Walgreens, CVS are Running a Vastly Profitable 'Welfare Queen' Scam

Maybe you saw the 60 Minutes special about how Social Security disability payment fraud is so rampant in some Appalachian towns, there’s a traffic jam every month on the days the checks come out.

Or perhaps you recall Linda Taylor, the fur coat-toting con artist who used 80 names, 31 addresses, 25 phone numbers, and 30 wigs in the 1970s to build a sizable fortune from illicit government aid payments, dubbed the “Welfare Queen” by the Chicago Tribune and made infamous by Ronald Reagan.

It’s human nature: as long as the government has been sending checks to people, it’s had to contend with a large number of fraudulent claims to that money.

But while “Taylor’s” take was as high as $1 million, big chain pharmacies are running their own scam that makes a million bucks look like chump change.

Since Obamacare was enacted in 2010, the number of pharmacies participating in a little-known government program called “340B” has skyrocketed.

Prior to Obamacare, about 3,000 pharmacy locations participated in the program. This year, according to new data from a highly regarded consulting firm, the number is nearly 18,000 – a 600 percent increase. That’s significantly more locations than the number of McDonald’s restaurants in the U.S. (about 14,000). Roughly a third of those are Walgreens, with other big name chains composing another third (CVS, Walmart, Rite Aid) and smaller stores making up the last slice.

What’s behind this flurry of economic activity? 340B entitles certain hospitals to buy drugs at a steeply discounted prices. Drug manufacturers are required to participate if they want their drugs to be eligible for Medicaid, one of the largest purchasers of drugs in the country.

The program is supposed to help low-income patients, especially those without health insurance, so eligibility for the program is limited by a byzantine system designed to assess how many poor, especially uninsured, patients a hospital serves.

As far as the patients, anyone who receives care from an eligible hospital can “get” the discounts. But there’s a catch. Just because the hospital gets to buy the drug on the cheap doesn’t mean they have to pass the savings on to the patients.

You can see where this is going. The hospital buys the drugs at the discounted price and “sells” it to the patient at the normal price, securing a tidy profit in the process.

While most drugs are covered by insurance, the people paying out of pocket are, given the original intent of the program, are of particular concern. But a large majority of hospitals charge uninsured patients the full price, even when they get the discount, which Dr. Adam J. Fein, the president of Pembroke Consulting and expert on the program, dubbed a “soak-the-poor strategy.”

The money at stake is astronomical. Duke University Hospital, for example, in 2012 disclosed $292 million in profits over five years from its participation in the program. Although technically a “non-profit,” the hospital takes in roughly $300 million more in revenue every year than it spends and paid its CEO, Victor Dzau, a very for-profit salary of $2.8 million in 2014, according to tax forms.

The 340B program is now estimated to compose 4 percent of the U.S. drug market, double its 2 percent, pre-Obamacare share. The U.S. drug market is estimated at approximately $450 billion. Four percent of that is $18 billion, so this special price-control welfare is netting the recipients thousands of times the amount Taylor, America’s most notorious welfare fraud, got.

The big change in Obamacare was, it made it vastly easier for pharmacies to participate in the program on behalf of a sponsor hospital that is eligible for the program.

The process actually takes place after the prescriptions have already been filled and paid for, when the pharmacies and hospitals match up their records to find any crossovers. Then the hospital files a claim to the drug companies for the discounts and pays a healthy fee to the pharmacy. The patient is none the wiser.

The new data shows there are now 5,649 hospitals (and smaller clinics, etc.) eligible for 340B cash and they have over 40,000 contracts with pharmacies, meaning most of the 18,000 locations are matching up records with more than one hospital.

Despite netting hospitals and chain pharmacies billions of dollars in profit that does literally nothing to help patients every year, there’s almost no transparency or accountability for how 340B operates. The standards are loosey-goosey, oversight scarce.

It’s no wonder it’s sparked a pharmacy gold rush. Taylor, wherever she is, would be proud.