Feds Aim to Tighten Drug Payment Loophole, Save Taxpayers Billions

Medicare beneficiaries could save more than $1 billion in copayments on prescription drugs in 2027 under new drug pricing guidelines proposed by the federal government on July 2.

The proposed rules would significantly narrow a loophole allowing major hospital chains to cash in on mandatory prescription drug discounts intended for struggling, safety-net providers.

The provision is part of the 340B Drug Pricing Program, which Congress created to assist providers such as underfunded rural hospitals and sole community hospitals.

Thanks to the widespread consolidation of hospitals, surgery centers, and physician practices, large healthcare corporations have been able to use these discounts to generate revenue from the resale of prescription drugs.

That may have inflated drug prices and increased beneficiary copayments, according to experts such as Laura Hobbs, the former director of health care policy at the American Action Forum, who wrote in a 2023 case study that changes are “necessary to ensure that perverse incentives to favor higher-cost drugs are not undermining broader U.S. public health initiatives.”

The new rule would address that imbalance, though not eliminate the 340B program altogether, reducing drug spending by an estimated $4.6 billion a year.

Drug Inflation

Large hospitals are able to use the 340B program in ways Congress did not envision, which has inflated prescription drug prices, according to some experts.

“Because of poor design, [the program] has caused enormous distortions in the healthcare industry as hospitals reconfigured their systems so that they would qualify for the program,” Jeremy Nighohossian, a senior fellow and economist Competitive Enterprise Institute, told The Epoch Times by email.

The 340B program was designed to aid struggling safety-net providers. But if even one hospital or clinic in a large network qualifies for the discount, it can be used by any provider in the system.

About 80 percent of these discounts go to about 1,000 hospitals and their tens of thousands of subsidiary hospitals, physician practices, outpatient centers, and freestanding surgery centers.

“Essentially, 340B allows certain providers to purchase prescription drugs at a reduced price. They then charge the payers, including Medicaid and Medicare, the full price, allowing them to pocket the discount,” Nighohossian said.

Hospitals generally say they use the added revenue for charity care and other community benefits, though they are not required to report how it’s spent.

However, the program has increased drug prices across the board because hospitals receiving the discounts tend to buy more expensive drugs so their margin on the resale is greater, according to the Congressional Budget Office.

Lower Prices

The fix proposed by the administration is to reduce the price Medicare pays hospitals for the prescription drugs they acquired under the 340B. The proposed reduction is about 40 percent.

That was calculated based on a survey conducted by the administration earlier this year, which showed the true prices that hospitals in the 340B program pay for drugs.

In certain cases, the 340B hospitals were buying drugs for less than the amount of the beneficiaries’ copay, according to the agency.

The proposed change is expected to save money for some patients.

“Medicare beneficiaries would see immediate savings because their 20 percent coinsurance is based on the Medicare payment amount,” Stacey Hale, a senior director at specialty pharmacy LongitudeRx, told the Epoch Times.

Increase Non-Drug Reimbursement

A larger aim is to reduce the incentive of big hospitals to fund their operations at additional expense to Medicare—and the taxpayers.

This rule change is budget neutral. That means any money Medicare saves on these drug sales must be spent somewhere else.

The proposal would take those savings and spend them on non-drug services, which would benefit many more providers.

“In effect, Medicare would shift funds away from hospitals that receive large financial benefits from the 340B program and redistribute them across outpatient providers according to the standard [Hospital Outpatient Prospective Payment System] payment formulas,” Nighohossian said.

Hospitals React

Major hospital associations responded to the administration’s proposal swiftly, issuing statements the day it was released.

“This enormous cut will make drugs less affordable for America’s most vulnerable patients—many already struggling with higher insurance premiums, loss of healthcare coverage, and skyrocketing drug prices,” wrote Ashley Thompson, a senior vice president at the American Hospital Association.

Jennifer DeCubellis, president and CEO of America’s Essential Hospitals, said the payment reductions were unlawful and will “disproportionately harm essential hospitals.”

A reduction in 340B revenue could lead to belt tightening that increases patient costs or reduces access, Hale said.

“Ultimately, the greatest risk falls on the patients and communities that depend on these safety-net providers,” Hale said.

The new payment rules would affect about 3,500 hospitals and 6,400 ambulatory surgery centers.

However, lone hospitals serving rural communities, children’s hospitals, and certain cancer hospitals are exempt from the change.

Risk Versus Benefit

Some analysts question how great the impact on providers will be.

Most hospitals don’t directly pass on the drug discounts to their patients, William Soliman, a former pharmaceutical executive with Boehringer Ingelheim, AbbVie, and Merck, told The Epoch Times.

“Many providers argue they use the savings to fund uncompensated care and safety-net services, but whether patients receive direct, transparent savings varies widely,” Soliman said.

Overall, the price reduction is a positive step, said Kent McKinney, principal consultant at Wellguidant Advisors.

“As a good steward for the Medicare Trust Fund resources, [the government] is making the right decision to lower reimbursement to 340B hospitals in line with prices the hospitals pay for these outpatient drugs,” McKinney told The Epoch Times.

The proposed rule is open for public comment through Aug. 31. The new payment rate would be effective Jan. 1, 2027.