The 340B Program: What it Means for the Private Sector

J Clin Pathways. 2025;11(1):55-56.

An ideal US federal health care program should reduce costs for patients by supporting efficient care provision while avoiding over-regulation and being mindful of private sector impact. The 340B Drug Pricing Program was established to aid safety net institutions. It has created though an incentive structure that has shifted oncology practices to the higher cost hospital setting, with unintended negative consequences for the private sector.

The 340B program was intended to give discounts to certain facilities to “stretch” scarce federal resources.¹ Legislators were concerned that manufacturers would provide fewer discounts to their local facilities that serve a large population of low-income patients due to experiencing price pressure under the Medicaid Drug Rebate Program law. As such, they created a law from manufacturers requiring specific pricing for these facilities.²

The law tied the program discount to the Medicaid rebate formula with a minimum discount of 23% for drugs purchased by covered entities (CEs) named in the law, such as federally qualified health centers and certain nonprofit rural or dispro­portionate share hospitals (DSH) participating in the Medicare or Medicaid program.³ Over time, changes in the law increased the mandated discounts in the Medicaid rebate formula and the Medicare DSH formula,⁴ indirectly expanded the amount of discounts and the types of facilities that would qualify as CEs along with any of their off-site clinics. Moreover, in a regula­tory action, HRSA expanded the number of permitted con­tracted off-site pharmacies further affecting the delivery of pharmacy cancer drugs.

The Affordable Care Act (ACA) further expanded the rebate program by increasing the number of Medicaid beneficiaries, thereby making it easier for hospitals to meet the thresholds for Medicare DSH status and 340B eligibility.⁵ These changes increased the volume and size of discounts,^4,6 such that recently measured discounts under 340B reached $54 billion in 2022.⁷ Medicare DSH hospitals, which meet varying benchmarks for a share of Medicaid or low-income elderly inpatients, receive 75% of 340B discounts.⁶ It would be misleading to state that the majority of the covered patient population are low-income Medicare, Medicaid, or uninsured5 since most covered patients are in hospitals, which serve a broad population rather than grantees at community health centers. This is reflected in the data, which shows that, on average, hospitals with 340B status preferentially expand to reach more affluent communities.⁸

By definition, entities in the 340B program can maximize earn­ings through the spread between the drug’s acquisition cost and insurance and patient payments. Covered entities control drug acquisition and focus purchasing within the 340B program.

This incentive structure has been shown to increase drug spending and raise system costs in a few ways: It creates prefer­ences for higher-cost brand drugs over lower-cost generics or biosimilars that have lower spread, and there is some evidence that 340B providers infuse more drugs per episode.⁹ Indepen­dent physician practices are ineligible for the discount, so it increases market consolidation and drug spending.¹⁰ Conse­quently, it drives more services to the most expensive settings, such as hospital-owned oncology physician practices.¹¹

To offset the cost of the lowered sales prices,^12,13 manufac­turers must either increase prices¹⁴ to other purchasers or ex­perience reduced shareholder value.¹⁵ Despite its size, we have yet to find strong counterfactual evidence that suggests 340B lowered branded pharmaceutical companies’ stock price¹⁶ or a US return. This suggests higher purchase prices make up these discounted sales to non-price-regulated private purchasers.¹⁷

Additionally, studies have found that 340B rebates crowd out or replace manufacturer contractual rebates to self-insured private employers.¹⁸ Operationally, the 340B discount is made at the wholesale level as part of a discounted price to the CE. Avoiding low or negative returns on the product, manufactur­ers will contractually prohibit other rebates after the point of sale to the patient. Thus, the employer-sponsored plan loses out on the CE discounted prices.

Finally, a little-discussed issue is the potential impact of 340B on lowering federal and state tax revenues. The tax loss created by any lower sales revenues of manufacturers is histori­cally unmeasured due to the federal budget scoring rules that generally limit budget costs to explicit changes in the tax code. Again, the tax loss is smaller if the manufacturer’s lost revenue is made up by higher net prices to others.

Each of these documented trends raise private spending on health services. Yet, there are no offsetting program require­ments about how the 340B profits are spent by nonprofit hos­pitals in their communities.¹⁹ Adding it all together, the 340B program is a highly inefficient wealth transfer from taxable groups—taxpayers, the pharmaceutical industry, and employ­ers—to the tax-exempt hospital industry and others.

To address the negative externalities—including crowding out private payer discounts and rebates,^18,20 raising patient care costs, and lowering tax revenues—the US Congress should consider new policies that increase transparency and account­ability for the 340B program.

Step one is to have increased reporting/tracking to make ag­gregate discounts transparent in each state and municipality to reassess the level of other federal, state, and local subsidies.²¹ A controversial step further is to require transparency for the individual 340B discounts, excluding any privately contracted amounts, to aid employers and others in interpreting their own or others’ contracted rates and potentially aid in negotiating payments with providers.

Given that there is little evidence of 340B entities improv­ing pharmaceutical access for patients, these nonprofit entities could provide more explicit support for access to treatments by patients.¹⁹ To address this issue, Congress could include a statutory requirement tying program participation to facili­ties reducing out-of-pocket costs for their low-income patients with or without insurance. This is commonly referred to as the “discount following the patient.”

We must acknowledge the public value of this financing component as part of other support in Medicare, Medicaid, and state subsidies. However, improvements can be made to reduce negative impact on clinical care and open access to the choice of most appropriate treatment with the best value for the patient and purchaser.