Future Of 340B Rebate Models Hinges On Regulatory Decision Point

As pharmaceutical companies seek to transform how drug discounts are delivered under the 340B program, a federal ruling reinforces HRSA's authority. The industry must now wait for critical guidance from the Trump administration that could reshape compliance strategies and financial outcomes.

Percent sign moving down from top stair on white background
• Source: Shutterstock
Key Takeaways
  • A federal judge ruled that the HRSA has the authority to approve pharma companies' proposed rebate models for the 340B Drug Discount Program, effectively slowing industry efforts to shift from upfront discounts to rebates.
  • Pharma argues that the current 340B discount structure enables duplicate discounts and lacks proper oversight, especially with the Inflation Reduction Act adding complexity through Medicare price negotiations and inflation rebates that overlap with 340B obligations.
  • The Trump administration is expected to provide guidance on 340B rebate models in June 2025, which could significantly impact how pharma manufacturers structure their pricing and rebate strategies for drugs sold through the program.

A federal judge has sided with a US government agency in a simmering battle over a federal drug discount plan, ruling that it has the right to first approve a controversial proposal by several pharmaceutical companies to use rebates – instead of upfront discounts – when selling medicines to hospitals. Meanwhile, the Trump administration is expected to take a more definitive move next month.

The ruling came after some companies sought to change payment terms for transactions conducted as part of the 340B Drug Discount Program, which was created to make sure vulnerable patients have access to medicines. To ensure the program achieves its goals, drug makers that want to take part in Medicare or Medicaid must offer medicines at a discount to participating hospitals and clinics.

Since its inception more than three decades ago, the program has ballooned - there are now about 55,000 covered entities – and has regularly factored into the clash in the US over the cost of medicines. Prescription medicines purchased under the program amounted to $66.3bn in 2023, a 23.4% increase from the previous year, according to federal government data.

This growth has spurred widespread controversy. Drug makers argue that hospitals abuse the program and divert payments to other uses, such as fueling consolidation of health care systems that, in some cases, favor wealthy communities. As a result, the pharma and hospital industries have squared off over pricing, billing and claims data. And the use of contract pharmacies has also spawned lawsuits.

Indeed, a recent US Senate Committee investigation into the 340B program concluded that “there are transparency and oversight concerns that prevent 340B discounts from translating to better access or lower costs for patients.” The committee recommended that Congress act to improve transparency and ensure that pharmaceutical discounts actually benefit patients, among other things.

Double Discounts

The latest flash point, though, is over double discounts, an issue that can be traced, in part, to the Inflation Reduction Act (IRA), which allows Medicare to negotiate prices. The Biden administration backed the rebate model pursued by the companies, but it has been unclear what the Trump administration might do, since President Trump has consistently berated the pharmaceutical industry over its pricing.

The concern is a significant issue for the drug makers. Mostly, it stems from the fact that certain medicines had been selected by Medicare for price negotiations. These included the blood thinners Xarelto (rivaroxaban) and Eliquis (apixaban), as well as the psoriasis treatment Stelara (ustekinumab) and the heart medicine Entresto (sacubitril/valsartan).

The IRA imposes a maximum fair price on drugs paid for by Medicare and obligates manufacturers to pay additional inflation rebates in Medicare Parts B and D. But this is where things get sticky: These obligations overlap with 340B, because drug makers must offer hospitals the lower of the maximum fair price or 340B price, and pay inflation rebates only on drugs not sold at the 340B price.

Meanwhile, drug companies pay separate mandatory rebates to Medicaid, which covers lower-income patients, and federal law bars duplicate discounts for the same prescription. But the companies argue that the current way of providing the 340B discount is ripe for abuse because it can allow hospitals to apply 340B prices to prescriptions that should not be eligible, such as those reimbursed by Medicaid.

Congressional lawmakers have also voiced objections. Last fall, more than 180 members of Congress wrote to the HHS to complain that the proposed 340B rebate model would also affect three dozen state Medicaid programs. Under the rebate model, they argued that the states would have to pay the high sticker price while waiting for rebates and also incur costs to reconcile payments.

The pharma industry maintains all this has created confusion and threatens its bottom line. The drug makers also argue that the federal government has refused to take responsibility for assuring that claims are not duplicated and, instead, told the companies to develop their own methods for avoiding discounts. By altering payment models, the drug makers are trying to solve the problem.

“In some ways, this is industry trying to seize oversight,” explained Brian Reid of Reid Strategic, a consultant who works with drug companies on pricing and access issues. “They’re saying that the government told us to deal with (duplicate discounts), and so we need to deal with this, but we can’t think of another way to get it done.

“The pharmaceutical companies need a guarantee that claims are being processed in a way that ends inappropriate uses of the program. That’s the big prize for them. The thought is that duplicate discounts might be happening a lot, although estimates are hard to come by. But this is driving the urgency and the litigation is probably the lever to move the government.”

Pharma Approaches To The Issue

Not every drug maker has pursued the same approach to the discount problem, though. Sanofi, for instance, proposed offering credits to certain hospitals and clinics that ordered medicines at full price from a wholesaler. However, the credit would only be issued after a hospital or clinic submits claims data, including the prescription, about a patient’s hospital visit and related dispensing information.

Johnson & Johnson, which was the first to pursue an alternate payment model, sought to issue rebates to hospitals that purchased two of its widely prescribed medicines. Novartis and Bristol Myers Squibb also sought to offer rebates. Lilly, meanwhile, planned to pay cash directly to 340B hospitals, ensuring they pay no more than the ceiling price called for in the program.

But the US Health Resources and Services Administration (HRSA), which is responsible for the discount program, played tough. The agency maintained the various proposals would violate federal law governing the program because the rebates would be mandatory and force hospitals to pay higher prices up front, not just for initial purchases that are later replenished at the lower 340B pricing.

The HRSA also argued the move requires approval from the US Department of Health and Human Services (HHS), which oversees the agency. But in order to thwart the companies from proceeding, the HRSA began threatening to issue sanctions. Consequently, the drug makers backed down, but soon filed lawsuits accusing the agency of acting “arbitrarily and capriciously.”

In their lawsuits, the drug companies argued that HRSA did not have the authority to reject the proposed rebating model. They also contended that the HHS has refused to issue guidance so duplicate discounts can be avoided, and that HRSA failed to look for duplicate discounts during audits, according to the lawsuits.

Last March, HHS pushed back. In a court filing, the agency wrote that its decision was not arbitrary and capricious, and that HHS approval for the rebate models was consistent with the law and past practice. HHS also maintained that it was premature to express concerns about the relationship between the 340B program and the IRA.

By ruling the HRSA has the right to first approve the rebate model, US District Court Judge Dabney Friedrich effectively gave the agency the ability to slow the recent push by the drug makers to shift to rebates. The decision supports arguments that “there is certainly adequate justification for rejecting these proposals,” said Bruce Siegel, who heads America’s Essential Hospitals, in a statement.

The Trump administration is poised to go further. In a May 2 court filing, the administration made a very brief statement that indicated it understands the magnitude of the problem. “Large-scale implementation of rebate models to effectuate the 340B ceiling price would be a significant change for the 340B Program and its stakeholders,” the filing stated.

“Because the implications are not straightforward, the Department continues to carefully evaluate its options alongside ongoing efforts to address 340B program integrity matters and keeping in mind the approaching effective date of certain IRA requirements. The Department expects to be in a position to provide guidance for stakeholders in thirty days.”

A Waiting Game

It is not clear whether HHS will issue an official guidance on the topic. But the filing suggested the escalating drama may be a step closer to getting sorted out, giving credence to a recent claim by Adam Fein of Drug Channels Institute, a research firm that tracks the pharmaceutical supply chain, that the IRA would be a “catalyst” for 340B change.

Meanwhile, the American Hospital Association - which represents some 5,000 hospitals, including 2,100 that participate in the 340B program – wrote to HHS Secretary Robert F. Kennedy Jr. in hopes of convincing him that the proposed rebate models would inflict “ruinous consequences” on hospitals and their patients.

“If HHS authorizes these proposed rebate models, it would come at the expense of America’s most vulnerable patients and communities,” the AHA wrote in May 9 letter. “Any use of rebate models, whether large-scale or small-scale, would not just be a significant change. It would be a significantly harmful change.”

The AHA argued that the implications could be enormous because drug companies may not pay rebates in a timely manner, placing hospitals under financial pressure due to uncertain cash flow. In other words, pharma companies would be in a position to profit by holding on to funds longer than they would otherwise.

Hospitals, however, are accused by the pharmaceutical industry of shedding crocodile tears. Some large hospitals systems, in fact, are sometimes portrayed as financial companies that happen to provide health care. But health policy experts suggest that many smaller safety-net clinics, some of which are run on tight budgets, would be hurt if they are forced to accept rebates after purchasing 340B drugs.

“I think the pharmaceutical companies have been working for a while on how to solve the problem of not paying two discounts,” said Sayeh Nikapy, an associate professor at the University of Minnesota School of Public Health who studies 340B pricing. “Rebates are part of a grand arc to bring more control over a program that’s gotten much bigger than anyone thought it would have been three decades ago.”

More from Market Intelligence

More from Market Access