Background

Administered by the federal agency, the Health Resources & Services Administration (HRSA), the 340B Drug Pricing Program was established to enable certain safety-net providers, known as covered entities, who typically care for underserved populations to purchase covered outpatient drugs at substantial discounts from manufacturers. The program was created in 1992 after the enactment of the Medicaid drug rebate program due to concerns around the availability of voluntary discounts on drugs sold to safety-net providers.

All manufacturers participating in Medicaid or Medicare Part B are required to offer 340B discounts on outpatient medicines to qualifying covered entities, with the amount varying by drug. The statute defines covered entities to include specific hospital types, health centers, specialized clinics, and other federal grantees. Most hospitals enrolled in the 340B program are eligible in part based on a required Medicare disproportionate share hospital (DSH) adjustment percentage, which reflects the inpatient percentage of Medicaid and low-income Medicare beneficiaries.

Covered entities are permitted to retain the difference between the 340B acquisition cost for a medicine and the price charged to patients and insurers. There are no requirements in statute or regulation for covered entities to pass savings generated through the program to patients or be reinvested in ways that support care for indigent populations. In fact, the 340B program does not require that hospitals report how much revenue they generate from the program or how that revenue is used.

In the years since the program was established, the HRSA has issued guidance for 340B covered entities to register their off-campus outpatient facilities—known as “child sites”—in the program if the facility meets certain rules and is included in a hospital’s cost report. The agency also issued separate guidance that allows covered entities to enter contract pharmacy arrangements with an unlimited number of external pharmacies. As a result, covered entities began receiving 340B discounts for drugs administered and dispensed at child sites and contract pharmacies. These policy changes, coupled with market dynamics and expanded covered entity eligibility criteria, have resulted in the substantial growth of the program, raising stakeholder concerns around the 340B program’s core mission to treat underserved populations.

Avalere explored the race/ethnicity and income of populations in areas where a 340B DSH hospital’s contract pharmacies and child sites are located relative to the populations in areas where the 340B DSH hospital itself is located to determine whether demographics at these locations differ substantially. The study examined 340B DSH hospitals participating in the program in 2021; contract pharmacies, which dispense pharmacy benefit products; and child sites, which administer physician-administered drugs. The 2019 American Community Survey was the source of race/ethnicity and income data.

Findings on Income and Demographics of 340B DSH Hospital Contract Pharmacy ZIP Codes

This analysis examines the extent to which contract pharmacies are located in areas where underserved populations live, since these populations are the intended recipients of 340B benefits. This analysis focuses on those who are low-income and non-White.

Among the contract pharmacies affiliated with DSH hospitals, 94% are located in a different ZIP code than their 340B DSH hospital. Most contract pharmacies that are in a different ZIP code are located in an area that had a higher median income than their 340B DSH hospital, with 46% located in areas where the median income is at least 30% higher.

Avalere also analyzed the extent to which contract pharmacies serve populations from racial and ethnic minority groups. The analysis found that among contract pharmacies located in different ZIP codes than their main 340B DSH hospital, 41% are located in ZIP codes with a population that had at least 10% more White residents than the ZIP code of the main DSH hospital. Nearly 26% of 340B DSH hospital contract pharmacies are located in a ZIP code where the percentage of the population that is White is at least 30% higher than in the ZIP code of the associated 340B DSH hospital.

Findings on Income and Demographics of 340B DSH Hospital Child Site ZIP Codes

Avalere also compared income and race demographics between 340B DSH hospitals and their off-campus child sites. Similar to contract pharmacies, child sites are eligible for 340B discounts and are intended to serve 340B-targeted populations. The analysis shows that 61% of child sites are located in a different ZIP code than the main 340B DSH hospital and of these, 60% are in areas with at least 10% higher median income than their main 340B DSH hospital. Almost half (47%) have median incomes at least 30% higher than their parent sites.

Similar to the findings for 340B DSH hospitals and their contract pharmacies, Avalere found that among child sites located in different ZIP codes than their main 340B DSH hospital, approximately 26% are located in an area where the percent of White residents are at least 30% more than in the ZIP codes of the associated 340B DSH hospital.

Findings on Uninsured Levels in 340B DSH Hospital Child Site and Contract Pharmacy ZIP Codes

The intent of the 340B program is not simply to provide access to drugs to underserved populations but to also allow covered entities to use 340B savings to benefit low-income and uninsured patients. Avalere’s analysis found that when child sites and contract pharmacies are located in a different ZIP code than the main 340B DSH hospital, 60% of child sites and 49% of contract pharmacies are in areas with a smaller share of uninsured populations relative to location of their 340B DSH hospital.

What’s Next

The growth of the 340B program has raised questions regarding targeted reforms, limits on child sites and contract pharmacies, and the definition of 340B patients. As stakeholders discuss options to reform the 340B program, the demographic characteristics of the patients served by 340B covered entities and the potential guardrails that protect access for populations that are the intended recipients of 340B benefits can be used to inform that process.

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Methodology

Avalere analyzed the 340B parent, child site, and contract pharmacy relationships using data from HRSA’s Office of Pharmacy Affairs Information System (OPAIS). The study sample included covered entities participating in the 340B program in 2021. To conduct this analysis, Avalere merged ZIP code-level median income and racial demographic data from the 2019 American Community Survey using the addresses available in the OPAIS data. Differences in median income and race were examined to measure the extent to which the populations at covered entities are similar to or different from the populations at child sites and contract pharmacies.