Sometimes it is hard for hospitals to provide expensive care to poor patients. When a low-income patient needs $20,000 of chemotherapy, a hospital loses money if that patient cannot pay for the medicine, or pays through Medicaid, with its relatively stingy reimbursement. Fortunately, the federal government created a program for hospitals that care for a disproportionate share of low-income patients, whereby they can purchase those medicines at a discount. The program is called the 340B Drug Pricing Program and, unfortunately, hospitals are taking advantage of the program, leaving taxpayers on the hook.

Here’s how the program works. Under 340B, if more than 11.75% of a hospital’s patients are low-income, the hospital can purchase the medicines at a steep discount. When, subsequently, the hospital doesn’t get paid for the medications – say, in the case of an uninsured patient with acute leukemia – the discounts reduce the hospital’s losses. In other cases, when the hospital cares for Medicaid recipients (a program that often doesn’t cover hospital costs adequately), the discounts once again reduce their losses.

Here’s how the program fails. When the hospital treats a Medicare enrollee, it will typically receive a payment that is significantly greater than its costs. In those circumstances, the hospital will have bought the medicine at a discount while selling it at full price.

Hospitals that qualify for the 340B program can make lots of money giving medications if they can muster enough paying patients.

A study in the New England Journal of Medicine looked at hospitals that qualified for 340B payments and compared them to hospitals that didn’t quite qualify. The study found that 340B hospitals had a larger number of oncologists on staff, 2 to 3 times as many than non-340B hospitals in fact, thereby enabling them to infuse profitable IV chemotherapy into a larger number of patients. Here is a picture of that finding. On the left side, it shows hospitals that didn’t qualify for 340B discounts; note that all have disproportionate share (DSH) less than 11.75%. On the right, it shows hospitals that did receive discounts because more than 11.75% of their patients were low income. Note that as we move from left to right, there is a sudden and dramatic change in the number of hematology and oncology specialists employed by hospitals, a sharp increase right as we cross the 11.75% line:

340B Program–Related Discontinuities in Hospital Ownership of Physician Practices and Part B Drug Administration per Year, According to Specialty

The same discontinuity six held for ophthalmologists, but not rheumatologists:

340B Program–Related Discontinuities in Hospital Ownership of Physician Practices and Part B Drug Administration per Year, According to Specialty

What’s happening here? As soon as hospitals qualify for the 340B program, they appear to seek out subspecialists who prescribe expensive medication to their patients, knowing they can buy medications at discount for these physicians and charge full price to enough patients to more than cover the cost of purchasing all those physician practices.

What should we do to reform the program? First and foremost, we shouldn’t make overnight changes. Hospitals have become so used to 340B revenue – have sometimes in fact reorganized their businesses to maximize 340B funds – that efforts to scale back the program have been met with fierce resistance. We should stick with plans to reform the program, but over a long enough period of time that hospitals won’t experience immediate and drastic funding cuts. We need to help hospitals in their efforts to provide expensive care to low-income patients. But we shouldn’t give them an incentive, in the process, that allows them to enrich themselves at the expense of the nation’s Medicare program.

Peter Ubel is a physician and behavioral scientist who blogs at his self-titled site, Peter Ubel and can be reached on Twitter @PeterUbel. He is the author of Critical Decisions: How You and Your Doctor Can Make the Right Medical Choices Together. This article originally appeared in Forbes.

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