Subsidizing Consolidation? Unintended Consequences of a Federal Drug Discount Program∗

Many salient profit incentives that health care providers face stem from government policies. We investigate hospital response to the 340B Drug Discount Program, a federal policy that substantially increases profitability of drug administration for about 45% of hospitals by entitling them to discounts of between 20% and 50% on drugs. Our primary empirical strategy is a fuzzy regression discontinuity design that exploits a cutoff for hospital eligibility to identify exogenous variation in hospitals’ 340B participation. Using a novel measure of hospital-physician consolidation, we find that 340B hospitals increasingly consolidate with physician practices and increase drug administration per patient in drug-intensive specialties such as oncology. Despite the program’s intention that 340B hospitals use savings from drug discounts to subsidize care for low-income and uninsured populations, we do not find evidence that they do so. Our findings contribute to evidence that profit incentives embedded in government policies are significant drivers of market structure and service provision in the health care delivery system. Moreover, policies aimed at encouraging providers to treat low-income and uninsured populations should use more targeted mechanisms to minimize distortion of incentives.