The 340B Drug Pricing Program is a federal discount program that lets certain hospitals and clinics buy outpatient drugs at steeply reduced prices. The intent is simple: stretch scarce resources to serve vulnerable patients. The reality is complex. The rules sit at the intersection of drug pricing, reimbursement, and pharmacy operations. That complexity creates room for hospitals to earn large margins on drugs—legally—while sparking constant debate over who benefits.
What 340B Is—and Why It Exists
Congress created 340B in 1992. Drug makers that want Medicaid coverage must sign an agreement to sell outpatient drugs to eligible providers—called “covered entities”—at or below a government-calculated ceiling price. The goal was not to lower patients’ pharmacy bills. It was to reduce acquisition costs for safety‑net providers so they could do more with fixed budgets.
Importantly, the law does not require hospitals to pass discounts to insurers or patients. That omission is why the economics produce large spreads and profit opportunities.
Who Qualifies and Which Drugs Qualify
Covered entities. Eligibility flows from how much low‑income and Medicaid care the provider delivers, or from its designation in federal programs. Common examples:
- Disproportionate Share Hospitals (DSH), children’s hospitals, and freestanding cancer hospitals
- Rural hospitals like Critical Access, Sole Community, and Rural Referral Centers
- Federally Qualified Health Centers (FQHCs) and Ryan White HIV clinics
Hospitals register outpatient child sites with HRSA. Only prescriptions tied to those registered sites, and to eligible “patients,” can be filled with 340B drugs.
Outpatient drugs only. 340B applies to outpatient use. Inpatient drugs are excluded. This split forces hospitals to separate inventories and use “split‑billing” software to assign purchases to inpatient, outpatient, and 340B buckets.
Key carve‑outs. Rural hospitals listed above cannot use 340B for orphan‑designated drugs. DSH‑type hospitals face a “GPO prohibition,” meaning they cannot buy outpatient drugs through a group purchasing organization if they use 340B, with narrow exceptions.
How Pricing Works: The Ceiling Price and the “Spread”
Manufacturers must not charge covered entities more than a calculated ceiling price. That price is tied to the drug’s Average Manufacturer Price (AMP) and the Medicaid Unit Rebate Amount (URA). The URA includes a base rebate (23.1% of AMP for most brands; 13% for generics) plus an inflation penalty if the drug’s price rose faster than inflation.
Two results matter for economics:
- Deep discounts. Many brand drugs are 20–50% below wholesale list, sometimes more when inflation penalties stack up. Older drugs with large penalties can be sold for “pennies.”
- Spread capture. Payers reimburse based on usual market benchmarks, not the 340B price. That gap—the spread—is where hospitals generate margin.
Because the law does not lower payer reimbursement, the discount does not reduce what insurers pay. It reduces what the hospital pays to acquire the drug. That is why the spread can be large.
How Hospitals Make Money in Practice
Hospitals generate 340B margin in two main settings: buy‑and‑bill infusions in clinics, and prescriptions dispensed through retail or specialty pharmacies.
Infusion example.
- A cancer drug has an Average Sales Price (ASP) of $6,000 per dose.
- The hospital’s 340B acquisition cost is $3,000.
- Medicare pays hospitals roughly ASP + 6% under current rules (about $6,360). Private payer rates vary but are often similar or higher.
- Gross drug margin ≈ $3,360 per dose (before fees, wastage handling, pharmacy overhead). The clinical visit and administration fees are separate revenue.
From 2018–2022, Medicare temporarily paid many 340B hospitals less (ASP − 22.5%). That cut was later unwound. The takeaway: payment policy shifts can swing margins by thousands per claim.
Retail/specialty example (contract pharmacy).
- A specialty pill has a list price of $5,000 for 30 days. 340B price is $2,200.
- A commercial plan reimburses the dispensing pharmacy $4,700. The patient has a $50 copay.
- After fees to the contract pharmacy and third‑party administrator (TPA), the hospital nets a large share of the spread: roughly $2,000 per fill in this example.
Why does this work? The plan pays its usual rate because it does not know or price against the 340B cost. The patient’s copay is based on plan design, not hospital cost. The hospital captures the difference between reimbursement and its lower acquisition cost.
Contract Pharmacies: The Profit Engine
Hospitals can dispense 340B drugs through their own outpatient pharmacy or through outside “contract pharmacies.” After 2010 guidance, the number of contract pharmacies exploded because they made it easy to capture community prescriptions.
How it operates.
- The hospital enrolls one or more retail and specialty pharmacies and a TPA vendor.
- Claims from those pharmacies are matched to the hospital’s patient encounters to decide which fills are 340B‑eligible.
- The TPA “replenishes” inventory virtually. The contract pharmacy is reimbursed by the payer, then the spread is shared.
Money flows. Typical deals pay the pharmacy a per‑script fee (for example $10–$25) and/or a share of the spread. TPAs also charge per‑script fees. The hospital usually keeps most of the net savings. This model is powerful for high‑cost specialty drugs because each eligible fill can produce four‑figure margins.
Why manufacturers push back. Since 2020, several manufacturers have limited shipments or discounts to multiple contract pharmacies, citing diversion and duplicate discount risks. Ongoing litigation reflects the tug‑of‑war between program intent and the financial scale of contract pharmacy spreads.
Compliance Landmines
The rules are strict on paper but hard to execute in busy systems. That tension is why audits are frequent and the program feels risky to manage.
- Patient definition. A claim is 340B‑eligible only if the hospital has a valid provider relationship and documentation for that episode of care. Loose interpretation risks “diversion” to ineligible patients.
- Duplicate discounts. The same claim cannot get both a Medicaid rebate and a 340B price. Hospitals must “carve in” or “carve out” Medicaid and maintain accurate billing identifiers and the Medicaid Exclusion File. Managed Medicaid adds complexity because state policies differ and identifiers can be inconsistent.
- GPO prohibition. DSH‑type hospitals cannot use a GPO for outpatient drugs if they use 340B. Violations happen when split‑billing rules or NDC crosswalks misroute purchases.
- Orphan drug exclusion. Rural hospitals noted earlier cannot use 340B pricing for orphan‑designated drugs, regardless of indication. This must be enforced at the NDC level.
- Mixed‑use areas. Emergency departments, observation, and same‑day surgery blur inpatient vs outpatient status. Accurate status at the time of administration is essential.
To manage this, hospitals invest in split‑billing software, NDC‑HCPCS crosswalks, wastage tracking, and frequent internal audits. The cost is high, but the margins at stake are higher.
Why the Program Is So Complicated
340B sits at the junction of three systems that do not talk well to each other:
- Manufacturer pricing rules. Ceiling prices rely on AMP and URA math that providers cannot verify. Some data are confidential by law, which limits transparency.
- Payer reimbursement. Medicare, Medicaid, and commercial plans pay based on their own formulas (ASP, MAC, AWP, negotiated rates), not 340B costs.
- Pharmacy operations. Inventory is “virtual,” with after‑the‑fact replenishment and complex matching logic. One coding or data mismatch can misclassify hundreds of claims.
Add constant policy shifts, manufacturer restrictions, and state laws on PBM “discrimination” against 340B claims, and you have a moving target. Accuracy requires clean data across EHRs, pharmacy systems, and TPA platforms, which is rare.
Who Benefits and Who Pays
Hospitals and clinics. They capture the spread and say they use it to fund free drugs, charity care, care coordinators, mobile clinics, and language services. There is no uniform reporting requirement, so the use of funds varies.
Patients. Some patients benefit directly when hospitals choose to lower out‑of‑pocket costs or supply free meds. But many pay the same copay they would have paid anyway because plan designs are unchanged.
Insurers and employers. They usually do not see lower claims costs. In fact, site‑of‑care shifts to hospital outpatient departments can raise allowed amounts for infused drugs.
Manufacturers. They fund the discounts. Inflation penalties make some 340B prices extremely low. Manufacturers argue that unchecked contract pharmacy use and duplicate discounts extend the program beyond its safety‑net purpose.
What Success Looks Like Inside a Hospital
Hospitals that run compliant, high‑performing 340B programs usually do the following:
- Limit contract pharmacies to high‑value partners with strong data feeds and specialty capabilities
- Run monthly audits for diversion, duplicate discount, and accumulator accuracy
- Tighten “patient definition” rules to clear documentation for each eligible script
- Track net benefit at the drug and site level and tie savings to visible community investments
- Engage compliance, pharmacy, revenue cycle, and legal teams together, not in silos
What Might Change Next
Expect continued movement in five areas:
- Transparency. More reporting on how 340B savings are used, especially for hospitals with large contract pharmacy networks.
- Contract pharmacies. Resolution of manufacturer limits and clearer federal rules on how many and under what conditions.
- Medicaid managed care. Stronger standards to prevent duplicate discounts across states and plans.
- Site neutrality. Payers pushing to pay the same for drugs regardless of setting, which would shrink spreads in hospital outpatient departments.
- Patient benefit. Policies nudging or requiring some savings to flow to patients at the point of sale for certain drugs.
Bottom Line
340B is the most complicated program in U.S. healthcare because it layers drug manufacturer pricing rules onto payer reimbursement systems and then runs them through messy, real‑world pharmacy operations. That machinery allows hospitals to buy low and bill at normal rates, which creates large margins on some drugs. Whether that is a feature or a flaw depends on how the savings are used—and how well the program can balance safety‑net support with accountability and fair pricing.
I am a Registered Pharmacist under the Pharmacy Act, 1948, and the founder of PharmacyFreak.com. I hold a Bachelor of Pharmacy degree from Rungta College of Pharmaceutical Science and Research. With a strong academic foundation and practical knowledge, I am committed to providing accurate, easy-to-understand content to support pharmacy students and professionals. My aim is to make complex pharmaceutical concepts accessible and useful for real-world application.
Mail- Sachin@pharmacyfreak.com