How Does 340B Work? A Guide for Rural Healthcare Leaders

The federal 340B Program is a drug price control program. It lets qualifying facilities purchase outpatient drugs at 20 to 50% below the average manufacturer price. In this article, we answer “how does 340B work?,” who qualifies, and what 340B participation can mean for your rural healthcare facility and the patients you serve.

What Is the 340B Drug Pricing Program?

The 340B Drug Pricing Program is a U.S. federal program created under the Veterans Health Care Act of 1992. It’s managed by the Health Resources and Services Administration (HRSA) through its Office of Pharmacy Affairs (OPA). HRSA sits within the Department of Health and Human Services (HHS). 

Under the program drug manufacturers are required to offer discounts to eligible healthcare organizations (known as covered entities [CEs]), as a condition for the drugs being covered by Medicaid. 

Through the program, eligible hospitals and clinics that serve underserved, low-income, or rural populations, can purchase outpatient prescription drugs at 20 to 50% discounts directly or through a 340B contract pharmacy arrangement.

The program’s goal is to help participants save money, improve access to medications and expand services. Facilities can invest the money not spent on full-price medications to help vulnerable, underserved, and uninsured patients, including through expanded clinical programs, charity care, and community outreach.

How Does the 340B Drug Program Work?

The 340 Drug Discount Program essentially puts extra money in the pockets of participating facilities.

Through the program, CEs purchase prescription drugs at a discount. CEs then bill insured patients’ insurance companies the average manufacturer price (AMP) plus any markup they add at their in-house pharmacy. The difference between what they pay and what they bill insured patients is called 340B savings.

The money they gain from the savings, or surplus funds, are called 340B funds. 340B funds are a form of revenue hospitals and facilities can use. Each facility chooses how to spend their 340B funds. Many choose to use it to:

• Provide low or no-cost medications and services to low-income and uninsured patients
• Offer financial assistance and cover charity care
• Expand access to services, such as mental health services
• Do community outreach
• Cover emergency care and/or specific treatment programs

The 340B Drug Pricing List​ and Orphan Drugs

Almost all outpatient prescription and over-the-counter drugs are on the 340B drug pricing list. HSRA maintains a portal where CEs can see published 340B drug ceiling prices. CEs can also ask their supplier for a complete list of its 340B drugs and prices. 

There are “orphan drugs” that manufacturers aren’t required to discount for rural referral centers, critical access hospitals (CAHs), community hospitals, and cancer hospitals. Orphan drugs are a protected class of medications typically used to treat rare conditions or diseases. In some cases, when orphan drugs are also used to treat common conditions, discounts are applied.

How 340B Drug Program Pricing Is Calculated

That 340B discount is at or below what’s known as a ceiling price and is based on Medicaid drug pricing. It reflects the average manufacturer price (AMP), which is what the drug maker charges a pharmacy, minus a unit rebate amount (URA). Different URA calculations are used for brand name versus generic medications.

Ceiling Price = Average Manufacturer Price (AMP) − Unit Rebate Amount (URA)

The URA represents the rebate that manufacturers pay Medicaid and is typically:

• A minimum of 23.1% for most brand-name prescription drugs
• 13% for generic and over-the-counter drugs
• 17.1% for brand-name pediatric and clotting-factor drugs

When the AMP minus URA is more than the manufacturer’s price for a brand name drug, the manufacturer has to charge 340B participants the lower of the two prices.

How 340B Drug Pricing Is Processed

Manufacturers have to pay Medicaid the URA amount for each drug sold to a Medicaid patient. Pharmacies keep track of medications sold to Medicaid patients. They report them to the state Medicaid agency, which then invoices drug manufacturers who pay the rebate amount back to the state Medicaid agency. The state and federal government split the rebate money according to Medicaid’s state-federal cost sharing rules. For example:

Drug A

• AMP: $100
• URA: $25
• Medicaid reimbursed units: 1,000 

Rebate to Medicaid = 1,000 × $25 = $25,000 (paid back to the state Medicaid program)

340B Penny Pricing

If the URA (the rebate that manufacturers pay to Medicaid) is high, the URA can end up being higher than the AMP. In other words, the discount is more than the cost of the discounted drug, making the ceiling a negative number.

In these cases, HSRA has drug manufacturers use $0.01 for the ceiling price, which is known as penny pricing.

340B Drug Program Pricing Example

A common misconception is that 340B pricing only applies to Medicare or Medicaid patients. In fact, covered entities pay 340B drug pricing for all medications for all patients. There’s an exception of community clinics that can only buy them for patients whose care is covered by a federal grant. 

This is how CE’s get revenue from the program. Say a CE has two patients come in for the same treatment. Both are prescribed the same medication. One patient has insurance, the other doesn’t. The CE purchases the medication for both patients at the 340B discounted price. 

The CE bills the insurance company of the patient who has insurance for the nondiscounted price of the drug (AMP plus any markup). It bills the patient without insurance the discounted rate it paid or chooses to offer it at a larger discount or free. In this scenario, the CE makes money by getting to keep the difference between what it paid for the drug and what it charges the insurance company of the patient with insurance. 

With typical 340B discounts ranging from 20 to 50% for a medication, a CE can make a good “profit” by participating in the program. For example:

• AMP: $100
• URA: $25
• Billed to the insurance company of the patient with insurance: $100
• Billed to patient without insurance: up to $75
• CE total spend: $150
• CE potential total return: a net profit of $25 ($175 minus $150)

The CE can use its profit (multiplied by many patients) to help other patients and for other needs.

Who Can Participate in the 340B Program?

To participate, facilities must qualify as covered entities (CEs). CEs usually serve low-income, uninsured, or underserved populations, including in rural areas, and can include the following.

• Hospitals
  • Critical access hospitals (CAHs)
  • Rural referral centers (RRCs)
  • Sole community hospitals (SCHs)
  • Disproportionate share hospitals (DSH)
  • Children’s hospitals
  • Cancer hospitals
• Federally qualified health centers (FQHCs) and related entities
  • Community health centers
  • Migrant health centers
  • Health care for the homeless programs
  • Public Housing Primary Care Programs
• Ryan White HIV/AIDS Program grantees
  • Entities that provide care and services to people living with HIV/AIDS
• Specialty clinics
  • Black lung clinics
  • Hemophilia treatment centers
  • Title X family planning clinics
  • Sexually transmitted disease (STD) clinics
  • Tuberculosis clinics
• Native American/tribal health centers
  • Indian Health Service (IHS), Tribal, and Urban Indian Health programs.

To qualify, entities have to meet eligibility requirements and register with the Office of Pharmacy Affairs (OPA).

How the 340B Program Benefits Rural Healthcare

More than 1,200 critical access hospitals participate in the 340B Program.¹ And 60% of 340B hospitals serve rural areas.¹ For rural hospitals, 340B funds maximize federal dollars, such as from Medicaid. 

The revenue that rural hospitals get from the 340B Program can also help subsidize uncompensated care for uninsured patients and provide patients with free or low-cost medications.

Without 340B funds, critical access hospitals, community hospitals, and their associated outpatient facilities and rural health clinics may be forced to:

• Find new revenue streams or new federal funding (potentially from taxpayers)
• Turn away uninsured or under-insured patients or increase charity care
• Cut patient care programs
• Close and discontinue patient services

How to Participate in the 340B Program

The basics of participating in the program are to ensure you’re eligible, enroll, re-enroll annually, and maintain ongoing compliance.

To participate:

1. Determine whether you’re eligible for the 340B program as defined by section 340B(a)(4) of the Public Health Service Act. 
2. Enroll in the 340B Program: To enroll, apply online. The online registration process includes entering facility information and uploading supporting documentation. The process and information needed varies based on facility type. 340B registration is open the first two weeks of each calendar quarter (January, April, July, October). Registration details can be found on the HRSA site. 
3. Get your 340B ID number by email if approved. 
4. Request 340B discount drug pricing by giving your wholesaler or third-party administrator (TPA) your 340B ID number.
5. Recertify annually with the 340B recertification process: You’re required to go through recertification each year in addition to notifying OPA if there’s a change in your eligibility. OPA sends email notifications prior to the recertification period. You’re required to update information as needed and attest to 340B program compliance to complete the annual 340B recertification process.
6. Report the value of 340B revenue used in your community each year as part of your annual tax reporting if you’re a tax-exempt hospital.
7. Ensure you stay compliant (see below).

340B Program Compliance Requirements

To stay 340B compliant, CEs are responsible for the following ongoing requirements.

• Ensure 340B drugs are only provided to eligible patients. Eligible patients are those who have a visit with a provider working for a CE. The patient-provider relationship can’t be strictly prescription-based. 
• Prevent receiving duplicate discounts of a 340B discount and a Medicaid rebate on the same drug by being consistent with your Medicaid billing carve-in/carve-out decisions (decisions on what drugs you will or won’t bill Medicaid for).
• Be 340B audit ready. CEs are subject to audits from the federal government or drug manufacturers to ensure 340B program compliance.
• Comply with state laws. Some states require that hospitals and other CEs disclose 340B revenue and how they used the money to further support patient care.

Note that HRSA upped its audit efforts from 2024 to 2025, which will likely extend into 2026. The goal is to identify duplicate discounts where a drug receives both 340B discounts and a Medicaid rebate.

340B participation and compliance isn’t free. In 2018, hospitals reported average 340B compliance costs of $100,000 to $200,000 and needed two full time employees to oversee and maintain the hospital’s 340B program.² But in 2023, the program overall collected $66.3 billion dollars. So 304B funds made off the savings typically outweigh the costs for hospitals.³

The Future of 340B

The transparency, patient definitions, and fund usage of the 340B program is regularly scrutinized. 

Multiple legislative proposals have been made to address concerns. Of those, HRSA’s 340B Rebate Model Pilot will test replacing reduced pricing with rebates. It will require CEs to pay full price and then submit a rebate request for nine medications. Testing of the model begins January 1, 2026. Eight manufacturers will participate. Hospitals fear that if the change becomes permanent and expands to all drugs, they won’t be able to absorb the necessary upfront costs.

Oversight of the 340B program for 2026 may also shift from HRSA to the Centers for Medicare & Medicaid. The implications of the move are unclear.

Medicaid spending cuts due to the One Big Beautiful Bill Act (OBBBA), may also impact some hospital’s eligibility to participate.⁴ 

For more information and updates on the 340B Drug Pricing Program, view the official Health Resources and Services Administration (HRSA) website.

Sources

1.   https://www.healthcaredive.com/news/gao-finds-most-340b-hospitals-are-rural-critical-access/528153/
2. https://www.aha.org/system/files/2018-03/340b-community-benefit-analysis.pdf
3.  https://www.healthcaredive.com/news/azar-says-change-is-coming-for-340b/527359/
4.  https://www.340bhealth.org/files/2018_Annual_Survey_Report_FINAL.pdf

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