Drugmakers Sue to Curb 340B, Citing Hospital Abuses

In the final days of 2024, three pharmaceutical giants sued the federal government. In their joint lawsuit, Amgen, Eli Lilly and Company, and UCB claim several Nevada STD clinics were unlawfully qualified for the federal drug discount program, 340B, giving them access to millions of dollars in drugmaker discounts for which they weren’t eligible.

The legal action is just the latest in a series of recent lawsuits by drugmakers targeting the 340B program, which gives qualified hospitals a 20%-50% discount on certain outpatient drugs.

In November, both Johnson & Johnson and Eli Lilly and Company filed their own lawsuits against the US Department of Health and Human Services (HHS) after the regulator rejected their plans to change how they offer 340B discounts. In December, Sanofi and Bristol Myers Squibb followed suit.

The discount program designed to keep safety-net hospitals afloat has long been a point of contention with drugmakers because it curtails their profit margins. But in the series of lawsuits, pharmaceutical manufacturers say that they aren’t the only ones getting gamed by the discount program. They claim providers getting the discounts — especially large hospital networks — are abusing the system, maximizing their discounts in order to generate profits, and leaving patients and taxpayers to foot the bill.

Bigger Than Was Intended

The 340B program was created in 1992 to keep safety-net hospitals afloat. Through the program, hospitals that care for a disproportionate number of low-income and underinsured patients get a significant discount when they purchase outpatient drugs from manufacturers. The provider can then pass that discount on to the patient or bill payers for full reimbursement and use the revenue to expand their services, according to the USC Leonard D. Schaeffer Center for Health Policy & Economics, Los Angeles.

“I think that it is undeniable that the program has grown larger than it was intended — to cover in places it wasn’t intended to cover,” said Aaron Kesselheim, MD, JD, MPH, who leads the Program On Regulation, Therapeutics, And Law at Brigham and Women’s Hospital in Boston.

“It gave [safety-net hospital] patients access to very expensive drugs at a very low price. What ensued was better access to high-cost drugs, Kesselheim told Medscape Medical News.

But since the program’s inception, enrollment has ballooned. In 2020, there were 50,000 entities enrolled compared with 8100 in 2000. Now, more than half of all nonprofit hospital systems are part of the program. And the 5-year growth (2018-2022) in 340B drug sales was 129.4%, more than three times the growth of non-340B drug sales, according to a 2024 report by IQVIA Market Access.

At the same time, the cost of drugs has skyrocketed. The median annual cost of cancer care in 2008 was $2000, Kesselheim said. “Today it’s $300,000.” The government-mandated discount of 20%-50% now captures a much larger sum of money.

What started as a small relief plan for needy hospitals, now has drug manufacturers offering enormous discounts to more than half of hospital systems. In 2020, those discounts were worth $38 billion, or 7% of the total US drug market.

Drug manufacturers claim that not all of the program growth is legitimate, that hospitals claim 340B discounts on patients who get Medicaid discounts while also diverting 340B discounts to patients who aren’t really part of a needy hospital.

Wealthy hospitals, for instance, have found ways to qualify for drug discounts by merging with safety-net hospitals or contracting pharmacies in 340B locations. Using these partnerships, hospital systems can “buy the drugs in the disadvantaged hospital and sell them from their most affluent hospital,” said Barbara McAneny, MD, former AMA president and CEO of a New Mexico Cancer Center, Albuquerque, New Mexico.

“It’s been shown that a lot of the newer 340B participant hospitals are in wealthier areas where patients are more likely to have commercial insurance,” said Karen Mulligan, PhD, who researches the economic value of healthcare interventions at the USC Leonard D. Schaeffer Center for Health Policy & Economics. Commercial plans pay more for drugs, “meaning there’s a larger spread between the 340B price and what the hospital makes from reimbursement.”

And because the original legislation from 1992 is so opaque, there’s really no way to know how much revenue covered hospital systems are making, which patients they’re including in the discount, or how they use the money they make.

What Happened to Charity Care?

The 340B program was ultimately created to support needy patients. The legislation doesn’t specify how 340B entities should use the money they make through the program or obligate them to charity care. Nor is there a means to track how 340B entities use the revenue they make on discounts. Even with mandated discounts, drug companies still do very well for themselves, with profit margins in the 20% range, Kesselheim said.

And a 2020 study found there was “no association between uncompensated care, the standard measure of safety‐net care provision, and 340B participation.” Another 2023 study found that while 340B does keep needy hospitals afloat, the evidence is mixed on whether hospitals actually use the extra funds for patient care.

In fact, patients often face more costs at 340B hospitals. In 2015, the Government Accountability Office reported that oncology care costs were significantly higher at 340B sites than at non-340B sites. And a 2024 study using Blue Cross Blue Shield claims data found that markups for infusion drugs sold at 340B hospitals were 6.59 times higher than at a private practice.

If hospitals aren’t passing their savings on to the patient or payer, they could be investing the profits back into patient care. But an investigation by The New York Times in 2022 found that, at least in some cases, larger hospital systems use safety-net hospitals to buy drugs and turn a profit. And they invest the windfall into their more affluent hospitals and allow the intended safety-net hospital to fall into disrepair.

Because drug companies are allowed to set their prices as high as they want, commercially insured patients are likely affected too. Medicare Part D and commercial plans will ultimately subsidize the rising cost of 340B, Mulligan said. “[Commercial] plans might raise premiums to account for higher drug prices.”

“The problem is not with the federally qualifying hospitals and Ryan White STD centers,” McAneny said. “Those are generally good actors; the people out there are actually taking care of poor people. The issue is huge hospital systems gaming the system for this, using it as a cash revenue stream that just goes into their hospital and is not reflected in increased care for disadvantaged patients.”

A Force for Consolidation

Drug companies aren’t the only ones who’ve found flaws with the 340B program. Moshe Chasky, MD, a Philadelphia oncologist, allegedly lost hospital privileges at Jefferson Health in Philadelphia in the wake of 340B.

A private practice oncologist, Chasky, and his colleagues had long collaborated with Jefferson to provide continuous care for local cancer patients. But soon after Chasky and his colleagues declined Jefferson’s acquisition in 2016, the hospital revoked their privileges and started blocking referrals.

“That’s what led to the acquisition of so many oncology practices,” McAneny said. Once they’re 340B, hospitals want to gather up as many patients using these drugs as possible. “A fully scheduled oncologist writes about $2 million in prescriptions per year,” McAneny said. That’s extremely lucrative to a hospital that can buy those drugs at up to a 50% markdown.

A Way Toward Change

The 340B program is clearly vital for the survival of essential safety-net providers. But a growing number of stakeholders are calling for major reform. In 2023, New York State changed the way 340B discounts are paid to try and prevent double dipping with Medicaid discounts. In 2024, Minnesota started requiring 340B entities to report their expenses, revenue, and pharmacy contracts related to the 340B.

Some have suggested the program be patient-based rather than hospital-based. “The discount should follow the patient,” McAneny said. Patients can qualify based on their tax return, and then no matter where they get care, the discount is applied.

In this instance, McAneny said the needy hospitals caring for underinsured patients would continue to see the benefit. But the hospital networks gaming the system would lose out. Chasky agrees this would be better, but he admits the logistics would become much more challenging.

Meanwhile, the drugmakers suggested a rebate plan. Johnson & Johnson was the first, in August, to notify HHS that it would stop providing the discount upfront for two of its biggest sellers: Stelara and Xarelto. Instead, the insurer said it would require the full price upfront and issue a rebate later — presumably after they verified there was no overlap with Medicaid discounts and the patient truly received care at a 340B provider, Mulligan added.

Several other drugmakers followed suit, developing rebate plans for their own high earners. In each case, the HHS called the rebate plans illegal. The regulator threatened fines as well as removal from Medicaid if the manufacturers went through with the new plan.

Ultimately, the rebate plan will affect wealthy hospitals less, Mulligan said. They can afford to float the drug costs and wait on the rebates. It’s the true safety-net hospitals that won’t be able to afford the upfront cost. “They can’t wait in the negative all year while they wait for rebates to happen,” she said.

The strategy with the rebate reforms and lawsuits is “to try and reduce which institutions qualify,” Kesselheim said. And the drugmakers have had some success with legal action in the past.

“We really need Congress to update this,” Mulligan said of the policy.

Donavyn Coffey is a Kentucky-based journalist reporting on healthcare, the environment, and anything that affects the way we eat. She has a master’s degree from NYU’s Arthur L. Carter Journalism Institute and a master’s in molecular nutrition from Aarhus University in Aarhus, Denmark. You can see more of her work in Wired, Teen Vogue, Scientific American, and elsewhere.