The truth behind growth of the 340B prescription drug program

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The 340B Drug Pricing Program was created by Congress in 1992 to help hospitals and other safety-net providers manage high and increasing drug prices — an issue that persists today. The 340B program is an excellent example of a public-private partnership, where pharmaceutical companies are incentivized to offer discounts on certain outpatient drugs to hospitals and other providers that care for high numbers of underserved patients in exchange for coverage of these drugs by Medicaid and Medicare, all without reliance on taxpayer dollars.

In effect, 340B benefits everyone — pharmaceutical companies get their drugs covered by two of the largest national customers; eligible hospitals and other providers get discounts on drug purchases, which frees up resources to finance needed health programs and services for their patients; and patients benefit from having access to these programs and services that improve their health and well-being.

Despite these many benefits, pharmaceutical companies increasingly have taken aim at the program, complaining that it has grown “out of control” and is not operating consistent with congressional intent. These claims rely on falsehoods and fuzzy math. Among their many mendacities, pharmaceutical companies have repeatedly misstated Congress’ purposes for establishing the program, 340B hospitals’ use of the program, and, particularly bewildering, the impact of the program on drug manufacturers’ bottom lines.

The facts here are simple: (1) the 340B program has experienced growth since its inception; (2) that growth, in large part, has been due to pharmaceutical companies’ pricing strategies and market-domination tactics; and (3) despite program growth, 340B discounts still account for only a small share of pharmaceutical companies’ revenues.

Below we discuss these facts in more detail.

Indiscriminate price increases

Bharath Krishnamurthy, MPH
_{© American Hospital Association}

Megha Parikh, PhD, MS
_{© American Hospital Association}

Pharmaceutical companies raise drug prices indiscriminately. A recent government report found that pharmaceutical companies increased prices for more than 4,200 drugs between January 2022 and January 2023, many of which are used to treat chronic and complex conditions like cancer and autoimmune diseases. For nearly half, or approximately 2,000 drugs, pharmaceutical companies increased prices faster than inflation, with an average price increase of 15.2%. When pharmaceutical companies increase their drug prices faster than inflation, they are by law subject to an inflationary penalty that increases the 340B discount they have to offer on that drug. As a result, the more pharmaceutical companies increase prices, the more 340B discounts they have to pay, which significantly contributes to growing the program. American Hospital Association estimates show that had pharmaceutical companies not increased their prices so fast, they would have only paid $21.5 billion in discounts to 340B hospitals in 2022 versus the $46.5 billion that they did pay. Their decisions to increase drug prices were responsible for more than half of the scope of the program.

Record high prices for new drugs

Pharmaceutical companies are introducing new drugs at record high prices. A study by Reuters found that in 2023, the median price of a new drug was $300,000, a 35% increase from the prior year. Several of these drugs had price tags north of $1 million and many are used to treat critical illnesses such as cancer, hemophilia, and sickle cell disease. Another study published in the Journal of the American Medical Association found that the median price of a new drug had increased from $2,115 in 2008 to more than $180,000 in 2021, which represents an adjusted growth rate of 13% per year, well above general inflation during that period. If drugs are continually being introduced to the market at higher prices, the magnitude of the 340B discounts for those drugs also increases. In other words, a drug priced at $300,000 will result in a much larger 340B discount compared with a drug priced at $2,000. Much like their decision to increase prices greater than the rate of inflation, these initial pricing decisions play a direct role in growing the 340B program.

Blocking competitors

Pharmaceutical companies increasingly employ profit-driven, market-domination tactics that keep lower-cost alternatives off the market. To sustain their profits from brand-name drugs, pharmaceutical companies often employ strategies to delay or prevent the entry of lower-cost generic medications into the market. For instance, they introduce slightly modified versions of existing drugs to extend the monopoly period or create a complex web of patents covering different aspects of a single drug, making it difficult for competitors to navigate. In other cases, pharmaceutical companies pay generic manufacturers to not bring their generics into market. These “pay for delay” schemes cost consumers and taxpayers more than $3.5 billion annually, according to estimates by the Federal Trade Commission. By preventing lower cost generics from entering the market — which have lower 340B discounts compared to brand-name drugs — pharmaceutical companies contribute to growing the 340B program.

Marketing specialty drugs

Pharmaceutical companies invest heavily in marketing and producing high-cost specialty drugs. Though it is estimated that less than 2% of the U.S. population uses specialty drugs, this market has experienced tremendous growth and is expected to only grow more. According to an IQVIA study, in 2022 the specialty drug market accounted for more than half of the total U.S. drug market with $324 billion in spending, an increase of 33% from 2019. Moreover, nearly 80% of the drugs seeking U.S. Food and Drug Administration approval in 2023 were specialty drugs. The growth in specialty drugs is due to their high-margin and high-dollar value, driving company profits and shareholder returns. As a result, pharmaceutical companies invest significant resources in the production and marketing of these drugs. For example, the drug Dupixent had sales of $8.7 billion in 2022 with $491 million in marketing spending and Rinvoq had sales of $2.5 billion with nearly $426 million for marketing. Because most specialty drugs come with high price tags, pharmaceutical companies are also subject to substantial 340B discounts on these drugs. As pharmaceutical companies introduce more specialty drugs, the amount of 340B discounts also increase.

Big Pharma decisions

Collectively, these facts demonstrate that 340B program growth is a direct result of the decisions made by pharmaceutical companies — not a function of nefarious hospital behavior. This does not even account for other factors that have also influenced 340B growth, including regulatory policies pushing more services to be delivered in the outpatient setting and advances in technology and medicine that have enabled the use of outpatient drugs as a substitute for complex surgeries.

Proverbially speaking, as pharmaceutical companies throw stone after stone at the 340B program, they should beware of their own glass house. Their complaints ring hollow when it is clear that their own actions are driving growth in the program. And their house is especially fragile when one realizes that a) drug company profits are at record levels; and b) between 2017 and 2020, the growth in IRS-reported community benefits by 340B hospitals outpaced the growth in 340B discounts by billions of dollars. In fact, in 2020 alone, the most recent year for which this information is available, tax-exempt 340B hospitals provided more than $84 billion in total benefits to their communities.

For all of these reasons, policymakers and the public should reject the fabrications perpetuated by pharmaceutical companies. Instead, they should work to protect and support the 340B program and the benefits it affords to countless patients and communities across the country.

Bharath Krishnamurthy, MPH, is the director of health policy and analytics at the American Hospital Association. Prior to joining AHA in 2019, he served as senior manager of research at 340B Health.

Megha Parikh, PhD, MS, is the associate director of health analytics and policy at the American Hospital Association. Prior to this, she served as a senior research scientist at the Pharmacy Quality Alliance, where she led and contributed to projects on medication use quality.