Many rural hospitals and pharmacies rely on a federal drug discount program. Some drug companies are trying to scale it back

In Tecumseh, a southeast Nebraska town of around 1,600 people, two locally owned pharmacies sit on the square overlooking the Johnson County Courthouse.

One of those is Hasselbalch Pharmacy, which owner Michael Wendt has run for nearly 30 years. He greets most customers by name.

On a frigid February afternoon, a woman walks in, in need of crutches for her son. Wendt pulls out some used crutches and hands them to her, free of charge.

Hasselbalch is an example of a contract pharmacy under the 340B program.

Congress created the program in 1992 to help hospitals serving low-income populations by offering them discounts on drugs. The program later expanded to include additional rural hospitals like Johnson County Hospital, a few blocks up the road from Hasselbalch Pharmacy.

340B requires drug companies to provide discounts to eligible hospitals in exchange for their participation in Medicaid and Medicare. No federal or state tax dollars are used for the program.

In theory, hospitals can use the money saved to provide more comprehensive services. Hospitals without an in-house pharmacy, like Johnson County Hospital, can contract with other pharmacies and still receive the 340B discount.

The program also helps the contract pharmacies, since hospitals have to pay them a dispensing fee and replace their drugs used for 340B. Wendt said it keeps his smalltown pharmacy going and improves accessibility of care.

"Without programs like this, it's going to be harder and harder for small town pharmacies to survive, and then eventually for even county hospitals," Wendt said.

Olivia Little is the 340B director at Johnson County Hospital. She said Johnson County Hospital’s 340B benefit was $831,000 during the last fiscal year. That represents the amount of money the hospital saved on drug discounts from the program and the net revenue it received from its three contract pharmacies.

Little said the hospital uses these funds on services like home health and a new EMS ambulance service, which would otherwise be too costly for the 18-bed facility.

According to the Nebraska Hospital Association, 54% of rural critical access hospitals in the state are operating at a net loss, including Johnson County Hospital. All but four receive 340B drug discounts.

In recent years, many hospitals have seen their 340B benefits shrink. At Johnson County Hospital, program benefits made up around 15% of the hospital’s operating revenue in the 2020 fiscal year. Now, it’s close to 8%.

“It's scary to think what could happen, and when the 340B program gets at risk, that takes away money that we can use for our patients and our communities help keep our doors open,” Little said.

In 2010, the Health Resources and Services Administration issued new guidance allowing hospitals to contract with more than one pharmacy. That same year, the Affordable Care Act added new classifications of hospitals and clinics that were eligible to participate in the 340B program. The number of hospitals and contract pharmacies participating in the program expanded rapidly soon after.

In 2012, the year Johnson County Hospital became a 340B hospital, there were only around 4,000 total contract pharmacy locations nationwide. That expanded to around 33,000 by 2023. Today, 340B is a $66 billion program, and at around 20% annual growth, its expected to eclipse Medicaid Part D as the largest federal prescription drug program as soon as 2028.

Around 2020, some drug companies began to push back on the growth of the program by limiting the number and type of contract pharmacies to which they would ship orders. Others created complex reporting requirements.

"Some manufacturers want us to submit data. Some manufacturers say that pharmacy has to be within 40 miles, and at this point they are just kind of making up their own rules," Little said. "So we're just waiting to see what rule they make up next."

In the Unicameral, Sen. Brian Hardin of Gering introduced a bill, LB168, aimed at addressing the issue on the state level.

His legislation, called the 340B Contract Pharmacy Protection Act, would prohibit drug companies from interfering with the delivery of discounted drugs. The manufacturers would no longer be able to require hospitals to submit reports as a condition of acquiring the drugs or limit the number of pharmacies they can contract with. The Nebraska Attorney General’s Office and county attorneys would be given enforcement authority on the legislation.

Similar bills have recently been passed in other states like Arkansas, Kansas and Missouri.

Hardin, as well as other state lawmakers pushing for 340B protection legislation, has faced scrutiny from several national organizations.

An ad from the Elon Musk-backed, pro-Trump nonprofit Building America’s Future, paints Hardin and other Republicans introducing 340B legislation as “Trump underminers.” The ad encourages listeners to tell their representatives to let the president fix 340B instead.

Hardin said he agrees that federal reforms are needed but wants to do what he can on the state level while waiting for change from Washington.

“It really does need to be comprehensively changed, and since we in the Legislature don't have the ability to really change that, we've got to wait for Congress to do it,” he said. “But in the meantime, the best way to do that is to pass 340B.”

The Pharmaceutical Research and Manufacturers of America (PhRMA) and the Alliance for Integrity and Reform of 340B (AIR340B) are other national organizations opposed to 340B protection legislation.

Both groups say they support the 340B program’s original intent, but have concerns about how the rapidly growing program is being abused by large hospitals and pharmacies.

While many small pharmacies in rural Nebraska rely on the program to stay open, most contract pharmacies are owned by larger companies.

In 2023, five pharmacy chains, including CVS Health and Walgreens, made up around 75% of the 195,000 contract pharmacy relationships with hospitals. In Nebraska, 47% of the contract pharmacies 340B hospitals contract with are from out of state.

Critics also say protecting 340B could result in higher costs for employers and less tax revenue for governments.

According to the Nebraska Legislature’s Fiscal Office, Hardin’s bill would likely not cost the state any money.

However, PhRMA estimates that Nebraska employers pay $36.6 million more in health care costs because of the 340B program, resulting in a $3 million reduction in state and local tax revenue.

Another critique is that the benefits hospitals receive from the 340B program aren’t being used to serve patients in need. In Nebraska, charity care accounts for just 0.7% of total operating costs at 340B hospitals in the state. The national average of all hospitals is 2.5%. Charity care refers to free or discounted medical care given to patients who can’t afford to pay their full hospital bill, whether they have health insurance or not.

Rachel Weissman, a policy researcher with the PhRMA, said the data shows clear issues with the program.

“It sounds like it should be a great program, but because of the lack of transparency, the lack of oversight, and just the immense amount of gaming and loopholes we've seen, it's not actually achieving its intended goals and it's actually having unintended consequences for the system as a whole,” she said.

Back at Johnson County Hospital, 340B director Olivia Little said sentiments like that are offensive to her work.

“The program has a ton of oversight already,” she said. “It almost personally hurts me when manufacturers or whoever is critiquing says this program has no oversight. They can come spend a day with me and see what I do all day of critiquing what we're doing and being compliant.”

She said one of the reasons the state's charity care percentage is low is because many patients would rather go to collections than sign up for charity care.

“I don't know if it's pride in Nebraska. Once they find out it's about Medicaid, they will not come in here and sign up,” she said. “It's very hard to get people to utilize charity care in rural health areas when we can't get the people in the door to do that.”

And some of the benefits of the program never make their way into a report, like Wendt's gift of free crutches at Hasselbalch Pharmacy.

"Do you think Walgreens is going to do that? Do you think Eli Lilly is going to just hand out meds to their patients? That's what we do," Little said. "So when they say, 'We want reporting, we want to see it,' – that didn't show up on an Excel spreadsheet anywhere."

During Unicameral debate on Hardin's bill Wednesday, senators largely agreed that the 340B program has issues and needs a federal fix. However, the 340B Contract Pharmacy Protection Act unanimously advanced from the first round of floor debate.