Making the Case for 340B Reforms

Ryan Long, the co-author of a recent USC Schaeffer Center white paper on the 340B Drug Pricing Program, argues that meaningful reform requires shifting to a direct subsidy model based on need.

The 340B Drug Pricing Program isn’t helping hospitals it should be helping, critics say. And that’s why it’s time to reform the program.

Established in 1992 with the intent to improve healthcare access for uninsured and underinsured patients, the 340B Drug Pricing Program has grown significantly. Spending through the program has increased by about 19% annually, from $6.6 billion in 2010 to $43.9 billion in 2021.

Discounts achieved through the program are a significant source of revenue for hospitals. However, hospitals that treat a higher proportion of commercially insured and are already on strong financial footing fare far better than those with a higher proportion of patients covered by public payers, according to a recent white paper from the USC Schaeffer Center.

“The program is not actually directed to the needy,” says Ryan Long, JD, a nonresident senior scholar at USC who previously served as senior policy advisor to House Speaker Kevin McCarthy (R-California).

“The more commercially insured patients you have, the more revenue you can generate from the program,” he says. “But those hospitals that have high commercial payer rates also tend to be the most financially viable hospitals.”

Spread Pricing Creates Misaligned Incentives

Through the 340B program, hospitals purchase outpatient drugs at significant discounts and receive full reimbursement for those drugs from payers. Hospitals keep the difference, or the “spread,” as revenue.

However, commercial payers typically pay more than public payers. According to the Minnesota Department of Health, 53% of net 340B revenues come from commercial payers while 31% come from Medicare and 14% come from Medicaid.

“Commercial payers reimburse much higher than Medicare, much higher than Medicaid, and certainly much more than the uninsured,” Long says. “So, the more commercially insured patients you have, the more money you can generate from the 340B program.”

This spread pricing mechanism also creates other misaligned incentives, according to the USC paper:

• It encourages high-cost drugs: The spread is larger for higher-priced drugs, which incentivizes the use of more expensive medications over lower-cost generics and biosimilars, driving up overall healthcare spending.
• It drives consolidation: The revenue model encourages 340B hospitals to acquire physician practices and open clinics in more affluent, commercially insured areas to expand their patient base and maximize profits.

Why True Reform Could Benefit Safety-Net Hospitals

The spread pricing mechanism may have worked at the inception of the 340B program, when fewer than 100 hospitals were participating, but it has become unsustainable with nearly 3,000 hospitals and more than 33,000 contract pharmacies participating in 2025.

A redesigned program could be a net positive for true safety-net providers, according to Long.

Long argues that the 340B program should shift to a “direct line of assistance where assistance is provided to hospitals, not off their ability to gain the spread, but off of their need.”

While some calls for reform would maintain the spread pricing mechanism, Long and his co-authors argue that these could have unintended consequences. For instance, transparency requirements would create additional compliance costs that would disproportionately affect hospitals that receive less in 340B revenues, which are often the hospitals treating more Medicare and Medicaid patients.

While hospital advocacy groups continue to fight against proposed changes to the 340B program, lawmakers seem to be growing increasingly skeptical of its current structure and revenue cycle leaders should prepare for a change regardless of the shape it takes.