A new study released today by the Pacific Research Institute finds that a program to give discounted prescription drugs to poor Americans is riddled with abuse, has created a perverse incentive for providers to profit instead of effectively serve the poor, and is hurting overall health care quality.

Click here to download a copy of “Addressing the Problems of Abuse in the 340B Drug Pricing Program”

“The 340B Program is a well-intended effort to give America’s most vulnerable populations access to discounted prescriptions,” said Dr. Wayne Winegarden, author of the new study. “Over the years, it has evolved into a complicated mess, rife with abuse, and has encouraged health providers to put profitmaking ahead of serving the poor. Our study shows that Congress must reform 340B, so we can get back to the original mission – ensuring America’s poor have access to life-saving prescription drugs at a low cost.”

Under the 340B Program, Medicaid prescription drug discounts were extended to health care providers that largely serve the poor. Participating drug manufacturers provide 20 to 50 percent discounts for drug costs sold to qualifying clinics, hospitals, and pharmacies.

In “Addressing the Problems of Abuse in the 340B Drug Pricing Program,” Winegarden found that:

With little guidance from the federal government there is no requirement that hospitals provide the discounted drugs solely to people who are truly in need.

In practice, hospitals can prescribe discounted medicines purchased through the 340B Program to any of their patients, including those who have insurance and can pay full price – and pocket the difference. Many hospitals have taken advantage of this loophole and government-guaranteed profits.

Neglecting the program’s mission to serve the most vulnerable, more 340B hospitals have been set up in recent years to serve higher-income patients and secure more profit.

Exploiting this profit motive, the program encourages participating hospitals to prescribe high-priced medicines as discounts are based on a share of the drug’s costs. They earn more revenue when prescribing the most expensive drug possible.

The program has also led to a rising trend of health care consolidation, as independent practices are not eligible for 340B discounts and losing patients. In recent years, hospitals have increasingly acquired independent practices and set them up as hospital outpatient departments.

Winegarden concludes that the program has resulted in serious unintended consequences that are affecting the quality of the overall health care system, and must be addressed by policymakers in Washington. He argues that Congress should consider enacting reforms to the 340B program to ensure that the program solely benefits uninsured and low-income patients, while improving both oversight and administration.

Dr. Wayne Winegarden is a Senior Fellow in Business and Economics at Pacific Research Institute. He is also the Principal of Capitol Economic Advisors and a Managing Editor for EconoSTATS.