HHS Economists Say 340B Drug Discounts Fuel Costly Drugs and Hospital Consolidation

Economists at the Department of Health and Human Services argue that the federal 340B drug discount program now rewards hospitals for favoring expensive medicines and expanding outpatient sites — a finding that bolsters a proposed Medicare payment cut hospital groups are fighting.

The internal brief from HHS’s Office of the Assistant Secretary for Planning and Evaluation, reported last week, is not a peer-reviewed study. Authors include HHS Chief Economist Casey B. Mulligan. They say the program, created in 1992 to help safety-net providers, has “expanded beyond its original intent.”

How the discount spread works

Drugmakers that sell to Medicaid must offer deep outpatient discounts — often estimated at 20% to 50% — to qualifying hospitals and clinics. Those facilities still receive Medicare payment at a standard rate, currently average sales price plus 6%, and keep the difference. Hospitals say the margin funds care for low-income and uninsured patients.

HHS economists contend the gap encourages overuse of high-cost drugs and consolidation through “child sites” that can also buy at 340B prices. Outpatient drug payments grew nearly 15% a year from 2015 to 2017, leveled after a 2018 payment cut, then rose about 25% a year after inflation from 2021 to 2023 once the Supreme Court overturned that cut. Separately, GAO figures show covered-entity sites more than doubled from about 20,000 in 2013 to more than 55,000 in 2023.

The 2027 Medicare proposal

CMS’s draft 2027 outpatient rule would pay for 340B-acquired drugs at average sales price minus 33.4%. The agency estimates Original Medicare drug payments would fall about $4.55 billion in the first year and beneficiary coinsurance about $1.15 billion, with offsets that raise payments — and patient cost sharing — for other outpatient services. Rural sole community, children’s and certain cancer hospitals would be exempt.

340B Health and the American Hospital Association oppose the cut, saying seniors would not see net savings and vulnerable patients could lose services. The Federation of American Hospitals, which represents investor-owned facilities, has urged CMS to finalize it. A final rule is expected later this fall for a Jan. 1, 2027 start; hospitals have also sued over a separate 340B rebate pilot set for January.