340B: The Drug Pricing Program Everyone in Healthcare Should Understand

If you work in healthcare — as a provider, an administrator, a payer, or in policy — you’ve probably heard the term “340B” used in the healthcare setting. The program is genuinely complicated, and the conversation around it has grown louder as the dollars involved have grown larger.

In a recent RxLaw Group conversation, Dr. Kevin Hartman, a 340B contract pharmacy owner, walked through 340B from the operator’s side, and Matt Gibbs added the perspective of someone with more than a decade inside Tennessee’s healthcare regulatory system. Together they laid out something worth understanding before a pharmacy ever decides whether 340B belongs in its business. The discussion below draws on that conversation.

What Is 340B?

The 340B Drug Pricing Program was created by Congress in 1992 as part of the Public Health Service Act. Its core idea is straightforward: pharmaceutical manufacturers that want their drugs covered by federal payor programs (e.g. Medicaid) must also sell those same drugs to certain covered entities at a steep discount. The discount price is created through a statutory formula. This price is called the “340B ceiling price.”

The result is that covered entities can acquire drugs for significantly less than reimbursement rates. The difference — often called “the spread” — is retained by the covered entity and is supposed to be reinvested into serving underprivileged patients. As Dr. Hartman put it, the savings let covered entities grow their services without doing it on the back of the taxpayer. For many safety-net providers, 340B savings are a meaningful, sometimes essential, revenue stream.

The scale of the program today reflects just how fully that idea took hold. Covered entities purchased $66.3 billion in drugs through the program in 2023, and that figure climbed to $81.4 billion in 2024. This amounts to a jump of nearly 23% in a single year. At that pace, the program is on track to approach $100 billion. That growth is what has made 340B a target for manufacturers, regulators, and legislators alike.

Who Qualifies?

Not every healthcare organization can participate. The statute designates specific types of covered entities, which fall into two buckets.

On the hospital side, the biggest category is Disproportionate Share Hospitals (“DSH”) — facilities that serve a high proportion of low-income patients and meet an adjustment percentage threshold. Also eligible are children’s hospitals, critical access hospitals, rural referral centers, and sole community hospitals.

On the non-hospital side, the eligible entities are organizations receiving specific federal grants: Federally Qualified Health Centers (“FQHCs”), Ryan White clinics, Title X family planning clinics, STD and TB clinics, hemophilia treatment centers, and others.

By sheer number of registered sites, FQHCs are the most numerous participants. But by drug purchase volume, DSH hospitals dominate, accounting for roughly three-quarters of total 340B drug spending. This concentration is why the policy debate around 340B is almost entirely focused on hospitals rather than community health centers.

How Contract Pharmacies Fit In

Most covered entities don’t operate their own full-service pharmacy. To extend the program’s reach, the Health Resources and Services Administration (“HRSA”), the federal regulatory oversight agency for the 340B program, allows covered entities to contract with outside pharmacies to receive 340B drugs on their behalf from the manufacturers and then dispense the drugs accordingly. Contract pharmacies are made up of both independent community pharmacies and large retail chain pharmacies. Contract pharmacies dispense prescription drug products purchased at 340B prices and collect insurance reimbursement on behalf of the covered entity, returning the spread (minus a dispensing fee) to the covered entity. While the cost of purchasing the drug is significantly reduced, the reimbursement rates are standard rates. As noted, this difference creates the spread.

Managing this relationship requires careful data tracking, which is why most contract pharmacy arrangements involve a third-party administrator (“TPA”). TPAs sit between the covered entity and the pharmacy, monitoring which prescriptions qualify under 340B eligibility rules and ensuring compliance with the program’s three cardinal requirements.

The Three Rules That Everything Else Flows From

Underneath all the operational complexity of 340B are three core tenets of the 340B program:

No diversion. A 340B-priced drug can only be dispensed to a patient of the covered entity. A patient is someone who has received a qualifying service from that entity, under the care of its provider, within a defined patient relationship. Dispensing to anyone else is prohibited.

No duplicate discounts. You cannot claim both the 340B discounted acquisition price and a Medicaid rebate on the same drug. This would mean the manufacturer pays twice, which the statute prohibits. Managing this in practice, particularly as Medicaid managed care has grown, is one of the most technically demanding aspects of 340B compliance.

Patient eligibility is the third critical piece. HRSA’s long-standing guidance from 1996 defines a qualifying patient using a three-part test: (1) the individual must have an ongoing relationship with the covered entity, and the entity must have a professional relationship with the patient such that it maintains responsibility for the care provided; (2) the patient must receive health care services from a professional who is either employed by, under contract with, or has another documented arrangement with the covered entity; and (3) the entity must maintain health records (such as clinical notes or single-form notes) that document the medical evaluation, treatments, or prescriptions provided to the individual. While this definition has been stable for 30 years, it is currently being challenged by industry stakeholders in federal court.

The Reimbursement Picture

Understanding who pays what is essential to understanding why 340B matters financially.

When a 340B drug is dispensed, the payer typically reimburses at the same rate it would for any other dispensing. The payer generally doesn’t know (and historically hasn’t known) that the drug was acquired at 340B pricing. That is changing: starting in 2026, CMS is requiring claims-based identification of 340B drugs under Medicare Part D, creating a new layer of transparency that payers and regulators will be watching closely.

A Program Under Pressure

The 340B program is more contested today than at any point in its history.

Manufacturer restrictions have been the flashpoint. Beginning in 2020, major drug manufacturers began limiting or refusing 340B shipments to contract pharmacies, arguing that the program had expanded well beyond its original intent. HRSA pushed back and litigation has been ongoing, with courts reaching mixed results across different circuits.

HRSA’s rebate model pilot — announced in mid-2025 — would have shifted the program’s mechanics from upfront discounts (the current model) to a back-end rebate system, similar to how Medicaid works. A federal court vacated it in February 2026, ruling HRSA lacked authority to implement such a fundamental change without notice-and-comment rulemaking. The agency has since issued a Request for Information, signaling the idea isn’t dead.

State reporting laws have proliferated. These laws require covered entities to disclose how 340B savings are being used — a direct response to critics who argue the statute imposes no requirements on how entities deploy their savings. Covered entities often reinvest in sliding-scale care, expanded services, or general operations, but the opacity has fueled political pressure.

Where Is This Headed?

The 340B program is unlikely to disappear. It is too embedded in the financial infrastructure of safety-net providers and too broadly supported in Congress. But it is entering a period of structural renegotiation.

The core tension is one that has always been present: a program designed to help providers serve the underprivileged has grown into a multibillion-dollar revenue mechanism, and not all participants look like the safety-net entities Congress had in mind in 1992. The combination of court decisions narrowing HRSA’s authority, manufacturer restrictions, compressed reimbursement rates, and growing transparency requirements means that the comfortable economics of the last decade are unlikely to persist unchanged.

For covered entities, contract pharmacies, and the administrators who manage these relationships, the lesson is the same: compliance, documentation, and a clear-eyed understanding of where the rules are heading are no longer optional. They are the table stakes for staying in the program.

The 340B program remains one of the most consequential and least publicly understood levers in the U.S. drug pricing system. As the policy environment shifts, the organizations that navigate it best will be those that understand not just the rules, but the pressures reshaping them.

What to Do Now

If 340B is on your radar, it’s worth understanding what participation would require of your operation before you file a single claim.

RxLaw Group helps pharmacies, compounders, and healthcare providers weigh whether 340B fits and get their compliance footing right. Schedule a consultation with Attorney Matt Gibbs to discuss a 340B readiness review.

_{This article is for informational purposes only and does not constitute legal advice. The 340B program is complex and its rules change frequently. Consult with a qualified attorney for guidance specific to your situation.}