The 340B Drug Pricing Program is a federal program that requires drug manufacturers to sell outpatient medications to certain healthcare organizations at significantly reduced prices. Created by Congress in 1992 under Section 340B of the Public Health Service Act, the program’s core idea is straightforward: stretch scarce resources so that safety-net providers can serve more patients, especially those who are uninsured or low-income. In 2024, covered entities purchased $81.4 billion in drugs through the program.
How the Program Works
Drug manufacturers that want their products covered by Medicaid must also agree to sell those same outpatient drugs at steep discounts to qualifying healthcare organizations, known as “covered entities.” The discounted price a manufacturer can charge has a hard ceiling, calculated by taking the Average Manufacturer Price from the prior quarter and subtracting the rebate amount the manufacturer already owes for Medicaid. If that math produces a number below one cent, the floor is $0.01 per unit. For brand-name drugs, the resulting discount typically falls between 25% and 50% off the list price, though some drugs see even deeper cuts.
When a new drug first hits the market and doesn’t yet have a pricing history, the manufacturer estimates the ceiling price using the wholesale acquisition cost minus the standard rebate percentage. That estimate stays in place until real pricing data becomes available, generally within four quarters.
Who Qualifies as a Covered Entity
Not every hospital or clinic can participate. The law limits eligibility to specific types of safety-net providers. The most common include federally qualified health centers (community health centers serving underserved areas), children’s hospitals, critical access hospitals, and disproportionate share hospitals, which are facilities that treat a high percentage of low-income patients. Other eligible organizations include Ryan White HIV/AIDS clinics, hemophilia treatment centers, sexually transmitted disease clinics, tuberculosis clinics, Black Lung clinics, and certain family planning providers.
Each entity must register with HRSA, the federal agency that oversees the program, and maintain its eligibility status in an online system called OPAIS. Losing the underlying grant or failing to meet the qualifying thresholds (like disproportionate share percentages for hospitals) means losing 340B access.
Who Counts as a 340B Patient
A person must be a patient of the covered entity to receive 340B-priced drugs. That means the entity has to maintain a health record for the individual that identifies them, documents a medical evaluation (including any tests, diagnoses, or clinical impressions), and records the treatment provided or prescribed. The record can be as simple as a single form or note page. During declared public health emergencies, self-reported identities and medical histories are acceptable when patients lack identification or insurance cards.
The key restriction: 340B drugs are for the entity’s own patients. Giving discounted medications to someone who isn’t an established patient of that provider is called “diversion,” and it’s one of the most common compliance violations the program sees.
Contract Pharmacies
Many covered entities, especially small clinics, don’t operate their own pharmacies. The program allows them to partner with outside retail pharmacies through written contracts. A covered entity can sign agreements with one or more contract pharmacies to dispense 340B drugs to its patients. Each contract pharmacy must be registered and listed as active in the OPAIS system before it can start dispensing.
This arrangement comes with serious oversight responsibilities. The covered entity must provide ongoing supervision of its contract pharmacies, hire an independent firm to audit each contract pharmacy at least once a year, maintain auditable records, and report any compliance violations to HRSA. Contract pharmacies must also avoid dispensing 340B drugs to Medicaid patients unless there’s a specific state arrangement in place to prevent what’s called a “duplicate discount.”
Contract pharmacies have become a major flashpoint. Several drug manufacturers began restricting 340B shipments to contract pharmacies starting around 2020, arguing the program had expanded far beyond its original intent. In 2024, the D.C. Circuit Court of Appeals ruled that Section 340B does not categorically prohibit manufacturers from placing conditions on how discounted drugs are distributed to covered entities. The Third Circuit reached a similar conclusion, finding that the statute is “silent about delivery” and does not require manufacturers to ship drugs to an unlimited number of contract pharmacies. These rulings have given manufacturers legal footing to limit contract pharmacy access, which many covered entities say threatens their ability to serve patients in areas without an on-site pharmacy.
The Duplicate Discount Problem
Federal law prohibits a drug manufacturer from having to provide both a 340B discount and a Medicaid rebate on the same drug. That would amount to the manufacturer paying twice, once through the upfront 340B price cut and again through the Medicaid rebate after the fact. To prevent this, covered entities must choose one of two approaches for their Medicaid fee-for-service patients.
In a “carve-in” model, the entity uses 340B-priced drugs for its Medicaid patients and lists itself on HRSA’s Medicaid Exclusion File so that the state Medicaid agency knows not to invoice the manufacturer for a rebate on those prescriptions. In a “carve-out” model, the entity purchases drugs for Medicaid patients through normal channels at regular prices, keeping the Medicaid rebate pathway intact while reserving 340B pricing for non-Medicaid patients. Each entity makes this election when it enrolls and must keep its billing information accurate in the system. The Medicaid Exclusion File only applies to fee-for-service Medicaid, not Medicaid managed care organizations.
Common Compliance Issues
HRSA conducts annual audits of covered entities. In fiscal year 2022, the agency finalized 199 audits and found recurring problems in three main areas.
- Registration errors: Incorrect entries in the OPAIS system, such as wrong Medicare cost report dates, missing grant-associated sites, duplicate pharmacy registrations, or ineligible outpatient facilities listed as active 340B locations.
- Duplicate discounts: Entities billing Medicaid while not properly listed on the Medicaid Exclusion File, submitting incomplete information to HRSA, or contract pharmacies billing Medicaid without notifying HRSA.
- Diversion: 340B drugs dispensed to inpatients (who aren’t covered under the outpatient drug program), dispensed at a contract pharmacy without a supporting medical record, or prescribed by providers who aren’t eligible to write 340B prescriptions for that entity.
Entities found in violation are required to develop corrective action plans and may face repayment obligations or removal from the program.
Why the Program Is Controversial
The 340B program has grown substantially since its creation. The $81.4 billion in covered entity purchases in 2024 reflects a program that now touches a significant share of the U.S. drug market. Supporters argue that the discounts are essential for safety-net providers that operate on thin margins, allowing them to fund services like free clinics, patient assistance programs, and behavioral health care that would otherwise go unfunded. Critics, including pharmaceutical manufacturers and some policy analysts, contend that the program lacks transparency about how the savings are used, that the rapid growth of contract pharmacy arrangements has extended discounts well beyond the original safety-net mission, and that some large hospital systems generate substantial revenue from the spread between the 340B acquisition cost and what insurers reimburse.
There is no federal requirement for covered entities to pass 340B savings directly to patients in the form of lower drug prices. Some entities do offer reduced-cost or free medications, but others use the margin to fund other parts of their operations. This gap between the program’s intent and how savings flow is at the center of ongoing legislative debate.