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February 01, 2018

340B Drug Pricing Program: Uncertain Future and Need for More Guidance

Ayeisha A. Cox, Esq., DrFirst, Inc., Rockville, MD

The 340B Drug Pricing Program (Program) plays a key role in ensuring that low-income patients have access to essential health services and medications. Yet the Program has been under increased scrutiny in recent years due to studies and reports accusing covered entities of using revenue gained from the Program for reasons other than to expand patient services and provide charity care.1 Although the Health and Resources Services Administration (HRSA)2 has made efforts to increase the transparency of the Program, more oversight and transparency into how covered entities use revenue generated by the Program is needed. While the Program needs greater oversight, Congress and HRSA should avoid “knee-jerk” reactions that could result in financial burdens on hospitals and non-hospital entities providing necessary medical care at reduced costs to vulnerable patients.

History of the 340B Drug Pricing Program

Congress passed the law creating the Program in 1992 with the intent to assist providers that treat a disproportionate number of low-income patients.3 Congress directed HRSA to administer the Program to permit eligible covered entities “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”4 Drug manufacturers participating in Medicaid are required to enter into an agreement with the Department of Health and Human Services (HHS) to provide certain covered outpatient drugs at discounted prices.5 Manufacturers are restricted from charging a 340B-covered entity6 above the maximum price for drugs covered under the Program. This “ceiling price” is equal to the price Medicaid reimburses for covered outpatient drugs. Covered entities pocket the difference, and the revenue allows the hospitals to expand services for vulnerable patients.

Concerns over the Program are rooted in whether it is still operating according to Congress’ original intent. The uncontrolled and unintended expansion of the Program has drawn concern from Congress, calling the future of the Program into question.7

Concerns within the 340B Program

Unclear Definition of Patient and Covered Entity

Several features of the Program have caused much scrutiny by lawmakers and the drug manufacturers that are required to offer drugs at reduced rates to covered entities. Many concerns lie within the wording and criteria for eligibility within the statute.

One issue is the unclear definition of “patient” under the statute. An individual is considered a patient if:

(1) the covered entity maintains records of the patient’s healthcare;
(2) the individual is under the care of a physician or healthcare professional who is employed by, or provides healthcare under a contract or agreement with, the covered entity such that responsibility for the patient’s care remains with the covered entity; or
(3) the patient receives a range of healthcare services that are consistent with the services for which grant funding or Federally Qualified Health Center look‐alike status has been provided to the covered entity.8

Many covered entities have interpreted this broadly to include patients who are uninsured as well as insured, including patients covered by Medicare and private insurance. In fact, the Government Accountability Office (GAO) found that about half of the 340B entities generated revenue from private insurer reimbursements that exceeded 340B prices.9 Additionally, covered entities include patients with prescriptions from physicians who are loosely affiliated with the hospital or clinic. In essence, all patients possessing a written prescription that can be filled at a retail pharmacy are covered, as long as they are receiving care from the covered entity.

The qualifications for eligible covered entities to participate in the program are also broad and ambiguous. The Program allows six categories of hospitals and 12 categories of non-hospital entities to participate and receive discounts. Hospitals must be (1) owned by a state or local government, (2) a public or non-profit hospital that is formally delegated governmental powers by a state or local government, or (3) a non-profit hospital under contract with a state or local government to provide services to low-income patients who are not eligible for Medicare or Medicaid. Non-hospital entities that receive certain federal grants qualify.10  The ambiguity allows covered entities that do not treat a high number of low-income patients to qualify for the Program.

Lack of Authority of How Covered Entities Use Revenue

HRSA currently lacks the statutory authority to govern how covered entities use revenue gained from the Program. Covered entities are not required to document how revenues are being used to expand patient services. Furthermore, covered entities calculate 340B savings inconsistently across the board. The Senate’s Subcommittee on Oversight and Investigations held a hearing in October 2017 to examine how covered entities utilize revenues derived from discounted prices.11 During the hearing, five 340B-covered entities testified, which revealed the inconsistencies in how savings are calculated. For example, one covered entity based its savings on costs related to its contract pharmacies, while another covered entity calculated its savings based on its net margin after 340B drugs were reimbursed.12

Rapid Expansion of Eligible Covered Entities

Since the start of the Program, the number of covered entities participating in it has grown rapidly. In the past decade, the number of participating covered entities has increased to over 30,000.13 The rapid expansion has increased spending within the Program. According to a 2015 MedPAC report, the amount of money spent by covered entities tripled from 2005 to 2013.14 Latest figures indicate that 340B prices totaled $12 billion in 2015, and covered entities gained approximately $6 billion in savings.15

There are several contributing factors to this rapid expansion of covered entities and subsequent spending.  As previously mentioned, the criteria to qualify as a covered entity is unclear and has contributed to the growing number of hospitals and non-hospital entities applying for 340B discounts. For example, the number of Disproportionate Share Hospitals participating in the 340B program doubled from 2005 to 2014.16 Disproportionate Share Hospitals also purchase more than 70 percent of covered drugs, even though they account for less than half of eligible covered entities in the program.17 Furthermore, mergers between 340B entities and non-340B entities have increased the number of participants within the program.18 This is more evident in oncology care, where discounts are more attractive. Hospital acquisition of physician practices has increased costs by the ability to purchase expensive oncology drugs at discounted rates and has become a burden for small physician practices that are unable to compete.

The Patient Protection and Affordable Care Act (PPACA) also contributed to the influx of covered entities participating in the program. PPACA expanded categories of eligible covered entities, allowing critical access hospitals and rural health centers to participate in the program.19 The type of reimbursable covered outpatient drugs was also expanded under the program.

There has also been a substantial increase in hospital agreements with contract pharmacies. Hospitals often enter into agreements with contract pharmacies to distribute drugs at off-site locations. When Congress created the 340B program, only covered entities without on-site pharmacies were permitted to enter into contract pharmacy agreements. Subsequently in 2010 HRSA issued guidance that allowed covered entities to enter into multiple contract pharmacy agreements in order to provide greater care and access for patients.20 While this has allowed providers to increase patient access to medications, it has caused covered entities to generate even more revenue.

Increased Medicare Spending

Program spending has also impacted the Medicare program.  Medicare spending for 340B drugs has significantly increased since 2005.21 Prior to 2018, Medicare paid significantly higher costs than the covered entities’ acquisition costs, reimbursing hospitals at the average sales price (ASP) plus six percent. The increase in spending has prompted attempts by government bodies to scale back the Program over the past few years. MedPAC has scrutinized the Medicare reimbursement rate and recommended that Medicare modify reimbursement rates for Part B drugs.22 Critics have also alleged that physicians often choose a higher-cost drug as opposed to a lower-cost therapy in efforts to receive a greater discount and pocket the difference.

In November 2017, the Centers for Medicare & Medicaid Services (CMS) released the Outpatient Prospective Payment System (OPPS) final rule, which finalized its proposal to lower reimbursement rates for drugs covered by the Program by nearly 30 percent beginning January 1, 2018.23  For the first time, and in an effort to address concerns, CMS implemented MedPAC’s recommendation to reduce the discount to 22.5 percent less than the ASP. CMS estimated that the rule would result in $1.6 billion in cuts to reimbursement. This cut would dramatically affect safety net hospitals that heavily rely on discounts provided by the Program.

Immediately following the release of the OPPS final rule, industry hospital groups (American Hospital Association, Association of American Medical Colleges, and America’s Essential Hospitals) filed a lawsuit challenging CMS’s authority to cut reimbursement rates and requested a preliminary injunction until the court ruled on the merits of the case.24 In early January 2018, a federal court denied the injunction, dismissing the case on procedural grounds.25 The courts have not yet decided whether CMS actually has the authority to lower reimbursement rates for drugs covered by the Program. The determination will most certainly impact the reimbursement rates for 340B drugs in the future.

HRSA’s Regulatory Authority is Unclear

Until recent years, the Program was operated strictly by statute. In response to increased scrutiny and GAO recommendations, HRSA has released guidance to provide greater oversight of the Program. In May 2012, HRSA clarified its policy for when manufacturers restricted distribution of a covered drug and specified the type of information manufacturers should include in their restricted distribution plans. HRSA also initiated audits of covered entities and now performs over 200 audits a year.26 After the passing of PPACA, HRSA began promulgating regulations as interpretative guidance to provide clarity in the Program after PPACA expanded the eligibility of covered entities. In 2013, HRSA released interpretative guidance relating to the Program’s orphan drug policy.27 HRSA later released Omnibus Guidance in 2015 that further clarified policies for manufacturers, covered entities, and contract pharmacies.

Yet it became unclear whether HRSA actually had the authority to promulgate rules when a federal court vacated HRSA’s interpretative guidance regarding orphan drugs in October 2015, stating that the 340B statute was unambiguous and therefore HRSA is not permitted to implement rules and regulations, including guidance, in areas not expressly authorized by Congress.28 Subsequently, in January 2017, HRSA withdrew its Omnibus Guidance while it was pending Office of Management and Budget approval. HRSA released a final rule in January 2017 enforcing Civil Monetary Penalties for drug manufacturers that charge covered entities at prices above the allowable 340B ceiling price.29 However, HRSA’s regulatory authority remains unclear on areas that are deemed not “expressly authorized by Congress.”

The increased scrutiny and stringent regulations threaten the vitality of the Program. While some covered entities have abused and gained substantial revenue from the Program, other covered entities, such as Disproportionate Share Hospitals, critical access hospitals, and clinics have heavily relied on the Program to survive. Drastic cuts to the Program could severely impact the Program’s original mission to provide and increase healthcare access to vulnerable patients. If attempts to correct abuse within the Program are overreaching, not only will uninsured and underinsured patients be harmed, but the safety net hospitals and programs that treat these patients will also endure financial hardship.

Solutions to Improving the 340B Program

The original intention of the Program remains relevant and, despite Congressional scrutiny, there is still bipartisan support for the Program. The following are recommendations that could improve, and ease concerns of abuse, within the Program.

Increase HRSA’s Regulatory Authority for Greater Program Oversight

Congress should give HRSA greater regulatory authority on areas deemed not expressly authorized by Congress, which will allow the agency to promulgate rules necessary to efficiently run the Program without being open to litigation challenging its regulatory authority. This will allow HRSA to issue necessary guidance and audit for noncompliance. Increased transparency of how hospitals are using revenue will ensure that abusers of the Program are held accountable, while providers that heavily rely on the Program can adequately enhance care to their vulnerable patients. Increasing the agency’s regulatory authority will ensure that the Program operates in the way Congress originally envisioned.

Provide Clear Definition of Patient

HRSA should issue guidance, within its regulatory authority, that modifies patient definition guidelines. Currently, the patient definition is broad, encompassing patients with Medicare and commercial insurance. As concerns grow that unintended patients are receiving discounts under the Program, providing a clear definition increases the likelihood that only intended, vulnerable patients are receiving the care they need and have adequate access to their medications.

Clarify the Criteria for Eligible Covered Entity


There needs to be more specificity and clarity of the standards for eligible covered entities. Congress should grant HRSA regulatory authority to specify the entities that qualify for the Program by issuing guidance that provides clear, unambiguous criteria. HRSA should furthermore ensure that entities that apply for 340B discounts treat a disproportionate number of vulnerable patients and are committed to increasing charity care with revenue gained from the Program.


It is clear that the 340B Program is needed, but that there is uncertainty in how to improve the Program overall. These solutions will not guarantee a panacea to fix the many problems within the Program, but they can rein in some of the unintended consequences of the Program, as many safety net hospitals still need the flexibility to expand healthcare services for their patients. With proper guidance, the Program can operate the way Congress intended, while still providing access to medications for vulnerable patients who desperately need them.

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1 Dickson, Virgil. “Lawmakers Worry Providers are Abusing the 340B Program.” (Oct. 11, 2017); Conti, R. & Bach, P.,The 340B Drug Discount Program: Hospitals Generate Profits By Expanding To Reach More Affluent Communities, Health Affairs (2014), available at

2 HRSA is the federal agency responsible for improving healthcare medically underserved patients across the United States.

3 Veteran’s Health Care Act of 1992, Pub. L. No. 102-585, 106 Stat. § 602 (amended Public Health Servs. Act to include § 340B).

4 Id.

5 Dep’t of Health and Human Servs., Medicaid Drug Rebate Program, MEDICAID.GOV (last updated Feb. 15, 2017),

6 340B-covered entities include Disproportionate Share Hospitals, critical access hospitals, cancer hospitals, rural referral centers, and sole community hospitals. They also include non-hospital entities such as federally qualified health centers (FQHCs), Ryan White HIV/AIDS program grantees, and other health clinics. To apply, entities must carry covered outpatient drugs and meet other criteria as specified by the 340B statute.

7 Jon Reid, “House Energy and Commerce Report Calls for 340B Discount Drug Program Overhaul,” (January 10, 2018). Congress recently released a report that calls for more program oversight by HRSA over the Program, including stricter reporting requirements for covered entities.

8 61 Fed. Reg. 55156, 55157.

9 Medicare Payment Advisory Comm’n, Report to the Congress: Overview of the 340B Drug Pricing Program, at 13 (2015); U.S. Government Accountability Office Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement, GAO 11-836 (2011).

10 Sec. 340B PUBLIC HEALTH SERVICE ACT 42 U.S.C. § 256b(a)(4).

11 U.S. Senate Energy and Commerce Subcommittee on Oversight and Investigations. “Examining How Covered Entities Utilize the 340B Drug Pricing Program.” (Oct. 11, 2017),

12 Id.

13 Medicare Payment Advisory Comm’n, supra n. 9, at vii.

14 Id

15 U.S. House of Representatives Energy and Commerce Committee. Report: Review of the 340B Drug Pricing Program at 2. (2017), available at

16 Medicare Payment Advisory Comm’n, supra n. 9, at vii.  The Patient Protection and Affordable Care Act (PPACA) also modified the formula for determining Disproportionate Share Hospital payments, which based payments on a hospital’s ratio of Medicaid and low-income Medicare patients prior to the passage of PPACA.  Many hospitals saw a shift of uninsured patients enroll in Medicaid, which likely caused them to qualify, or be more likely to qualify, for 340B discounts.

17 Id.

18 Shepherd, Joanna, The Prescription for Rising Drug Prices: Competition or Price Controls?  27 Case Western J. of Law & Medicine., 314, 333 (2017). 19 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, §7101, 124 Stat. 259 (2010).

20 Notice Regarding 340B Drug Pricing Program—Contract Pharmacy Services, 75 Fed. Reg. 10,272 (Mar. 5, 2010),

21 Medicare Payment Advisory Comm’n, supra n. 9. 22 Medicare Payment Advisory Comm’n, Report to the Congress: Medicare Part B Drug Payment Policy Issues, at 40 (2017).

23 82 Fed. Reg. 52356, 52398.

24 Complaint, American Hospital Assn. vs. Hargan, (D.D.C. 2017) (No. 1:17-cv-02447), available at

25 American Hospital Assn. vs. Hargan, (D.D.C. 2017) (No. 1:17-cv-02447).

26 U.S. Government Accountability Office, Testimony Before the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives: Update on Agency Efforts to Improve 340B Program Oversight, available at (July 2017).

27 Dep’t of Health and Human Servs. Interpretive Rule: Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities Under the 340B Program, available at

28 Yood, Kenneth, “D.C. District Court Vacates HRSA’s Interpretative Rule on Orphan Drugs,” (Oct. 20, 2015).

29 82 Fed. Reg. 1210.  HRSA cited clear authority to promulgate this rule.

Ayeisha A. Cox, Esq.

DrFirst, Inc., Rockville, MD

Ayeisha A. Cox serves as Corporate Counsel for DrFirst, Inc. a healthcare IT company in Rockville, Maryland, where she advises on HIPAA-related issues, including potential risks in contractual, regulatory, and compliance matters. In addition, Ms. Cox is the CEO of AAC Healthcare Consulting, where she educates hospital and physician clients on matters related to Medicare and Medicaid regulatory guidance and compliance. Ms. Cox graduated from Emory University School of Law and is admitted to the Virginia State Bar. She is also a member of the American Bar Association (Health Law Section) and the American Health Lawyers Association. She may be reached at [email protected].