Last November, Californians passed Prop 34 to stop abuse of a prescription drug discount program. Lawmakers are now moving in the opposite direction
By Anthony M. DiGiorgio
San Francisco Chronicle
May 21, 2025
Health care costs are out of control, hitting Californians in the form of higher premiums, higher deductibles and higher costs at the pharmacy counter. Millions of patients risk foregoing critical treatments because they cannot afford the co-payments and out-of-pocket costs.
Meanwhile, a well-intentioned federal program to make drugs more affordable for vulnerable patients is being exploited by large hospital conglomerates in California.
Known as 340B, it was created to give safety-net hospitals discounts on drugs so they could better serve vulnerable patients. The intent was to allow these hospitals, which serve poor communities, to resell the discounted drugs in a single, in-house pharmacy, thus stretching scarce resources and allowing the hospitals to stay financially solvent.
However, here in California, the program has morphed into a system that enriches large hospital chains, inflates drug prices and reinforces the corporate practices it was meant to fight.
The 340B program requires that drug manufacturers give large discounts on outpatient medications to eligible hospitals. But instead of passing these savings on to patients, too often these hospitals are reselling the drugs for much higher prices, often at off-site contract pharmacies and pocketing the difference.
One could perhaps morally justify this misuse of the system if it were used to subsidize essential but less profitable care. In practice, however, studies have shown that as soon as hospitals gain 340B eligibility, they preferentially expand into wealthy neighborhoods and contract with pharmacies hundreds of miles away — with no requirement of benefit to the poor or uninsured. Because there is no requirement, and the program lacks transparency, there is no evidence that 340B hospitals use their revenue to benefit poor patients.
Few states have transparency laws, and those that do, such as Minnesota, note serious abuses and a lack of oversight in the program. Besides revenue going to hospitals, clinics and health centers, Minnesota noted that 16% of the revenue goes to for-profit companies that simply administer the program. Aside from those companies, most of the 340B revenues go toward large hospital conglomerates. What’s worse, the 340B program doesn’t just hurt pharmaceutical companies; over 80% of its revenue comes from commercial payers, Medicare, Medicaid and patients themselves.
Other evidence suggests that this enormous profit arbitrage, which is unavailable to independent physician practices, fuels hospital consolidation, drives up prices and increases insurance premiums for patients. In many cases, patients are paying co-pays that exceed what the hospital paid for the drug, which is why congressional leadership has called for reforms to ensure the program will “actually benefit 340B-eligible patients.”
California voters are no strangers to 340B abuse, but they do want to stop it.
Last year, they recognized malfeasance in the program and passed Proposition 34, which reined in some of the most egregious exploitation of the program, such as using 340B revenue to purchase property completely unrelated to health care. Californians saw certain entities using revenue from the program to purchase multifamily housing units, many of which had multiple code violations and were downright dangerous. In essence, 340B revenue was funding slumlords.
The passage of Prop 34 limited how 340B revenue could be spent, requiring certain entities participating in the program to spend 98% of 340B money directly on patient care. However, the measure was limited in scope and targeted only a few bad actors. Unfortunately, there is a lot more corruption in the 340B program beyond what Prop 34 addressed.
Now, the large corporations that continue to benefit from the system are trying to entrench their advantages. And California legislators are helping them.
AB1460 by Assembly Member Chris Rogers, D-Santa Rosa, locks in many of the worst aspects of the 340B program, defying the will of the voters who clearly have an appetite for reform. The legislation prohibits any restrictions on 340B drug delivery, even when hospitals are using pharmacies with no connection to the safety net. It shields hospitals from any scrutiny on how and where they dispense these discounted drugs, undermining longstanding efforts to ensure 340B drugs are actually going to needy patients and not just padding the revenues of hospitals and other intermediaries.
Despite what some advocates say, AB1460 is not about patients, nor is it about expanding access to care. It is about preserving a lucrative revenue stream for large health systems that prioritize profits over patients.
California has already taken some needed steps to limit exploitation of this program by mandating the state’s Medi-Cal program carve out 340B medications from managed care. This limited hospital corporations from profiting off the Medi-Cal program and the state’s most vulnerable patients.
But AB1460 would be a step backward if passed.
True reform should require transparency. States like Minnesota are showing the way and have demonstrated just how much this financial arbitrage is costing taxpayers and patients. Rather than protecting this questionable practice, Californians should once again demand accountability within the 340B program. We should demand that drug discounts are given to patients and not used to pad hospital margins or fund their executives’ seven-figure salaries.
If Californians are serious about protecting access to affordable health care, we should start by cleaning up the 340B program, demanding transparency and ensuring the money is being used to benefit hospitals truly serving the safety net. We should not accept enshrining the worst parts of 340B into law.
Anthony M. DiGiorgio is a board-certified neurosurgeon practicing at a safety-net hospital in San Francisco.