340B Program, Explained: How Manufacturers Should Respond

The 340B program is a critical provision for the pharmaceutical industry, one that has now shaped how drugs are priced, accessed, and reimbursed for decades. Originally designed to help safety-net providers stretch limited resources, it now plays an increasingly complex role in shaping commercial strategy and market access.

In this article, we break down how 340B works, how it has evolved over time, and why it remains a flashpoint in access and reimbursement discussions today.

What is the 340B Program?

The 340B Drug Pricing Program was established in 1992 to offer discounted outpatient drugs to safety-net providers (“covered entitites”), such as Disproportionate Share Hospitals (DSHs), children’s hospitals, Critical Access Hospitals (CAHs), Federally Qualified Health Centers (FQHCs), and rural hospitals, enabling them to serve underserved populations more effectively.

Since its expansion under the Affordable Care Act (ACA) in 2010, the program has grown significantly, with 340B drug purchases reaching $38 billion in 2020, up from $9 billion in 2014. This growth, particularly due to the rise of contract pharmacies, presents opportunities and challenges for healthcare providers, pharmaceutical manufacturers, and market access professionals.

How Does the 340B Program Work? 

The Health Resources and Services Administration (HRSA), part of the U.S. Department of Health and Human Services, oversees the 340B program through its Office of Pharmacy Affairs. 

1. Drug manufacturers must agree to provide 340B discounts as a condition of having their outpatient drugs covered under Medicaid and Medicare Part B. This agreement is a direct contract with CMS.
2. Manufacturers sell outpatient drugs to eligible 340B providers at significantly reduced prices. The exact discount is calculated based on a statutory formula tied to the Medicaid Drug Rebate Program, The discount begins at 23.1% off the Wholesale Acquisition Price.  By law, Medicaid must receive the “Best Price” for drugs as compared to the marketplace.  Manufacturers who offer a non-Medicaid entity a discount or rebate greater than 23.1% must lower the discount to Medicaid, preserving the Best Price Statute.  
3. Eligible facilities purchase drugs at the 340B price. Facilities acquire the medication at the contracted Medicaid Rate and, for Medicaid Patients, are reimbursed by the state at a contracted rate which varies by the state. Eligible facilities have no restriction on using the 340B purchased drugs for only Medicaid Patients. It has become common practice to use 340B purchased drugs with commercially insured patients. The hospitals are usually reimbursed by these commercial insurers at a standard commercial rate. However, as we explore below, the actual market impact of this program is more nuanced.

Expansion of the 340B Drug Pricing Program

The 340B program was initially designed to help safety-net providers stretch their resources and improve access to care for low-income and uninsured populations. However, as the program expanded (especially following the ACA), concerns emerged about how these savings were being used and whether they directly contributed to improved patient outcomes.

Sources: [1], [2], [3]

Many hospitals, particularly larger ones, benefit financially from the spread between 340B ceiling prices and the higher prices they charge insurers. Unfortunately, these gains don’t always result in better care for low-income or underserved populations.^{[2] [3]}

Current Challenges and Market Dynamics for the 340B Program

The explosive growth of contract pharmacies has sparked debates around how 340B revenues are utilized. Today, more than 33,000 contract pharmacies are involved in the program. However, covered entities are not required to use 340B savings directly for patient care.

Studies indicate that some nonprofit hospitals use these savings to bolster their revenues rather than improve care for low-income patients, as 340B-eligible facilities have little oversight into how they distribute purchases from the manufacturers.

• Facilities purchase drugs directly from the manufacturer at a minimum discount of 23.1% off the list price.
• This medication is dispensed to both Medicaid and commercial patients without accountability.
• These facilities bill commercial payers at a markup from the manufacturer's list price, a practice that can account for substantial margins for eligible facilities.

Pharmacies near these facilities feel this practice is non-competitive behavior, as they find their prices higher than the 340B facility. In response, CMS (Centers for Medicare and Medicaid Services) has expanded the list of eligible facilities in an attempt to control costs. At this time, the expansion of the 340B program by CMS does not appear to be a political issue that the government is trying to reform.

Manufacturers often find the Medicaid discount to be doubled for some patients (a practice sometimes known as a double-dip or duplicate discount). This occurs when the eligible facility purchases the drug off the 340B list with the off-invoice discount applied. The facility then bills the state for the drug at the 340B price. The state often processes the discount and then charges back the 23.1% discount to the manufacturers. In many cases, manufacturers find they simply do not have the infrastructure or resources to audit states for this double charge.

Additionally, the introduction of Maximum Fair Prices (MFPs) under the Medicare Drug Price Negotiation Program, set to start in 2026, complicates the landscape for manufacturers. There is a risk of duplicate discounts, where manufacturers might be required to offer both 340B and MFP discounts on the same drug, prompting many manufacturers to rethink their strategies.^[4]

In recent years, commercial payers have begun forming partnerships with 340B covered entities, leveraging these collaborations to increase patient volume while negotiating additional drug discounts. This evolving dynamic presents opportunities for cost savings and improved patient care. However, as these partnerships develop, both parties must prioritize regulatory compliance and effective communication to ensure transparency and maximize the benefits of this arrangement while mitigating potential risks.^{[5] [6]}

How Can Manufacturers Mitigate the Impact of the 340B Program?

Pharmaceutical manufacturers have adopted various strategies to mitigate the fiscal impact of 340B, particularly regarding contract pharmacies. One approach has been to limit access to 340B pricing by requiring covered entities to either use on-site pharmacies or designate a single-contract pharmacy. Additionally, many manufacturers now request de-identified claims data to verify that only eligible patients benefit from 340B discounts.

Sources: [1], [2], [3]

Another approach is shifting toward a rebate model. In this model, covered entities purchase drugs at wholesale acquisition cost (WAC) and submit claims for rebates after dispensing the drugs. This approach allows manufacturers to verify eligibility before applying discounts, reducing the risk of duplicate discounts. Companies like Sanofi and AstraZeneca have implemented this model, leading to ongoing legal battles over the legitimacy of contract pharmacy restrictions.

In one notable case, a major pharmaceutical company limited the number of eligible contract pharmacies and transitioned to a rebate model. This allows the company to confirm the eligibility of claims before issuing rebates, preventing duplicate discounts, and reducing financial exposure.

For now, the Health Resources & Services Administration (HSRA) has posted a notice on its official page for the 340B program, stating that “HRSA has recently received inquiries from manufacturers related to different proposed rebate models for the 340B Program. HRSA continues to be in the process of reviewing these varied inquiries, which would significantly and unilaterally alter the administration of the Program. As HRSA has previously stated, implementing a rebate proposal without Secretarial approval would violate Section 340B(a)(1) of the Public Health Service Act.”

How Does the 340B Program Impact Market Access?

The growing 340B program has significant implications for market access strategies. Covered entities can buy drugs at a discount and resell them at a profit, which can influence their choice of higher-cost drugs. This often makes it difficult for payers to promote lower-cost alternatives like generics or biosimilars, creating tension between manufacturers, payers, and healthcare providers. Moreover, 340B claims are scrubbed from rebate submissions to prevent double discounts, which further complicates formulary decisions. 

Additionally, with more than 220,000 contract pharmacy relationships, tracking costs has become increasingly challenging. To address this, manufacturers, payers, and pharmacy benefit managers are working toward better data-sharing agreements to increase transparency and ensure that 340B savings are used as intended. 

A Positive Example: 340B and FQHCs

Despite these challenges, FQHCs offer a different, more positive example of how the 340B program can be used effectively. A recent study found that FQHCs are using 340B savings to directly enhance care for low-income and uninsured patients. 

Services such as HIV testing, chronic disease management, and tobacco cessation programs are being expanded, and many FQHCs report increases in patient volumes, particularly among non-English-speaking populations. This demonstrates that, when applied as intended, the 340B program can significantly improve care for underserved populations.

What’s Next for the 340B Program?

The 340B Drug Pricing Program has grown rapidly over the past decade, bringing both opportunities and challenges. While FQHCs have shown how 340B can enhance care for underserved populations, concerns remain about the use of 340B savings by some hospital systems.

Additionally, the increased involvement of commercial payers in the 340B space signals a shift that may redefine cost-sharing mechanisms and access to affordable medication. As these partnerships expand, it will be critical to establish clear guidelines to balance cost containment with patient access. 

Manufacturers are actively adjusting their strategies, limiting contract pharmacies, and adopting rebate models to mitigate financial risks. As the program continues to evolve, with the introduction of MFPs and increasing regulatory scrutiny, stakeholders across the board will need to adapt to ensure the program achieves its original purpose.

Need Support Navigating the Evolving 340B Landscape?

TJP helps pharmaceutical teams adapt to challenging policy shifts, changing payer dynamics, and access challenges. Get in touch with our team to learn how we can support your commercialization strategy.

References

1. Bringing Clarity to the World of Duplicate Discounts: A Whitepaper. Kalderos, 2021. Available at: https://www.kalderos.com/resource/bringing-clarity-to-the-world-of-duplicate-discounts
2. Live Webinar: Fein, A. J. (2024). The 340B Drug Pricing Program: Trends, Controversies, and Outlook. Drug Channels Institute. Available at: https://www.drugchannels.net/2024/05/the-340b-drug-pricing-program-trends.html
3. Government Accountability Office. Drug Discount Program: Federal Oversight of Compliance at 340B Contract Pharmacies Needs Improvement. GAO-18-521. Published July 2018. Available at: https://www.gao.gov/products/gao-18-480
4. Avalere Health. (2024). Intersection of 340B Program and Maximum Fair Prices.
5.  Baker, J. (2022). The Impact of the 340B Program on Drug Pricing and Access to Care. Journal of Health Economics, 45(2), 234-250.
6. Rosenbaum, S. (2023). The Role of 340B in Healthcare Cost Management. American Journal of Public Health, 113(1), 45-52.