The 340B drug pricing program requires pharmaceutical manufacturers to provide outpatient medications at steeply discounted prices to certain types of hospitals and health clinics. Intended to provide critical cost savings for hospitals and other entities that provide charitable care for patients without health coverage, eligibility for the largest proportion of entities participating in the program is based on a funding formula that relies on the proportion of Medicare and Medicaid inpatients served by a given hospital. As 340B enters its third decade as part of the federal health funding structure, now is a good time to reevaluate and make sure it is working as intended. This short paper argues that a fundamental change in the formula would better reflect the program’s stated priority.

The 340B program was originally intended to correct an imbalance created by the passage of the Medicaid Drug Rebate statute.  It was meant to play only a small role in the health insurance market. However, as with most interferences in the free-market, the 340B rule has “expanded beyond its bounds”, in the words of outgoing Secretary of HHS Kathleen Sebelius.  As the program has expanded the market inefficiencies it created have been magnified.