Hospitals are locked in a dispute with the Department of Health and Human Services (HHS) over how much the government owes them in back pay for a drug-reimbursement program. But this argument is just a symptom of a much bigger and more urgent problem.

The issue revolves around the 340B Drug Pricing Program, under which HHS covers drugs for hospitals that meet certain requirements. After payments were suspended for several years, the government settled on a plan to pay the funds but claw some of the money back, ultimately leaving hospitals ahead by $2.7 billion. Yet hospitals claim there should be no claw-back, and that paying them “only” $2.7 billion will leave them in dire financial straits.

If that sounds convoluted, it is. The roots of the problem go way back. While started with good intentions, the 340B program has become a waste of federal money that enriches hospitals and for-profit pharmacies at the expense of patients. The whole system needs reform.

In 1992, Congress instituted the 340B program to let health care providers serving low-income communities buy drugs at steep discounts. The idea was that helping out these hospitals and clinics financially would enable them to better serve the most vulnerable patients.

But Congress forgot to include a few important details. The 340B law doesn’t expressly state how providers should use their savings. They can spend the extra cash however they please, without oversight or obligation. Over the past 30 years, hospitals have taken full advantage of that lack of detail to reap billions of dollars in profit. 

Meanwhile, the program isn’t too picky about which hospitals qualify for the discounts. They are supposed to go to facilities that serve a “disproportionate share” of low-income patients. But in recent years, the number of providers benefiting from 340B payments has exploded, to include hospitals in wealthy communities that just have one small branch clinic in a rural area or low-income urban neighborhood.  

Between 2000 and 2020, the number of sites participating in the 340B program increased by more than 500% — from 8,100 to over 50,000. Many of these institutions game the system by buying discounted drugs under 340B, then dispensing them at full price to insured patients. Last year, the difference between the discounted 340B price and the list price for all drugs acquired under the program was $52.3 billion. 

So what are hospitals doing with that taxpayer-sponsored windfall? It would be one thing if the rise in 340B revenue coincided with a rise in charity care, but hospitals have actually decreased what they spend on it. A 2018 study by the Center for Regulatory Effectiveness found that the ability of people in severe economic hardship to afford medical care was actually negatively correlated with the growth of the 340B program.

For-profit pharmacy chains also benefit from 340B largesse. More than half of the pharmacies in the country — some 32,000 locations — are contracted to dispense prescription medicine for providers in the 340B program. Not to be left out of the money grab, they negotiate complex profit-sharing plans with hospitals, the details of which are shrouded in secrecy. But one thing is clear: Many prescriptions filled at these contract pharmacies are dispensed to patients with insurance, not the poor and uninsured patients 340B was meant to help. 

A recent report by the Berkeley Research Group found that the average profit margin on commonly dispensed 340B drugs is 72 percent, but only 22 percent for non-340B drugs. In some instances, pharmacies recoup full market value on drugs that cost very little to buy at discount. 

It’s clear that over three decades, 340B has deteriorated from a well-intentioned (if somewhat half-baked) plan to help struggling patients into a government-funded profit center for hospital groups and pharmacy chains.

So while hospitals complain that HHS isn’t paying them enough, they’re shining a light on a much bigger problem: that the whole 340B drug program has slid off the rails due to lack of government oversight and rapacious corporate healthcare players. It’s time for Congress to overhaul the whole system.

Peter J. Pitts, a former FDA associate commissioner, is president of the Center for Medicine in the Public Interest.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.