The 340B Drug Pricing Program: How It Works

keep climbing, the 340B Drug Pricing Program is part of the answer. Created in 1992, this federal program requires drug manufacturers to sell outpatient medications to eligible healthcare providers at discounts of 25% to 50% off regular prices.

But here’s what makes it interesting: it’s grown from covering roughly 90 hospitals at inception to a program where covered entities purchased $66.3 billion in discounted drugs in 2023 alone. That growth has sparked debates about whether it’s still serving its original purpose. That scale has raised questions about oversight, but it has also made 340B essential for many clinics and FQHCs.

DosePacker supports covered entities with tools and services that simplify how they run their 340B pharmacy operations.

What The 340B Program Actually Does

The concept is straightforward. Drug manufacturers participating in Medicaid must provide outpatient drugs to covered entities at significantly reduced prices. In exchange, their medications get covered under Medicaid and Medicare Part B.

Think of it as a trade-off. Pharmaceutical companies agree to steep discounts for certain healthcare providers in return for maintaining access to the massive Medicaid and Medicare markets.

The discount structure follows specific formulas. For most brand-name drugs, manufacturers must offer at least 23.1% off the average manufacturer price. For generic medications, that minimum drops to 13%. But covered entities often negotiate even deeper discounts below these ceiling prices.

When insurance reimburses above what the hospital paid for the medication, that difference becomes revenue the hospital can use to expand services, provide free care, or fund community health programs.

Who Qualifies For 340B Drug Pricing

Not every hospital or clinic can access 340B pricing. The program defines eligible “covered entities” in statute, and the requirements are specific.

Hospital categories that qualify:

• Disproportionate Share Hospitals (DSHs) serving high numbers of low-income patients
• Children’s hospitals
• Critical Access Hospitals in rural areas
• Rural Referral Centers
• Sole Community Hospitals
• Freestanding cancer hospitals

Most hospitals must meet a “disproportionate share” threshold, meaning at least 11.75% of their patients are low-income and uninsured. They also need to be owned by a government entity or be a nonprofit with contracts to serve vulnerable populations.

Federal grantee categories:

• Federally Qualified Health Centers (FQHCs)
• Ryan White HIV/AIDS clinics
• State AIDS Drug Assistance Programs
• Family planning clinics receiving Title X funding
• Tuberculosis clinics
• Black lung clinics
• Hemophilia treatment centers

In 2021, there were over 55,000 active 340B-covered entities, with hospitals accounting for the largest share.

How Registration And Compliance Work

Getting approved requires navigating specific windows and ongoing responsibilities.

Facilities can register only during the first two weeks of each calendar quarter: January 1-15, April 1-15, July 1-15, and October 1-15. Once approved by the Health Resources and Services Administration (HRSA), entities are added to the 340B OPAIS database and receive a unique 340B identification number.

The approval isn’t permanent. Covered entities must recertify their eligibility every year. Miss that recertification, and you’re out of the program.

The program also has strict rules about who can receive discounted medications. Drugs purchased at 340B prices can only go to patients who meet a specific definition: there must be a documented healthcare relationship with the covered entity, and the provider must be employed by or under contract with that entity. This prevents “diversion”, the sale of discounted drugs to ineligible patients.

Another major compliance concern is avoiding “duplicate discounts,” in which a drug receives both the 340B discounted price and a Medicaid rebate. Federal law prohibits this, and covered entities need systems to catch it.

The Role Of Contract Pharmacies

Here’s where things get more complex. Many hospitals don’t have in-house pharmacies, or their patients live far away. Enter contract pharmacies – retail pharmacies like CVS, Walgreens, or independent stores that dispense 340B medications on behalf of covered entities.

The use of contract pharmacies has exploded. From 2010 to more recently, the number of unique 340B contract pharmacies grew by 770%, and total contract pharmacy arrangements increased by 1,245%.

The process works like this: a patient receives a prescription from a 340B provider, takes it to a registered contract pharmacy, and a third-party administrator verifies eligibility. The pharmacy dispenses the medication, then the hospital orders replacement inventory at the 340B price.

This system improves patient access; someone in a rural area doesn’t need to drive to the hospital pharmacy. But it also adds complexity to preventing diversion and ensuring compliance. If your organization needs a more efficient, compliant, and scalable contract pharmacy model, DosePacker can support every step of that workflow.

The Bottom Line

The 340B Drug Pricing Program serves a real need, helping hospitals with limited budgets afford medications for vulnerable patients. When it works well, patients get access to prescriptions they couldn’t otherwise afford, and hospitals can expand services like free clinics, medication management programs, and community health initiatives.

But the program’s rapid growth has created legitimate questions. Is the money reaching patients? Are contract pharmacy arrangements adding value or just complexity? How do we balance program access with preventing abuse?

As policymakers, manufacturers, and hospitals continue debating these questions, one thing remains clear: for many safety-net providers, 340B discounts make it possible to keep serving the patients who need them most. The challenge is ensuring the program delivers on its original promise while addressing valid concerns about transparency and accountability.

For healthcare organizations managing the operational complexities of medication dispensing, whether through 340B or other programs, maintaining accuracy and efficiency matters at every step.