The HEAL Network sat down with health economist Dr. Sayeh Nikpay to examine one of the most debated drug pricing programs in American healthcare — and what meaningful reform might look like.
The 340B Drug Pricing Program was established in 1992 to give certain safety-net hospitals and clinics access to discounted prescription drugs. What began as a narrowly targeted program has grown into a $50+ billion enterprise touching two-thirds of all non-profit hospitals in the United States — and generating fierce debate about whether it still serves its original purpose. The HEAL Network exists to connect academic expertise with the policy questions that matter most — and 340B is exactly the kind of pressing issue that deserves that attention.
Dr. Sayeh Nikpay, an associate professor at the University of Minnesota School of Public Health recently sat down with Stephen Parente to discuss the 340B Program on an episode of On Background. In addition to the episode, Dr. Nikpay graciously provided written responses to five questions Stephen proposed, offering readers a second way to engage with her thinking on transparency, targeting, and the future of 340B.
Dr. Nikpay’s written Q&A responses appear below and her extended On Background conversation with Stephen Parente is available here.
Question 1: The Minnesota Department of Health recently released its second annual 340B transparency report, providing a clearer view of program utilization across the state. The data shows that more than half of all 340B revenue flows to the four largest Disproportionate Share Hospitals (DSH). Is this what we should expect from a well-targeted safety-net program?
I’m not surprised by this distribution because the program’s current eligibility criteria are a blunt instrument for targeting safety-net providers. The DSH patient percentage is an outdated metric; it was designed in the 1980s when we lacked robust data on uncompensated care across hospitals. Today, it reflects only the inpatient payer mix—a segment that is rapidly shrinking as a share of total hospital revenue.
Furthermore, the size of a 340B subsidy depends directly on drug claim volume and provider reimbursement rates. It shouldn’t surprise anyone then that hospitals with specialized service lines and large populations of commercially insured patients will benefit most. While these top four hospitals certainly care for some patients who have trouble accessing care, the 340B subsidy is not particularly well-calibrated to a hospital’s actual financial burden or charity care volume.
Question 2: A common criticism of 340B is the lack of transparency. Are there additional data points you would advocate for in future reports to better unveil the program’s inner workings?
Both the Minnesota report and recent federal inquiries—such as Senator Cassidy’s work on contract pharmacy fees—suggest we need much more clarity on the nature of third-party arrangements.
Specifically, I think policymakers and the public should have more information on how many patients receive a meaningful price reduction at the point of sale. Oncology treatment, for example, is a primary driver of medical debt. We need to know how often hospitals pass the 340B discount directly to the patient versus charging the patient and the insurer the full list price.
Conversely, I don’t believe we need more reporting on how organizations “spend” the money. Although it is not necessarily true for the safety-net clinics participating in the program, 340B revenue is fungible for hospitals. Hospitals already report community benefit spending and uncompensated care through other channels; adding 340B-specific spending requirements is a popular talking point, but I’m not convinced it provides useful policy insights.
Question 3: You recently published a Health Affairs article noting that 340B and state Medicaid programs are essentially competing for the same safety-net dollars. Is it possible to reform 340B so it works in tandem with Medicaid rather than against it?
Reform is both necessary and possible. In the program’s early years, federal rules appeared to prioritize Medicaid savings for the state over the 340B subsidy for the provider when the two overlapped. Over time, Medicaid’s ability to preserve those savings has eroded.
To lower costs for state Medicaid programs, we should move hospital reimbursement closer to actual drug acquisition costs. States could then use the savings to strengthen the safety net with a pool that providers that serve patients regardless of their ability to pay, such as public hospitals or Federally Qualified Health Centers (FQHCs) could draw from to offset their losses. Alternatively, a state might decide to only let certain demonstrated safety-net providers charge Medicaid more than their acquisition costs. Either way, thinking more carefully about which providers the state is willing to forgo their own savings for is good policy.
Question 4: What federal reforms would be most impactful?
The most critical reforms focus on transparency and targeting.
First, federal policymakers should adopt transparency requirements similar to Minnesota’s, requiring participants to report revenues and acquisition costs by payer, as well as fees paid to pharmacies and third-party administrators. Without these data, we cannot accurately assess the program’s scale or the impact of any proposed changes.
Second, we must refocus eligibility on the core safety net. Currently, two-thirds of all non-profit hospitals participate in 340B, yet non-profit hospitals with a meaningful safety-net orientation likely represent a much smaller fraction of the total. The DSH percentage threshold is set too low and is a poor proxy for safety-net status. Tying eligibility directly to uncompensated care or charity care levels would be a far more effective targeting mechanism.
Finally, federal policy should require participating hospitals to share drug discounts with low-income, uninsured patients as a condition of eligibility.
Question 5: If you could start from scratch, what would the 340B program look like?
If we were starting from nothing, we wouldn’t use drug sales to fund the safety net. In other words, 340B would never be a source of revenue. The reason 340B was created was to solve an acute problem: the best price provision of the newly introduced Medicaid drug rebate program had the unintended consequence of doubling or even tripling the drug acquisition costs for core safety-net clinics and the VA, which often received the best prices from manufacturers. If the 340B program had remained a program focused solely on Federally supported safety-net clinics and public hospitals, it might not have grown into such a boondoggle. But making it into a source of revenue creates really clear perverse incentives where providers with large privately insured patients really end up driving the program because they have the most to gain from it. It also creates budgetary instability; the introduction of a lower-cost generic or biosimilar can inadvertently create a massive funding gap for a provider.
A better model given where we are today would be to rein the program back to its original scope and then require pharmaceutical manufacturers to use a portion of the savings they would handsomely benefit from to fund direct, transparent, capped federal grants to safety-net providers. Distributing funds annually based on a provider’s verifiable volume of uncompensated care and services to low-income populations would provide a more stable, honest, and effective foundation for the American safety net.
Dr. Sayeh Nikpay is an associate professor at the University of Minnesota School of Public Health. Her research examines the intersection of hospital finance, Medicaid policy, and drug pricing. Listen to her extended conversation with Stephen Parente on On Background here.