Prior to 1990, many drug manufacturers voluntarily discounted their drugs to hospitals and clinics that serve disproportionately poor and uninsured populations. Then Washington was seized with a good intention -- and you know which roads are paved with them.
Congress passed a law in 1990 mandating that pharmaceutical companies selling drugs through Medicaid -- a government health insurance program for the poor -- give the program the "best price" available.
That requirement had a major unintended consequence: Drug companies could no longer deeply discount prices to those organizations serving vulnerable patient populations because, by law, Medicaid had to get the lowest price.
As a result, many firms simply stopped providing those voluntary price discounts.
So, in 1992 lawmakers were struck with another good intention and created a program known as "340B" to reverse the negative impact of their last good intention. The law required pharmaceutical firms to do what they once did voluntarily -- offer steep discounts on certain outpatient drugs, such as cancer drugs, to entities that treated vulnerable patient populations.
Those lawmakers initially expected about 90 U.S. hospitals to qualify. By 2011, 1,675 hospitals participated in 340B. And the reason is more about profit than helping the poor.
Qualifying hospitals and clinics buy all of their 340B medications at a 25 to 50 percent discount, whether they're dispensed to poor people or not. Hospitals then bill the insurance company at the full price, plus a mark-up.
Dr. Scott Gottlieb of the American Enterprise Institute points out that in 2011 Duke University Health System paid $54.8 million for drugs under the 340B program and sold them to patients for $131.8 million -- a profit of $77 million. Ka-ching!
Part of the problem is that no one is policing the program. The Government Accountability Office has determined that qualifying standards for 340B are notoriously lax. Instead of serving the poor, many of the facilities participating mainly serve people who have insurance, especially after Medicare added prescription drug coverage, known as Part D, in 2006.
But there's a downside: Allowing so many 340B-qualified facilities to get deep discounts and then charge the insured standard prices drives up health care costs for those with private health coverage.
Here's why. Suppose you're a plumber who volunteers to spend one afternoon a week doing plumbing work for the city's poor. City officials are so enamored with your efforts that they pass a law requiring you to work a whole day, or maybe two, at a deeply discounted rate doing what you had been doing voluntarily.
To offset your lost revenue -- because if you go out of business no one benefits -- you raise your prices to your paying customers. So while the politicians boast of helping the poor, what they have actually done is indirectly pass the costs on to their constituents.
Ditto for 340B. Hospitals and other facilities are profiting while people with insurance are paying higher premiums.
And it gets worse. Many hospitals and clinics don't have dispensing pharmacies to provide the drugs and so were unable to participate in 340B. But in 1996 government officials had another good intention: allow hospitals and clinics to utilize an outside "contract pharmacy."
A decade later, the Department of Health and Human Services (HHS) decided to expand the program and allow 340B entities to contract with an unlimited number of outside pharmacies. As a result, the number of contract pharmacies has swollen by 700 percent over the past three years.
By participating in the program, pharmacies may be paid a substantial mark-up for every prescription eligible for a discount under the 340B program, providing them with an economic incentive to dispense as many 340B drugs as possible. And sure enough, today nearly $7 billion worth of prescription drugs are sold through the 340B program, and that number is expected to hit $12 billion by 2016. Ka-ching!
In essence, the 340B program forces one private sector industry to deeply discount its products so that other private sector industries can profit handsomely.
Theoretically, the new health care law should reduce the need for the 340B program because so many more uninsured people are supposed to get health coverage. But until we know for sure, Congress or HHS should limit 340B to its intended purpose of helping the poor.
Merrill Matthews is a resident scholar at the Institute for Policy Innovation in Dallas, Texas.