DSH hospitals have been eligible since the program was created. Additional hospital categories were added through subsequent legislation between 2003 and 2010.

In addition to meeting the above criteria, DSH hospitals, freestanding children’s and cancer hospitals must also have a Medicare DSH adjustment greater than 11.75% for the most recently filed cost report. Sole community hospitals and rural referral centers must have a DSH adjustment of 8% or higher. A hospital’s DSH adjustment depends on the number of inpatient days of its Medicaid and Supplemental Security Income (SSI) patients.

The 11.75% Medicare DSH adjustment percentage is the equivalent of an inpatient patient population of 27.32% Medicaid and SSI patients. The 8% Medicare DSH adjustment percentage is the equivalent of an inpatient population of 22.77% Medicaid and SSI patients.

HRSA provides an annual update on the drug volumes each CE type purchased through the program. In calendar year 2025, 340B covered entities purchased $100 billion in covered outpatient drugs under the 340B program.

Under the 340B statute, manufacturers may not charge CEs more than the “340B ceiling price” for covered outpatient drugs. The ceiling price is the average manufacturer price (AMP) minus the unit rebate amount (URA). The URA reflects minimum statutory rebates under the Medicaid Drug Rebate Program—23.1% for most brand-name drugs, 17.1% for brand-name pediatric drugs and clotting factors and 13% for generic and over-the counter drugs. HRSA maintains a ceiling price website that enables CEs to  validate the prices they pay for 340B drugs.

CEs generate savings when a drug purchased at the 340B discounted price is sold to a patient with commercial insurance, Medicare or Medicaid managed care coverage that reimburses the facility at a higher rate than fee-for-service (FFS). Not all states allow CEs to bill Medicaid managed care plans above acquisition cost, and CEs cannot bill Medicaid FFS higher than acquisition cost plus a state allowable dispensing fee. There are also limits on revenue opportunities in the Medicare market since drug products subject to government negotiations reimburse at much lower rates.

340B savings are intended to support a CE’s mission and can be used in various ways to meet this goal. Examples include: reducing drug prices for low-income and other vulnerable patient populations, transportation and language services, expanding clinical services, offsetting uncompensated care or sustaining operations in underserved areas.

Federal law protects manufacturers from having to provide both a 340B discount and a Medicaid FFS rebate on the same drug (i.e. “duplicate discount prohibition”). Duplicate discounts occur when a drug manufacturer provides both an upfront discount to a CE and a back-end rebate to the state Medicaid rebate program. To comply with the prohibition, CEs must first decide whether they will use the 340B drugs for their Medicaid FFS patients (i.e. carve in) and notify the federal and state government of this decision.

Manufacturers are also protected from paying both a 340B discount and a Medicare-negotiated “maximum fair price” (MFP) on the same drug. The 2022 Inflation Reduction Act (IRA) authorized Medicare to negotiate MFPs for certain high-cost drugs beginning in 2026. However, the law requires manufacturers to offer CEs the lower of the 340B price or the MFP, but not both.

In addition to the “duplicate discount prohibition,” DSH, children’s and free-standing cancer hospitals are subject to a GPO prohibition. Rural hospitals are prohibited from accessing discounts on orphan drugs. The 340B statute authorizes a prime vendor program (PVP), that has been tasked with negotiating additional pricing discounts (below the 340B ceiling price) with participating manufacturers and providing education, training and resources. Apexus has served as the prime vendor since 2004. Participation in the PVP is voluntary, and CEs may independently negotiate subceiling discounts.

HRSA on July 31, 2026 announced it plans to implement a revised rebate model pilot program for roughly 20 drugs that are part of the IRA’s Medicare Drug Price Negotiation (MDPNP) program for 2026 and 2027. The pilot is expected to take effect on Jan. 1, 2027.

HRSA’s pilot would require CEs to purchase those drugs at the higher wholesale acquisition cost (WAC) and submit claims data to manufacturer vendors within 45 days of dispense. Drugmakers would have 10 days to repay a rebate equal to the difference between the WAC and 340B ceiling price or deny a claim with “rationale and specific documentation.” Qualifying manufacturers must apply for rebate plan approvals through HRSA.

Post-purchase rebates would mark a departure from the program’s longstanding upfront discount structure, dating back to its origin in 1992.

HRSA’s initial rebate pilot was set to begin Jan. 1, 2026. However, four hospitals and two hospital trade groups sued HRSA and a federal judge halted the pilot. The court found HRSA likely violated the Administrative Procedures Act for failing to adequately explain its rationale for a rebate model or consider the pilot’s impact on CEs. Shortly after withdrawing its initial rebate pilot, HRSA invited stakeholder comments on a revised 340B rebate pilot and received a high volume of feedback, most of it from CEs opposing the idea.

Manufacturers have argued that a rebate model is necessary to enable more accurate 340B claim identification and prevent duplicate MFP and 340B discounts on the same drug and that the pilot will not unduly burden CEs. However, CEs have argued that shifting from upfront discounts to post-purchase rebates would require them to carry higher WAC-based drug costs on their balance sheets, creating new financial and administrative burdens and shifting how the program has historically operated.

Further legal challenges to the rebate pilot are anticipated. Lawmakers have introduced legislation that would either end or delay implementation of a rebate pilot or exempt certain providers from the proposal but it is uncertain if these efforts will be successful.

The number of 340B contract pharmacies has grown significantly since HRSA permitted multiple contract pharmacy arrangements in 2010. Manufacturers have contended that the scale of these arrangements increases the risk of diversion and duplicate discounts, resulting in financial losses for these companies. CEs have argued that contract pharmacies help ensure patients can access medications closer to home and that there are strong compliance systems in place.

Several manufacturers began implementing policies in 2020 to restrict or refuse providing 340B-priced drugs dispensed through contract pharmacies. 340B Report tracks these manufacturer policies for subscribers. CEs and the federal government have challenged these actions, asserting that the 340B statute requires manufacturers to provide discounted drugs regardless of dispensing arrangements. However, federal courts have so far ruled largely in favor of manufacturers.

Acknowledgments: 340B Report thanks the author of this report, Anna Mangum, for drafting the 340B Explainer. We also want to thank Ted Slafsky, William Newton and Shannon Young for their editorial contributions; Jane Aylward and Drew McKenna for their graphic design support; and Diane Slafsky, Julie DeMaio and Reshma Eggleston for providing valuable feedback. For questions about the report or about becoming a 340B Report subscriber, please reach out to Diego Ortiz.