Modernizing the FDA and Addressing 340B’s Costly Incentives

This week’s newsletter highlights two new reports: a bipartisan roadmap for modernizing the Food and Drug Administration and a new report from the Department of Health and Human Services (HHS) exposing the costly incentives embedded in the 340B Drug Pricing Program.

Registration is also open for two events happening today:

1. Paragon’s virtual discussion on why private plans work better in Medicare than in Medicaid at 2 p.m. EDT.
2. A Bipartisan Policy Center discussion on FDA reform featuring Paragon’s Ryan Long at 1 p.m. EDT.

I will also participate in an event on Medicaid provider tax reform at HHS’s Humphrey Building on October 20 at 10 a.m. EDT.

Roadmap for FDA Modernization: 12 Bipartisan Ideas to Help Patients and Strengthen American Leadership

Last Thursday, Paragon’s Ryan Long and Rohini Kosoglu of the Stanford Mussallem Center for Biodesign released Roadmap for FDA Modernization: 12 Bipartisan Ideas to Help Patients and Strengthen American Leadership. The paper presents 12 reforms designed to speed patient access to new treatments, modernize the FDA’s regulatory tools, reduce inefficiencies that raise development costs, and reestablish the United States as the place to conduct early-stage clinical trials.

Bringing Early-Stage Clinical Trials Back to the United States

Early-stage clinical research is shifting away from the United States. China registered more than 7,100 clinical trials in 2024, compared with approximately 6,000 in the United States.

Australia’s notification system allows trials to begin in six to 12 weeks, while approvals by FDA and institutional review boards in the United States routinely add three to six months. To address this, the paper proposes a voluntary Clinical Trial Notification Pathway for lower-risk Phase 1 trials, modeled on Australia’s system. FDA-certified review boards would conduct reviews, and sponsors would notify the FDA rather than await its approval. The FDA would retain authority to place clinical holds when warranted.

The paper also calls for clearer Phase 1 manufacturing guidance specifying the testing required before a treatment can first be administered to humans and identifying requirements that need not be met at this early stage. It recommends separate Phase 1 manufacturing guidance for cell and gene therapies and a statutory pathway allowing a developer, with the owner’s consent, to reference another company’s validated platform manufacturing data, as small-molecule developers can through drug master files. Together, these reforms would reduce the cost and time required to initiate clinical trials domestically.

Modernizing Evidence Requirements

A second set of reforms focuses on modernizing evidence generation to keep pace with advances in science. As the FDA moves toward treating one pivotal trial plus confirmatory evidence as its default approval standard, the paper recommends a formal process for qualifying new approach methodologies—laboratory and computer-based methods that model human biology—as confirmatory evidence, with published thresholds and predictable timelines. These methodologies could include artificial intelligence and other technologies that help evaluate treatments more efficiently.

For diseases where scientific understanding is evolving, the paper proposes a process for the FDA to weigh external developments that emerge during multiyear trials, such as a newly validated biomarker. The paper also proposes to extend the FDA’s drug development tool qualification process to natural history datasets—which document how diseases progress without an experimental treatment—allowing one qualified dataset to serve as an external control for multiple treatment programs targeting the same rare disease. Patient organizations and academic consortia could seek FDA qualification before any company enters the field, and datasets would be requalified periodically to reflect changes in the standard of care.

Accelerating Treatments for Rare Diseases

FDA regulations have historically been designed for diseases affecting larger patient populations, but greater flexibility is needed for rare diseases and genetic variants affecting individual patients. For therapies designed for a single patient’s genetic variant, the paper proposes that the FDA accredit qualified centers to make individualized adjustments to a platform-based therapy without repeating the full investigational new drug process for each patient.

A proposed new cross-program learning mechanism would allow patient groups, research consortia, and coalitions of companies to request a nonbinding FDA bulletin, issued within a set period such as 120 days, on recurring technical or safety problems.

Making FDA Reviews More Predictable and Efficient

The paper also proposes reforms to improve review predictability and efficiency. The authors propose making rolling review, currently available for fast-track and breakthrough products, an elective option for any sponsor that commits to a submission schedule. This change could reduce multi-cycle reviews that delay patient access to new treatments. The paper also recommends reforming the FDA’s complete response letter process to prevent successive rejections over issues that could have been identified during an earlier review. The paper also proposes authorizing reciprocal recognition agreements under which the FDA could rely on peer regulators’ completed reviews of internationally harmonized sections, such as nonclinical pharmacology and toxicology, while retaining sole authority over safety and efficacy determinations. These agreements already exist for facility inspections and could reduce redundant reviews.

Finally, the paper recommends making the Rare Pediatric Disease Priority Review Voucher program permanent, providing greater predictability for developers pursuing treatments for children with rare and serious diseases.

Congress will consider reauthorization of the prescription drug and medical device user fee programs next year. Reauthorization has long provided opportunities to improve FDA policies; the Pediatric Priority Review Voucher program, for example, was enacted alongside the 2012 reauthorization. The paper’s 12 proposals offer a bipartisan opportunity to strengthen American leadership in biopharmaceutical innovation and deliver lifesaving therapies to patients faster while preserving the FDA’s clinical hold, inspection, and enforcement authority and the evidentiary standard for approval.

New HHS Report Exposes 340B’s Misaligned Incentives and Rising Costs

A new report from HHS’s Office of the Assistant Secretary for Planning and Evaluation (ASPE), Mission vs. Margin: Misaligned Incentives in the 340B Drug Pricing Program, documents how a program intended to help safety-net hospitals has produced large financial incentives for hospital consolidation, more expensive drugs, and higher health care spending.

Under 340B, eligible hospitals purchase drugs at steep discounts but generally receive reimbursement rates as if they purchased drugs at customary rates. Hospitals retain the difference, or spread, between their acquisition costs and reimbursement. Because the spread can increase with drug prices, hospitals have financial incentives to administer more expensive medications and acquire physician practices and infusion clinics to capture additional 340B revenue.

The program has grown dramatically. The value of drugs purchased through 340B at discounted prices increased from $12 billion in 2015 to $100 billion in 2025. Hospital off-campus 340B clinic sites expanded from approximately 7,000 in 2013 to more than 34,000 in 2023. Contract pharmacies—outside pharmacies that dispense 340B drugs on behalf of eligible hospitals and other providers—grew from roughly 1,300 in 2010 to more than 31,000 by mid-2026. Many hospital-affiliated outpatient sites operate in wealthier, better-insured communities rather than the underserved areas the program was intended to help.

To address the perverse incentives in Medicare, the first Trump administration reduced payments for affected 340B drugs from average sales price (ASP) plus 6 percent to ASP minus 22.5 percent in a 2018 rule. The Supreme Court invalidated that policy because HHS had not conducted a statutorily required acquisition-cost survey.

CMS has now conducted the required survey and proposed paying affected hospitals ASP minus 33.4 percent beginning in 2027. CMS estimates the change would reduce Medicare drug payments by $4.55 billion and beneficiary cost sharing by $1.15 billion in its first year.

In an October 8 STAT op-ed, HHS Chief Economist and Chief Regulatory Officer Casey Mulligan explains that some Medicare beneficiaries owe more in coinsurance than hospitals paid to acquire their drugs. For a drug with a $1,000 ASP, beneficiary coinsurance would fall from $212 to $133.20 under the proposed reform. Hospitals would retain their 340B purchasing discounts, while Medicare payments would more closely reflect acquisition costs, reducing costs for beneficiaries and weakening incentives that contribute to higher drug spending and hospital consolidation.