Nonprofits lobby for exemption from HHS fraud-prevention program

Nonprofit healthcare centers are lobbying for a special exemption from a new Health and Human Services reimbursement review system intended to prevent fraud in a federal safety net program that has been highly lucrative for hospitals classified as charitable care providers.

The carveout would exempt nonprofit groups known as federally qualified health centers from paying the full wholesale acquisition cost of drugs upfront under the Trump administration’s newly proposed 340B rebate model.

Section 340B of the Public Health Service Act currently allows certain medical providers to purchase drugs at steep, federally mandated discounts from pharmaceutical manufacturers and then reinvest those savings into other patient care services.

Established by Congress in 1992, the drug discount program is supposed to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” But conservative critics pushing for the program’s reform say that some FQHCs are either spending 340B proceeds on expenses entirely unrelated to medical care, such as political lobbying, or are using their generated savings to subsidize nonessential services, such as transgender procedures.

FQHCs, whose revenues are boosted significantly by 340B billing, have pushed back against the reform efforts.

The National Association of Community Health Centers has galvanized thousands of FQHCs, called “community health centers,” from across the country, warning them that the rebate payment model would fundamentally change how and when they can access 340B savings.

According to its proponents, the rebate model is meant to root out fraud and abuse in the drug discount program by establishing a regulatory framework that requires 340B-covered entities to verify drug-discount claims as legitimate before they can recoup acquisition costs. FQHCs, meanwhile, are bemoaning that they would have to submit “extensive” claims data and subsequently wait for drugmakers to issue rebates.

To date, NACHC’s members have sent more than 35,000 emails demanding that the U.S. Health Resources and Services Administration’s Pharmacy Affairs Office, the division within HHS that administers 340B, drop the rebate requirements altogether or at least exclude so-called community health centers from the pilot program. In their demands, they argue that the pending payout changes would jeopardize healthcare nonprofit groups’ ability to offer affordable medication for millions of disadvantaged Americans and create “cash flow crises by forcing [FQHCs] to pay high upfront costs they cannot afford.”

Federal spending hawks critical of FQHCs, which are tax-exempt hospitals or healthcare clinics specifically designed to serve low-income patients, say they have exploited the 340B program to turn a profit, pointing to ballooning net revenues and fraud risks indicated in their own auditor reports.

For instance, an independent auditor for Sea Mar Community Health Center in Seattle flagged discrepancies in how it applies the federally set sliding fee scale, which charges prescription fees based on a patient’s income and household size.

“Certain patients may have been billed amounts in excess of and less than the amounts defined by the sliding fee discount schedule,” the auditing firm found in 2024. “We recommend that further processes and training be put in place to ensure that the sliding fee scale is accurately applied to all qualifying program participants and applicable documentation is retained.”

Sea Mar concurred with the auditor’s finding and promised to follow its corrective action plan. That same year, Sea Mar’s CEO took home more than $1.5 million, tax filings show, as its 340B-derived earnings grew from $35.9 million to $50.9 million between 2023 and 2024.

Altamed Health Services, a 340B participant providing “culturally sensitive” care to underserved communities in California and the country’s largest FQHC, amasses an average of $1.5 billion in total yearly revenue. It reportedly spent over $1 million on international art acquisitions while providing only $12.8 million in charity care, the bulk of which was subsidized by outside gifts and grants.

Also in California, United Health Centers of the San Joaquin Valley’s 340B business surged from $9.5 million in net pharmacy revenue in 2021 to nearly $24 million in 2024, an annual growth pace of roughly 33%. Over that same period, its charity care spending fell every single year. 

Those seeking to rein in the 340B industry suspect that providers are marking up drugs that they bought at a deep discount and charging patients full price to fill their prescriptions, unbeknownst to the beneficiaries. The difference is allegedly pocketed and spent elsewhere, rather than serving the patients for whom 340B was built. Structured as an accountability tool to keep providers in check, the post-sale rebate model makes covered entities purchase drugs at market price and receive the rebated discount after their claims are approved.

The rebate model was scheduled to roll out on Jan. 1, but its launch is delayed due to litigation brought by the American Hospital Association on behalf of hospitals participating in the 340B program.

AHA’s complaint, requesting a federal court to declare the rebate model unlawful, argues that switching to a refund system would “drain 340B hospitals of huge sums of money through payments to drug companies” as well as impose “vast administrative costs to submit, track, recover, and potentially dispute the rebates.”