The Senate Health, Education, Labor, and Pensions Committee held a hearing last month examining the 340B drug discount program. A recurring line of questioning centered on whether 340B assistance is actually going to those most in need. At the University of Southern California Schaeffer Center for Health Policy & Economics, we recently uncovered how the 340B drug discount program, a well-intentioned initiative, has morphed into a revenue engine for well-heeled hospitals that exacerbates inequality, inflates costs, and distorts the market for pharmaceuticals.
The program, enacted in 1992, mandates that drug manufacturers offer steep discounts to eligible hospitals and clinics. By last year, it had grown to cover 3,300 hospitals, generating $66 billion in discounted purchases.
At the heart of the problem is the program’s “buy low, sell high” mechanism, which creates a lucrative spread for covered entities but higher, unnecessary costs for the health system. Wealthier hospitals rake in money from reselling the discounted drugs while financially struggling hospitals get comparatively less benefit.
Here’s how it works. Under 340B, hospitals and other participants purchase outpatient drugs at discounts of 25% to 50% off the average wholesale price. They can then dispense these drugs to any patient, insured or uninsured, and bill payers such as Medicare, Medicaid, or commercial insurers at standard, nondiscounted rates. The difference, or “spread,” becomes unrestricted revenue for the entity. For instance, a hospital might acquire a drug for $1,000 via 340B but receive $3,000 in reimbursement from a commercial insurer, pocketing a $2,000 profit. Recent data from Minnesota’s 340B Covered Entity Report show that commercial payers account for 53% of net revenues, Medicare 31%, Medicaid 14%, and cash-pay patients, including the uninsured, less than 1%.
This spread pricing perversely ensures that those who need the most assistance receive the least, while entities that need the least get the most. Eligibility for 340B is based on a hospital’s disproportionate share percentage — serving Medicaid inpatients at least 11.75% of the time — but revenues are untethered from need. Instead, they hinge on payer mix: Hospitals with more patients who have commercial insurance, which reimburses at 3.8 times 340B acquisition costs, can generate outsized profits due to higher reimbursements. Wealthier hospitals in affluent areas, with favorable mixes of private insurance, capture the bulk of benefits. In Minnesota, large hospitals claimed 80% of the $630 million in 340B revenue.
Conversely, true safety-net providers, burdened with higher Medicaid and uninsured caseloads, face lower reimbursements and thinner spreads, despite their greater financial strain. A hypothetical we outline: Two hospitals prescribe the same 10,000 drugs, but the one with more commercial patients reaps far more revenue. Studies confirm that 340B hospitals with richer payer mixes report higher profits. This inversion, subsidies flowing to the financially stable while starving the distressed, undermines the narrative of those wanting to protect the status quo.
The fallout extends to skyrocketing costs for Medicare and commercial insurance. As Senate HELP Committee Chairman Bill Cassidy (R-LA) stated at last month’s hearing, “Anyone who says 340B is cost-neutral to taxpayers is not paying attention.”
By rewarding volume and high-cost drugs, 340B incentivizes overprescribing and shunning generics or biosimilars. Authors at the New England Journal of Medicine link 340B eligibility to 90% and 177% surges in Part B drug claims for hematology-oncology and ophthalmology. Branded drugs dominate 89.6% of 340B sales, versus 77.8% elsewhere, with biosimilar use 66% lower. This utilization boom drove 79.6% of program growth from 2018 to 2024, inflating Medicare premiums and copays. An IQVIA model estimates $5.2 billion in extra employer costs from lost rebates. These burdens manifest as higher premiums, squeezing families and businesses.
Worse, 340B fuels consolidation, further driving up healthcare costs. To maximize spreads, entities acquire physician practices, infusion centers, and “child sites” — expanding from 1,339 in 2010 to over 36,000 today. A single oncologist can yield $1 million in annual 340B profits. Independent physician practices are not eligible for the 340B program, but if a hospital buys the practice, it can enter the program and reap the financial rewards of the spread.
Press reports have demonstrated that entities acquiring new child sites target wealthier communities with higher rates of commercial insurance. Such consolidation raises hospital prices, suppresses wages, and perpetuates a cycle of cost escalation. This increases federal spending and Medicare beneficiary premiums, as well as those with private insurance.
DEMOCRATS: IF IT’S BROKE, DON’T FIX IT
There are less affluent hospitals that do rely on the 340B program to bridge the gap between staying open and closing their doors. However, the current program is not designed to target assistance to these hospitals — rather, wealthier hospitals with their favorable commercial payer mix receive the lion’s share of the benefit.
Reform must eliminate “the spread” as a mechanism for generating revenue. Retention of the spread will, by definition, retain incentives to increase costs and consolidate, and it can never effectively target subsidies to hospitals based on their need. Without this change, 340B will continue to enrich wealthier entities at the expense of the vulnerable entities while increasing costs for taxpayers and making health insurance premiums more expensive for families and seniors. It’s time to ask, who benefits? Not those it was meant to serve.
Ryan Long is a senior scholar at the USC Schaeffer Institute. Karen Mulligan is a scholar at the USC Schaeffer Institute and a research scientist at the USC Schaeffer Center.
