340B Program’s Future: Will Medicare Drug Price Negotiation Create a New System?

The 340B drug discount program, designed to stretch limited federal resources so safety-net hospitals can offer reduced-price pharmaceuticals and expanded care to vulnerable populations, may be facing an unintended evolution. While the Trump administration continues to refine a potential rebate model for the program – a second attempt following a court challenge – a different, potentially problematic successor could emerge as a consequence of the Medicare Drug Price Negotiation Program (MDPNP) slated to initiate in 2028.

For over three decades, the 340B program has required drug manufacturers to provide upfront discounts. However, its substantial growth has drawn scrutiny from lawmakers and pharmaceutical companies, who allege abuse of the system and margin-padding by health systems. The Health Resources and Services Administration (HRSA) recently released a request for information (RFI) seeking input on a potential rebate model, signaling ongoing efforts to address these concerns.

The Fragile Balance of Drug Margins

The potential shift stems from the complex economics of the drug supply chain. As drugs move from manufacturers to wholesalers to outpatient clinics, each entity typically retains a percentage of the drug’s cost – the drug margin. Outpatient clinics, in particular, rely on a 6% add-on fee to the average sales price to offset losses in reimbursements elsewhere. This system, while precarious, has allowed many providers to remain viable. However, it also creates incentives to prescribe higher-priced drugs to maximize profit.

The MDPNP, authorized by the Inflation Reduction Act, threatens to disrupt this balance. Beginning in 2028, the Centers for Medicare & Medicaid Services (CMS) plans to calculate the 6% add-on fee based on the negotiated price of drugs, rather than the average sales price. This will inevitably reduce the add-on fee and, the revenue for outpatient clinics. CMS has signaled its intent to aggressively negotiate drug prices, further amplifying these projected revenue losses.

Echoes of 340B: A Looming Parallel

Alarmed by these projected losses, provider groups – including the Community Oncology Alliance, senior care pharmacists, and infusion centers – are already lobbying for solutions. These organizations, with a strong presence on Capitol Hill, are advocating for mechanisms to ensure that the reductions in drug margin resulting from the MDPNP are borne by drug manufacturers, not healthcare providers. Proposed solutions often involve additional payments to outpatient clinics, either from Medicare or directly from the manufacturers.

This represents where the potential for a 340B-like successor arises. Such proposals would essentially create another channel for funds to flow from drug manufacturers to outpatient clinics, mirroring the structure of the 340B program. While different in design and purpose, it would further entrench the reliance on drug margins in physician reimbursement. Senator John Barrasso (R-Wyo.) has already introduced a bill requiring manufacturers to provide additional rebates to maintain current reimbursement levels for outpatient clinics.

A Systemic Problem, Not a Quick Fix

Experts warn that these short-term fixes will likely perpetuate the labyrinthine payment pathways that contribute to high healthcare spending. Sujith Ramachandran, an associate professor of pharmacy administration at the University of Mississippi School of Pharmacy, argues that these solutions create a lose-lose situation. Manufacturers face increased financial pressure, providers continue to have perverse incentives, and patients navigate an increasingly complex access pipeline. Taxpayers may also fail to realize the anticipated savings from the MDPNP if additional government spending is required to offset revenue losses for clinics.

The core issue, Ramachandran suggests, is the fundamental way we reimburse healthcare providers for prescription drugs in outpatient settings. Tying reimbursement to the cost of the drug itself incentivizes the dispensing of higher-priced medications. A potential solution, similar to changes made in Medicare Part D recently, would be to ban price-linked fees and compensate clinics fairly for their services without incentivizing drug price selection.

Lessons from Past Attempts

Previous attempts to address this problem, as detailed in reports from the Centers for Medicare & Medicaid Services (2018, competitive acquisition program, and MedPAC reports), highlight the need for broad consensus and a comprehensive approach. Finding coalitions that can drive meaningful reform will be crucial.

As the 2028 implementation date for the MDPNP approaches, the pressure to find solutions will intensify. Legislators will be keen to avoid negative publicity resulting from clinic closures in their districts. The closer we obtain, the more likely It’s that the U.S. Will settle for short-term fixes that fail to address the underlying systemic issues. A truly sustainable solution requires reforming the convoluted system for paying for prescription drugs in outpatient clinics, decoupling reimbursement from drug cost, and prioritizing value-based care.

What comes next: The coming months will be critical as provider groups continue to lobby for legislative changes and CMS finalizes its implementation plans for the MDPNP. Monitoring the progress of Senator Barrasso’s bill and observing the level of bipartisan support will provide early indicators of the direction policymakers are likely to take. Stakeholders should also closely follow CMS guidance and any proposed rule changes related to the 6% add-on fee and potential alternative reimbursement models.