The Department of Health and Human Services published a report on Oct. 8 arguing that the 340B Drug Pricing Program encourages hospitals to acquire outpatient clinics and physician practices to profit from drug reimbursement differences.
The program allows qualifying safety-net hospitals to purchase drugs at steep discounts while collecting higher reimbursements from insurers. That difference creates a financial incentive to bring more outpatient facilities under hospital ownership.
Agency policy leaders argue that 340B has expanded beyond its original intent, encouraging consolidation without necessarily improving patient care.
Eligible drug purchases climbed from $12B in 2015 to $81B in 2024. Meanwhile, hospital off-campus clinic sites increased from roughly 7K in 2013 to more than 34K in 2023.
HHS analysis found that inflation-adjusted payments for 340B drugs at non-exempt sites rose by $3.6B between 2021 and 2023.
CMS wants to shrink the 340B payment spread
The Centers for Medicare & Medicaid Services has proposed changing how Medicare reimburses affected 340B drugs starting in 2027. Instead of paying average sales price plus 6%, the agency wants to lower the rate to average sales price minus 33.4%.
CMS says the proposed rate more closely reflects what hospitals actually pay to acquire the drugs. The goal is to reduce the reimbursement gap that makes 340B drug purchases financially attractive.
The agency estimates the change would reduce drug payments by $4.85B in calendar year 2027.
HHS chief economist Casey B. Mulligan argues that the current system rewards hospitals for administering more expensive drugs. It also makes outpatient infusion clinics more financially attractive acquisition targets for hospitals participating in 340B.
Hospital groups are preparing for a legal fight
Hospital trade groups have signaled plans to challenge the proposed payment change in court, setting up another potential legal battle over Medicare's treatment of 340B drugs.
The financial stakes are significant for hospital operators with large outpatient networks. Lower reimbursements would reduce the margins hospitals earn on affected drug treatments, weakening one of the financial incentives behind outpatient acquisitions.
The administration argues that the existing structure encourages hospitals to expand their networks to capture larger reimbursement spreads. Its proposal seeks to narrow that gap by bringing Medicare payments closer to estimated acquisition costs.
For hospitals, the question is how much of their outpatient drug revenue could disappear if the proposed rate takes effect. For policymakers, the challenge is changing those incentives without undermining the safety-net providers the program was designed to support.
Whether the proposal is finalized and survives potential litigation will determine how much the economics of outpatient hospital acquisitions change in 2027.
