What Is the 340B Prescription Drug Discount Program?

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Section 340B of the Public Health Service Act requires significant discounts on outpatient drugs for “covered entities"—safety-net providers and programs.

In this new 340B insight series, Avalere will explain how the 340B program was established, provide an overview of stakeholders, and discuss key trends. This insight will discuss the program’s history, background, and key functions.


The 340B Drug Pricing Program was aimed at mitigating potential changes in pricing resulting from new pricing incentives following the creation of the Medicaid Drug Rebate Program (MDRP) in 1990. The MDRP requires prescription drug manufacturers to pay rebates on drugs sold in the Medicaid program as a condition of participating in Medicaid and Medicare Part B. Under the MDRP, rebates were determined using the “best price” in the market and incorporated voluntary rebates manufacturers paid to safety-net providers and Department of Veterans Affairs (VA) providers. However, the creation of the new Medicaid rebate prompted concern among safety-net providers that they could see increased rates in their contracts with drug manufacturers.

In November 1992, Congress passed Section 340B of the Public Health Service Act, which required pharmaceutical manufacturers that participate in the Medicaid and Medicare Part B programs to sell outpatient drugs to certain providers and programs, called covered entities, at significant discounts. Congress noted that the intent of the program is to enable covered entities to “… stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”

Eligible Providers: What Is a 340B Covered Entity?

Covered entities can receive 340B pricing on outpatient drugs prescribed to eligible patients. Covered entities fall into two categories: hospitals and grantees. Both 340B hospitals and grantees may contract with pharmacies to dispense drugs to eligible patients.

Hospitals participating in the 340B program must be owned or operated by a state or local government, a public or private non-profit corporation granted powers by a state or local government, or a private non-profit group holding a contract with a state or local government to render care to low-income individuals ineligible for Medicare or Medicaid. Additionally, except for critical access hospitals, 340B hospitals must have a disproportionate share hospital (DSH) percentage (noted below) that reflects the inpatient percentage of Medicaid patients and low-income Medicare patients. 340B hospitals may also register additional offsite outpatient sites known as “child sites” to participate in the program.

Table 1. Qualifying DHS Percentage by 340B Hospital Type
340B Hospital Type Qualifying DSH Percentage
DSH Hospitals >11.75%
Children’s Hospitals >11.75%
Free Standing Cancer Hospitals >11.75%
Rural Referral Centers >8%
Sole Community Hospitals >8%
Critical Access Hospitals No DSH requirements

Other non-hospital providers that receive federal funding are known as “grantees” and can participate in the 340B program. Grantees may also include organizations known as “subgrantees” that receive a subaward or in-kind donations from a recipient of an eligible federal grant. These include:

  • Black lung clinics
  • Comprehensive hemophilia diagnostic treatment centers
  • Federally Qualified Health Centers (FQHCs)
  • FQHC look-alikes
  • Native Hawaiian health centers
  • Ryan White HIV/AIDS Program grantees
  • Sexually transmitted disease clinics
  • Title X family planning clinics
  • Tribal/urban Indian health centers
  • Tuberculosis clinics

Eligible Patients

Covered entities may access 340B pricing on outpatient drugs for all patients, regardless of their insurance status. Covered entities must establish relationships with and maintain records for their patients. Patients must receive services from a healthcare professional who is either employed by the covered entity or providing care under contract with the covered entity that remains responsible for the care provided. Additionally, patients must receive healthcare services from the covered entity consistent with the services for which grant funding or FQHC look-alike status is outlined.

340B Discounts

In the 340B program, the 340B ceiling price equals the average manufacturer price subtracted by the Medicaid unit rebate amount. According to a 2015 Medicare Payment Advisory Commission report, 340B pricing on average reflects a 34% discount on the cost of outpatient drugs, but the discount range varies among facilities and drugs. The report also estimated that 340B drugs are discounted by 22.5%. The 340B statute prohibits duplicate discounts in Medicaid (i.e., when a covered entity and a state Medicaid agency receive a discount on the same drug unit).

Learn More

Our next insight will provide an overview of key stakeholders in the 340B program. This will be followed by an insight exploring duplicate discounts.

As policymakers consider changes to the 340B program, stakeholders can prepare by understanding how shifts in policy will impact their business. Avalere’s subject matter experts continue to track ongoing activity at the state and federal level that could influence the broader program landscape. To learn how Avalere can help you qualitatively and quantitatively evaluate the impact of various developments and policy proposals related to 340B, connect with us.

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