Overview of the 340B Drug Discount Program

Overview of the 340B Drug Discount Program

October 14, 2022
Overview of the 340B Drug Discount Program
Congress created the 340B Drug Discount Program (340B)
statute permits HRSA and manufacturers to audit covered
in 1992 through the Veteran’s Health Care Act (P.L. 102-
entities to ensure they meet the requirements for 340B
585) to enable health care providers that serve low-income
pricing. It also requires HRSA to ensure that both covered
and uninsured patients to purchase drugs at lower costs. The
entities and manufacturers comply with Program
Health Resources and Services Administration (HRSA),
requirements. Participants who are non-compliant may be
part of the U.S. Department of Health and Human Services
subject to civil monetary penalties (CMPs). HRSA also
(HHS), administers the Program. HRSA estimates that
promulgated regulations that govern alternative dispute
340B sales constitute about 7.2% of the overall U.S. drug
resolution (ADR) proceedings. Both manufacturers and
market and reports that in 2021, total program sales reached
covered entities may use ADR to resolve disputes related to
approximately $44 billion, an almost 15% increase over
pricing overcharges and covered entity eligibility.
2020. The authorizing statute—Section 340B of the Public
Health Service Act (42 U.S.C. § 256b)—requires drug
Changes to the 340B Statute
manufacturers that participate in the Medicaid Program to
Congress has changed the 340B Program on a number of
offer certain outpatient drugs to “covered entities” at
occasions, most recently via the Consolidated
discounted prices.
Appropriations Act of 2022 (P.L. 117-103). The 2022 Act
allows certain covered entities that were terminated from
Statutory Requirements
the 340B Program during the COVID-19 pandemic to be
The 340B statute requires the Secretary of HHS to enter
reinstated through December 31, 2022. During the
into purchase price agreements (PPAs) with drug
pandemic, DSH percentages changed for some hospitals as
manufacturers that participate in the Medicaid Program.
patients delayed care and hospitals postponed elective
The terms of these PPAs require manufacturers to sell
procedures to divert more resources to caring for patients
certain covered outpatient drugs at a “ceiling price,” which
with COVID-19. Qualifying facilities under the 2022 Act
is calculated based on a statutory formula. Manufacturers
include hospitals that were eligible covered entities prior to
may not charge covered entities more than the ceiling price
the COVID-19 pandemic, but lost their eligibility due to a
if they sell the drug to any other entity at any price.
decrease in their DSH patient percentage. The temporary
Providers may pass the drug discounts on to patients, but
eligibility change allows hospitals that would otherwise be
the statute does not require them to do so. The statute
disqualified from 340B pricing to remain eligible through
provides a list of “covered entities” that may purchase
the end of 2022. (More information about this waiver and
drugs from manufacturers at discounted prices. Covered
which entities qualify may be found on HRSA’s website,
entities include Federally Qualified Health Centers, Native
https://www.hrsa.gov/.)
Hawaiian Health Centers, Tribal and Urban Indian
Organizations, children’s hospitals, and other providers that
Congress also made substantial changes to the 340B
care for rural and underserved populations.
Program in 2010 via the Patient Protection and Affordable
Care Act (ACA) (P.L. 111-148), which expanded the list of
According to HRSA, more than 75% of FY2021 340B
covered entities to include children’s hospitals, cancer
covered entity purchases were made by disproportionate
treatment facilities, critical access hospitals, rural referral
share hospitals (DSHs). DSHs are statutorily defined in
centers, and sole community hospitals that have a certain
Section 1886(d)(5)(F) of the Social Security Act; they serve
DSH percentage. Hospital participation in the 340B
a disproportionate number of low-income patients who
Program has tripled from the time before the ACA’s
qualify for Medicare and Medicaid. To qualify for 340B, a
enactment. There are currently more than 53,000 registered
DSH must be owned or operated by a state or local
340B sites, which is almost double the number of registered
government; be a public or private nonprofit corporation
sites in 2014 (28,272).
that is granted governmental powers by a state or local
government; or be a private nonprofit hospital that contracts
The ACA further authorized HRSA to improve Program
with a state or local government to provide care for low-
integrity by ensuring manufacturer compliance with ceiling
income patients who do not qualify for Medicare and
price sales by allowing HRSA to issue regulations
Medicaid. The DSH’s percentage of low-income patients
regarding the imposition of CMPs for manufacturer and
must also be above certain statutorily defined percentages
covered entity noncompliance. The ACA also established
in order to qualify for 340B.
the ADR process by which manufacturers and covered
entities could settle disputes regarding 340B purchases.
The 340B statute places limitations on covered entities.
Covered entities are prohibited from receiving duplicate
GAO Findings and Recommendations
discounts on 340B drugs from Medicaid rebates and from
In recent years, the Government Accountability Office
dispensing or selling covered drugs to non-patients. The
(GAO) has undertaken investigations and audits of the
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Overview of the 340B Drug Discount Program
340B Program, making two main recommendations for
The manufacturers have since challenged the violation
oversight and improvement. First, GAO recommends that
letters in four federal district courts across the country,
HRSA increase its oversight of covered entities, and
arguing they violate the Administrative Procedure Act and
particularly DSHs, to ensure they meet program eligibility
constitute an unconstitutional taking under the Fifth
requirements. Second, GAO suggests that HRSA and the
Amendment. The cases turn on HHS’s interpretation of the
Centers for Medicare & Medicaid (CMS) enhance their
340B statute, which is silent as to contract pharmacies’ role
oversight of the 340B and Medicaid rebate programs,
in the Program. In reaching their decisions, each district
respectively, to ensure that covered entities are not
court analyzed the statutory text, legislative history, and
receiving duplicate discounts on 340B-covered drugs.
HRSA’s guidance, but the courts arrived at different legal
conclusions. Two of the courts ruled that HHS acted within
In a December 2019 report, GAO found that over two-
its statutory authority in issuing the violation letters, while
thirds of covered entities are nongovernmental hospitals
two others disagreed. Three of the cases were appealed to
that qualify for 340B based on their contracts with state and
the Courts of Appeals for the Third, Seventh, and D.C.
local governments to provide care for low-income patients
Circuits.
ineligible for Medicare and Medicaid. GAO stated there is
little oversight of these hospital contracts, and the 340B
Differing outcomes in these cases could lead to more
statute does not require the contracts to detail the scope of
uncertainty around the 340B Program, and could prompt
care being provided to low-income patients. Upon
more drug manufacturers to consider whether to restrict
reviewing 258 hospital contracts, GAO found that the
covered entities that use contract pharmacies from 340B
documentation provided by some covered entities was
pricing. (For more information about the contract pharmacy
insufficient to demonstrate that the hospital was actually
litigation, see CRS Legal Sidebar LSB10842, Courts
meeting 340B requirements.
Evaluate the Role of Contract Pharmacies in the 340B
Drug Discount Program, by Hannah-Alise Rogers.)
In 2020 and 2022, GAO issued a “priority
recommendation” to HHS on the perceived need to prevent
Considerations for Congress
covered entities from receiving duplicate discounts from
Several questions have arisen around the appropriate
Medicaid and 340B. Federal law allows state Medicaid
interpretation of the 340B statute as well as the scope of
programs to request manufacturer rebates on certain drugs
HRSA’s authority to police general Program compliance.
used to treat Medicaid patients, but drugs that are purchased
Stakeholders debate whether covered entities should be
through 340B are not eligible for these rebates. In FY2018,
permitted to use contract pharmacies to dispense 340B
the Medicaid rebates saved states and the federal
drugs and, if so, how many contract pharmacies each
government approximately $36 billion. A January 2020
covered entity may use. Congress could amend the 340B
GAO report, however, found several holes in CMS’
statute to clarify the role contract pharmacies should play in
tracking of state policies and procedures regarding the
the 340B Program.
prevention of duplicate discounts. The report reiterated
previous 2018 findings that HRSA lacks guidance and audit
Stakeholders also debate the extent to which the Program
procedures to police duplicate discounts in Medicaid,
helps underserved patients and whether the revenue
particularly for Medicaid managed care.
generated by hospitals from 340B drugs should be passed
on to patients or otherwise be used to care for underserved
Recent 340B Litigation
populations. Congress could amend the statute to clarify
In summer 2020, drug manufacturers began announcing
how covered entities may use the profits attributable to
plans to impose 340B discount restrictions on covered
340B drugs. Congress could also require DSHs seeking to
entities that purchase 340B medications through contract
become covered entities to more clearly demonstrate their
pharmacies. Covered entities may dispense 340B drugs
eligibility for 340B pricing, including by detailing the scope
through in-house pharmacies or contract with outside retail
of care the hospitals provide to underserved patients who
pharmacies to dispense the drugs on their behalf. Many
are ineligible for Medicare or Medicaid.
covered entities do not have their own in-house pharmacies,
so contracting with outside pharmacies enables them to
Congress could also amend the 340B statute to increase
participate in the Program.
HRSA’s authority to regulate the Program and its
participants. In its FY2023 Budget Justification, HRSA
In setting 340B discount restrictions, the manufacturers
proposed a statutory amendment to provide the agency with
argued that the increase in the number of contract
rulemaking authority in order to strengthen its oversight of
pharmacies in recent years has led to increased Program
the Program. The agency stated that such authority “would
fraud and abuse. Some Members of Congress have reacted
allow HHS to set clear, enforceable standards for
to the manufacturer-imposed restrictions by urging HHS to
participation in all aspects of the 340B Program.”
take action against the manufacturers. In May 2021, HRSA
issued violation letters to several manufacturers notifying

them that the restrictions imposed on covered entities using
contract pharmacies violated the 340B statute. The violation
Hannah-Alise Rogers, Legislative Attorney
letters threatened CMPs for manufacturers that continued
their pricing restrictions.
IF12232

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Overview of the 340B Drug Discount Program

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