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Origins and Purpose of the 340B Program
The 340B Drug Pricing Program helps certain healthcare providers, known as covered entities, stretch limited resources while expanding access to outpatient medications for vulnerable populations. It was established in 1992 under Section 340B of the Public Health Service Act.
The 340B Drug Pricing program originated as a response to unintended consequences of the Medicaid Drug Rebate Program, which had discouraged manufacturers from offering voluntary discounts to safety-net providers. Congress enacted the 340B program to formalize mandatory discounts for designated safety-net providers, protect them from rising drug costs and help them extend their resources to serve more eligible patients.
The program’s foundational goal remains consistent: to enable covered entities to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services”. This mission directly supports healthcare organizations in their efforts to provide affordable medications and enhanced services to underserved communities.
How Does 340B Pricing Work?
Ceiling Price Calculation
The maximum price manufacturers can charge covered entities, known as the “ceiling price,” is calculated using this formula:
Ceiling Price = Average Manufacturer Price (AMP) – Unit Rebate Amount (URA)
The formula incorporates statutory minimum rebate percentages:
- 23.1% of AMP for most brand-name drugs
- 17.1% of AMP for certain pediatric drugs and clotting factors
- 13% of AMP for generic drugs
Additional factors can increase the discount, including an inflation penalty when drug prices rise faster than inflation and considerations of Medicaid “best price.”
Typical Discount Levels
The 340B ceiling price typically results in discounts ranging from 25% to 50% off a drug’s average price. Discounts can be even more substantial due to the inflation penalty component, particularly older brand-name medications with significant price increases.
In cases where the calculated ceiling price is less than $0.01, “penny pricing” applies, setting the price at $0.01 per unit. This can result in extremely deep discounts for some medications, creating significant savings opportunities for covered entities to reinvest in patient care.
Eligible Covered Entities
Participation in the 340B program is limited to two types of healthcare organizations: hospital types, federal grantees. As covered entities, both these organization types must meet specific conditions.
Hospital Types:
- Disproportionate Share Hospitals (DSH) that serve a high percentage of low-income patients, greater than 11.75%*
- Children’s Hospitals that provide care primarily to pediatric populations, 11.75% or greater*
- Freestanding Cancer Hospitals specializing in oncology care, greater than 11.75%*
- Sole Community Hospitals serving as the primary care provider in rural areas, 8% or more*
- Rural Referral Centers providing care in non-urban settings, 8% or more*
- Critical Access Hospitals with 25 or fewer acute care beds in rural communities (and are exempt from the DSH percentage requirement*)
*The DSH adjustment percentage is a Medicare calculation that reflects the proportion of low-income patients a hospital serves, based on the percentage of inpatient days for Medicaid patients and Medicare patients who receive Supplemental Security Income (SSI). This percentage serves as a key eligibility metric to ensure 340B benefits flow to hospitals with a documented commitment to serving financially vulnerable populations.
Federal Grantees:
- Federally Qualified Health Centers providing comprehensive primary care
- Ryan White HIV/AIDS Program grantees serving HIV-positive individuals
- State-operated AIDS Drug Assistance Programs providing HIV medications
- Title X Family Planning clinics offering reproductive health services
- Specialized clinics for tuberculosis, sexually transmitted diseases, and hemophilia
Qualifying Criteria:
Hospitals must meet the following two criteria to participate in the 340B program
- demonstrate minimum DSH percentage treatment, per above
- Critical Access Hospitals are exempt from the DSH percentage requirement due to their essential rural healthcare role.
- meet ownership requirements
- be government-owned or
- have formal governmental powers or
- maintain contracts to provide care to low-income individuals not eligible for Medicare or Medicaid.
Financial Flow and Generation of Savings
- The discounted price at which the entity purchases drugs
- The higher reimbursement received from third-party payers
- The covered entity purchases medications at the 340B ceiling price
- Medications are dispensed to eligible patients through in-house or contract pharmacies
- Insurance payments are collected at standard reimbursement rates
- The difference between purchase price and reimbursement creates the financial benefit
Leveraging 340B Savings for Patient Assistance Programs
One of the most impactful ways healthcare organizations use 340B savings is by resourcing or using vendors to help patients through patient-focused philanthropic funding programs.
Free Drug Programs
These programs allow covered entities to provide medications at no cost to qualifying patients by:
- Targeting uninsured or underinsured patients below certain income thresholds
- Focusing on high-cost or critical medications for chronic conditions
- Implementing clear distribution processes to ensure compliance with 340B requirements
- Developing standardized eligibility criteria for consistent application
Hospitals use 340B savings to implement programs and hire staff that provide direct patient benefits. Patients can receive essential medications, improving health outcomes and reducing emergency department visits and hospitalizations when medication acquisition costs are reduced,
Co-Pay Assistance & Diagnosis-based Foundation Initiatives
Covered entities can use 340B savings for insured patients struggling with high co-payments or deductibles to implement:
- Co-pay cards that reduce patient out-of-pocket costs
- Voucher systems for specific prescriptions
- Sliding fee scales based on patient income level
- Deductible support during high-deductible phases of coverage
These programs benefit patients with chronic conditions requiring costly specialty medications. These programs help prevent disease progression and complications by removing financial barriers to medication adherence.
Program Integrity and Compliance
While implementing patient assistance programs, covered entities must maintain strict compliance with 340B requirements:
Key Compliance Areas:
- Prevent duplicate discounts (when a manufacturer provides both a 340B discount and a Medicaid rebate on the same drug)
- Avoid diversion of 340B drugs to ineligible patients
- Define and verify patient eligibility
- Maintain comprehensive documentation and audit readiness
- Ensure transparency in program administration
340B Drug Pricing Enables Safety Net Hospitals
The 340B Drug Pricing Program equips safety net hospitals with a vital tool to serve vulnerable populations. And entities generate savings that benefit patients via free drug programs and co-pay assistance through compliance.
As medication costs rise, these programs determine whether patients get necessary treatment. This is the 340B program’s core mission: stretch resources and ensure access to medication for those most in need.
