Reforming the Federal Drug Discount Program to Address Incentive Misalignment

The rapid expansion of a major federal drug discount initiative has sparked ongoing discussions about its effectiveness in benefiting low-income patients versus unintentionally enriching healthcare providers. The program, established over three decades ago through the 340B Drug Pricing Program, aimed to assist hospitals and clinics serving uninsured populations by allowing them to purchase outpatient medications at significantly reduced prices. However, the law does not mandate these providers pass on discounts directly to patients or allocate savings to safety-net services.

A recent white paper from the USC Schaeffer Center highlights how eligibility expansions and incentive distortions have transformed the program from a modest effort into the nation's second-largest drug purchasing initiative, with expenditures soaring from $4 billion in 2009 to over $66 billion in 2023.

The core issue identified is 'spread pricing,' where providers buy drugs at discounted rates and then bill insurers at standard or higher rates, keeping the difference. This practice tends to favor providers with more commercially insured patients, due to higher reimbursement rates from private insurers compared to programs like Medicare and Medicaid. Consequently, a significant portion of the revenue generated from the program does not necessarily benefit disadvantaged communities, but rather boosts profits for wealthier providers.

Data from Minnesota shows that more than half of the net revenues for covered entities derive from private insurance, with minimal contributions from Medicaid and nearly none from uninsured patients. Spread pricing also encourages providers to use more expensive and higher-priced drugs to maximize revenue, at the expense of cost-effective alternatives, which increases overall healthcare costs and contributes to higher insurance premiums.

Additionally, this incentive structure has led to provider consolidation, reducing competition, and raising drug prices, further escalating federal healthcare spending. Experts argue that these outcomes betray the original intent of the program, which was to assist vulnerable populations.

Current reform proposals mainly focus on transparency, regulating contract pharmacies, and testing rebate models. However, the authors warn that without addressing fundamental incentives, these incremental measures will fall short. They advocate for reforming payment structures to better align with providers' actual financial needs and avoid rewarding profit-driven behavior, ensuring that program benefits reach the populations most in need.

Overall, the white paper underscores the importance of tackling misaligned incentives to restore the program’s original purpose and control rising healthcare costs, proposing a more equitable and effective approach to drug pricing and distribution.