Commentary: Medicare policy shift could unlock major prescription savings

Medicare may soon save beneficiaries more than $1 billion on prescription drugs without lowering the price of a single medication. A proposed change would do it by altering how Medicare reimburses hospitals for drugs obtained through a little-known federal discount program.

Regulators should not miss this chance.

The 340B Drug Discount Program, created in 1992, requires drug makers to offer steep discounts on outpatient medicines to certain eligible health care providers. It was originally designed as a limited safeguard for federally supported clinics and state and local public hospitals.

Over time, however, the program has expanded well beyond that purpose and now acts as a subsidy for multibillion-dollar nonprofit hospital systems. It now covers roughly two-thirds of the country’s nonprofit hospitals and accounts for more than $100 billion in discounted drug purchases each year, functioning as a kind of reverse Robin Hood.

Here is how the system works: A hospital in the program buys an outpatient drug at a large 340B discount, then bills Medicare, a private insurer or even a cash-paying patient at a much higher rate and keeps the difference. Hospitals are not required to pass the savings on to patients.

The distortion is especially clear with cancer drugs. Research commissioned by the Community Oncology Alliance found that 340B hospitals charged commercial insurers and cash-paying patients a median price nearly 400% higher than what those hospitals paid for oncology drugs.

Patients end up paying for those markups through higher premiums, deductibles and coinsurance. Medicare beneficiaries are affected directly because their 20% cost sharing is based on Medicare’s payment amount, not the hospital’s discounted acquisition cost.

Patients are not the only ones hurt. Smaller hospitals, including rural and community facilities that do not earn huge profits from 340B drugs, are also disadvantaged.

Medicare’s outpatient hospital payment system is budget neutral, meaning the overall pool of payments is essentially fixed. When hospitals receive excessive payments for discounted drugs, less money remains available to pay other hospitals for outpatient care.

The result is another reverse Robin Hood transfer, moving money from smaller and less drug-dependent hospitals to large health systems that have turned 340B into a major source of revenue.

The Centers for Medicare and Medicaid Services is now proposing an important first step to correct the distortion. Starting in 2027, the agency would pay hospitals for 340B drugs at the average sales price minus 33.4%, based on acquisition costs reported in CMS’s hospital survey, instead of the current average sales price plus 6%. That would be a needed correction. Medicare should not knowingly pay hospitals far more for drugs than the hospitals spent to obtain them.

The money would not simply vanish from hospital budgets. Because of budget neutrality, CMS would redirect the reduction in 340B drug payments into higher payments for hospitals’ non-drug outpatient services.

If the policy had applied to 2025 claims, total Medicare outpatient payments would have risen for 78% of hospitals, according to Avalere Health. Hospitals with fewer than 100 beds would have seen an average increase of about 7%.

CMS estimates that Medicare beneficiaries would save $1.15 billion in the first year.

The 340B program does not need to be eliminated. It needs to return to its original mission: helping vulnerable patients and true safety-net providers get affordable medicines. Discounts should follow the patient, not become hidden revenue for wealthy hospital systems.

The agency’s proposal will not fix every problem with 340B. But paying hospitals closer to what they actually spend, while shifting the difference to smaller hospitals, struggling rural facilities and patient care, would be a strong start.

For too long, this little-known government program has taken from patients and struggling providers to enrich some of the nation’s wealthiest hospitals. CMS has a chance to begin repairing the reverse Robin Hood effect. It should take it.

Ted Okon is the executive director of the Community Oncology Alliance. Lucio Gordan is the president and managing physician at Florida Cancer Specialists and Research Institute.