There are many reasons why government programs fail to deliver on their intentions, regardless of how well meaning they may be. The rhetoric from too many 340B recipients exemplifies a primary obstacle: Reforms that are necessary to correct a program’s glaring flaws or its fundamental unsustainability are demagogued and labeled insidious threats to working class Americans or the vulnerable.
In the latest example, a Hill editorial paints reforms that would rein in the out of control 340B program as schemes to deny care to vulnerable patients. Ironically, by thwarting the necessary reforms, this rhetoric threatens the sustainability of the program.
340B enables qualifying institutions (called covered entities) to purchase medicines from drug manufacturers at steep discounts, generally between 25% and 50% off list price, but sometimes even larger. Covered entities earn revenues by pocketing the spread between the drug’s 340B price and the payments from well insured patients that pay the drug’s full value. Expanding the program’s reach, covered entities (particularly disproportionate share hospitals) are allowed to contract with an unlimited number of pharmacies (aka contract pharmacies) who earn hefty profits by dispensing these medicines and pocketing profit margins as large as 72%!
The discount program is supposed to improve the capacity of the clinics and hospitals serving a disproportionate share of low-income and uninsured patients. More and more, this is not how the program is working. The number of organizations participating in the 340B program is exploding, but far too many of the program expansions are by covered entities and contract pharmacies that do not serve the intended populations.
Much of the 340B program now subsidizes large pharmacies (e.g., CVS and Walgreens); in fact, the five largest contract pharmacies earned $3.2 billion in 2021 and are estimated to earn $2.9 billion in 2023. It’s not just the contract pharmacies either. Many of the 340B disproportionate share hospitals are expanding to wealthier neighborhoods where the intended population does not live. Further these hospitals fail to provide more charitable care than the average hospital.
These misaligned incentives are destabilizing the 340B program while imposing costs on the broader healthcare system, which is why there is a growing chorus calling for reform. It is important to note that the vast majority of reform proposals are not suggesting that the byzantine 340B structure should be eliminated. Instead, they call for more effective oversight, demand transparency, and want assurances that the discounts serve their intended purpose.
Instead of justifying why such reforms are not needed, proponents of the status quo (such as the author of the Hill editorial) resort to misdirection and misinformation making claims such as:
All of the drug industry’s criticisms and so-called 340B “reform proposals” culminate in one goal, which is to limit the number of prescriptions available at 340B prices. This would inevitably prioritize drugmaker balance sheets [sic] over the clinical outcomes of vulnerable Americans.
The misdirections in this quote are clear. Obviously, a program that is supposed to help at-risk patients (a small share of the population), but has become the second largest drug discount program in the country, needs to be “limited.” But limiting the program to the intended population does not jeopardize clinical outcomes for vulnerable Americans. In fact, by stabilizing the program, it helps promote better clinical outcomes.
Another fallacy is the idea of private industry prioritizing income. Whether it is HIV or cancer, private companies empowered to develop medicines are the driving force behind the development of life-altering treatments. Private companies excel at this process, in part, because capital markets provide the necessary discipline for those organizations that fail and reward those organizations that succeed. Without bearing the costs of failure, success is not possible.
Further, despite the rhetoric, pharmaceutical returns are barely in line with the broader market. According to the financial data maintained by NYU Professor Aswath Damodaran, the industry’s profitability is less competitive than the total market. As of January 2023, the biotechnology and pharmaceutical sectors earned a 1.5% and 13.7% return on equity (ROE, a typical measure of profitability), respectively, compared to 14.5% ROE for the market overall. Financial returns vary over time, of course. However, over time, the pharmaceutical and biotechnology industries’ returns are not exceptional compared to the market and often lag overall profitability.
Other objections fall flat as well. For instance, documenting that a specific entity uses its 340B money well does not invalidate the need for reform. Undoubtedly, many organizations use the 340B program as intended and help serve underserved populations. The anecdotes do not change the reality that abuse and misuse are rife. These cases justify why the program should be reformed, not eliminated.
When fulfilling its intentions, the 340B program serves an important goal – improving access for the vulnerable to crucial healthcare services. But, as currently designed, the program is unsustainable, which is why fixing 340B’s fundamental flaws should be a top political priority. Consequently, rhetoric that misrepresents reforms and ignores the program’s inherent defects is an obstacle to the program’s long-term sustainability.
