340B drug pricing

The 340B Drug Pricing Program (Section 340B of the Public Health Service Act) is the federal program that requires drug manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to qualifying safety-net healthcare providers (covered entities including Federally Qualified Health Centers, Disproportionate Share Hospitals, Ryan White HIV/AIDS Program grantees, and Critical Access Hospitals). 340B operates through statutory ceiling prices and contracted pricing agreements. HRSA administers the program and conducts audits of covered entity compliance.

How the 340B program works

Covered entities qualify based on their statutory category (FQHC, DSH, Ryan White, Critical Access, and certain other safety-net designations). Once qualified, the entity registers with HRSA's Office of Pharmacy Affairs and can purchase covered outpatient drugs at the 340B ceiling price from participating manufacturers. The entity then dispenses those drugs to its patients through in-house pharmacies, contract pharmacies, or hospital outpatient departments, and bills the patient's insurance (Medicare, Medicaid, commercial) at the standard reimbursement rate. The margin between the 340B acquisition cost and the insurance reimbursement is the program's economic benefit, intended to support the covered entity's mission of expanded care for underserved populations.

HRSA audits covered entity compliance focusing on patient definition (each dispensed claim must be to a qualifying patient of the covered entity under the program's specific definition), diversion (drugs cannot be diverted to non-patients), duplicate discounting (where Medicaid rebates and 340B discounts would both apply, only one is permitted), and contract pharmacy compliance. Manufacturer-side audits also occur, focused on ceiling-price accuracy and compliance with contracted commitments.

When 340B applies

340B applies to outpatient drugs dispensed by covered entities to eligible patients. The program does not extend to inpatient drugs, certain over-the-counter drugs, or drugs dispensed by entities outside the covered category. Manufacturer participation in 340B is required as a condition of participation in Medicaid. The 2024-2026 period has seen significant manufacturer-driven contraction of contract pharmacy participation, with multiple manufacturers limiting or eliminating 340B discounted product availability through contract pharmacies, prompting HRSA enforcement and significant litigation.

The covered entity's exposure under 340B compliance

HRSA audit findings can require repayment of the 340B discount on non-compliant claims and, in significant matters, termination from the program. Loss of 340B status can be financially catastrophic for safety-net covered entities whose operating model depends on the 340B margin. FCA exposure surfaces where 340B compliance failures support knowledge or reckless disregard theories on government program claims. State Medicaid agency parallel enforcement adds another exposure layer. The defense framework focuses on patient-definition documentation, contract pharmacy oversight records, duplicate-discount-prevention controls, and the corrective action engagement with HRSA when audit findings issue.

Related terms

• NDC (National Drug Code) The drug identifier whose accuracy is central to 340B compliance verification.
• Formulary The PBM-side drug list framework that interacts with 340B program drugs.
• AWP The pharmaceutical pricing benchmark that contrasts with the 340B ceiling price framework.
• False Claims Act The civil statute under which 340B compliance failures can support FCA liability.

See also

• Practice area
  Healthcare Fraud Defense

  Healthcare fraud defense framework where 340B compliance disputes intersect with broader fraud enforcement.

• Practice area
  Medicare & Medicaid Audit Defense

  The umbrella Medicare audit defense framework where 340B-program claims also face standard Medicare audit review.