-care system has changed a lot in the 28 years since the discount program was introduced. The 340B program needs to be modernized so that it benefits seniors and other patients—while supporting the genuine safety-net services of health-care providers. In the absence of sensible regulations, manufacturers will struggle to make sure that patients benefit from discounts on prescription drugs.
Mr. Fein is CEO of Drug Channels Institute.
