If you are familiar with the federal government’s 340B Drug Discount Program, you might also be familiar with the controversy surrounding it. A big part of the controversy lies in drug manufacturer claims that the program is unfair to them. But if that is the case, why do they participate? Drug companies are not compelled by any particular statute to do so.
In simple terms, it is all about margins and profit. Companies of all sorts can make money on products in one of two ways. They can do it by charging the highest possible price the market will bear and making their money on a per-piece basis. Alternatively, they can go with a lower price and earn their money on sales volume. As long as they make their margins, that’s all that matters.
Basics of the 340B Program
Understanding manufacturer complaints of a lack of fairness requires understanding the basics of the program. Established in 1992, the 340B program is designed to help healthcare providers make better use of their Medicaid and Medicare resources to serve low income and uninsured patients.
Ravin Consultants explains that the 340B program gives healthcare providers access to discounted prescription medications purchased either from contract pharmacies or manufacturers. They offer the medications to eligible patients at equally discounted prices. Meanwhile, Medicare and Medicaid reimburse at full price. The extra money realized through such transactions is supposed to be put back into patient services, thereby increasing healthcare access among the needy.
Why Manufacturers Claim It’s Unfair
Manufacturers choosing to participate must offer cover medications at a discounted price that can be no higher than the ceiling price established by the HRSA. They are always free to negotiate lower prices with healthcare providers. As for why manufacturers claim the program is unfair, it rests in the fact that they do not generate as much revenue from 340B transactions compared to standard transactions.
That goes without saying. If you are charging a 340B-eligible healthcare provider a lower price for certain drugs, you are generating less revenue on a per-piece basis. That could mean not meeting margin expectations. But don’t forget the ability to sell in volume.
Larger Volumes Achieve Expected Margins
Manufacturer complaints tend to fall on deaf ears when drug companies sell covered drugs in such large volumes. To make this easier to understand, let us step outside prescription medications and talk about big box retail. We can point to Walmart as the perfect example.
Walmart offers some of the lowest prices in the retail industry. They make money through the economics of scale. In other words, they can afford to sell at lower prices because their size allows them to buy from manufacturers at lower prices.
The icing on the cake is their sales volume. They don’t need to make as much money per item because they sell so much. They make their profit by selling a ton of merchandise at volumes they could not achieve were their prices higher.
Pharmaceutical manufacturers participating in the 340B program have a similar experience. There are tens of thousands of eligible healthcare providers, also known as covered entities, participating in the program. Manufacturers are selling them billions of dollars’ worth of discounted drugs.
It’s Always Something
Drug maker complaints about the unfairness of the 340B program are only valid to point. But in the end, it is always something. If they didn’t have 340B to complain about, they would choose another topic. The fact is that drug companies participate in 340B because there is money to be made. The program cannot be all that unfair or drug companies wouldn’t participate.