Opaque drug discount program delivered $630 million last year to safety net hospitals, clinics in MN

A first-of-its-kind state report shows safety-net hospitals and health care providers in Minnesota saw $630 million in extra revenue last year — and probably much more — from an obscure program funded by large discounts on medications provided by drug manufacturers.

The findings, released Monday by the Minnesota Department of Health, have been eagerly anticipated by health policy experts as a window into the vast sums that certain hospitals receive from a program known as “340B,” which Congress created in 1992 to help safety-net providers and low-income patients.

Drugmakers question how much of the program’s benefit gets passed on to needy patients, while hospitals say it’s been critical to keep medical centers running at a time of intense financial challenges.

“We serve all patients that come to us,” said Trevor Sawallish, CEO of Robbinsdale-based North Memorial Health, which the report said collected $88 million last year via the drug-discounting system. “Even with the 340B program, we’re struggling to stay around in that mission.”

The program lets pharmacies like North Memorial’s buy medications at a discount so they lose less money when drugs are dispensed to patients who lack insurance and can’t pay.

In addition, these health care providers can tap big discounts when dispensing prescriptions to people covered by health plans, generating extra revenue as they charge insurers significantly more than their acquisition costs.

To be eligible for 340B discounts, health care providers must be nonprofits that treat a significant number of low-income patients and/or critical patient populations. The program is unavailable to many providers in Minnesota, such as Mayo Clinic in Rochester, but last year it delivered $129.6 million to the University of Minnesota Medical Center and $70.2 million to Hennepin Healthcare, which runs HCMC in Minneapolis.

The new report is the first to tally this extra revenue for health care providers, although researchers say it significantly understates the financial benefits. That’s because many health care providers didn’t provide information about office-administered drugs, a big source of spending in the program, said Stefan Gildemeister, state health economist with the Minnesota Department of Health.

Adjusting for this missing data, the extra revenue to health care providers might have been over $1.2 billion, Gildemeister said. The problem will be fixed, he added, in next year’s report.

North Memorial was one of just a few hospitals that didn’t have this underreporting problem with the data released Monday.

“These resources come to support charity care, deliver services that are low in revenue, [and] enable hospitals to be open 24/7 for patients when they have an emergency,” Gildemeister said. “But it’s too early to know really what incentives the program establishes, whether they’re consistent with the mission and how the program revenues are used.”

The state’s largest hospitals collected about 80% of the extra revenue, according to the report, while small safety-net clinics generated a relatively small amount.

It found that hospitals and clinics paid $120 million to contract pharmacies and third-party administrators, which 340B pharmacies hire to help them extend the program to more patients.

Manufacturers provide the discounts to so-called “covered entities” in the 340B program as a condition of selling drugs to the state-federal Medicaid program for low-income patients. Drugmakers have long questioned exactly what happens to all the extra revenue generated by the program.

“The recent report on 340B purchases by Minnesota hospitals is beginning to expose how big hospital systems and their contract pharmacies are using the 340B program to pad their profits at the expense of patients,” PhRMA, the trade group for manufacturers, said in a statement. “Despite the huge discounts shown by the data, many of these hospital systems are not providing charity care at levels proportional to those savings.”

Hospitals say it’s misleading for drug companies to focus on charity care spending, which is financial assistance to low-income patients who can’t afford care. The funds are used to support a wide variety of critical services, they argue, while addressing the gap between the cost of care and Medicaid reimbursements.

“Without the 340B program, these resources would flow instead to pharmaceutical manufacturers — the same companies whose top 10 players alone reported $95 billion in profits in just the first three quarters of 2024,” the Minnesota Hospital Association said in a statement. “Yet even with 340B support, two-thirds of Minnesota hospitals operated at a financial loss in 2023, leading to a wave of service line closures in 2024.”

The Minnesota Star Tribune looked at tax filings for three of the four largest recipients of 340B revenue — Hennepin Healthcare, North Memorial and the U Medical Center — and found they collectively provided about $92 million in charity care last year, compared with about $288 million in extra revenue via the drug discounts.

A tax filing was not available for the fourth large recipient, Duluth-based Essentia Health, which received about $70.7 million in excess 340B revenue last year.

Comparisons to charity care are important, but nothing in the 340B program says covered entities must pay out in charity care what they make via drug discounts, said Sayeh Nikpay, a public health researcher at the U. The three large recipients last year had about $607 million in overall community benefit spending, which includes shortfalls with Medicaid reimbursement.

PhRMA says Congress needs to make the 340B program viable over the long run through reforms including “patient affordability requirements, clarifications around hospital eligibility and enforceable accountability measures,” the trade group said in a statement.

The Minnesota Hospital Association urged policymakers to resist appeals from drug companies receiving what hospitals describe as “record profits.”

“340B discounts to all providers amounted to $6 billion, or 1.3% of total U.S. drug sales in the U.S. in 2015,” the hospital association said in materials released Monday. “In contrast, drug companies spent four times as much on marketing and advertising their products.”

Nikpay said the new report is important for documenting fees to contract pharmacies and third-party administrators because these sums, in some cases, are going to large chain pharmacies and software companies rather than safety-net providers. Gildemeister of the Health Department highlighted these payments as well, saying they provide “an insight into the complexity of the system.”

“A more rational, streamlined system with transparent and aligned incentives could generate less of that facilitation cost, that could be administrative waste in many ways,” he said.

In 2023, there were about 200 covered entities in Minnesota, the report found, but just 26 of these health care providers accounted for 90% of the extra revenue.

Commercial health insurers provided $343.2 million of the extra revenue, followed by $197 million from Medicare insurers and $86.6 million from private health plans in the state’s Medicaid program.

The interaction between 340B funds and Medicaid is what prompted Rep. Tina Liebling, DFL-Rochester, to push legislation a few years ago for data collection behind the new report. Liebling worries the funding has blocked attempts to reform the Medicaid managed care system in the state, because the money flows to hospitals through health plan reimbursements.