The 340B drug pricing program isn’t a household name. But it has become the country’s second largest federal prescription drug purchasing program, only behind Medicare’s outpatient pharmaceutical benefit. The program, which requires pharmaceutical manufacturers to sell medications at steep discounts to safety-net healthcare organizations and clinics, reached approximately $100 billion in discounted purchases in 2025. The objective is to lower the costs of medications for uninsured and low-income patients. Because 340B has also become a major revenue generator for entities deploying the “buy low, sell high” principle, it is the subject of intense debate in policy circles and in Congress. It’s possible that structural reforms to the program could serve as a catalyst to make hospitals and other purchasers of medicines more price-sensitive and subsequently adopt more lower-cost biosimilars.
Established by Congress in 1992, 340B was designed to “stretch scarce federal resources,” enabling safety-net providers to serve more eligible low-resourced patients. Under the program, facilities classified as “covered entities” are allowed to purchase medications at a discount. These entities include hospitals, HIV/AIDS clinics, cancer centers and other federally qualified safety-net facilities.
While well-intended, the phrase “stretch limited federal resources” doesn’t necessarily mean helping low-resourced people. A non-partisan Government Accountability Office report found that roughly 50% of 340B contract pharmacy arrangements did not extend discounts to uninsured patients.
Covered entities can generate revenues through 340B to effectively subsidize broader operations, as they purchase drugs at heavily discounted prices and get reimbursed by insurers at much higher prices. They can keep the spread between acquisition cost and payer reimbursement.
Notably, branded drugs account for close to 90% of 340B sales, whereas they comprised about 78% of non-340B sales. Moreover, purchasers preferred higher-cost originator biologics in classes with biosimilars. Researchers found a 66% reduction in biosimilar use associated with 340B eligible entities. The program may be incentivizing covered entities to select more expensive drugs over generics and biosimilars, as higher priced medications generate more revenue.
There is growing support for adding transparency and oversight to 340B. To illustrate, Sen. Cassidy (R-LA) released a legislative discussion draft this summer aimed at giving the program more regulatory clarity and preventing gaming of the system by way of better-aligned incentives.
The Trump administration is also getting involved. The Health Resources and Services Administration, which is part of the Department of Health and Human Services, has put forward a pilot “rebate model” with a start date of Jan. 1, 2027. It will pertain to a limited subset of drugs, namely those subject to Medicare’s so-called maximum fair prices. These are the now dozens of top-selling pharmaceuticals that have been negotiated between the federal government and drug makers under an Inflation Reduction Act provision.
Hospitals or other 340B-eligible entities will receive discounts after purchasing and dispensing drugs rather than upfront. Specifically, covered entities will pay the wholesale acquisition cost initially and then submit claims to HRSA or a designated third-party administrator to receive rebates that reflect the 340B ceiling price. The model seeks to track claims to ensure the program is helping those for whom it is intended. And the pilot aims to mitigate the risk of duplicate discounts between the 340B program, Medicaid and the new Medicare negotiated prices.
An assessment of claims data will allow manufacturers to have improved visibility on prescription drug utilization and the allocation of 340B discounts.
Nonetheless, the changes could worsen cash-flow issues for covered entities since they will not receive 340B discounts upfront. In this respect, 340B reforms are perceived as a threat by entities that rely directly on the “buy-low, sell-high” spread to fund uncompensated care. The biggest risk is for rural and community hospitals as well as specialized clinics like Ryan White.
Legislation introduced this summer, the SUSTAIN Act, would seek to establish clearer rules for patient eligibility as well as improved covered entity oversight. But its main purpose is to protect the 340B program by terminating the Trump administration’s pilot program less than a year after it begins, codifying upfront point-of-sale discounts which help ensure covered entities’ viability and putting an end to drug manufacturer-imposed limits on when, where, and how safety-net hospitals and clinics can access legally mandated drug discounts.
Case of Keytruda
Hospitals often earn considerable spreads on high-volume branded drugs purchased through 340B. If reforms reduce those spreads, hospitals may become more price-sensitive, making lower-cost biosimilars relatively more attractive. Biosimilars are medicines made from living organisms called biologics. Like biologics, biosimilars go through rigorous testing before receiving FDA marketing authorization. They’re made from the same types of organic material and offer the same clinical benefits as their referenced originators.
Reform efforts could improve the economics for hospital-administered biosimilars, including eventually in the cancer therapeutic Keytruda (pembrolizumab) space, as Keytruda-referenced biosimilars could become available in the U.S. as early as 2028 or 2029, pending ongoing legal settlements.
Keytruda accounted for over $8.1 billion in 340B sales in 2024, nearly 30% of the product’s total worldwide revenues. A hospital administering Keytruda can acquire the drug at the 340B ceiling price, which is considerably lower than the average sales price. Then it gets reimbursed by insurers at negotiated rates that are much higher than the acquisition cost, retaining the spread.
A study showed that for hospitals eligible for 340B discounts, each Keytruda patient was associated with $102,680 in annual revenue, compared to $67,825 in revenue at non-eligible hospitals and $3,094 in revenue at physician practices. This translates into substantial price markups, or the difference between acquisition and (government or commercial) reimbursement prices. These averaged 173% in hospitals eligible for 340B discounts, 78% in hospitals ineligible for such discounts and 16% in community-based physician practices.
340B reform could alter market adoption of Keytruda biosimilars by reconfiguring the financial incentives of hospitals, so as to mitigate the preference to prescribe the higher cost, branded originator biologic to maximize margins. Of course, the other things equal (ceteris paribus) clause applies as preferences for continuing to prescribe Keytruda over its biosimilars could relate to changes the originator manufacturer makes to the delivery mechanism (subcutaneous as opposed to infused, for example).