Why Hospitals Get Drug Discounts—and You Don’t
- Yuchi Song
- Oct 26
- 5 min read
Hospitals and clinics get big price breaks on brand-name drugs under the 340B program
When Baxter Health, a small hospital network in rural Arkansas, began running in the red, administrators looked for any margin that could keep the lights on. Rising labor costs, thinning reimbursements, and a dwindling privately insured population were squeezing its budget. Yet one line item helped it stay afloat: the 340B Drug Pricing Program, a little-known federal rule that lets hospitals buy certain outpatient drugs at steep discounts.
Those savings, the hospital says, helped it open a diabetes clinic and preserve local services that would otherwise have disappeared. “We would not be here to serve our patients without 340B,” Baxter’s CFO told the American Hospital Association in 2023.
That sentiment echoes across America’s safety-net hospitals and community clinics. But the program that was once a financial lifeline has become a sprawling, $66-billion system whose benefits—and costs—are unevenly felt.
The Promise—and the Fine Print
Congress created 340B in 1992 with an unglamorous but humane goal: help hospitals that treat large numbers of low-income or uninsured patients “stretch scarce federal resources.” The deal was simple on paper. Drug manufacturers that wanted access to Medicaid had to sell certain outpatient medicines at discounted prices—known as 340B prices—to approved hospitals and clinics.
Those institutions, called covered entities, could then use the savings to expand services for vulnerable patients. HRSA, the Health Resources and Services Administration, was tasked with policing the program, defining who counted as an eligible patient, and setting a ceiling price—a formula roughly equal to the average manufacturer price minus Medicaid rebates.
The intent was never to hand out discounts at the pharmacy counter. The savings were meant to flow back into care for those least able to pay.
Then, in 2010, HRSA allowed hospitals to partner with an unlimited number of outside contract pharmacies—retail or mail-order drugstores that could dispense 340B drugs on their behalf. That quiet rule change opened the floodgates.
How a Good Idea Became a Giant
Once hospitals could outsource dispensing, chains like Walgreens, CVS, and specialty mail-order firms jumped in. By linking data systems through third-party administrators, hospitals could claim 340B pricing for any prescription tied to one of their patients, even if filled far from the hospital itself.
The results were staggering. In 2009, only about 600 pharmacies participated. By 2023, there were more than 33,000 individual locations, managing over 229,000 hospital-pharmacy relationships in 2025.
Hospitals now purchase over $66 billion in 340B-priced drugs a year, up from $53.7 billion in 2022. Analysts estimate that roughly one in every ten dollars spent on U.S. outpatient drugs now flows through the 340B system.
The Quiet Economics
Here’s the unspoken math: hospitals buy low and bill high. A cancer drug might cost a 340B hospital half of what a commercial buyer would pay, yet the insurer reimburses both at the same rate. The spread—the difference between acquisition cost and reimbursement—can fund free clinics, mental-health programs, or new facilities.
Supporters argue that’s exactly the point: without those margins, many safety-net hospitals would close. But the program doesn’t require hospitals to pass savings directly to patients, and federal auditors have found they rarely do.
A 2015 GAO study discovered that average drug spending per Medicare patient was higher at 340B hospitals, suggesting some may favor pricier drugs. The OIG, in 2014, found many contract pharmacies didn’t offer uninsured patients 340B prices at all—perfectly legal under the statute. Yet states such as Minnesota have documented clear community gains: clinics using 340B proceeds to run mobile dental vans, behavioral-health care, and rural pharmacy access programs.
The program, in other words, funds the system around patients more often than it reduces their individual bills.
Pushback and Politics
As 340B ballooned, drug manufacturers began to question where their mandated discounts were going. They pointed to opaque accounting, weak eligibility checks, and what they called “leakage”—discounted drugs dispensed to ineligible patients through sprawling contract-pharmacy networks.
Hospitals countered that the program is functioning as intended, especially as uncompensated-care costs soar. Both sides headed to court.
In 2023, the Third Circuit Court of Appeals ruled that manufacturers don’t have to provide unlimited discounted shipments to every contract pharmacy a hospital names. The D.C. Circuit echoed that ruling in 2024, allowing certain restrictions. Meanwhile, states like West Virginia and Maryland have passed laws forbidding pharmacy benefit managers from cutting reimbursement rates on 340B claims, leading to contradictory court decisions.
The program has survived every political swing for a simple reason: few lawmakers want to explain to voters why they made drugs more expensive for community hospitals.
A New Twist: Weight-Loss Drugs
The latest challenge to 340B’s purpose comes from blockbuster GLP-1 drugs, Ozempic, Mounjaro, Wegovy, and Zepbound, used for diabetes and weight loss. Their list price hovers around $1,000 a month.
For hospitals and clinics that qualify, 340B pricing can make those medicines dramatically cheaper to acquire. But manufacturer restrictions on contract-pharmacy shipments mean some rural patients can’t easily fill them.
Coverage adds another wrinkle. Medicare Part D still excludes drugs “used for weight loss,” though after Wegovy gained a cardiovascular indication in 2024, plans may cover it for that purpose. Medicaid coverage for obesity treatments is slowly expanding—14 states as of early 2025. For safety-net clinics, the difference between paying full price and paying 340B rates can decide whether they offer those treatments at all.
The paradox: a program meant for the poor may now be subsidizing access to some of the most expensive, and most sought-after, drugs in America.
Timeline: Key Moments in 340B
1992 — Congress enacts 340B under the Veterans Health Care Act.
1996 — HRSA defines who counts as a “patient.”
2010 — Multiple contract pharmacies allowed; program growth accelerates.
2014–2018 — GAO and OIG reports flag oversight and pricing gaps.
2017 — HRSA finalizes the ceiling-price and penalty rule.
2023–2024 — Federal courts affirm manufacturer rights to limit contract-pharmacy shipments.
2025 — States test transparency laws; HRSA eyes tighter definitions.
The Road Ahead
By late 2025, HRSA is expected to revisit two major gray areas: what defines a 340B-eligible patient, and how states can prevent “duplicate discounts” in Medicaid managed care. Manufacturers continue to push for limits on contract-pharmacy networks, while a handful of states are exploring public reporting on how hospitals use their 340B gains.
After three decades, the program’s survival seems certain; its shape, less so. The question is no longer whether 340B works, but for whom.
FAQ
Do patients automatically get 340B prices?
No. The discounts apply to what hospitals pay, not what patients pay. Some providers use the savings to reduce bills; most fund community care instead.
Why do drug companies fight it?
They argue 340B has grown far beyond its original intent, with lax oversight and massive pharmacy networks that cut into profits. Courts have partially agreed.
Is anyone fixing it?
HRSA is preparing new rules, states are testing transparency programs, and Congress, so far, has stayed silent.
Sources
Editor’s Notes (data gaps & disputes to watch)
Contract‑pharmacy counts: Government doesn’t publish a clean annual time series. We present selected credible points; relationships vs locations are different metrics.
Share of drug spend: CBO’s 11% (net) vs CRS/other estimates ~7% reflect different denominators (net vs gross) and methodologies. We note the range.
Patient definition: Genesis applies to the plaintiff; HRSA’s broader policy stance may evolve through guidance or rulemaking.
GLP‑1 coverage: State Medicaid policies are moving targets; KFF’s Aug. 2024 count (13 states) rose to ~14 by Jan. 2025; verify your state’s current policy.
Comments