A Backgrounder: The 340B Drug Program in 2024

The 340B Drug Pricing Program was enacted by Congress in 1992[i]and has become the second largest federally sponsored drug program in the U.S. only surpassed by Medicare Part D.[ii] The program requires pharmaceutical manufacturers to provide outpatient drugs at significantly discounted prices to eligible health care organizations, which are known as covered entities (CEs). The original intent of the program was to expand services to low-income patients by stretching scare federal resources and by creating a new revenue stream for safety-net health providers, allowing them to expand services and service a greater volume of patients. Revenues for CEs are generated when insurance reimbursements exceed 340B acquisition costs.

Passed after the enactment of the Medicaid Drug Rebate Program the 340B program ensured “safety net providers” were provided discounts on outpatient drugs comparable to those made available to state Medicaid agencies.[iii] As a condition of participating in the Medicaid Drug Rebate Program (MDRP) and Medicare Part B, drug manufacturers are required to participate in 340B. The 340B program was designed so that covered entities would “pass all or a significant part of the discount to their patients.[iv]

As the program enters its 32^nd year, it faces new challenges due to its rapid expansion since its inception.

Structure of the Program

340B Providers/Covered Entities (CE). Hospitals qualify for the 340B program if they are non-profit or government owned and serve a large share of low-income patients, such as Disproportionate Share Hospitals, children’s hospitals, sole community hospitals, and rural referral centers. Federal grantees, such as federally qualified health centers (FQHC) and Ryan White HIV/AIDS clinics, also qualify for the program. To qualify, hospitals must have a disproportionate share (DSH) percentage that is greater than 11.75%. (>8% for rural referral centers and community hospitals). DSH refers to the share of total patient volume that is covered either by Medicaid or Medicare and receiving supplemental security income (SSI).[i]^,[ii]. The program was amended by the Patient Protection and Affordable Care Act (PPACA)[iii], which Congress passed in March 2010, allowing new categories of covered entities to be added.

Patient Eligibility. Covered entities are permitted to use drugs purchased at the 340B price for all individuals who meet the definition of a patient whether or not they are low income, uninsured, or underinsured.[iv] The 340B statute requires only that the individual be a patient of the covered entity. The Health Resources & Services Administration (HRSA), the 340B administrator, stated in 1996[v] that the criteria for patient eligibility included patients with an established relationship with the CE such that the CE maintained the individual’s health care records; the patient received health care services from a health care professional who was either employed by the CE or under a contractual arrangement with the CE; and the individual received services from the CE that were consistent with the range of service for which grant funding has been provided. According to HRSA guidance, “An individual is not considered a patient if the only health care service received from the covered entity is the dispensing of a drug or drugs for subsequent self-administration or administration in the home setting.”[vi] Covered entities are prohibited from diverting any drug purchased at a 340B price to an individual who does not meet HRSA’s current definition of a patient.

Recently, the decision of a federal judge in Genesis Health Care, Inc. v. Becerra, upheld the Federally Qualified Health Care Center (FQHC) position that the HRSA language does not align with the plain language of the law.[vii] This case sets a legal precedent for how broadly the 340B patient definition may be interpreted moving forward.

Drug Pricing Mechanism. The 340B drug pricing mechanism is central to the program's functioning. For each drug, there is a statutorily defined uniform ceiling price setting a cap on the price manufacturers can charge covered entities. These discounts are substantial; according to anecdotal evidence they typically range from 20% to 50% less than the Average Manufacturer Price (AMP). The ceiling price for each drug is the AMP from the preceding calendar quarter that was reported to the Centers for Medicare and Medicaid Services (CMS), reduced by a unit rebate amount.[viii] The covered entities received the largest discount of any purchaser giving them most favored nation status.[ix]

Contract Pharmacies (CP). In order to take advantage of the program, hospitals must sell self-administered drugs to patients either at their facilities or through contract pharmacies. Contract pharmacies partner with hospitals to dispense drugs purchased through the 340B program. Before 2010, 340B providers were limited to working with an in-house pharmacy. Because fewer than 5% of covered entities used in-house pharmacies at that time, in 2010, HRSA, issued guidance allowing 340B hospitals to use an unlimited number of contract pharmacies.[x]

Eligible Drugs. With a few exceptions, covered entities can purchase nearly all self- or physician-administered drugs dispensed in the outpatient setting at the 340B discounted price. Vaccines and orphan drugs are not eligible. Additionally, drugs purchased by hospitals through group purchasing organizations are excluded from receiving 340B discounts.[xi]

Trends, Challenges and Controversies

As the 340B program has grown substantially over the years, its trend lines have sparked debates that threaten its effectiveness and sustainability.

• Rapid expansion in sites. Between 2000 and 2020, the number of covered entity sites participating in the 340B program increased from 8,100 to 50,000. In 2020, hospitals comprised just over 60% of sites.[xii] Critics argue that some participating entities are using the program to generate profits rather than expanding care for underserved populations. A 2022 New York Times investigation into the 340B program management at the Bon Secours Mercy Health system found that the health system used 340B program savings from a poor Richmond neighborhood to fuel expansion into more affluent areas.[xiii]
• Rapid expansion in contract pharmacies. The number of retail pharmacies working as contract pharmacies for 340B providers has grown from fewer than 5,000 in 2010 to 33,000 in 2024.[xiv] Of contract pharmacy arrangements, 46% are now with pharmacies that are associated with one of the three largest PBMs and contracts have increased by 8000%.[xv]
• Increase in discounted sales, gross profits. The estimated discounted purchases through the program have increased from about $4 billion per year in 2007-2009 to $54 billion in 2022, 7% of the total U.S drug market.[xvi] $13 billion in estimated gross profits was generated by 340B covered entities and their contract pharmacies on 340B retail medicines in 2018 alone.[xvii]
• Limited discounts to patients. In a 2018 study, the GAO found that 33% of federal grantees and 57% of hospitals sampled did not provide discounts to low-income, uninsured patients.[xviii] In a 2022 study[xix], IQVIA found discount sharing was evident in only 1.4% of branded, 340B-eligible claims at contract pharmacies that used a 340B discount card. A 2022 report by the Alliance for Integrity and Reform of 340B found that charity care spending for nearly two-thirds of 340B hospitals was less than the national average for similar hospitals.[xx]
• Limited Oversight. The 340B program faces ongoing controversy in other areas as well, including limited program oversight and transparency in how covered entities use funds generated by the program. For example, the Government Accountability Office (GAO) found inadequate reasonable assurance that participating nongovernmental hospitals met eligibility requirements or have contracted to serve low-income patients.[xxi]^,[xxii] The Office of the Inspector General (OIG)[xxiii] recommended improved oversight to ensure that the program is operating as intended.
• Drug Diversion. While the full extent of drug diversion in the 340B program is unknown, across the 1,242 audits conducted between 2012 and September 2020, HRSA reported 546 diversion-related findings.[xxiv] Participating hospitals are required to prevent drug diversion to ineligible patients and ensure that drugs are not resold.

Stakeholder Policy Positions

Pharmaceutical Companies. Pharmaceutical companies depend on revenues to finance innovation to address high unmet needs in all patient populations. They point to the lack of 340B program transparency in the service of low income and vulnerable patients and the dearth of evidence of improved health outcomes generated by the program. Since 2020, at least twelve pharmaceutical firms have announced that they would no longer provide 340B-discounted products to contract pharmacies, leading to litigation between the government and drugmakers.[xxv]^,[xxvi] Pharmaceutical companies have also advocated for controls on the number of contract pharmacies; transparency on use of hospital revenues derived from the program; ensuring benefits reach low-income patients and for patient eligibility; and confirming true safety net participation of hospitals in charity care, calling out the debt collection practices of hospitals.[xxvii]

Lawsuits have been part of key pharmaceutical company 340B reform strategy. In response to lawsuits filed by 3 pharmaceutical companies, in 2023, a federal appeals court ruled drug companies have the right to limit discounts to hospitals that rely on numerous contract pharmacies participating in a U.S. government drug discount program.[xxviii] A recent federal appeals court win involving manufacturer restrictions on contract pharmacies may have encouraged a new change in rebate policies by one large company to shift to back-end rebate payment from up front discounts.[xxix]

American Hospital Association (AHA). The AHA seeks to protect the 340B program for all providers and ensure that the program continues to help providers stretch their limited resources and offer more comprehensive services to more patients. The AHA also advocates that the Department of Health and Human Services (HHS) remedy all affected hospitals for the unlawful Medicare payment cuts and expands drug manufacturer transparency. They work to “thwart drug manufacturers’ efforts to unilaterally and unlawfully change the 340B program.” They support eliminating the orphan drug exclusion for certain 340B hospitals and oppose efforts to scale back, significantly reduce the benefits of, or expand the regulatory burden of the 340B program, including proposals to dramatically expand reporting requirements on certain 340B hospitals and impose a moratorium on new entrants into the program. They support expanding the program to reach additional vulnerable communities, including investor-owned hospitals that provide care for underserved populations. Additionally, they support program integrity efforts that are equitable and accountable for both providers and drug companies to ensure adherence to the program’s rules and regulations.^[xxx]

Impact on Pharmacy Practice. The impact of the challenges and potential reforms described in the previous sections extend beyond policy considerations to directly affect pharmacy practice, however, “Pharmacies, particularly those serving as contract pharmacies for 340B entities, face increased administrative burdens in tracking 340B eligibility and managing multiple inventories. Impending legislation could potentially make this problem worse if not correctly implemented. The uncertainty surrounding the program's future may impact long-term planning and resource allocation for many pharmacies who have not only supported the program over the years but possibly relied on it.”[xxxi]

The Future of the 340B Program

Because of the challenges described in this paper, stakeholders are exploring several potential paths forward for the 340B program. Legislative reform is being pursued; three significant pieces of legislation that are currently being lobbied are:

• The 340B Accountability and Compliance Criteria Enforcement Safeguards and Safety (ACCESS) Act[xxxii] (U.S. Representatives Larry Buschon, M.D. (R-IN-08), Buddy Carter (R-GA-01), and Diana Harshbarger (R-TN-01). The 340B ACCESS Act aims to

• • Make 340B a true safety-net program for patients.
  • Ensure 340B prescriptions are offered to patients at a discount.
  • Update the 340B patient definition with strong safeguards. 
  • Establish clear criteria for 340B contract pharmacy arrangements to improve access.
  • Prevent middlemen and for-profit entities from profiting off the 340B program.
  • Update and strengthen 340B hospital eligibility requirements.
  • Address standards for 340B child sites and subgrantee eligibility. 
  • Create a neutral 340B claims data clearinghouse.
  • Facilitate public reporting on 340B program data.
  • Establish enforceable rules and enhance federal administration and oversight of the 340B program.
• The 340B Saving Underserved Communities, Clinics, and Essential Services for Safety Nets (SUCCESS) Act[xxxiii]. The 340B SUCCESS Act seeks to protect and expand the program, particularly in relation to contract pharmacy arrangements. (U.S. Senators John Thune (R-SD.), Debbie Stabenow (D-MI), Shelley Moore Capito (R-WVA), Tammy Baldwin (D-WI), Jerry Moran (R-KS), and Ben Cardin (D-MD). The SUCCESS Act aims to:
  • Codify unlimited contract pharmacies (CPs) in the 340B statute and prohibits manufacturers from placing restrictions on the provision of 340B discounted drugs.
  • Require covered entities to extend current financial assistance policies to patients served by child sites and make such policies transparent at the point of care and “publicly reported.”
  • Require GAO to conduct a study and report to Congress on the impact of financial assistance.
  • Create a national third-party claims data clearinghouse to prevent diversion and duplication of discounts.
  • Require that child sites be wholly owned and clinically and financially integrated with the CE.
  • Goals specified in Senator Thune’s press release are:
• Ensuring that safety-net providers continue to receive drug discounts to help underserved populations.
• Helping hospitals and clinics that provide essential healthcare services to low-income, rural, and uninsured patients.
• Implementing measures to improve accountability and transparency in how the 340B savings are used by providers, ensuring that the benefits of the program directly support patient care.
• Safeguarding the financial viability of hospitals and clinics that rely on the 340B program while reinforcing the program's mission to reduce healthcare costs for the most vulnerable populations.
• The 340B PATIENTS Act[xxxiv]. The 340B PATIENTS Act would “protect and strengthen the 340B program by codifying 340B providers’ ability to use contract pharmacies to dispense 340B discounted drugs.” (U.S Representative Doris Matsui (D-CA))
• Codifies unlimited CP in the 340B statute and prohibits manufacturers from placing restrictions on the provision of 340B discounted drugs.

Additional Concerns - IRA and 340B Duplicate Discounts

Looking ahead, The Inflation Reduction Act further expands the opportunity for price arbitrage in the 340B program. Starting in 2026, directed by the Inflation Reduction Act, the government will set the price for ten drugs in Medicare, and those prices will be available to 340B facilities. The drug company must provide the lower of the two discounted prices, 340B or Inflation Reduction Act Maximum Fair Price. The federal government has said the hospitals should not get both discounts but has explicitly said they won’t take responsibility for ensuring they don’t happen or provide a mechanism for dispute, even though there are electronic record systems in place that could reduce the risk of illegal duplication[xxxv].

If the person being seen by an affiliated physician has insurance through Medicaid, which is for low-income people, the facility is not supposed to get charged by the drug company for the Medicaid discount for a drug they already received at a discounted price. However, the government knows that duplicate discounts happen with Medicaid already based on existing audits, and has still elected to expand the opportunity for this illegal practice with the Inflation Reduction Act.[xxxvi]

The resolution of the 340B program's challenges will likely require compromise among various stakeholders. Future solutions may involve finding middle ground between manufacturers, covered entities, and policymakers to ensure program sustainability.