The program pays best where the need is least
Medicare finally measured what hospitals pay for 340B drugs. The number explains why the same program is a growth strategy in one hospital and the difference between open and closed in another.
Somewhere today, in a conference room at a health system, a standing financial review is deciding where a new infusion therapy will be delivered. Not a cancer drug. The cancer centers were converted to hospital outpatient departments years ago and that argument is settled. What comes to this room now are the newer infusions, the biologics for autoimmune disease and the antibody therapies for Alzheimer’s.
The roster is familiar: revenue cycle, pharmacy, ambulatory operations, clinical operations, senior executives. The recommendation to offer the therapy came from the clinical service line leader and arrives with the clinical case already made. What this room decides is something else. Whether the therapy is delivered in a hospital outpatient department that carries 340B benefit, or at another site of service. Occasionally the answer is that the organization will not offer it at all, when it cannot be made to work financially anywhere. And sometimes the question runs the other direction: whether an existing site should be converted into a hospital outpatient department so that it carries the benefit.
The number driving the decision sits in the pharmacy line, labeled 340B benefit. It is quantified partly to understand what the program contributes and partly to understand how much the service line’s profitability depends on it. It stays out of the service line pro forma and out of the financial reporting. The figure shaping where a patient will receive treatment lives in a document separate from the one recording the decision.
I have been in rooms like that one. The people in them are conscientious and the work is ordinary, and the meeting sits on a standing calendar because this decision comes up several times a year, every year, at systems across the country.
That room has always run on a number the government never actually quantified. Three weeks ago it measured it. Medicare had spent most of a decade declining to ask hospitals what they pay for the drugs they buy, and the answer, published on July 7 inside a proposed payment rule written so that few people outside hospital finance would ever get through it, was that drugs acquired through the 340B program cost hospitals 33.4 percent below the average sales price, the benchmark Medicare uses to set what it pays. Drugs acquired outside the program cost 2.7 percent above it. Over that same window, Medicare was reimbursing those same hospitals at the benchmark plus six percent. In round numbers, the hospital buys at sixty-seven cents and is paid a dollar six.
That difference has a name in the trade. It is the spread, and it is worth being clear about something before going further: the spread is not an abuse of the program. The spread is the program. Congress built 340B in 1992 by requiring drug manufacturers, as a condition of participating in Medicaid, to sell certain outpatient drugs to safety-net providers at a deep discount. It attached no appropriation, and it attached no requirement that the resulting margin be traced to a low-income patient or reported to anyone. That last line should sound familiar to anyone who read last week’s piece: the reporting requirement is missing in the same place, for the same institutions.
Two honest qualifications. Thirty-three percent off acquisition is not thirty-three percent to the bottom line, because split-billing software, third-party administrators, contract pharmacy dispensing fees and the compliance staff the program requires all come out of it first. And the six percent is a statutory figure; after sequestration the effective rate lands closer to four and a third. The spread survives both. It is smaller than the headline and it is still the largest reliable margin in most hospital pharmacies.
The argument worth having about that conference room is not the one either industry lobby is making. The pharmaceutical industry’s version is that 340B has become a scam. The hospital associations’ version is that it is working as intended. Both are arguments about the average. Look instead at the distribution, because the two ends of it are not the same room, and almost everything interesting about this program lives in the distance between them.
It helps to clarify the size of the program first. In calendar year 2024, covered entities purchased $81.4 billion in discounted drugs, up 23 percent in a single year, and disproportionate share hospitals, the large facilities that qualify by treating a high proportion of low-income patients, accounted for nearly 79 percent of it. That growth did not come from a sudden expansion of the uninsured population. It came from institutions doing what financially rational institutions do. The Congressional Budget Office found that the number of off-site outpatient clinics registered in the program grew from roughly 6,100 in 2013 to 27,700 in 2021, a great many of them in affluent, commercially insured markets. Contract pharmacy arrangements went from fewer than 1,300 locations in 2010 to roughly 31,600 today, spanning something close to 240,000 separate covered-entity contracts. A contract pharmacy is a retail pharmacy that dispenses 340B-priced drugs on a hospital’s behalf and splits the spread with it, which is why a single hospital can have hundreds of them.
Those numbers describe a peak rather than a trend. Since 2020 a long list of manufacturers has restricted contract pharmacy shipments outright, and the fight has now moved to rebate models and state protection laws, with the federal circuits now split on whether those state laws survive. The restrictions are themselves evidence that the extraction is real enough for manufacturers to have spent six years and considerable money trying to stop it.
Here is why the geography matters. The spread on a drug is proportional to the drug’s price and to what the payer reimburses, which means the program pays best on expensive drugs given to commercially insured patients. Oncology sat at the top of that list for a long time, and the pattern is visible in the data: researchers at the USC Schaeffer Center found Part B oncology spending per Medicare beneficiary running substantially higher at 340B sites than at comparable non-340B sites, with 340B eligibility associated with a roughly 90 percent increase in hematology-oncology claims. Association is not attribution, and site-of-care migration and referral concentration both push in the same direction. But site-of-care migration is not a statistical artifact. It is a decision, made on a standing calendar, by the room described at the top of this piece. The researchers are measuring the residue of thousands of those meetings.
Set that beside what the Government Accountability Office has been reporting for years. In a review of 55 covered entities, a sample GAO itself cautions does not generalize to the program, 30 offered discounts to low-income or uninsured patients at some or all of their contract pharmacies. Just over half. The important part is that the other twenty-five broke no rule, because no rule required them to do otherwise. That is the finding. Not that covered entities broke a promise, but that Congress never asked for one.
Now the other end of the distribution. A twenty-five-bed critical access hospital in a rural county qualifies for 340B on different terms than an urban system does, and depends on it differently. Cost-based Medicare reimbursement sounds like it should cover cost, but it does not because it pays a percentage of allowable costs on Medicare patients only and leaves the rest of the building uncovered. The 340B margin fills part of that gap. And here is the uncomfortable part, the one that complicates my own frame: the rural hospital’s margin comes from the same place the suburban system’s does, from commercially insured patients and retail scripts run through a contract pharmacy. The mechanism is identical at both ends. Only the use of the money differs, and only one end has the scale to build a service line designed around it.
The clearest evidence of how thin the rural end of the spectrum runs sits in a contradiction Congress has left in place since these facilities first became eligible in 2023. Rural Emergency Hospitals, the designation created specifically to keep small rural facilities from closing, are statutorily ineligible for 340B. A hospital that converts in order to survive loses the program in the same transaction. The Rural 340B Access Act, introduced in January of 2025, would fix exactly this. It has sat in committee since.
The loss compounds from there, running in a loop rather than a chain. A thin margin makes an oncology service line hard to sustain; losing the line removes the highest-spread category from the hospital’s 340B book; and that thins the margin that sustains everything else. Between 2014 and 2023, 424 rural hospitals stopped providing chemotherapy services. The wrinkle worth naming is that critical access hospitals, rural referral centers and sole community hospitals are excluded from 340B pricing on orphan-designated drugs, which covers a good deal of modern oncology, so the rural end of this ledger was thinner than the urban one by definition. Set the two ends beside each other and the shape is hard to miss. In one room the question is which new therapy to offer where. In the other, the question was whether chemotherapy could continue at all, and for 424 hospitals the answer was no. What that produces is a patient with a curable cancer driving ninety miles each way, every three weeks, for a cycle that used to be given a few minutes from home.
The strongest objection to all of this is correct as far as it goes. Cross-subsidization is how safety-net hospitals have always worked. Revenue earned on commercially insured patients has funded uncompensated care for as long as there have been hospitals, and demanding a dollar-for-dollar accounting that ties each discounted vial to a specific charity prescription misunderstands how hospital finance operates. The honest question was never whether every 340B dollar buys an uninsured patient’s medicine. It is whether the institution’s capacity to serve underserved patients survives without the program, and for a great many covered entities, particularly rural ones, the margin is the institution. The evidence on the other side is mixed rather than damning. A February preprint, not yet peer reviewed and written by authors with a stated critical posture, found 340B hospitals providing somewhat less charity care as a share of operating expenses than non-340B hospitals, 2.16 percent against 2.82. Two scoping reviews, in the Milbank Quarterly and JAMA Health Forum, reached the same unsatisfying place: real revenue, expanded services, inconsistent evidence that the revenue specifically reaches low-income patients.
There is one more thing worth holding onto, and it is the reason anyone on the provider side, at the bedside or in the budget meeting, can cite the GAO findings without becoming a pharmaceutical talking point. There is no appropriation and no line in a federal budget. The discount comes out of manufacturer revenue. The spread, though, is paid on the claim, which means commercial premiums and Medicare coinsurance fund it, and manufacturers argue the cost reappears in list prices, an argument that deserves a hearing it rarely gets from our side. What remains true is that the first-order incidence sits with an industry that is not the patient in the bed. That distinction changes the weight of the critique considerably, and it is what makes an honest accounting possible from the provider side at all.
Which brings the argument back to the proposed rule, and to the part that will be misread. Medicare is not changing 340B. The discount, the eligibility rules and the ceiling price all live at HRSA and none of them change. What Medicare controls is what it pays, and the proposal is to reimburse 340B-acquired drugs at the benchmark minus 33.4 percent rather than the benchmark plus six, which removes the spread on the Medicare portion of a hospital’s drug volume. Because the change has to be budget neutral by statute, the roughly $4.55 billion it recovers gets handed back to hospitals paid under the outpatient system as an 8.44 percent increase in what Medicare pays for non-drug services. Follow the money and the transfer is the story. It moves away from hospitals in the program and toward hospitals generally, which makes hospitals that were never in 340B the net winners, and which makes procedural and surgical service lines at those hospitals the quiet beneficiaries of a rule everyone will describe as a drug cut.
Being specific about what the rule reaches matters, because the piece would be wrong otherwise. The largest spread sits on commercially insured patients, and Medicare cannot touch that book. A rule aimed at the top of the distribution reaches only the part of it Medicare pays for.
Go back to the conference room, though, because this is where the two threads meet. Medicare has been narrowing the payment advantage of hospital outpatient status for years, one service line at a time. Clinic visits went to a physician-office-equivalent rate in 2019. Drug administration followed, effective this past January, at grandfathered off-campus departments. Imaging without contrast is the one proposed for 2027. Each of those narrows what a hospital earns for the service of delivering an infusion. What survived all of it was the drug line, which is to say the 340B spread, and the drug line is the reason the conversion question keeps coming back to that room. A March court decision made it easier still, vacating HRSA’s requirement that a new outpatient site appear on the Medicare cost report before it could buy at 340B prices. The government has appealed. So the honest way to read this proposal is that Medicare, having spent a decade trimming the reward for delivering care in a hospital outpatient department, is now going after the one part of that decision that still pays.
This is also the second time Medicare has tried the 340B piece. In 2018 it cut 340B drug payment to the benchmark minus 22.5 percent, and in 2022 a unanimous Supreme Court threw the cut out, not because a differential rate was forbidden but because the agency had varied the rate by hospital group without the acquisition-cost survey the statute requires before it may do so. This time the survey came first. That is what the 33.4 percent figure is: the evidentiary record the Court said was missing, built and published before the rate was proposed. Hospitals are also still absorbing the remedy from the first attempt, a reduction to non-drug payments that this same rule proposes to raise from half a percent to three. The legal armor is different now, and hospitals planning around a second Becerra are planning around the wrong case.
Now the part I had wrong when I started writing this, and the part most coverage will likely get wrong too. The rule does not fall evenly, and it does not fall on the bottom of the distribution at all. Critical access hospitals are excluded from the outpatient payment system by regulation and paid on cost, so the cut cannot reach them, and neither can the 8.44 percent offset. Rural sole community hospitals, children’s hospitals and PPS-exempt cancer hospitals were carved out of the 2018 cut, and the current proposal carries those exemptions forward, leaving them at the benchmark plus six while they collect the service-payment increase alongside everyone else. They come out ahead. CMS says in the same section that it may revisit the rural exemption in future rulemaking, and it is taking comment on all three. The protection is real and it is discretionary.
Sit with what that means. The payment system has learned to tell the two rooms apart. It sorts by hospital class, protects the facilities where the program is most clearly working as intended, and lands the cut on the large disproportionate share systems that capture most of the spread. The program itself still makes no such distinction. 340B allocates its benefit in proportion to commercially insured volume and contract pharmacy scale, which is very nearly the inverse of safety-net need, and it has done so for thirty-four years. Medicare figured out in one rulemaking cycle what the statute has never been amended to see.
Whether any of this is a rounding error or a service-line decision at your institution comes down to three numbers your chief financial officer already has: the share of your 340B margin that comes from Medicare rather than commercial payers, the share that comes from oncology, and your non-drug outpatient volume. The first sets your exposure, the second sets your concentration, and the third sets how much of the offset comes back to you. If you are at a hospital paid under the outpatient system with a large Medicare oncology book, you are the target. If you are at a critical access hospital, a children’s hospital or a rural sole community hospital, you are not, and the more useful question is what the increase does for the service lines you run. Comments on the rule close August 31, and a comment from a fifteen-bed hospital describing what its 340B book actually funds will carry weight that a trade association letter cannot.
I keep returning to that survey number, because of what it took to produce it. For thirty years this argument was conducted between advocates trading averages, and the government did not know, with any precision, what hospitals were paying. Now it does. And then, having finally measured the distribution, it priced off the midpoint, one national rate for both rooms. The number confirms what both sides already understood, that the program generates a large and real margin exactly as designed. What it cannot tell you is where that margin went, which hospital kept the lights on with it and which one built a suburban infusion suite with it. That is not an unknowable fact. It is known with precision in the conference room this piece opened in, by everyone sitting at that table, several times a year.
For anyone moving from the clinical side into a room where these decisions get made, that is the lesson worth carrying out of a drug pricing fight. Institutions answer to the incentive in front of them rather than to the intention behind it, and reading the incentive correctly is the first thing the new chair will ask of you. There will be a therapy on the agenda, a clinical case already made, and a line in the pharmacy column that decides where the patient goes. Those are the two rooms. They are running on the same statute, and they should stop being governed as though they were the same room.
This is the fourth piece in a thread that runs from what happens when surgery stops subsidizing the hospital through who owes the readiness payment and last week’s look at how executive pay gets set. The map that holds all of it lives here.
From the room you can’t see.