A federal program intended to help low-income patients has instead become a major revenue source for large California hospital systems.
Hospitals are using gaps in oversight within the 340B Drug Pricing Program to lock in substantial margins on prescription drugs — and driving healthcare costs higher for Californians in the process. Today, the state’s 340B hospitals earn 3.6 times more from the program than they spend on charity care.
It’s time for Congress to bring stronger accountability to 340B and ensure that the program actually serves its intended beneficiaries: vulnerable patients.
Congress created 340B in 1992 to help safety-net providers stretch scarce resources. The program requires drug manufacturers to sell medicines to participating hospitals and clinics at steep discounts, with the expectation that providers will use the savings to expand access to care for underserved patients.
But weak transparency requirements and limited oversight have allowed the program to spiral far beyond that mission.
Hospitals can purchase medicines at heavily discounted 340B prices, bill insurers at markups of 1,000% or higher, and retain the difference. They have no obligation to pass their savings along to patients.
With those warped incentives in place, it’s no wonder providers’ annual 340B drug purchases have soared to more than $80 billion today.
When hospitals bill insurers full price for medicines acquired at steep discounts, those higher costs do not simply disappear. They are passed along to consumers as higher premiums and deductibles.
As hospitals recognized the program’s financial upside, participation surged. Lawmakers initially expected 90 hospitals to enroll. Today, nearly double that number have enrolled in California alone — with more than 2,600 hospitals participating nationwide.
Many are large, well-capitalized systems that bear little resemblance to the safety-net providers the program was designed to support. Nearly 80% of California hospitals offer below‑average levels of charity care. At Stanford Health Care, for example, charity care accounts for just 0.2% of total operating expenses.
Hospitals have also expanded 340B well beyond their own facilities through arrangements with retail pharmacies. These partnerships allow hospitals to claim discounted pricing on prescriptions filled far from low‑income communities. More than half of California’s 340B contract pharmacies are located in affluent neighborhoods. Some are as far away as Florida.
Hospitals can abuse the program because it lacks accountability standards. Participating entities are not required to disclose how much revenue they derive from 340B or demonstrate how those profits benefit vulnerable patients.
Federal audits cover fewer than 1% of participating hospitals each year and routinely fail to identify ineligible claims, duplicate discounts, or other compliance problems. The program’s vague definition of what constitutes a 340B patient also creates opportunities for multiple providers to claim discounts tied to the same prescription.
As a result, some manufacturers have begun implementing safeguards of their own.
Eight pharmaceutical companies have started requiring providers to submit claims-level data for dispensed 340B medicines. Because this information is already collected during routine patient visits, the approach offers a practical way to verify eligibility and prevent duplicate discount claims.
The Trump administration is also pursuing reforms aimed at improving transparency by requiring providers to prove a prescription is eligible before receiving a 340B discount.
These efforts represent progress. But they cannot substitute for clear, consistent federal standards enshrined in law by Congress.
Lawmakers should clarify which hospitals and patients qualify for the program, strengthen reporting requirements, and improve oversight to ensure that 340B savings support the vulnerable populations the program was created to serve.
At the same time, reforms can be designed carefully so smaller clinics and genuine safety-net providers have the compliance and technical support they need.
Congress created 340B to expand access to care for vulnerable patients in California and across the country. That mission remains important. But without stronger accountability, the program will continue drifting away from its original mission.
Wayne Winegarden, Ph.D., is the senior fellow in business and economics at the Pacific Research Institute and director of PRI’s Center for Medical Economics and Innovation.
