The 340B program was created in 1992 following the enactment of the Medicaid Drug Rebate Program and gives certain safety net providers discounts on outpatient drugs comparable to those made available to state Medicaid agencies. HRSA, through its Office of Pharmacy Affairs, is responsible for administering and overseeing the 340B program, which according to federal standards, includes designing and implementing necessary policies and procedures to enforce agency objectives and assess program risk. These policies and procedures include internal controls that provide reasonable assurance that an agency has effective and efficient operations and that program participants are in compliance with applicable laws and regulations. Eligibility for the 340B program is defined in the PHSA. Entities generally become eligible by receiving one of 10 federal grants or by being one of six hospital types. (See appendix II for a complete list of covered entity types and their eligibility requirements.) To participate in the 340B program, eligible entities must register with HRSA and be approved. Entity participation in the 340B program has grown over time to include over 16,500 covered entity sites (see fig. 1). Federal grantees are eligible for the 340B program by virtue of receiving certain federal grants administered by different agencies within HHS. Eligible grantees include clinics that offer primary and preventive care services, such as FQHCs, family planning clinics, and clinics that target specific conditions or diseases that raise public health concerns or are expensive to treat, such as hemophilia treatment centers. Participating clinics may offer eligible services at one or multiple sites. They also include state-operated ADAPs, which serve as a “payer of last resort” to cover the cost of providing HIV-related medications to certain low-income individuals. Hospitals eligible for the 340B program include certain DSH hospitals, children’s hospitals, freestanding cancer hospitals, rural referral centers, sole community hospitals, and critical access hospitals. While DSH hospitals have been eligible for the program since its inception, children’s hospitals became eligible in 2006, and the remaining hospital types became eligible through PPACA. Hospital eligibility for the 340B program has more elements than that of federal grantees, because unlike federal grantees, hospitals do not qualify for the program based on receipt of a federal grant. Rather, they must meet certain requirements intended to ensure that they perform a government function to provide care to the medically underserved. First, hospitals generally must meet specified DSH adjustment percentages to qualify; however, critical access hospitals are exempt from this requirement. Additionally, all hospitals must be (1) owned or operated by a state or local government, (2) a public or private, nonprofit corporation that is formally delegated governmental powers by a unit of state or local government, or (3) a private, nonprofit hospital under contract with a state or local government to provide health care services to low income individuals who are not eligible for Medicaid or Medicare. Clinics and other sites affiliated with a hospital, but not located in the main hospital building, are eligible to participate in the 340B program if they are an integral part of the hospital, which HRSA has defined as reimbursable sites on the hospital’s most recently filed Medicare cost report. All drug manufacturers that supply outpatient drugs are eligible to participate in the 340B program and must participate if they want their drugs covered by Medicaid. To participate, manufacturers are required to sign a pharmaceutical pricing agreement with HHS in which both parties agree to certain terms and conditions and submit this agreement to HRSA. Covered entities typically purchase and dispense 340B drugs through pharmacies and can structure their programs in different ways. Entities can have (1) an in-house pharmacy model, in which the pharmacy is housed within the covered entity, (2) a contract pharmacy model, in which the entity contracts with an outside pharmacy to dispense drugs on their behalf, or (3) both. Historically, only covered entities that did not have an in-house pharmacy were allowed to contract with a single outside pharmacy to provide services. In March 2010, however, HRSA issued guidance allowing all covered entities—including those that have an in- house pharmacy—to contract with multiple outside pharmacies. Some covered entities use HRSA’s Pharmacy Services Support Center (PSSC) or private companies that provide technical assistance, information technology, and other services to help develop, implement, and manage their 340B pharmacy program. The 340B price for a drug—often referred to as the 340B ceiling price—is based on a statutory formula and represents the highest price a drug manufacturer may charge covered entities; however, the provision establishing the 340B pricing formula indicates that manufacturers may sell a drug at a price that is lower than the ceiling price. As such, covered entities may negotiate prices below the ceiling price. Manufacturers are responsible for calculating the 340B price on a quarterly basis. Occasionally the formula results in a negative price for a 340B drug. In these cases, HRSA has instructed manufacturers to set the price for that drug at a penny for that quarter—referred to as HRSA’s penny pricing policy. Covered entities must follow certain program requirements as a condition of participating in the 340B program. For example, covered entities are prohibited from diverting any drug purchased at a 340B price to an individual who does not meet HRSA’s current definition of a patient. This definition was issued in 1996 and outlines three criteria which generally state that diversion occurs when 340B discounted drugs are given to individuals who are not receiving health care services from covered entities or are only receiving non-covered services, such as inpatient hospital services, from covered entities. (See table 1 for more information on HRSA’s definition of a 340B patient.) Covered entities are permitted to use drugs purchased at the 340B price for all individuals who meet the definition of a patient, whether or not they are low income, uninsured, or underinsured. Covered entities also are prohibited from subjecting manufacturers to duplicate discounts whereby drugs prescribed to Medicaid patients are subject to both the 340B price and a rebate through the Medicaid Drug Rebate Program. To avoid duplicate discounts, covered entities can either purchase drugs for Medicaid patients outside the 340B program, in which case the state Medicaid agency may claim the rebate, or they can use drugs purchased at 340B prices, in which case the agency may not claim the rebate. Covered entities that decide to use 340B drugs for Medicaid patients must notify HRSA so that it can coordinate with state Medicaid agencies for billing purposes. Further, certain covered entities— DSH hospitals, children’s hospitals, and freestanding cancer hospitals— are prohibited from purchasing outpatient drugs through any group purchasing organization (GPO). However, they may purchase drugs through the specified HRSA contractor, the Prime Vendor Program (PVP). Rural referral centers, sole community hospitals, and critical access hospitals participating in the 340B program are allowed to purchase outpatient drugs through any GPO. Drug manufacturers also must follow certain 340B program requirements. Specifically, they must sell outpatient drugs to covered entities at or below the statutorily determined price. In addition, HRSA’s nondiscrimination guidance prohibits manufacturers from distributing drugs in ways that discriminate against covered entities compared to other providers. This includes ensuring that drugs are made available to covered entities through the same avenue that they are made available to non-340B providers, and not conditioning the sale of drugs to covered entities on restrictive conditions, which would have the effect of discouraging participation in the 340B program. About half of the covered entities we interviewed reported that they generated 340B program revenue that exceeded drug-related costs—the costs of purchasing and dispensing a drug—and revenue generation depended on several factors. Regardless of the amount of 340B revenue generated or the savings realized through 340B discounts, covered entities generally reported using the 340B program to support or expand access to services. Thirteen of the 29 covered entities we interviewed reported that they generated revenue through the 340B program that exceeded drug-related costs. Of the 16 remaining, 10 did not generate enough 340B revenue to cover all drug-related costs, and 6 covered entities were unable or did not report enough information for us to determine the extent to which they generated 340B revenue due, in part, to their inability to track 340B- specific financial information. In general, 340B revenue—whether exceeding drug related costs or not— was generated through reimbursement received for drugs dispensed by 340B in-house or contract pharmacies, though several factors affected the extent to which the covered entities we interviewed generated revenue through the program:  Third-party reimbursement rates: Eighteen of the 29 covered entities we interviewed generated 340B revenue by receiving reimbursement from third-party payers and tracked revenue by payer source. Of the 18, most reported that they generated more 340B revenue from patients with private insurance and Medicare compared to other payers. However, a few of these covered entities reported that their ability to generate 340B revenue from private insurers, including Medicare Part D plans, was decreasing because some insurers were reducing contracted reimbursement rates for drugs based on the entity’s status as a 340B provider. Of the 18 covered entities, most of those that used 340B drugs for Medicaid patients reported that state-determined Medicaid reimbursement rates for these drugs were generally lower, compared to private insurers and Medicare. For example, most reported that Medicaid reimbursement for a 340B drug was set at the price paid for the drug—the 340B price or any lower price—plus a dispensing fee, the latter of which generally did not cover the costs of dispensing the drug. This is typically referred to as reimbursement at actual acquisition cost, which reduces a covered entity’s ability to generate revenue because the state, rather than the entity, benefits from any savings from purchasing drugs at the 340B price. However, a few covered entities generated more 340B revenue through Medicaid than others because they had contractual agreements with their states to share 340B-related savings.