22 May What Is the 340B Program? The Four Things Every Covered Entity Is Audited On
The 340B Drug Pricing Program is a federal program under Section 340B of the Public Health Service Act that requires drug manufacturers participating in Medicaid to sell covered outpatient drugs to eligible safety-net providers at significantly reduced prices. HRSA’s Office of Pharmacy Affairs administers it, and the providers it serves are called covered entities.
Most explanations of 340B are written from the program’s point of view. This one is written for the person who has to run a 340B program and be audited on it, because that’s who we work with, and because the program’s definition and its audit scope turn out to be the same four things.
What Is the 340B Program for Hospitals?
For a hospital, 340B is a purchasing arrangement conditioned on eligibility and on four compliance obligations. HRSA’s 340B program page puts the purpose in one sentence, that the program “enables covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” A hospital qualifies through one of the statutory categories, disproportionate share hospitals, children’s hospitals, free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each with its own conditions in 42 U.S.C. 256b(a)(4).
The four obligations are the ones HRSA audits. Its program integrity page lists the scope of a covered entity audit as eligibility requirements, the group purchasing organization prohibition where it applies, duplicate discounts and diversion. Understand those four and you understand what the program asks of a hospital. Everything else is mechanics.
Who Pays for the 340B Program?
Manufacturers do, through the price, and there’s no federal appropriation behind the discount. A manufacturer that wants its outpatient drugs covered by Medicaid signs a pharmaceutical pricing agreement with the Secretary of Health and Human Services, and under that agreement it charges covered entities no more than a statutory ceiling price for covered outpatient drugs. HRSA’s program page states it directly. “Manufacturers participating in Medicaid agree to provide outpatient drugs to covered entities at significantly reduced prices.”
The covered entity then bills payers in the ordinary way, and the difference between what it paid and what it’s reimbursed is the program’s benefit. That structure is why two of the four audit obligations exist. Diversion, which means transferring a 340B drug to someone who isn’t the entity’s patient, and duplicate discounts, which means a manufacturer paying a Medicaid rebate on a drug it already sold at the 340B price, both take money from the manufacturer twice. Both are prohibited at 42 U.S.C. 256b(a)(5), and our explainer on Medicaid duplicate discounts covers how the Medicaid Exclusion File is meant to prevent the second.
What Makes a Patient Eligible for 340B?
A person receiving a 340B drug must be a patient of the covered entity, and HRSA’s eligibility page says so in exactly those words. What “patient” means is set by HRSA’s 1996 patient definition guidance, which turns on whether the entity maintains the individual’s health care record, whether the care was provided by a professional employed by or under arrangement with the entity, and whether the service is consistent with the entity’s grant or scope.
Those three questions decide individual prescriptions in an audit, and our September post on the 340B patient definition walks through them one at a time, including what the recent court rulings did and didn’t change. We won’t repeat that here. The operational point is that patient eligibility is evidenced in the health record and the prescriber relationship, not in a policy that says patients are eligible.
What Medications Are Covered Under 340B?
Covered outpatient drugs, as defined at Section 1927(k) of the Social Security Act, and nothing else. HRSA’s FAQs answer the inpatient question in two words, “No. 340B pricing applies to covered outpatient drugs only.” Prescription drugs dispensed or administered to outpatients are the core. Inpatient drugs are out. Whether a given product meets the statutory definition is something the entity has to be able to show with its own records and its own policy, and the FAQs say hospitals subject to the GPO prohibition should keep auditable records and policies on how they apply that definition.
That last sentence points at a rule some hospitals learn about late. Disproportionate share, children’s and free-standing cancer hospitals can’t buy covered outpatient drugs through a group purchasing organization at all, as a condition of eligibility. A federal court vacated HRSA’s 2013 policy on how that rule applies to replenishment purchasing in March 2026, and our post earlier this month on the 340B GPO prohibition explains what changed and what didn’t. The statutory rule is still one of the four things an auditor verifies.
How Do Hospitals Make Money on 340B?
They don’t, in the sense the question implies, and the accurate answer is that they keep the difference between the 340B acquisition cost and the reimbursement they’d have received anyway. There’s no rule requiring that difference to be spent in a particular way. The program’s stated purpose is that it’s reinvested in reaching more patients and providing more services, and the safety-net mission is the reason the eligibility categories look the way they do.
The savings are real, and for a hospital serving a large low-income population they’re material, but they exist only on drugs that were eligible at the moment of dispense. An entity that claims 340B pricing on a drug that turns out to have gone to a non-patient, or on a Medicaid claim that also drew a rebate, owes that money back to the manufacturer. Which is the practical answer to the question. Hospitals realize 340B savings by getting eligibility right at every dispense, and they lose them at audit when they didn’t.
What Running a 340B Program Requires of You
Enrollment, annual recertification, an accurate OPAIS record, and the four controls, maintained continuously. HRSA’s eligibility page requires covered entities to recertify every year and to notify the Office of Pharmacy Affairs immediately in OPAIS when their eligibility changes, and to stop purchasing through 340B when it does. Registration and recertification run through the 340B Office of Pharmacy Affairs Information System, and who qualifies and how the registration process works is a separate guide of ours.
Running the program day to day means a written policy and procedure for each of the four obligations, and evidence that each one operates. An inpatient and outpatient determination the pharmacy system applies at dispense. A Medicaid Exclusion File designation that matches how the revenue cycle team actually bills. A purchasing account structure that shows which account each covered outpatient drug was bought on.
Add a contract pharmacy oversight process, if the entity uses contract pharmacies, that can reconcile what was dispensed to whom. A contract pharmacy dispenses 340B drugs on the entity’s behalf at a retail location the entity doesn’t own, and HRSA’s audit procedures review compliance at contract pharmacies as part of the entity’s audit, not as a separate one. The entity stays responsible for every dispense the pharmacy makes under its 340B ID, which is why how those arrangements are documented matters as much as the contract itself.
HRSA’s audit procedures review “relevant policies and procedures and how they are operationalized”, and the second half of that phrase is where most findings come from. An entity that finds its own non-compliance has a route HRSA publishes for it, the self-disclosure process, and using it is a materially different conversation with the agency from having the same issue found in fieldwork. The entities we see come through audits cleanly aren’t the ones with the longest policies. They’re the ones whose last three self-audits are dated, filed and acted on.
The cost of getting this wrong is set out on HRSA’s program integrity page too. Findings may require repayment to manufacturers, a corrective action plan, and, for repeated diversion, removal from the program. We’ve supported 148 HRSA 340B audits on the covered entity’s side of that process and report an 80% success rate in overturning 340B audit findings, both published on our home page.
The 340B services we offer run from standing a program up to standing beside an entity in the audit. If you’re at the point of deciding whether your program can evidence the four things this page describes, HRSA 340B audit support is the engagement built for that question.
FAQ
Who pays for 340B?
Drug manufacturers, through the ceiling price they agree to charge covered entities as a condition of having their outpatient drugs covered by Medicaid. There’s no federal appropriation funding the discount.
How do hospitals make money on 340B?
A hospital keeps the difference between the reduced 340B acquisition price and its normal reimbursement, on drugs that were eligible at dispense. Savings claimed on ineligible dispenses are owed back to the manufacturer after audit.
What is the difference between Medicaid and 340B?
Medicaid is a payer that reimburses for care and collects rebates from manufacturers. 340B is a purchasing program that lowers what a covered entity pays for outpatient drugs. Where the two meet, on a Medicaid patient’s 340B drug, the entity has to prevent the manufacturer paying both a rebate and a discount.
What is the 340B program for hospitals?
A purchasing arrangement under Section 340B of the Public Health Service Act that lets qualifying hospitals buy covered outpatient drugs at reduced prices, conditioned on eligibility and on preventing diversion, duplicate discounts and, for some hospital types, GPO purchasing.
What makes a patient eligible for 340B?
The individual must be a patient of the covered entity under HRSA’s 1996 patient definition, which looks at whether the entity maintains the health record, whether the care came from a professional employed by or under arrangement with the entity, and whether the service fits the entity’s scope.