42 USC 256b: How the 340B Drug Discount Program Works

The 340B drug discount program works by requiring pharmaceutical manufacturers, as a condition of having their drugs covered by Medicaid, to sell outpatient drugs to certain safety-net healthcare providers at or below a statutory ceiling price. The program was created by Section 602 of the Veterans Health Care Act of 1992 and is codified at 42 U.S.C. § 256b.¹²³

The Ceiling Price and How It Is Calculated

Every drug in the program has a ceiling price, recalculated each quarter for each National Drug Code. The formula takes the Average Manufacturer Price from the preceding calendar quarter and subtracts the Unit Rebate Amount derived from the Medicaid rebate formula. If the result is less than a penny per unit, the ceiling price is set at $0.01.⁴

Manufacturers report their pricing data quarterly to the 340B Office of Pharmacy Affairs Information System, and HRSA validates the figures and makes them available to authorized covered entities.⁵ The discounts typically fall between roughly 20% and 50% off market prices, and can go deeper for drugs whose prices have risen substantially over time.⁶ Signing a Pharmaceutical Pricing Agreement sets the maximum a manufacturer can charge, not the minimum: manufacturers remain free to offer prices below the ceiling.

A manufacturer that knowingly and intentionally charges more than the ceiling price faces civil monetary penalties of up to $5,000 per instance of overcharging, with each individual order counted as a separate instance.⁴⁷ Covered entities themselves have no private right of action to sue manufacturers for overcharging; the Supreme Court held in Astra USA, Inc. v. Santa Clara County, 563 U.S. 110 (2011), that enforcement runs through HRSA’s administrative process.²

Who Qualifies as a Covered Entity

Only providers in categories Congress specifically listed can buy at 340B prices. The eligible groups include:

Federally qualified health centers, including look-alikes, tribal and urban Indian health centers, and Native Hawaiian health centers.
Ryan White HIV/AIDS program grantees.
Specialized clinics: black lung, comprehensive hemophilia diagnostic treatment centers, Title X family planning, sexually transmitted disease, and tuberculosis clinics.
Hospitals: disproportionate share hospitals, children’s hospitals, free-standing cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals.

The last four hospital categories were added by the Patient Protection and Affordable Care Act in 2010, which also introduced civil monetary penalties for overcharging, a formal dispute resolution process, and published ceiling prices.¹⁷

Hospital eligibility comes with additional conditions, including certain disproportionate share adjustment percentages and, in most cases, public or nonprofit ownership. All covered entities must recertify their eligibility annually and notify the Office of Pharmacy Affairs immediately if their status changes.⁸

The program has grown from roughly 8,100 covered entity sites in 2000 to about 50,000 by 2020, with hospitals accounting for more than 60% of those sites and more than 40% of all U.S. hospitals now participating.⁹⁶ Disproportionate share hospitals alone accounted for 78% of all 340B purchases in 2023.²

The Patient Requirement

A 340B-priced drug can only go to a “patient” of the covered entity, and the entity must maintain health records documenting the care relationship. Under a 1996 Federal Register notice that remains the primary guidance, an individual qualifies if the entity maintains records of the person’s care, the care is provided by a professional employed by or under contract with the entity, and, for grant-funded entities, the services are consistent with the entity’s grant. Someone who receives nothing from the entity other than a dispensed drug for self-administration does not qualify.¹⁰¹¹

HRSA later argued that the covered entity must have “initiated” the healthcare service that led to the prescription, but in Genesis Health Care, Inc. v. Becerra (D.S.C. Nov. 3, 2023), a federal district court rejected that reading, holding that the statute contains no initiation requirement.¹² The definition therefore remains contested.

How Manufacturers Get Into the Program

Manufacturers do not choose 340B separately from Medicaid. To have their drugs covered under the Medicaid Drug Rebate Program, they must also sign a Pharmaceutical Pricing Agreement with the Secretary of Health and Human Services agreeing to charge no more than the ceiling price to covered entities. The 1992 law also excluded 340B prices from the Medicaid “best price” calculation, so a manufacturer’s Medicaid rebate obligations do not go up just because it sells drugs cheaply through 340B.¹³

The Orphan Drug Exclusion

For the four hospital categories the ACA added, rural referral centers, sole community hospitals, critical access hospitals, and free-standing cancer hospitals, manufacturers are not required to provide 340B pricing on drugs designated under Section 526 of the Federal Food, Drug, and Cosmetic Act for a rare disease or condition. Manufacturers may still offer those prices voluntarily.¹⁴¹⁵¹⁶

Duplicate Discounts and Diversion

Two integrity rules shape day-to-day operations. First, 42 U.S.C. § 256b(a)(5)(A) forbids “duplicate discounts”: a manufacturer cannot be required to give both a 340B discount and a Medicaid rebate on the same unit of drug, and states cannot claim a Medicaid rebate on drugs bought through 340B.¹⁷¹⁸

To manage this, each covered entity chooses at enrollment whether to “carve in” or “carve out” its Medicaid fee-for-service patients. Carving in means the entity uses 340B drugs for its Medicaid patients and lists its billing information in the Medicaid Exclusion File so manufacturers know not to pay a rebate on those units. Carving out means the entity buys drugs for Medicaid patients outside the 340B program. Changes take effect on the first day of the following quarter, with HRSA capturing the data on the 16th of the month before each quarter begins.¹⁷¹⁸¹⁹

The second rule is the ban on “diversion,” which is the resale or transfer of 340B-purchased drugs to anyone who is not a patient of the covered entity.¹¹ The covered entity is on the hook for preventing both violations wherever its drugs are dispensed, including through outside pharmacies.

Contract Pharmacies

Many covered entities do not have their own in-house pharmacies. To reach patients, they contract with retail pharmacies to dispense 340B-purchased drugs. HRSA first authorized these arrangements in 1996 with a one-pharmacy limit per entity, then in 2010 issued guidance allowing unlimited contract pharmacy relationships.²⁰ Contract pharmacy arrangements jumped from about 1,000 in 2010 to nearly 28,000 by 2021, with Walgreens, CVS, and Walmart accounting for over 60% of locations.⁶

Under current HRSA guidance, a covered entity must sign a written contract with each pharmacy, register it in HRSA’s information system during one of four quarterly registration windows, and conduct independent audits at least annually. The covered entity remains fully responsible for compliance, including diversion and duplicate discount prevention.²¹²⁰

What Manufacturers Actually Have to Do

Starting in 2020, several major manufacturers began restricting or refusing to ship 340B-priced drugs to contract pharmacies. Their argument: the statute requires them to “offer” the discount to the covered entity, not to deliver drugs to any third-party pharmacy the entity designates.²² The courts have agreed. In Sanofi Aventis U.S. LLC v. HHS, 58 F.4th 696 (3d Cir. 2023), the Third Circuit held that the statute is silent on delivery obligations and that HRSA had no authority to mandate unlimited contract pharmacy access. The court drew a sharp line between “offer” and “deliver,” writing that the obligation to offer drugs at a discount “does not imply an obligation to deliver goods wherever and to whomever the buyer demands.”²³ The D.C. Circuit reached a similar conclusion in Novartis Pharmaceuticals Corp. v. Johnson in May 2024.²

As a result, manufacturers currently impose a range of conditions on contract pharmacy access, including limiting delivery to a single contract pharmacy per entity, requiring the submission of claims data to third-party platforms, or shifting to a rebate model in place of upfront discounts.²²

What HRSA Can and Cannot Do

The recurring pattern in 340B litigation is that HRSA loses when it tries to fill statutory gaps by rule or guidance. Courts have held that Congress gave HRSA rulemaking authority in only three specific areas: the administrative dispute resolution process, the ceiling price calculation methodology, and civil monetary penalty standards.¹⁵ Outside those areas, HRSA’s guidance documents, advisory opinions, and violation letters do not carry the force of law, and after the D.C. Circuit’s 2024 ruling, courts no longer defer to HRSA’s reading of the statute except to the extent it has the “power to persuade.”²²

The practical effect is that several core features of how the program operates, including how drugs are tracked, who counts as a patient, and what manufacturers must do about contract pharmacies, are not clearly defined by statute, and HRSA cannot resolve those ambiguities through binding rules.²²

Where the Program Stands Now

Two recent developments are worth knowing about because they change how covered entities actually receive discounts.

HRSA introduced a 340B Rebate Model Pilot Program to test paying discounts as backend rebates rather than upfront price reductions on ten drugs selected for the Medicare Drug Price Negotiation Program. Eight manufacturer plans were scheduled to take effect January 1, 2026, with a ninth on April 1, 2026.²² The American Hospital Association and co-plaintiffs sued in the District of Maine (Case No. 2:25-cv-00600-LEW), and on December 29, 2025, the court granted a preliminary injunction blocking the pilot, finding that HRSA had implemented it through a process that likely violated the Administrative Procedure Act and that hospitals would suffer irreparable harm if the pilot launched.²⁴

Separately, in June 2026 Eli Lilly announced it would deny 340B discounts to entities that do not submit in-house and contract pharmacy claims data to a designated third-party platform, 340B ESP. America’s Essential Hospitals called the policy an unlawful, extra-statutory mandate that effectively raises drug prices above the ceiling and urged HRSA to require refunds and civil monetary penalties. A member hospital testified that losing 340B pricing would cost it an estimated $17.8 million annually.²⁵

State Laws Filling the Gap

Several states have passed laws barring manufacturers from interfering with contract pharmacy arrangements. Arkansas’s Act 1103 was upheld against a preemption challenge in PhRMA v. McClain (8th Cir. Mar. 12, 2024), where the court found that pharmacy practice is traditionally left to the states and that the Arkansas law “assists in fulfilling the purpose of 340B” rather than obstructing it.²⁶ A similar Louisiana law has been upheld. A Fourth Circuit panel struck down West Virginia and Maryland statutes in April 2026, but the full Fourth Circuit agreed on May 28, 2026, to rehear those cases.²⁷ Over 70 bills addressing the 340B program were introduced across 34 states in 2025.³

Federal Legislation

Representative Doris Matsui and Senator Peter Welch reintroduced the 340B PATIENTS Act on July 22, 2025. The bill would require manufacturers to offer 340B pricing regardless of the manner or location of dispensing, prohibit manufacturers from conditioning access on proprietary data submissions or other requirements, and impose civil monetary penalties for violations.²⁸ An earlier version (H.R. 7635, 118th Congress) did not advance past subcommittee.²⁹ On the transparency side, the American Legislative Exchange Council finalized a model state bill in August 2025 that would require certain 340B hospital types to report annual data on acquisition costs, revenue, charity care spending, and contract pharmacy payments.³⁰ The Congressional Research Service concluded in September 2025 that key statutory terms remain undefined and that significant reform requires congressional action.²

1
Office of the Law Revision Counsel. 42 U.S.C. § 256b
2
Congressional Research Service. The 340B Drug Discount Program: Litigation Topics and Trends
3
National Conference of State Legislatures. State Legislative Actions and the Federal 340B Drug Pricing Program
4
eCFR. 42 CFR Part 10
5
HRSA. OPA Manufacturers
6
JAMA Health Forum. The 340B Drug Pricing Program
7
HRSA. PHS Act Section 340B
8
HRSA. OPA Eligibility and Registration
9
USC Schaeffer Center. The 340B Drug Pricing Program: Background, Ongoing Challenges, and Recent Developments
10
340B Health. 340B Program Overview
11
HRSA. Patient Definition Resources
12
McDermott Will & Emery. What Makes a Patient a Patient: Court Rejects Restrictive 340B Definition
13
HRSA. Public Law 102-585
14
HRSA. Orphan Drug Exclusion
15
PMC. PhRMA v. HHS
16
Arnall Golden Gregory. District Court in DC Vacates HHS Interpretive Rule Regarding Orphan Drug Exclusion
17
HRSA. OPA Medicaid Exclusion
18
MACPAC. The 340B Drug Pricing Program and Medicaid Drug Rebate Program: How They Interact
19
Government Accountability Office. GAO-20-212
20
Federal Register. Notice Regarding 340B Drug Pricing Program – Contract Pharmacy Services
21
HRSA. Contract Pharmacy Implementation
22
PMC. The 340B Drug Pricing Program
23
U.S. Court of Appeals for the Third Circuit. Sanofi Aventis U.S. LLC v. HHS, 58 F.4th 696
24
Georgetown Law Litigation Tracker. AHA v. Kennedy, Order on Motion for Preliminary Injunction
25
America’s Essential Hospitals. Eli Lilly Claims Response
26
U.S. Court of Appeals for the Eighth Circuit. PhRMA v. McClain, No. 22-3675
27
American Hospital Association. Full 4th Circuit to Rehear Challenges to State Contract Pharmacy Laws
28
Office of Rep. Doris Matsui. Matsui, Welch Reintroduce Legislation to Protect 340B Drug Pricing Program
29
Congress.gov. H.R. 7635 – 340B PATIENTS Act of 2024
30
ALEC. 340B Transparency and Accountability Act