The 340B program

The federal 340B program mandates that drugmakers sell drugs at discounted prices to so-called “safety-net” hospitals and clinics, which disproportionately serve low-income communities. The program results in discounts ranging from 20 percent to 50 percent, according to HRSA.[50] The Patient Protection and Affordable Care Act (PPACA), also known as Obamacare, has significantly increased the number of hospitals eligible for the 340B program, which demands deeply discounted prices for safety-net providers.

In 2002, about 8,000 hospitals and clinics were participating; by 2010, more than 14,457 were participating.[51] As of July 2011, more than 16,500 covered entities were enrolled.[52] However, 340B providers have not reported shortages except in two cases: intravenous immune globulin; and when the 340B price drops significantly. In the latter case, 340B providers are able to order significantly more of the drugs at below-market prices — prices at which the manufacturers would be unwilling to supply the drugs absent the government mandate.[53] It is reasonable to conclude that this government price intervention would create a perverse incentive for drugmakers to ration supplies to 340B facilities. The intervention would not, however, induce manufacturers to stop producing overall.

Also recall that while the 340B program demands a discount, it does not fix nominal prices. Drugmakers can respond to an increase in the government-dictated discount (or increase in number of beneficiaries of the discount) by increasing prices to private health insurers.