How Federal Drug Discounts for the Poor Are Enriching What Clients Call a 'Slumlord'
This June, a bipartisan group of Senators established a working group to reform a program requiring drug manufacturers who participate in Medicaid to provide certain non-profit healthcare providers, hospitals, and clinics up to a 90 percent discount on outpatient drugs. In recent years, participation in the program, known as 340B, has surged because it allows pharmacy to buy drugs through the 340B program at a discount and then charge health plans and consumers the retail price for their medicines. From 2017 to 2021 340B discounted purchases more than doubled from $19.3 billion to $44.2 billion.
The working group wants to ensure the 340B program is focused on the original intent of making medicines affordable to poor patients and allowing program participants to invest in delivering “comprehensive services to eligible patients and their communities.”
At the heart of the working group’s concern is the lack of transparent information to determine whether 340B healthcare providers’ savings are used to support services that benefit patients’ health.
Recently, the AIDS HealthCare Foundation, which participates in 340B, assured the Senators that
Contrary to claims made by 340B critics, we are not sitting on record-breaking profits. Unlike drug companies, we are not focused on turning a buck.
This is pretty remarkable since AHF’s gross profits from the 340B program were bigger than those generated by contract pharmacies such as CVS Health, Walgreens, Cigna (via Express Scripts), UnitedHealth Group (via OptumRx), and Walmart These contract pharmacy operators’ total estimated gross profits from the 340B program were nearly $3 billion in 2023. AHF generated almost $700 million in gross profits on pharmacy revenues of $1.6 billion.
AHF claims it is using the money to stretch federal resources and provide the poor with access to low-cost medicines.
Yet private insurers account for about 71% of AHF’s consolidated net patient service revenue in 2021. These plans reimburse the group the retail price for medicines that AHF buys at the 340B rate. As Adam Fein wrote: “Insured patients could pay thousands of dollars out of pocket—even as the 340B hospital and its contract pharmacy generate substantial profits.”
The 340B discounts are also designed to ensure that programs serving low-income customers arcannvest program dollars in medical services. AHF states th“s the largest HIV care provider in the country (it) has relied on 340B to expand geographically and programmatically.”
AHF’s expenditures on charity care grew from $45 million to $81 million between 2016 and 2021. Meanwhile, the amount AHF spends on medical services has declined from $191 million to $177 million.
Over the same period, the organization’s investment portfolio has surged from $75 million to $145 million, while real estate holdings grew $65 million to over $300 million.
Through the Healthy Housing Foundation, AHF has acquired and operates “more than 1,850 housing units, with hundreds more in the pipeline.” The organization sponsored an “enchanting Wizard of Oz-themed float in this year’s Los Angeles Rose Parade to spotlight its ‘Healthy Housing Foundation efforts to house homeless and extremely low-income individuals throughout Southern California and across the U.S.”
But Holly Stevens, a resident of one of AHF’s apartments, feels that the group’s housing is more “some kind of old horror movie,” She feels constantly on edge, hearing neighbors scream at all hours, creating an unsettling environment that makes it hard to be home. “I can’t even explain it… “It definitely does something to your mind.”
In 2018, after a blind tenant fell more than 12 feet down the open shaft, the elevator was out of service for seven months, according to Los Angeles city records and court testimony. It reopened but soon failed again, remaining broken for the better part of a year. Large-scale repairs started only after building inspectors threatened to turn the case over to the city attorney’s office for a criminal investigation.
In 2020, AHF was sued by tenants of one property called the Madison. In a lawsuit,the tenants stated that “the AIDS Healthcare Foundation is just The Madison’s newest slumlord in a long line of slumlords.”
These problems have persisted in other AHF properties. According to an investigation of the AHF properties by Knock LA, “more than a quarter of the city’s 912 inspection records noting violations in five AHF residential buildings between mid-2018 and mid-2022 were classified as “high” in severity, and another 65 were considered “medium. Analysis of 911 call data from 2098 calls placed between 2019-2022 from five AHF-owned buildings identified:
650 disputes and disturbances in the buildings, including 15 reports of weapons
218 complaints about prowlers
193 alleged batteries
174 suspected assaults with a deadly weapon
167 burglaries, thefts, and robberies
30 requests for an ambulance, including four calls related to “possible death investigations.”
Meanwhile, a 2022 audit by the California Department of Health and Community Services of its medical services control with AHF found the organization deficient in several quality performance measures. That included failing to conduct preliminary investigations of all suspected fraud and abuse cases to DHCS within the required timeframe. Additionally, AHF failed to ensure that 27 NEMT and two NMT providers in its network were enrolled in the Medi-Cal Program or had emergency approval from the DHCS Provider Enrollment Division.
The contract required AHF to have policies and procedures for members requiring alcohol or substance abuse treatment services. AHF told the state that it outsourced that responsibility to Magellan, a provider of mental health treatment services. AHF and Magellan acknowledged no Substance Use Disorder (SUD) and alcohol misuse policies and procedures.
Like any 340B provider, AHF provides valuable services to many HIV-positive patients nationwide. However, to ensure that the program's primary mission of providing people without drug coverage access to medicines bipartisan group should review AHF’s conduct to determine if the 340B program in general needs stricter limits on drug discounts.
At present, the money is being used for many other purposes. AHF has used the spread between retail and 304B prices to become a slumlord while enlarging its investment and real estate holdings. And just last month, AHF “purchased a majority stake in Crate Modular, a leading producer of prefab modular multifamily, supportive housing and educational buildings.” Perhaps Congress should ask AHF — like the Wizard of Oz — to reveal what is hiding behind its curtain.