How the 340B Drug Program Is Driving Up Costs For States and Employers

The federal 340B drug program was created with a straightforward mission – to provide steeply discounted drugs to safety net hospitals and clinics that serve large populations of low-income and uninsured patients. The idea was that it would help these providers to stretch scarce federal resources and improve access to medicines for vulnerable populations. As is often the case, the road was paved with good intentions, but the 340B program has ballooned far beyond its original scope.

Today, the 340B drug program is one of the largest federal programs most Americans have never heard of, and it encompassed purchases of $148 billion at list price in 2024. Instead of a small number of safety net hospitals, it is now dominated by large health systems and for-profit contract pharmacies.  Instead of reducing costs overall, it has shifted costs onto employers and states.

At the core of the 340B program, hospitals and clinics can buy drugs at a heavily discounted price. However, those discounts are not passed along to patients. Instead, providers turn around and bill those with commercial health insurance the full, undercounted price for the drug. For example, a hospital could acquire a specialty cancer drug for $5,000 under 340B pricing but turn around and bill the patient’s insurance $10,000 for the drug. The spread between the acquisition cost and reimbursement from the insurer becomes pure profit for the hospital.

Because 340B discounts are tied to the hospital and not the patient, 340B drugs are not only given to patients who are uninsured or low-income. In other words, 340B drugs are given to any patient treated at that facility, not just patients who could benefit from steeply discounted drugs. Regular drug rebates are not applicable to 340B drugs. As a result, states and employers are billed the full list price for drugs, which would normally be acquired for far less.

The 340 program, as it stands, also incentivizes hospitals and providers to favor higher-cost drugs. For example, a $100 generic drug would treat the patient, but a $10,000 specialty drug bought at a 340B discount would yield much higher profit margins for the hospital or provider. Multiple studies have shown that 340B hospitals prescribe more costly brand-name drugs at higher rates than non-340B institutions. These kinds of perverse incentives drive up overall spending for employer-sponsored insurance and directly undermine efforts to lower drug costs.

The explosion of the 340B program and the increasing number of hospitals and contract pharmacies that participate have left employers holding the bag. The increasing number of un-rebated 340B drugs that are given and the resulting higher drug costs drive up premiums for employers, and states are often the largest employers.

Reform is needed to return the 340B program to its original mission – to help support a small number of safety net hospitals serving vulnerable populations. If policymakers are serious about lowering the cost of prescription drugs, reforming 340B must be part of the solution.