Wild Price Variations and Exorbitant Markups: The Role Hospitals Play in a Flawed Drug Pricing System

By Penn Quarter Partners

When it comes to health care, everyone wants affordability. And everyone wants transparency to enable sound purchasing decisions. Yet, both objectives are difficult to achieve when, as a Yale economics professor recently wrote in the New York Times, health insurance premiums have increased 320% in the past 25 years and consumers are at a loss to explain why costs have risen so much.

Prescription drugs always draw a good deal of attention when cost enters the conversation. The drug pricing system is one in which multiple players in the health care system — insurers, pharmacy benefit managers, distributors, group purchasing organizations — have an impact on cost between the manufacturer and the patient.

But, as recent data shows us, it’s important to give particular scrutiny to the role hospitals are playing in this perplexing environment. As Yale professor Zack Cooper pointed out in his Times essay, hospital costs have grown three times as fast as inflation and twice as fast as prescription drugs.

Two recent reports have detailed how hospitals are a leading reason for the public’s dissatisfaction with high prescription drug costs.

The North Carolina State Health Plan took a hard look at the federal 340B drug discount program created by Congress in 1992 to provide safety-net hospitals with deep price cuts on prescription medications to benefit vulnerable patients and underserved communities.

What the North Carolina plan found, though, is that hospitals are selling those discounted drugs at sizable markups to generate handsome revenues.

In analyzing medical claims for state employees and teachers from 2020 to 2022, the North Carolina study found that hospitals in the 340B program were marking up drugs 84.8% higher than hospitals outside of the program. For example, one major hospital in the state charged an average of $5,353 for cancer medications that it had acquired at the 340B-discounted cost of just $517.

It should also be noted that, according to the study, these hospitals aren’t using this revenue to fulfill the mission of 340B. As it points out, “instead of using their discounts to benefit vulnerable communities, the 340B hospitals expanded into wealthier neighborhoods with a higher percentage of insured individuals who could pay more for the drugs.”

These pricing inconsistencies are not limited to the 340B program, though. The research firm 3 Axis Advisors, in a report commissioned by Patient Rights Advocate.com, analyzed over 1,300 hospital chargemaster files for prescription drug pricing patterns. What they found warrants attention.

As their report notes, “the same drug at the same hospital on the same day can have a dozen different prices. Or, said differently, when there are a dozen different prices for a thing, there is no standard price for that thing.” This, of course, defies ongoing efforts to achieve patient-friendly price transparency in the health care system.

The study found that, for one patient in one hospital, 200 milligrams of the cancer drug Keytruda were priced at $12,000. For another patient, that charge can be as high as $43,000. The multiple sclerosis drug Ocrevus had costs ranging as low as $16,000 and as high as $65,000.

These hospital markups, of course, have ripple effects that impact millions of Americans as payers increase insurance premiums and elevate out-of-pocket cost sharing. When consumers understandably find themselves frustrated with health care costs, it’s important that they realize a leading cause for the escalation.

Penn Quarter Partners continues to work with its clients and partners to spotlight these harmful flaws in the healthcare system and advocate for sensible, affordable pricing and a 340B drug program that serves the nation’s most vulnerable as Congress intended.