The $36 Billion Hidden Tax on America’s Small Businesses

Many hospitals are destabilizing small businesses across America by exploiting a little-known federal charity care program to drive healthcare costs up.

The 340B Drug Pricing Program was supposed to help safety-net hospitals serve vulnerable patients by letting them buy prescription medicines at a discount. But because hospitals are not actually obligated to pass those savings on, many use the program to bill patients — and their employer-provided insurance plans — at enormous markups to generate profit.

These tactics are already driving small employers’ costs to untenable levels. Small business health premiums have risen nearly 20 percent in the last year alone. In recent years, rising costs have forced nearly a third of small businesses to cut health insurance benefits.

It’s time for Congress to act by stopping hospitals’ misuse of the 340B program before it further undermines the small businesses that power American economic growth.

The problems with the 340B program were not inevitable. When lawmakers established 340B in the 1990s, they had good intentions: to help safety-net hospitals — those providing a significant of care to low-income patients — free up more resources for charity care.

To that end, the program allows participating hospitals to purchase prescription drugs at substantial discounts. Lawmakers expected hospitals would pass those savings on to patients or reinvest them in better care.

But the program doesn’t actually require hospitals to do either. As a result, some hospitals now use 340B not to support charity care, but to inflate their profit margins.

Many collect steep discounts when purchasing medicines, then turn around and bill patients at huge markups, which are sometimes 10 or more times the drug’s original cost.

Hospitals have also used 340B profits to fund acquisitions of smaller, independent physician practices, which don’t qualify for the program. By buying up these practices, large hospital networks can bring more patients under the 340B umbrella. This sort of consolidation can drive healthcare costs higher, since independent physician practices often provide care at lower costs than hospital systems.

Policymakers are increasingly recognizing how 340B abuse harms patients. But what many don’t consider is that it hurts small businesses, too.

When hospitals raise costs, small businesses face higher health insurance bills for their employees. And unlike large corporations, they often lack the pricing data and market leverage to negotiate better rates. In fact, the of small businesses offering health insurance has dropped from nearly 50 percent in 2000 to just 30 percent in 2023.

Many small companies rely on drug rebates from drug manufacturers to keep health coverage affordable. But drugs purchased through the 340B program are generally ineligible for these rebates.

As hospitals route more drug purchases through 340B, it raises net drug costs for employers and fuels premium increases, which then get passed on to employees in terms of higher contribution costs for coverage.

Recent research estimates that 340B adds roughly $36 billion to employers’ healthcare costs each year. In many states, 340B abuse is forcing small businesses to pay hundreds of dollars more annually for each employee covered by their health plans.

For startups and family-owned businesses, those costs can be devastating. Small companies must offer competitive health coverage to attract workers and compete with corporations, yet they often operate on thin margins. Inflated healthcare costs force them to choose between being competitive and being financially stable.

Left unfixed, abuse of the 340B program could even jeopardize America’s economic competitiveness.

Small businesses employ nearly half the U.S. private-sector workforce and have long been one of our country’s most important engines of economic growth. Every unnecessary dollar diverted into higher healthcare costs is one that cannot be invested in creating jobs, increasing wages, or developing innovative products.

Fortunately, Congress is working toward a bill that could help address the problem. The Tax Exempt Hospital Transparency Act would require tax-exempt hospitals to provide more detailed information in their annual Form 990 filings, including how they use 340B revenues. That would strengthen congressional oversight of the program while giving employers a clearer picture of the hidden costs driving their healthcare spending.

More importantly, it could lay the groundwork for broader reforms that ensure 340B discounts benefit patients and employers instead of simply boosting hospital revenues.

The original purpose of 340B is worth preserving. Vulnerable patients deserve access to care. But widespread misuse of the program threatens both patients’ health and the financial health of America’s small-business ecosystem.

Congress should restore accountability to 340B and ensure the program supports the vulnerable patients it was meant to help, without undermining the small businesses that keep America’s economy growing.

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