Federal drug pricing program drives up drug prices

Wondering why drug prices are so high? One reason is a federal program that allows some hospitals and medical clinics to buy drugs from manufacturers at a huge discount and then resell them for large profits. Michigan lawmakers may be making this problem much worse.

The cost of medicinal drugs has skyrocketed, and many politicians are pushing for the government to get more involved to control costs. But federal rules and programs are the key reasons for the price increase.

The federal 340B drug pricing program requires drug manufacturers to sell medicine at a huge discount to a hospital or clinic if at least 11.75% of its patients are in Medicaid. In the past decade, many states, including Michigan, have raised the income limits of those eligible for Medicaid, exploding the total number across the nation from 40 million to 80 million.

In Michigan, even as the state’s economy improved, lawmakers expanded Medicaid, adding more than 800,000 to the government health care rolls. Medicaid is now 27% of the Michigan budget, surpassed only by schools.

As more people became eligible for Medicaid, more hospitals and clinics were able to take advantage of the 340B program. A study from the Massachusetts-based Pioneer Institute says that drug sales through 340B rose from $9 billion in 2014 to $38 billion in 2020.

“Hospitals and clinics make loads of money by arbitraging the 340B drug discounts,” said Dr. William Smith, senior fellow and director of the Life Sciences Initiative at the Pioneer Institute, who wrote the study. “Hospitals make money by buying drugs at low prices and selling at higher prices. For example, if they can purchase a cancer drug for $25,000 with the 340B discount, then bill Medicare or private insurers for $100,000, they can make $75,000 on one prescription.”

The idea behind the program was that hospitals and clinics would profit from reselling the drugs and then use the gains to serve low-income residents.

But there is no requirement that they do so, and little evidence that it happens. A study from the Pacific Research Institute found that hospitals taking advantage of the 340B program made more profits but helped fewer lower-income patients. There are 86 hospitals in Michigan that now take advantage of discounted prices.

Michigan House Bill 4351, passed in March 2021, changes rules regarding the program in the state. One change would prohibit the use of a “claims modifier” to flag a 340B drug. This could limit drug manufacturers and others from seeing where the drugs are being sold and how much money is being made from them. That would make it harder to see how much drugs are being marked up and whether middleman sellers are taking advantage of a program meant to help the poor.

Smith believes the 340B program should be more transparent. His report suggests requiring hospitals and clinics to disclose how much annual revenue they get from it and specifically, how much charity care they are providing.

“If policymakers knew how much money hospitals were making from 340B, they could compare that figure with the hospital’s charity care spending,” Smith said.