340B Drug Pricing Program and States


Prescription drugs

The Omnibus Budget Reconciliation Act of 1990 established the Medicaid Drug Rebate Program (MDRP), which requires participating drug manufacturers to provide significant rebates to the federal government and states as a condition of having their outpatient drugs covered by Medicaid. Manufacturers must provide Medicaid the sum of (1) the greater of either a minimum rebate or the largest discount provided to private purchasers (known as the “best price”) and (2) a rebate if prices rise faster than inflation.

Prior to the MDRP, several manufacturers provided significant discounts to safety-net providers, but since the MDRP required manufacturers to offer Medicaid rebates equal to “best price,” some drug companies canceled their safety-net provider contracts. As a result, the federal 340B Drug Pricing Program (340B) was created by Congress to assist participating providers, known as covered entities (CEs), by requiring manufacturers to sell outpatient drugs at reduced prices that are tied to the low prices Medicaid receives.

Covered entities—including disease specific advocacy organizations, certain categories of hospitals, and federally qualified health centers—are certified and supported by the Health Resources and Services Administration (HRSA). These entities serve more than 10 million people in all 50 states, the commonwealths and territories.

The U.S. Government Accountability Office (GAO) estimates CEs can achieve 20-50% savings off list prices and garner prices lower than Medicaid. CEs may use savings generated by 340B discounts to increase prescription drug access to rural communities and underserved populations. Some CEs are required to reinvest 340B revenue in other health services, while others have no restrictions on how they use their 340B revenue. Importantly, manufacturers are not required to pay rebates under the MDRP on drugs purchased through the 340B program. In other words, entities are prohibited from collecting duplicate discounts for drugs dispensed to Medicaid beneficiaries.

Adding another layer of complexity, CEs may contract with non-affiliated pharmacies, known as contract pharmacies, to dispense drugs to patients on their behalf. Contract pharmacies have experienced a significant increase in recent years—over 4,000% between 2010-2020—which has been met with both support and opposition.

Manufacturers and covered entities are both subject to audits from HRSA to ensure program compliance, but states are ultimately responsible for ensuring 340B drugs are excluded from Medicaid rebates billed to manufacturers. States using a fee-for-service payment model in their Medicaid program must choose and identify which drugs will be carved in to the program or carved out and covered under 340B. A 50-state Kaiser Family foundation survey of Medicaid pharmacy directors revealed that avoiding duplicate discounts has been costly as well as administratively burdensome for some states, leading some lawmakers to pursue a variety of ways to ease this obligation.

To help states accomplish this, HRSA established the Medicaid Exclusion File that requires covered entities to report which products will be included under 340B. Managed care plans who administer a state Medicaid program’s prescription drug benefit must also have an exclusion process for 340B drugs to finalize a contract. Best practices released in 2019 from the Centers for Medicare & Medicaid Services (CMS) outline seven strategies states might use to avoid duplicating discounts, including limiting the ability of contract pharmacies to dispense 340B drugs.

State Examples

To generate additional savings, states may leverage 340B by contracting with CEs for their state employee health insurance plans. States can also encourage CEs to use the 340B Prime Vendor Program (PVP) to save on prescription drugs, vaccines and other medical supplies.

States may also leverage 340B pricing in their state correctional health programs. According to a 2019 National Governors Association report, at least 16 states have contracts with CEs to care for and administer certain specialty medicines to people who are incarcerated.

States have pursued a variety of activities to manage duplicative discounts, with some states simultaneously using multiple strategies. In addition to the strategies listed in the table, several states—including Massachusetts, Minnesota, Montana, Oregon, Rhode Island, South Dakota, Utah and West Virginia—prohibit covered entities, or a contract pharmacy acting on their behalf, from receiving a lower reimbursement than Medicaid for drugs provided under 340B. Montana’s law goes a step further by setting a reimbursement floor based on a calculation using national average drug acquisition costs or NADAC—the national average at which retail pharmacies purchase prescription drugs from manufacturers or wholesalers.

340B Management Strategies

Number of States

Use of the Medicaid Exclusion File (MEF)


Prohibition on contract pharmacies in traditional fee-for-service (FFS)


Prohibition on contract pharmacies in managed care


340B entities not allowed to carve into managed care


340B entities not allowed to carve into FFS


Source: 2019 KFF and Health Management Associates (HMA) survey of Medicaid officials in 50 states and DC, April 2020, and NCPDP Reference Guide.

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