340B legislation refers to the federal statute at 42 U.S.C. § 256b and the layer of regulations, court rulings, and state laws that have grown around it, all of which require pharmaceutical manufacturers to sell outpatient drugs at discounted prices to certain safety-net healthcare providers.1Office of the Law Revision Counsel. 42 U.S. Code 256b – Limitation on Prices of Drugs Purchased by Covered Entities Congress created the program in 1992, but the rules that actually govern day-to-day participation now sit across the Public Health Service Act, Title 42 of the Code of Federal Regulations, a series of federal appellate decisions on contract pharmacies, state PBM statutes, and, most recently, the Inflation Reduction Act.
The Federal Statute and Why Manufacturers Comply
Under 42 U.S.C. § 256b, every manufacturer of covered outpatient drugs must sign a pricing agreement with the Secretary of Health and Human Services promising to cap the price charged to qualifying providers.1Office of the Law Revision Counsel. 42 U.S. Code 256b – Limitation on Prices of Drugs Purchased by Covered Entities That cap is the “ceiling price,” and manufacturers report it quarterly.
The leverage that makes the program work lives in a different statute. Under 42 U.S.C. § 1396r-8, a manufacturer’s drugs are eligible for payment under Medicaid or Medicare Part B only if the manufacturer has both a Medicaid rebate agreement and a 340B pricing agreement in effect.2Office of the Law Revision Counsel. 42 U.S. Code 1396r-8 – Payment for Covered Outpatient Drugs A manufacturer that refuses to participate in 340B loses access to the two largest government drug purchasers in the country. Almost none do.
The Health Resources and Services Administration runs the program through its Office of Pharmacy Affairs, which handles registrations, sets compliance standards, and audits participants.3Health Resources & Services Administration. 340B Drug Pricing Program The implementing regulations are codified at 42 CFR Part 10.4eCFR. 42 CFR Part 10 – 340B Drug Pricing Program
How the Ceiling Price Is Calculated
The ceiling price for a covered outpatient drug equals the Average Manufacturer Price from the previous quarter, reduced by a rebate percentage tied to the Medicaid drug rebate formula.1Office of the Law Revision Counsel. 42 U.S. Code 256b – Limitation on Prices of Drugs Purchased by Covered Entities In simple terms: take the Average Manufacturer Price, subtract the Unit Rebate Amount, and the result is the most a covered entity should ever pay.
For some drugs, particularly generics with high rebate percentages, the formula produces a negative number. Because a $0 invoice creates operational problems, federal regulations set a floor: when the calculation drops below one cent, the price is $0.01 per unit. About 1 percent of listed drugs hit this “penny pricing” threshold in a given quarter.5Federal Register. 340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation Charging above the ceiling price exposes a manufacturer to civil monetary penalties.
Who Qualifies as a Covered Entity
The statute limits 340B to specific categories of safety-net providers. HRSA maintains the full list, and it includes:
- Federally qualified health centers, including health center program grantees and look-alikes, Native Hawaiian health centers, and tribal and urban Indian health centers
- Hospitals: disproportionate share hospitals, children’s hospitals, free-standing cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals
- Ryan White HIV/AIDS Program grantees
- Specialized clinics: black lung, hemophilia treatment centers, Title X family planning, sexually transmitted disease, and tuberculosis clinics
Each category has its own threshold.6Health Resources & Services Administration. 340B Eligibility For hospitals, the main gatekeeper is the Medicare disproportionate share adjustment percentage. Disproportionate share hospitals, free-standing children’s hospitals, and free-standing cancer hospitals must exceed 11.75 percent.7Health Resources & Services Administration. Disproportionate Share Hospitals Sole community hospitals and rural referral centers face a lower bar of 8 percent.
Child Sites
Hospitals often operate off-campus outpatient departments known as child sites that can buy at 340B prices under the parent hospital’s registration. To qualify, a child site must meet Medicare provider-based requirements as an off-site department of the parent entity. A March 2026 federal court ruling vacated HRSA’s earlier requirement that child sites appear on a hospital’s Medicare cost report and be formally listed in the 340B registration system before using 340B pricing. The court held those registration prerequisites had no basis in the statute. The practical effect is that hospitals can begin purchasing 340B drugs for new child sites as soon as those locations qualify as provider-based departments, without waiting for HRSA paperwork.
The Patient Definition
Not every person who walks through the door counts as a 340B patient. The covered entity must have an established relationship with the individual, must maintain records showing responsibility for the person’s care, and the drug must be tied to a service the entity provided. Dispensing 340B drugs to people outside that definition is “diversion,” one of the most common audit findings.
Registration and Annual Recertification
New participants register through the 340B Office of Pharmacy Affairs Information System, HRSA’s online portal.8Health Resources & Services Administration. 340B Office of Pharmacy Affairs Information System Registration windows are narrow: the first 15 days of January, April, July, and October.9Health Resources & Services Administration. Registration Miss the window and you wait until the next quarter.
Staying in the program requires annual recertification. An Authorizing Official (typically the CEO or CFO) verifies that all registered information is accurate and attests to ongoing compliance. That person carries legal responsibility for the entity’s 340B activities. Failure to complete recertification during the scheduled timeframe results in termination, without a grace period.10Health Resources & Services Administration. Recertification A terminated entity must re-register in a future quarterly window.
Contract Pharmacies: The Central Legal Battle
Many covered entities, especially community health centers, don’t run their own pharmacies. They rely on contract pharmacies, retail pharmacies that agree to dispense 340B drugs on the entity’s behalf. Starting around 2020, dozens of manufacturers began restricting these shipments. Some refused to ship to any contract pharmacy. Others conditioned shipments on the covered entity sharing claims data through a designated third-party platform. As of 2025, at least 37 manufacturers had some form of contract pharmacy restriction in place.
HRSA tried to stop these restrictions with violation letters and an advisory opinion declaring that manufacturers must offer 340B pricing on drugs shipped to contract pharmacies. Federal courts rejected that position. The D.C. Circuit and Third Circuit both found the 340B statute ambiguous on whether contract pharmacy arrangements are mandatory, and held that HRSA lacked rulemaking authority to resolve the ambiguity on its own. Manufacturers remained free to impose conditions.
The fight then moved to state legislatures. A growing number of states have passed laws prohibiting manufacturers from restricting 340B contract pharmacy access. In September 2025, the Fifth Circuit upheld Mississippi’s law, which bars manufacturers from interfering with how a covered entity distributes 340B drugs through contract pharmacies. The court found no ERISA preemption and no conflict with the federal 340B framework, reasoning that states retain authority over public health and consumer protection. Manufacturers have challenged similar laws in other states, and the resulting circuit split may reach the Supreme Court.
State PBM Anti-Discrimination Laws
A separate line of state legislation targets pharmacy benefit managers. PBMs sit between insurers, pharmacies, and drug makers, and some have used that position to claw back 340B savings from covered entities. Common tactics include paying lower reimbursement rates on drugs identified as 340B purchases, imposing extra fees on 340B claims, and excluding 340B pharmacies from preferred networks.
State anti-discrimination laws generally require PBMs to reimburse a drug at the same rate whether or not it was purchased at 340B pricing. The reasoning is that when a covered entity buys a drug cheaply through 340B, the savings should stay with the entity to fund patient care rather than flow to the PBM as extra margin.
PBMs have argued that ERISA preempts these laws. The Supreme Court narrowed that argument significantly in Rutledge v. Pharmaceutical Care Management Association (2020), holding unanimously that a state law requiring PBMs to reimburse pharmacies at or above acquisition cost was not preempted. The Court reasoned that such laws regulate PBM business conduct generally rather than the structure of employee benefit plans. That decision gave states considerably more room to enact and enforce 340B anti-discrimination statutes.
Compliance: Diversion, Duplicate Discounts, and Audits
Two violations dominate 340B compliance. Diversion happens when a 340B drug reaches someone who doesn’t qualify as a patient of the covered entity. Duplicate discounts happen when a manufacturer effectively pays twice on the same drug unit, once through the 340B ceiling price and again through a Medicaid rebate. The statute prohibits covered entities from billing Medicaid for a drug purchased at the 340B price if that drug is also subject to a Medicaid rebate.1Office of the Law Revision Counsel. 42 U.S. Code 256b – Limitation on Prices of Drugs Purchased by Covered Entities
To prevent duplicate discounts, covered entities use the HRSA Medicaid Exclusion File, which identifies 340B-purchased drugs that should not generate a Medicaid rebate claim. Inaccurate entries on that file are among the most frequent audit findings.11Health Resources & Services Administration. Program Integrity FY25 Audit Results Other common findings from FY 2025 include incorrect registration records (wrong shipping addresses, outdated DSH percentages, closed pharmacies still listed), diversion involving prescriptions written at ineligible sites or dispensed to inpatients, and group purchasing violations by hospital types prohibited from buying outpatient drugs through a GPO.
When HRSA finds diversion or duplicate discounts, the covered entity must repay the full discount amount to the affected manufacturers. Contract pharmacies or outpatient facilities involved in violations can be terminated. Both manufacturers and covered entities must retain relevant records for at least three years.12Federal Register. 340B Drug Pricing Program Administrative Dispute Resolution Regulation
HRSA expects covered entities to self-disclose material compliance breaches rather than wait for an audit. The agency does not define “material breach” with a fixed dollar amount. Each entity is expected to develop and document its own criteria, then disclose the full scope and duration of any breach that meets its threshold.13Health Resources & Services Administration. Entity Self-Disclosures Disclosures made after an audit engagement letter arrives may be folded into the audit itself.
Administrative Dispute Resolution
When a covered entity believes a manufacturer is overcharging, or a manufacturer believes a covered entity is diverting drugs or triggering duplicate discounts, either side can file through the 340B Administrative Dispute Resolution process.14Health Resources & Services Administration. 340B Administrative Dispute Resolution HRSA overhauled ADR in a 2024 final rule that removed the previous $25,000 minimum threshold for filing a claim, opening the process to smaller community health centers that had been shut out. Filers must show good-faith attempts to resolve the issue before turning to ADR.
The Inflation Reduction Act’s Effect on 340B Pricing
The Inflation Reduction Act of 2022 created a Medicare Drug Price Negotiation Program under which CMS directly negotiates prices for certain high-cost drugs. The first negotiated prices, called Maximum Fair Prices, took effect in 2026. When a drug has both a 340B ceiling price and a negotiated Maximum Fair Price, covered entities receive whichever is lower. They cannot stack both discounts.
The operational problem is real. The timelines for calculating 340B ceiling prices and Maximum Fair Prices don’t align cleanly, and CMS has acknowledged it still needs to build data-sharing systems with supply chain stakeholders to prevent manufacturers from issuing both discounts on the same transaction. For covered entities, the practical step is tracking which drugs are subject to Medicare price negotiation and confirming that purchasing systems can handle the comparison.
Pending Federal and State Legislation
Several bills in the 119th Congress would expand or modify 340B. The Rural 340B Access Act of 2025 (H.R. 44) would add rural emergency hospitals to the list of covered entities, a category Congress created in 2020 without making it 340B-eligible.15Congress.gov. H.R.44 – 119th Congress (2025-2026) Rural 340B Access Act of 2025 At the state level, a growing number of legislatures are imposing transparency requirements on 340B hospitals, mandating annual disclosures of drug purchasing volumes, reimbursement data, vendor payments, and how program savings are used. These reporting mandates reflect ongoing debate over whether 340B savings are reaching patients or being absorbed by hospital systems and their pharmacy partners.