Punching holes in things can be very useful. Evenly spaced holes made leather belts with metal buckles adjustable. Conductors punched holes in train tickets to invalidate them. Punch cards were once essential for digital data storage and have been used to record votes.
PhRMA and BIO have, for years, described how hospitals “profit” from the 340B drug-discount program. An attractive PhRMA infographic from 2015 depicts this “profit” with a one-two-three punch: “1) manufacturer provides 340B hospital with discounted drug; 2) 340B hospital provides medicines to patients, including those with commercial insurance; 3) insurer reimburses at the full negotiated rate; hospital keeps the difference as profit.” A recent “BIO.News” report on 340B spending describes how safety net providers are “profiting off of the difference” between the reimbursement at standard rates and the discounted prices, with “hospitals generating enormous profits from 340B arbitrage.”
For PhRMA and BIO to call 340B savings “profits” is technically wrong and politically motivated. It’s time to punch holes in their word choice.
Why savings are not profits
Legal and accounting distinctions
At its most basic level, the term “savings” accurately describes the fundamental mechanism of the 340B program: It lowers the cost of prescription drugs for covered entities. The difference between the full price and the discounted purchase price constitutes savings because it reduces the expense incurred by the covered entity without involving the generation of additional revenue. That said, these savings positively impact the financial position of covered entities.
The difference between profits and savings in healthcare isn’t just semantic — it reflects fundamental legal and accounting differences. Covered entities participating in the 340B program are not-for-profit organizations, which by definition and law do not generate profits. Under Generally Accepted Accounting Principles (GAAP), not-for-profit organizations must report their financial performance differently from for-profit entities. Under GAAP, for-profit entities record excess revenue over expenses as “profit” or “net income.” In contrast, not-for-profit organizations report this excess as “change in net assets.”
This GAAP reporting requirement aligns with IRS regulations governing 501(c)(3) organizations and reflects the core difference between commercial enterprises and mission-driven healthcare providers. While both types of organizations may generate positive financial margins, the accounting treatment and restrictions on use of those funds differ significantly based on their tax status and organizational purpose.
Regulatory requirements and oversight
The regulatory framework governing 340B-covered entities further distinguishes their savings from corporate profits. Not-for-profit organizations are required to file IRS Form 990, a comprehensive disclosure of revenues and expenses, and community benefit activities. The form makes no reference to “profit.” This completed form is publicly accessible, offering transparency that helps to ensure that these organization are accountable for their financial practices and provide benefits to the community. Additionally, not-for-profit hospitals must complete Schedule H, documenting such community-benefit activities as financial assistance at cost, health professions education, subsidized health services, research, and community-health improvement services. Whether the organization prepared a community-benefit report during the tax year and whether that report was made available to the public must also be reported.
The Affordable Care Act requires not-for-profit hospitals to conduct a community health needs assessment (CHNA) every three years to help ensure that their activities align with community needs. For-profit hospitals have no such requirement. In addition to determining whether a CHNA was conducted during the tax year or either of the two immediately preceding tax years and whether the CHNA report was made widely available to the public, not-for-profit hospitals use Form 990 to report whether the CHNA describes:
- A definition of the community served
- Demographics of the community
- Existing health care facilities and resources within the community that are available to respond to the health needs of the community
- How data were obtained
- Significant health needs of the community
- Primary and chronic disease needs and other health issues of uninsured and low-income persons, and of “minority” groups (the IRS is presumably referring to underserved populations)
- The process for identifying and prioritizing community health needs and services to meet those needs
- The process for consulting with persons representing the community’s interests
- The impact of actions taken to address the significant health needs identified in the hospital facility’s prior CHNA(s)
Reinvestment requirements and capital constraints
Perhaps the most crucial distinction between 340B savings and profits lies in how these funds can be used. Unlike corporate profits, which can be distributed to shareholders or freely reinvested at the company’s discretion, 340B savings are legally restricted to supporting mission-driven activities, such as lowering patients’ out-of-pocket prescription drug costs or supporting community health programs. This reinvestment aligns with IRS requirements for maintaining tax-exempt status. The excess cannot be distributed to private shareholders or owners, making it fundamentally different from profit in both accounting treatment and permitted uses.
In addition, covered entities face significant capital constraints that for-profit entities don’t encounter. Unable to raise capital through equity markets or by issuing stock, they instead rely primarily on tax-exempt bonds and philanthropic contributions. The process of securing tax-exempt bonds is regulated and requires demonstrating both financial stability and community benefit — requirements that don’t apply to for-profit entities.
Why savings are referred to as profits
If “profits” is technically the wrong term to describe the 340B savings, then why would PhRMA and BIO do so? For effect.
PhRMA and BIO’s persistent use of the word “profits” to describe 340B savings appears to be a deliberate communications strategy, not a simple word choice. By framing savings as profits, PhRMA and BIO suggest that covered entities are profiteering, exploiting the program for financial gain — which is at odds with PhRMA’s distorted view of the 340B program’s intent.
PhRMA and BIO’s messaging is likely designed to create skepticism about the program among policymakers and the public, potentially paving the way for restrictive policies that undermine organizations that serve vulnerable populations. Mischaracterizing 340B savings as profits helps to make the case for program restrictions or “reforms,” framing the program as a revenue-generating mechanism benefiting covered entities rather than a cost-containment strategy supporting underserved populations. Current legislative proposals and regulatory challenges to the 340B program are often based on a misunderstanding or misrepresentation of the program and its benefits.
PhRMA and BIO’s narrative also shifts attention away from drug pricing itself — suggesting that the problem lies with how disproportionate share hospitals and other safety-net providers use the program savings rather than the high cost of pharmaceuticals that makes such discounts necessary in the first place.
PhRMA and BIO’s word choice is just that, a choice. And that choice may help to advance their advocacy goals. Understanding this messaging strategy is crucial for policymakers and health care advocates. By recognizing the deliberate nature of this terminology, they can better evaluate claims about the program and focus on its actual impact on health care access and community health.
Oversight of the 340B program should indeed be strengthened. But when making health policy changes, evidence should be at play, not politically motivated wordplay.
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