Can Comprehensive 340B Reform Generate Federal Savings?

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Stakeholders are debating potential reforms to the 340B program, with specific policies directly or indirectly impacting federal spending.

Over the past several months, Congress has introduced an array of draft legislation that aims to reform the 340B program, with support from varying stakeholders including 340B covered entities and drug manufacturers. It is estimated that the 340B program reached almost $55 billion in sales in 2022, which represents an increase of 169% in the last five years and puts it on pace to become one of the largest federal drug programs. The 340B program is unique in that the federal government mandates a transfer of discounts between private entities but does not share in the savings or place explicit requirements on how the funds are used.

The substantial 340B growth in recent years, coupled with equivocal outcomes of recent litigation, have given rise to various reform proposals. Through legislation, Congress could address outstanding questions around contract pharmacies, define the enforcement authority of the federal agency that oversees the program, add new transparency or reporting obligations, and clarify the definitions that guide eligibility for patients and providers. It is unclear how these efforts will evolve in the current Congress and during an election year, but it is broadly understood that they will have a significant financial impact on the healthcare industry, including pharmaceutical manufacturers, 340B hospitals, and federal grantees. It is less clear whether comprehensive 340B reform could also yield any savings for the federal government, which could impact the level of interest on Capitol Hill in pursuing specific bills.

Opportunities for policy reform to impact federal savings could include:

  • Part B Reimbursement for Drugs Acquired Through the 340B Program: One of the most direct opportunities for federal savings is linked to how the Centers for Medicare and Medicaid Services (CMS) choses to set reimbursement for 340B drugs in Medicare Part B. In 2018, CMS lowered Part B payment for drugs acquired through the 340B program from average sales price (ASP)+6% to ASP-22.5% (before sequestration is applied). Stakeholders later filed a lawsuit questioning CMS’s methodology, which led to a Supreme Court ruling directing CMS to vacate its differential reimbursement methodology and repay hospitals for the “underpayment.” Existing statute requires that reimbursement for Part B drugs in the hospital outpatient setting be equal to the average acquisition cost for the drug, as determined by the US Department of Health and Human Services (HHS) based on a survey of hospitals. Congress could potentially compel CMS to conduct a robust survey of hospital acquisition costs for 340B drugs and set payment accordingly, which could yield direct savings for Medicare and beneficiaries.
  • Provider Consolidation and Site of Care Shifts: The Health Resources and Services Administration (HRSA) allows 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. Over the last few years, stakeholders have highlighted how this and other provisions of the 340B program may incentivize provider consolidation into hospitals, which allows acquired practices to become eligible for the 340B discounts. In fact, the Congressional Budget Office (CBO) itself highlighted in a September 2022 report that the 340B program may be an example of a payment policy that encourages provider consolidation. This consolidation may have a growing impact on federal spending, as Medicare reimbursement rates are often higher for services in hospital outpatient departments than in physician offices. Stakeholders have also expressed concern that 340B incentives may incentivize prescribing more drugs or more expensive drugs. In 2015, the Government Accountability Office found that per beneficiary Part B drug spending (including oncology drug spending) was substantially higher at 340B disproportionate share hospitals (DSHs) than at non-340B hospitals. Any 340B policy changes that limit 340B incentives may slow the trends of integration and consolidation, which in turn could bend the cost curve for Medicare spending.
  • Implications of the 340B Program on Income Tax Revenue: There are several ways that tax revenue could be impacted by the 340B program. The first stems from the potential links between 340B growth and premium increases that have recently been explored by stakeholders. Employer-paid premiums for health insurance are exempt from federal income and payroll taxes, as is the portion of premiums paid by employees. Therefore, any premium increases catalyzed by the growth of the 340B program represent tax expenditures for the federal government. Conversely, any policies that mitigate 340B growth and its impact on premiums could increase tax revenues. In addition, 340B discounts are classified as a business expense for drug manufacturers, and 340B discounts are non-taxable income for 340B covered entities, both of which have an impact on federal tax revenues.
  • Uncompensated Care for Patients with Limited Income and Those Who Are Uninsured: Although there is no clear requirement in the 340B program to pass the drug discounts to patients with limited income or coverage, there is an implicit expectation that 340B covered entities would reinvest the funds to increase access to care and services for vulnerable patients. The statute does not define the purpose of the 340B program, but HRSA’s interpretation is that the intent is “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” However, a report by the HHS Office of Inspector General (OIG) found that two-thirds of hospitals do not offer reduced 340B prices to uninsured patients. A recent analysis also found that 36% of 340B DSH hospitals provide charity care that represented less than 1% of their total operating costs in fiscal year 2021. Another study, published in 2021, found no evidence that hospitals increased provision of uncompensated care after entry into the 340B program. At the same time, the Kaiser Family Foundation estimated that the federal government contributed an estimated $21.7 billion through various programs to offset the cost of uncompensated care for uninsured patients. Any 340B reforms that increase oversight over how 340B discounts are used to directly reduce costs for patients could potentially yield savings from various federal uncompensated care programs.
  • Launch and List Prices for Drugs: A 2021 report highlighted 340B as one of the contributors to upward pressure on launch list prices, because manufacturers are likely to factor in all forms of discounts when determining pricing. Should any 340B proposal seek further growth of the program, this could diminish the incentive for manufacturers to raise list prices to offset their 340B liability. Bending the trend on launch and list prices could result in federal government savings across various major drug programs.

What’s Next

The CBO’s current approach to developing cost estimates for 340B proposed legislation may not reflect these considerations. As Congress considers legislation related to the 340B program and its growing complexities, it raises the question of whether the secondary impacts above could be incorporated into the scoring process.

To learn more about the state of the 340B program and potential impacts of proposed and discussed reforms, connect with us.

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