Colorado to consider state rules on massive federal 340B drug-pricing program

Many employers know little about the $66 billion 340B federal drug-pricing program and its impact on them. But that likely will change in 2025, when a schism between hospitals and drug makers over the rapid growth of the program will take center stage at the Legislature.

The Colorado Hospital Association is working with a group of lawmakers to introduce a bill early in the session that would prohibit drug manufacturers from limiting the use of the discount program to certain pharmacies. Eight states have passed similar laws and about a dozen others are expected to consider them next year, making it arguably the most divisive health-care debate in America today.

Created in 1992, the 340B program requires pharmaceutical companies participating in the Medicaid and Medicare programs to offer discounts ranging typically from 25% to 50% on certain higher-priced drugs to certain hospitals and clinics. Eligible providers, which must treat a minimum percentage of publicly insured or uninsured patients, then use the savings to prop up needed but unprofitable lines of service, offer public health education or, in some cases, reduce patient prescription costs.

At its outset, only a limited number of health-care providers used the program, but it began to catch on more widely around 2010 and now is employed by 57% of all U.S. hospitals, including 68 of Colorado’s 108 facilities. Total national discounts rose from $43 billion in 2021 to $54 billion in 2022 to $66 billion in 2023 — an eye-popping increase of more than 50% in just two years.

How the 340B program works

Hospitals pay the discounted price for the drugs when they order them from manufacturers and then can have patients pick up the drugs at a facility’s in-house pharmacy or at any outside pharmacy, including mail-order providers, with whom they contract. The number of pharmacies participating in the program has grown more than 8,000% since 2010 — a growth that hospitals say reflects a push for patient convenience but that drug makers argue allows for contract pharmacies to siphon portions of the savings.

To slow what they considered an unsustainable rise in costs, some pharmaceutical manufacturers in 2020 began limiting or banning hospitals’ use of contract pharmacies to fulfill discounted 340B orders on their drugs. This reduced the number of prescriptions eligible for 340B discounts, and hospital associations in several states fought back by spearheading pushes for new laws barring restrictions on contract-pharmacy participation, like the proposal Colorado facilities will support next year.

The state fight will occur simultaneously with federal debate in which drug makers are pushing a bill to reform the 340B program by limiting contract-pharmacy participation and requiring a certain percentage of each discount to hospitals be passed along to patients. But with federal action uncertain, the battle here will be fierce, with hospitals arguing the growing 340B program is now a lifeline to their struggling sector and manufacturers arguing the program is being abused.

Big schism between pharma, hospitals on 340B

Industry group Pharmaceutical Research and Manufacturers of America argues that the program has expanded well beyond its imagined purpose and that the savings generated through it are benefitting ever-growing hospital chains rather than in-need patients. And the National Alliance of Health Purchaser Coalitions argues that the growth of 340B discounts paradoxically is driving up the cost of prescriptions for employers and employees, which in turn is exacerbating the increase in health-insurance premiums.

“The program has grown exponentially, well past anything that was intended when it was put into place,” said Amy Berenbaum Goodman, vice president and counsel for policy and advocacy for the Colorado BioScience Association. “And new data indicates that money isn’t really going to the people it was intended to help.”

Hospital leaders say the program never envisioned patient discounts as a primary purpose but sought to allow care providers reliant on federal funding to be able to stretch those dollars further by reducing targeted costs without the use of more taxpayer dollars. The growth in 340B discounts has come during a time when operating costs have skyrocketed without commensurate boosts in reimbursement for care, and they’re needed for some programs and even some hospitals to keep their doors from closing, they say.

“If Colorado doesn’t take up the (federally qualified health centers)’ and CHA’s policy bill, the floodgates are going to open and pharma will cut use of the discounts across the board,” said Zach Zaslow, vice president of advocacy and community health at Children’s Hospital Colorado. “I don’t think big pharma needs more money given the situation. The safety net is fraying in Colorado, and that money is needed here.”

Hospitals deal with flagging financials

Roughly 70% of all Colorado hospitals and 89% of those participating in the 340B program have profit margins of 4% or less — margins that are considered unsustainable, as they don’t allow for significant reinvestment in personnel or innovation, explained Jeff Tieman, CHA president and CEO. For many, the 340B savings are the difference between them operating at those shaky levels and falling into the red, which would bring service and facility cuts, particularly in lower-income and rural areas heavy with uninsured and publicly insured patients.

Hospitals’ financial footing collapsed during the pandemic, industry leaders have acknowledged. An exodus of workers led to labor costs skyrocketing by 30% since 2019. Supply-chain kinks contributed to a 50% hike in supply pricing over that same time frame, Tieman added.

Yet, Medicare and Medicaid reimbursements have been largely flat since then — Colorado’s proposed budget for the next fiscal year recommends no provider-rate increase. And rollbacks in Medicaid enrollment have created steep boosts in the number of uninsured folks showing up in emergency rooms without paying, Tieman noted.

Pharma “padding its bottom line”?

UCHealth University of Colorado Hospital President/CEO Tom Gronow said that while the UCHealth system gets “tens to hundreds of millions of dollars” in 340B discounts annually, that pales in comparison to its $580 million in un- and under-compensated care that it provided to patients in fiscal year 2023. Ten of 14 UCHealth hospitals qualify for the 340B program, and further limitations by pharmaceutical manufacturers on contract-pharmacy usage for the discounts will mean that programs designed to help low-income patients, including at cancer centers, may be reduced.

“We’re not operating in 18, 20, 25, 30% profit margins like pharma is. And we’re also not $40 billion entities like pharma is,” Gronow said. “Any money going to pharma is padding its bottom line and is going out of state.”

But pharmaceutical-industry leaders say that the padding that is being done is to the revenues not just of hospitals but of contract pharmacies and third-party administrators.

Questions on who benefits from 340B discounts

A Minnesota study on 340B found just 13% of participating hospitals in that state generated $500 million of the $630 million in discounts, while pharmacies and administrators kept $120 million, noted Katelin Lucariello, PhRMA deputy vice president of state advocacy. Another study done by the North Carolina state treasurer’s office found that 340B hospitals in that state charged state employees an average price markup on outpatient infused cancer medications that was 5.4 times the hospitals’ discounted acquisition costs.

Some of the debate revolves around the question of whether states have the authority to pass laws regarding the 340B program or whether this is purely a federal issue. Drug makers sued to overturn an Arkansas law that mirrors what Colorado hospitals will propose, but two courts upheld that statute and the U.S. Supreme Court this month denied PhRMA’s request to review the case.

If the state believes it can pass regulations around this federal program, both Lucariello and Goodman suggested it start by requiring more disclosure around how providers are using money from 340B discounts. The program does not require detailed explanations of that spending now.

Is 340B growth raising insurance premiums?

Also, there is no mandate for hospitals to use discounts to lower patient costs, meaning they can get drugs at as much as 50% off normal prices but charge patients full list price without patients knowing that hospitals benefitted from the transaction, Lucariello said.

“You want to make sure those dollars are going to the intent of the program,” said Reid Porter, senior director of state public affairs for PhRMA. “Instead, we’re seeing prices increase for entities that should benefitting most from the program, and you’re seeing profits going into the hospital system.”

Shawn Gremminger, CEO of the National Alliance of Health Purchaser Coalitions, said there are four ways that the massive growth of 340B discounts has caused employers to pay more for the prescription drugs purchased by workers, rather than less. Providers covered by 340B programs mark up drug prices more than providers outside the program, such providers are more likely to prescribe more expensive drugs and savings generated by 340B discounts are a factor driving hospital-system consolidation, which also raises costs, he said.

Maybe the biggest impact is due to the fact that when hospitals use 340B discounts, employers cannot get the discounts on those drugs they normally would receive from pharmacy benefit managers — a loss of $6 billion in discounts annually because of a ban on double-discounting, Gremminger said.  And with more purchases being made by hospitals through the 340B program, premiums are going up in part to reflect those higher pharmaceutical costs, he said.

“I think small, rural hospitals need as much help as they can get,” Gremminger said. “I’m not sure that the big, very profitable tax-exempt hospitals need 340B.”

How hospitals use 340B discounts

Leaders of Colorado hospitals, however, point to a litany of programs they fund with the money saved from 340B discounts — programs that help many of the workers within their communities. And they said that each of the programs benefitting from the funding is in jeopardy of shrinking or going away if pharmaceutical makers can limit contract-pharmacy participation and, hence, limit their 340B revenues.

UCHealth funds access to cancer clinics for Medicaid recipients who otherwise would not have access there, Gronow said. Children’s Hospital helps to fund its money-losing mental-health programs with the savings and provides low-to-no-cost pharmaceuticals to the most impoverished patients, Zaslow said.

Community Hospital in Grand Junction receives $12 million to $14 million in discounts a year, and it funds two endocrinologists, a rheumatologist, an infectious-disease physician and four midwives, among other things — specialists it otherwise couldn’t afford. With the nonprofit facility only earning a $2.1 million positive bottom line this year, the savings from the 340B discounts literally could be the difference between staying open and closing, President and CEO Chris Thomas said.

Intermountain Health, which has four Colorado hospitals that are 340B participants, uses funds to offer a medication-discount program for low-income patients and to ensure access to charitable care in community programs like cancer centers. Losing discounts on expensive cancer medications due to contract-pharmacy restrictions would be a tough blow to patients because each purchase without a 340B discount makes it more difficult for hospitals to fund charity-care programs and creates unsustainable cumulative deficits, said Kevin Forbush, 340B program director for the hospital system.

A nuanced debate

“We don’t want to expand the program. We just want to go back to where we were in 2020,” Forbush said, referencing the year that manufacturers began to restrict discounts at contract pharmacies, which has been particularly tough on rural hospitals not located near any standalone pharmacies.

There are even more facets to the debate.

Some pharmaceutical manufacturers, for example, want to implement business practices used in other federal programs and the commercial market to provide the 340B price through a retrospective rebate rather than an up-front discount. This, they say, would allow manufacturers to verify claims and prevent illegal duplicate discounts from occurring.

Hospital CEOs, however, say that would delay savings by weeks or months. And such a change could hit lower-revenue rural hospitals the hardest, they say, as those facilities are more often strapped for operating cash.

But much of the debate will come down to two questions.

Has the 340B program grown well beyond its intent and led to potential abuses of discounts by hospitals and contracting pharmacies, necessitating that it be reined in?

Or has the once-limited program become nothing short of a lifeline for a hospital sector struggling under the weight of financial burdens beyond its control, leaving it in danger of going to code if the discounts are restricted further?

And those are questions that legislators likely are going to be grappling with throughout the 2025 session.