One reason libertarians don’t trust the government is because so many well-intentioned government programs end up either making things worse for the supposed beneficiaries, enriching wealthy and powerful special interests, or both. One example of this is the Section 340B prescription drug pricing program.
Created in 1992, Section 340B of the Public Health Service Act requires drug manufacturers to provide discounts on outpatient drugs purchased by “qualified entities” such as federally qualified health centers and disproportionate share hospitals (DSH). DSH are hospitals that provide large amounts of care to low-income Americans who cannot afford private health insurance but often cannot qualify for Medicare or Medicaid. Section 340B allows covered entities to buy the outpatient drugs at a lower rate—but be reimbursed the full price of drug from private insurers and government programs like Medicaid. The difference between the price the “covered entity” pays and the reimbursement they receive is supposed to be used to cover the cost of treating the uninsured.
Today, the Section 340B program has grown to include more than 53,000 sites with more than 42,000 covered entities. These covered entities have purchased more than $66.3 billion worth of outpatient drugs. However, hospitals and pharmacies have figured out how to game the system, so most of the money they receive by participating in Section 340B does not help low-income individuals. A study by independent research firm Milliman found that the average insured patient spent 200% more on drugs at a hospital that participates in Section 340B than at a non-Section 340B participating facility. According to a recent report by the non-partisan Congressional Budget Office (CBO), increased prescription drug prices were responsible for only a third of the increase in Section 340B spending. The rest of the increase is due to hospitals acquiring off-site clinics and pharmacies.
Since Section 340B payments are available for outpatient drugs distributed at any site connected to a “covered entity”, Section 340B incentivizes hospitals to buy up as many other hospitals, pharmacies, and clinics as possible and then send their patients to the most costly facility in order to further maximize their Section 340B revenue. Some might think that the increased costs of Section 340B are worth it since the increased spending means hospitals have more resources to provide care to low-income Americans that lack health insurance.
However there is no legal requirement that hospitals spend the savings they obtain from the Section 340B discounts on care. In fact, hospitals are not even required to report how they used the savings to the government. Another study by the Alliance for Integrity and Reform found that 69% of hospitals who participate in Section 340B spend less on charity care than the average hospital, while 25% of Section 340B participants provide 80% of the total charity spending from Section 340B rebates.
Ironically, Section 340B was created to address an unintended consequences of another well-intentioned intervention in the health care market: the Medicaid Drug Rebate Program. This program requires drug manufacturers to ensure that they are selling their products to state Medicaid programs at the lowest price they offer other providers. The government’s calculations of best price included the voluntary discounts drug companies provided to community health centers and safety net hospitals. As a result, the drug companies stopped providing these discounts altogether.
Congress created Section 340B in order to correct the failures of the Medicaid Drug Rebate Program. Congress also failed to take advantage of the opportunity to reform Section 340B when it expanded the program as part of the Affordable Health Care Act (aka Obamacare). Hospitals that participate in Section 340B should be required to spend the money they save by participating in the program on providing free or reduced-price care to those who lack insurance. This would not only fulfill the program's intent—it would remove the current program's incentives for hospitals and pharmacies to engage in mergers and acquisitions. Congress should also reduce health care costs and increase health care quality and access to care by creating a free market in health care through expanded individual tax credits and Health Savings Accounts (HSA).
