340B: A hidden driver of small businesses’ soaring health costs

Unfortunately, the program has expanded far beyond Congress’s original intentions — and is driving health costs up, not down.

Lawmakers originally expected about 90 hospitals to participate in the 340B program. But today, over 2,600 hospitals have enrolled. In fact, the majority of hospitals nationwide now qualify for the program.

And because Congress failed to stipulate that savings must go to patients, participating hospitals and clinics are extracting as much money as possible from the program. These providers often acquire discounted drugs, only to resell them at a steep markup to insured patients — sometimes 10 times what they originally paid. They have an incentive to prescribe more expensive drugs, since those drugs will yield the greatest returns.

When patients with employer-sponsored insurance receive a drug that a hospital purchased through 340B, the employer-sponsored health plan doesn’t receive the manufacturer rebates it normally would. As a result, employers of all sizes end up paying higher net drug prices, which inevitably leads to higher premiums.

Hospital executives have realized they can further increase their profits by acquiring independent physician practices — which don’t qualify for 340B — and essentially bring those patients under the control of the hospitals that do qualify for the discounted pricing.

That kind of consolidation drives the price of surgeries, tests, and procedures higher. Independent physician practices tend to provide lower-cost care or refer patients to lower-cost facilities; meanwhile, hospital-affiliated doctors often refer patients to specialists within the broader hospital network.

Not only do small businesses have less negotiating power than large corporations to mitigate these expenses, but they tend to have less visibility into these cost drivers in the first place. That leaves entrepreneurs essentially operating blind as they try to structure their health benefits.

Fortunately, some business advocates are attempting to shed light on how 340B affects small firms. A new 340B Employer Cost Impact Calculator, for example, allows entrepreneurs to enter information about the size and demographics of their workforce and estimate how much the program is costing them.

Due to 340B, the average small business owner in New York, for instance, pays about $285 extra for every person it covers under its health plan each year. Small businesses spend an extra $287 per covered person in Arkansas, $279 in Colorado, and $301 in Oregon. Nationwide, the 340B program costs employers a staggering $36 billion a year.

These kinds of tools are helping employers understand their rising costs. And the additional transparency is welcome.

But additional visibility into the burden doesn’t actually stop it from growing heavier year after year. Ultimately, Congress needs to reform the program to ensure that hospitals actually pass on savings to patients and employers.

Small businesses already face tight margins and high healthcare costs. Those costs will only grow unless Congress revamps a program that was supposed to make healthcare more affordable, but is driving up spending by tens of billions of dollars instead.

Karen Kerrigan is president and CEO of the Small Business & Entrepreneurship Council in Washington.