The 340B Drug Pricing Program is a federal program that requires pharmaceutical manufacturers to sell outpatient drugs at significantly reduced prices to hospitals and clinics that serve low-income and uninsured patients. Created in 1992 under the Veterans Health Care Act, it has grown into one of the largest drug purchasing programs in the country, with participating entities purchasing $81.4 billion in discounted drugs in 2024 alone.
The core idea is straightforward: safety-net providers operate on thin margins while caring for patients who often can’t pay full price. By forcing drug companies to offer steep discounts, the program helps these providers stretch their budgets and reinvest savings into patient services.
How the Pricing Formula Works
The 340B “ceiling price” is the maximum a manufacturer can charge a participating provider for a given drug. It’s calculated by taking the Average Manufacturer Price (the average price paid by wholesalers) and subtracting the Unit Rebate Amount, which is the same rebate figure used in the Medicaid Drug Rebate Program. The result is typically 25% to 50% below what a provider would otherwise pay, though discounts on some drugs can be even steeper.
For new drugs coming to market, manufacturers must estimate a ceiling price from day one. They use the wholesale acquisition cost minus the appropriate rebate percentage until enough sales data exists to calculate an actual Average Manufacturer Price, which must happen no later than the drug’s fourth quarter on the market. The Health Resources and Services Administration (HRSA) publishes ceiling prices rounded to two decimal places, giving covered entities a reference point when purchasing.
Who Qualifies as a Covered Entity
Not every hospital or clinic can buy drugs at 340B prices. Federal law limits participation to specific categories of safety-net providers. HRSA maintains the eligibility criteria, and the list is more varied than most people realize. Qualifying entities fall into four broad groups.
Federally qualified health centers make up a large share of participants. This includes health center program award recipients, look-alikes, Native Hawaiian health centers, and tribal and urban Indian health centers.
Hospitals must meet specific criteria. Eligible types include disproportionate share hospitals (those serving a high percentage of low-income patients), children’s hospitals, critical access hospitals, free-standing cancer hospitals, rural referral centers, and sole community hospitals.
Ryan White HIV/AIDS Program grantees qualify because they serve populations with high drug costs and limited ability to pay.
Specialized clinics round out the list: black lung clinics, comprehensive hemophilia diagnostic treatment centers, Title X family planning clinics, sexually transmitted disease clinics, and tuberculosis clinics.
Why Manufacturers Participate
Drug manufacturers don’t volunteer for 340B out of goodwill. Participation is the price of access to Medicaid. Any manufacturer that wants its drugs covered by state Medicaid programs must sign a pharmaceutical pricing agreement that includes offering 340B discounts to all eligible covered entities. Since Medicaid covers tens of millions of Americans, virtually every major drug company participates. Walking away from 340B would mean walking away from one of the largest payers in the country.
The Duplicate Discount Problem
One of the program’s trickiest compliance issues involves “duplicate discounts.” Federal law prohibits a manufacturer from having to provide both a 340B discount at the point of sale and a Medicaid rebate on the same drug. Without safeguards, a covered entity could buy a drug at the discounted 340B price, dispense it to a Medicaid patient, and then the state could also claim a Medicaid rebate from the manufacturer on that same transaction. The manufacturer would effectively be discounted twice.
To prevent this, covered entities must choose one of two approaches for their Medicaid fee-for-service patients. They can “carve in,” meaning they use 340B-priced drugs for Medicaid patients and flag those transactions so the state doesn’t also claim a rebate. Or they can “carve out,” purchasing drugs for Medicaid patients through regular channels and letting the standard rebate process work. Each entity’s choice is recorded in HRSA’s database and reflected on the Medicaid Exclusion File, which states use to avoid double-dipping.
How HRSA Oversees the Program
HRSA runs program integrity checks on both covered entities and manufacturers. Audits examine several key areas: whether the entity still meets eligibility requirements, whether it’s following the prohibition on using group purchasing organizations for 340B drugs (which applies to certain hospital types), whether drugs are being diverted to ineligible patients, and whether duplicate discounts are occurring.
In practice, auditors review policies and procedures, verify internal controls, check that the entity correctly classifies patients as inpatient or outpatient (since 340B only covers outpatient drugs), and test a sample of individual drug transactions. HRSA can also re-audit entities to verify that problems found in earlier audits have been corrected. Only one audit of a covered entity can happen at a time.
Where 340B Savings Actually Go
This is the program’s most debated question. The 340B statute doesn’t require covered entities to pass discounts directly to patients or to spend savings in any specific way. The original intent was to enable safety-net providers to “stretch scarce federal resources” and serve more patients. Many entities use 340B revenue to fund services like mental health counseling, sliding-scale pharmacy programs, transportation assistance, and chronic disease management for uninsured patients.
Critics, including many drug manufacturers and some lawmakers, argue that the lack of transparency makes it impossible to verify these claims. Hospitals with large 340B programs may generate substantial revenue by purchasing drugs at the 340B ceiling price and billing insurers at higher rates, pocketing the difference. Without reporting requirements, there’s no public accounting of how much of that margin flows back to patient care versus other institutional spending.
Proposed Reforms and Transparency Rules
Legislative proposals have attempted to address the transparency gap. The SUSTAIN 340B Act, a discussion draft circulated in the Senate, would require covered entities to report detailed information annually as an addendum to their Medicare cost reports. The required disclosures would include the number of patients receiving 340B-priced drugs (broken down by insurance type), charity care costs at each site, patient demographics, a list of contract pharmacies, the actual discount realized, and a description of how savings are used.
The proposal would also require covered entities to extend their financial assistance policies to patients served at affiliated child sites and contract pharmacies, and to make those assistance options visible to patients. A third-party clearinghouse for data exchange would help prevent duplicate discounts, and both the Government Accountability Office and the Medicaid and CHIP Payment and Access Commission would be directed to study and report on program performance.
None of these provisions are law yet, but they reflect a growing bipartisan consensus that a program handling over $81 billion in annual drug purchases needs stronger guardrails and public accountability.