Podcast

Stephen Parente

Welcome to On Background, our podcast covering health policy across the board. I’m Steve Parente, serving as guest host today. Joining me is Tom Gunderson, always a reliable voice in these conversations. Our topic today is the 340B program, and we’re fortunate to be joined by Dr. Sayeh Nikpay from the University of Minnesota’s Division of Health Policy and Management. She has done exceptional work in this space and recently published an article in Health Affairs on this very topic. Sayeh, to kick things off — could you give us a primer on 340B for anyone coming to this fresh?

Sayeh Nikpay

Sure. 340B is the biggest little safety-net program you’ve never heard of. The last time HRSA — the agency that regulates 340B — counted, it was about an $80 billion program. It allows a group of providers to participate in a special drug purchasing arrangement where they can buy drugs at some of the lowest prices available in the market, close to what Medicaid pays.

Some of those providers are small safety-net clinics — Federally Qualified Health Centers, Ryan White clinics, local health departments. But roughly two-thirds of all nonprofit hospitals also participate. The program doesn’t restrict how providers use those discounts. Safety-net clinics typically dispense drugs to uninsured patients at cost or for free, depending on the patient’s income. Hospitals, however, serve a much broader patient mix. They also have patients on Medicare, Medicaid, and commercial insurance — and in those cases, they can charge insurers and patients standard negotiated rates that don’t reflect the 340B discount. The difference between what they paid for the drug and what they charged for it generates what the industry calls “340B savings” or “340B net revenue.” It’s essentially a buy-low, sell-high arrangement.

Stephen Parente

And I’m assuming this was never the original intention of the program?

Sayeh Nikpay

Correct — and it’s actually a fascinating story. In the late 1980s, drug prices were rising sharply, particularly for Medicaid, which was the largest individual payer and lacked any mechanism to negotiate prices directly with manufacturers. Policymakers were alarmed by Medicaid drug spending, and several different policy approaches were floated before landing on what became the Medicaid Drug Rebate Program. The core idea was to piggyback on the negotiated “best prices” that HMOs and large hospital systems were getting from manufacturers and pass those savings through to Medicaid.

What they didn’t anticipate was that the best prices in the market weren’t actually being obtained by HMOs or large hospital systems — they were being obtained by core safety-net providers. The VA had been getting exceptional discounts for years. FQHCs and Title X clinics were getting penny-priced birth control. So when the Medicaid Drug Rebate Program went into effect, the acquisition costs for those safety-net providers shot up almost immediately — sometimes by 100 to 200 percent. Since many of those providers operate on fixed federal grants, the impact was severe.

The policy response was essentially: we spent scarce federal resources funding this clinic; let’s make sure those dollars go as far as possible. The solution was to extend Medicaid-level pricing to a small group of safety-net providers — and that’s how we got 340B. It started as a narrow fix to an unintended consequence of the Medicaid Drug Rebate Program. Fast forward to today, and both programs have grown enormously. 340B has actually surpassed Medicaid in terms of providing special pricing to purchasers, and the number of participating providers has increased by an order of magnitude.

Thomas Gunderson

Minnesota was the first state in the country to require this kind of 340B transparency reporting. Why Minnesota? And do we need to do this 50 times at the state level, or can it be done federally?

Sayeh Nikpay

I think Minnesota was first because we have legislators who see something they don’t understand and want to know more — and that’s really the principle that led to this report existing. There was a confusing back-and-forth in the legislature when a proposal to carve the Medicaid drug program out of managed care generated unexpected pushback from 340B covered entities — hospitals and clinics that participate in the program. Lawmakers were puzzled. They didn’t see the connection. What emerged from those conversations was that covered entities had been charging Medicaid standard negotiated rates for drugs they had purchased at deeply discounted 340B prices, effectively capturing the spread that might otherwise have generated savings for the state.

As for the federal question — there are people in Washington who have wanted federal transparency requirements for years, but the politics of 340B are genuinely difficult. Hospitals are already facing significant revenue pressure from proposed Medicaid cuts, and no legislator wants to be seen as financially destabilizing their local hospital. So the politics at the federal level remain very complicated.

Thomas Gunderson

From a patient perspective, it sounds like the safety net isn’t catching as many people as we’d hope. And I’ll raise something that often gets overlooked: even when a prescription is written, a significant share of patients never fill it, and an even larger share don’t take it as directed. When you’re looking at 340B and thinking about who is winning and losing, are the two sides of that equation — program design and patient outcomes — actually talking to each other?

Sayeh Nikpay

Not at all — and I’m glad you raised it, because when we have conversations about 340B, the party we should always be centering is the patient. This program exists to subsidize providers that give out free and discounted care. Safety-net clinics that receive federal grant funding are generally required to operate on a sliding fee scale. In Minnesota, if you look up an FQHC with a pharmacy, you’ll often find a price page on their website showing exactly what patients in different income brackets pay — typically something close to the clinic’s acquisition cost.

That’s what 340B was designed to be: a flywheel of discounts that gets passed through to patients. That’s not where we are today. I also serve as vice chair of the Minnesota Prescription Drug Affordability Board, and we hear regularly from Minnesotans who can’t fill prescriptions because of cost. There’s a real opportunity — and I would argue a responsibility — for some of the hospitals generating substantial 340B revenue to share more of those discounts with patients who are struggling.

Stephen Parente

If you were advising the Council of Economic Advisors, what would you recommend as immediate steps to bring greater national attention to this issue?

Sayeh Nikpay

Transparency is the easy first step — and it’s genuinely bipartisan. Think about hospital price transparency or insurer price transparency. Those were broadly supported ideas across the political spectrum. More transparency on 340B is achievable and overdue.

Beyond that, there’s a structural question about where regulatory authority over 340B should sit. Earlier in the Trump administration, there was discussion about moving oversight from HRSA to CMS, and that generated real interest among those who want to reorient the program toward patients. CMS has substantially more regulatory teeth, and it’s staffed to handle a program of this scale and complexity. HRSA does excellent work in rural health, safety-net clinics, and Ryan White — but the 340B program has evolved into something that looks much more like a hospital and pharmacy program, and it’s a genuine stretch to ask an agency of that size to regulate it effectively.

Thomas Gunderson

Transparency feels like a necessary but insufficient step. Monitoring winners and losers doesn’t change behavior on its own. What are steps two and three?

Sayeh Nikpay

Those are genuinely the hard parts. The Minnesota transparency report gives us a useful window. Last year, Minnesota providers — predominantly hospitals — took in roughly $3 billion in revenue from patients and payers for 340B drugs, spent about $1.53 billion acquiring those drugs, and after $165 million in administrative costs, netted approximately $1.34 billion in profit. The question — and this is really the crux of the paper I wrote — is what states should do with that information.

There are a few paths. States can move to prevent 340B covered entities from charging Medicaid more than their actual acquisition costs for 340B drugs — something New York, California, and several other states have already done. Alternatively, states could tax that spread revenue and redistribute it to safety-net providers that are genuinely struggling. In Minnesota, for example, covered entities were found to be charging the state roughly $90 million more than their 340B acquisition costs for Medicaid drugs. You could ask: should that $90 million continue flowing to covered entities, or could it be redirected to a public hospital like Hennepin County Medical Center, to FQHCs, to local health departments? Those are legitimately hard political decisions, and they’re complicated further by the federal-state cost-sharing structure of Medicaid. In Minnesota, the federal government covers roughly half of Medicaid costs — which means that every dollar of 340B spread revenue allowed by the state is effectively subsidized at 50 cents on the dollar by federal taxpayers.

Stephen Parente

The margins here are striking. Hospitals typically operate on margins of four to five percent. The pharmacy revenue generated through 340B is substantially above that.

Sayeh Nikpay

That’s exactly right — and hospital administrators will tell you openly that pharmacy is one of the only service lines that is consistently in the black. I understand why that’s so valuable to a hospital system. But the program was not designed to subsidize the buy-and-bill process for drugs across a commercially insured patient population. It was designed to address a very specific problem: people who can’t afford their medications and lack adequate coverage.

There’s a wide spectrum of who benefits and by how much. And I think before policymakers consider additional government subsidies for hospitals — whether through higher Medicaid rates or otherwise — we have to honestly account for what is already being provided through this less visible channel.

Thomas Gunderson

This has been a genuinely illuminating conversation. Thank you for your ability to make something this complex feel understandable.

Sayeh Nikpay

Thank you — I’m glad it landed. It really is a fascinating program, even if “340B” is one of the least compelling names in healthcare policy. It’s named for the section of the Public Health Service Act it sits in, which doesn’t exactly invite curiosity. But the substance underneath it matters enormously, and I’ve found it endlessly interesting to work on. Ultimately, Reena Conti — a colleague who studies this area closely — put it best: whenever we think about reforming 340B, patients have to come first. That’s been my guiding principle ever since.

Stephen Parente

A great note to close on. Thank you, Sayeh. Thanks to Tom as well. That wraps up this episode of On Background — thanks for listening, and we’ll see you next time.