340B Program & Oncology: What You Need to Know

October 8, 2020

By: Ashley Dyke & Jordan Tussy


The future of the 340B Program remains up in the air as policy makers continue to scrutinize its reimbursement model, citing a potential contribution to rising drug costs and a shift in site-of-service for cancer treatment.8,20 Will the uncertainty of 340B disincentivize hospital consolidation of oncology practices? Is this Program contributing to the shift in oncology treatment from free-standing clinics to hospital outpatient facilities? Many are asking what the future holds for the 340B Program and what the repercussions will be if significant changes are implemented.

340B Program Overview

The 340B Program requires drug manufacturers to offer qualified healthcare providers substantial discounts on select outpatient drugs. The formula used to calculate the “ceiling price”, or the maximum price a manufacturer can charge for a 340B drug, is based on the Medicaid drug rebate formula. It is the average manufacturer price (“AMP”) less a unit rebate amount (“URA”), which is specified in the Social Security Act (“SSA”) and varies by type of drug.21 Generally, the six hospital categories listed below can qualify as a “covered entity” and be eligible for the Program.

  1. Disproportionate share hospitals (DSHs);
  2. Children’s hospitals;
  3. Cancer hospitals (those exempt from Medicare);
  4. Sole community hospitals;
  5. Rural referral centers; and,
  6. Critical access hospitals.

The 340B Program was founded in 1992 with the goal of reducing drug costs for the listed entities and enhance access to prescription medication to vulnerable patients.

In 2010, the 340B Program experienced significant expansion with the passage of the Patient Protection and Affordable Care Act (“PPACA”).9 However, in recent years, CMS has enacted several budget cuts targeting the 340B Program and its reimbursement for drug costs, leaving the Program’s future in question. More cuts and/or structural changes to the 340B Program should be expected, as lawmakers re-evaluate the effectiveness of the current payment model.

340B Program Key Milestones

Some of the key dates in the history of the 340B Program are outlined chronologically below.

1992: 340B Program Enacted

  • Section 340B of the Public Health Service Act was enacted by Congress. Manufacturers of pharmaceutical drugs were required to enter into a pharmaceutical pricing agreement (“PPA”). The PPA agreement required manufacturers to provide front-end discounts to “covered entities”. Discounts are applied to qualified outpatient drugs to covered entities that serve the most at-risk populations.4

2018: CMS Final Rule

  • CMS final rule pays 340B hospitals 77.5% of the average sale price (“ASP”) for most Part B drugs. This payment rate was determined based on an analysis in 2015 the MedPAC report, which indicated the average discount received on 340B covered drugs was 22.5%.21 CMS historically paid 106.0% of the ASP.1
  • In December 2018, a Federal Judge from the US District Court for the District of Columbia ruled that CMS did not have the authority to change the payment rates because it had not collected enough data on the hospitals’ acquisition costs to justify the payment cuts.3, 6 HHS has appealed the ruling and continued to reimburse 340B hospitals at ASP minus 22.5%.6

November 2019: Proceed with Reimbursement Cuts

  • CMS announces plans to move forward with reimbursement cuts to 340B safety-net hospitals in 2020 despite pending litigation.11

January 2020: Hospital Eligibility Called into Question

  • The US Government Accountability Office (“GAO”) published the results of a study on the HRSA oversight of non-government 340B hospitals, which found the current processes did not provide adequate assurance that hospitals were meeting eligibility requirements for 340B participation. As a result, GAO recommended six steps for the HRSA to implement to improve these processes. The results of this study support the notion that 340B hospitals may face greater scrutiny in the future.12

March 2020: Program Incentives Not Aligned

  • Some have claimed that the 340B Program may incentivize qualifying hospitals to use more expensive cancer drugs. However, a study in the March MedPAC report to Congress concluded that there was little evidence to support the idea that 340B status influences cancer spending.13

April 2020: Approval of Hospital Survey

  • In response to the federal ruling, CMS received approval to survey 340B hospitals to collect drug acquisition costs2. The collected data may be used to determine future reimbursement rates for drugs purchased under the 340B Program. The goal, as stated by the agency, is “to ensure that the Medicare Program pays for specified covered outpatient drugs purchased under the 340B Program at amounts that approximate what hospitals actually pay to acquire the drugs.”3 Hospitals were required to submit the surveys by May 15th.7

July 2020: Trump Administration Announces Drug Price Cuts

  • President Trump signed four executive orders that will ultimately lower costs on prescription drugs, including insulin and epinephrine. Hospitals who purchase insulins and epinephrine through the 340B Program must pass the savings from discounted drug prices directly to the underserved patient.17

July 2020: U.S. Court of Appeals Upholds CMS Payment Cuts

  • On July 31, 2020, the U.S. Court of Appeals reversed a previous ruling, which claimed CMS did not have authority to change payment rates for the 340B drug discount Program. As a result, the 28.5% cuts to part B drug reimbursement for 340B hospitals are permitted to continue.18

August 2020: CMS Proposed Rule

  • On August 4th, CMS released the OPPS/ASC Payment System proposed rule for CY 2021, which included new proposed rates for covered 340B drugs based on results of the hospital survey. While CMS has proposed adopting rates of ASP minus 28.7% for 340B-acquired drugs, they have also solicited comment on continuing payments of ASP minus 22.5% instead. Additionally, CMS has proposed that children’s hospitals, rural sole community hospitals, and PPS-exempt cancer hospitals be exempt from either of the proposed policies and continue to be paid ASP plus 6%.19

How might changes to the 340B Program affect Oncology M&A?

As indicated in the March 2020 MedPAC report to Congress, cancer drugs from hospital outpatient departments comprise approximately 73% of total Medicare Part B drug spending. Consequently, any sustained budget cuts to the 340B Program would likely have significant effects on the oncology sector. For instance, a report by the community oncology alliance states “the 340B Pricing Program has fueled significant consolidation of the nation’s cancer care system, driving independent, community oncology practices to close or merge with hospital outpatient departments.” If CMS proceeds with the 340B reimbursement cuts, will hospitals become less incentivized to acquire oncology practices?

While changes to the 340B Program may create a major headwind for the oncology industry, the overall demographics for cancer treatment in America remain strong enough to spur attractive investment consideration. According to the American Cancer Society, approximately 80% of new cancer diagnoses occur in individuals aged 55 years and older.14 Given the current population trajectory, which projects approximately 20% of the population will be over the age of 65 by 203015, it is estimated that the incidence of cancer will continue to increase, from approximately 17.0 million in 2018 to 26.0 million in 2040.16 These factors will likely result in an increase in demand for oncology providers and services over the next ten years.

This notion is supported by the recent uptick in investment activity in the oncology provider space. In June 2019, e+CancerCare was acquired by the private equity group, Silver Oak, and then combined into larger Integrated Oncology Network. Additionally, Genesiscare acquired 21st Century Oncology on May 15, 2020.22 This recent activity suggests that even with the uncertainty, the oncology space remains ripe for investment.

The mixed trends facing the oncology sector suggests that hospitals and other potential acquirers will need to perform careful and proper due diligence to determine whether making investments in the oncology space is appropriate for their organization. With looming regulation on the horizon, it remains to be seen whether oncology practices continue to consolidate into hospitals, pursue alternative investment strategies in private equity firms or practice management groups, or revert to independent status.


  1. https://essentialhospitals.org/policy/cms-finalizes-340b-cuts-in-cy-2018-opps-rule/
  2. https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202002-0938-001
  3. https://www.govinfo.gov/content/pkg/FR-2020-02-07/pdf/2020-02357.pdf
  4. https://www.340bhealth.org/members/340b-Program/overview/
  5. https://www.ruralhealthresearch.org/projects/100001908
  6. https://www.natlawreview.com/article/cms-advances-340b-drug-acquisition-cost-survey-to-omb-and-solicits-final-comments
  7. https://www.natlawreview.com/article/340b-update-cms-opens-acquisition-cost-data-survey-340b-hospitals
  8. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2993068/#:~:text=We%20estimate%20that%20as%20many,through%20the%20Affordable %20Care%20Act.&text=The%20new%20rule%20allows%20all,location%20to%20numerous%20retail%20pharmacies.
  9. https://www.healthaffairs.org/do/10.1377/hpb20171024.663441/full/
  10. https://communityoncology.org/wp-content/uploads/2019/09/COA-340B-PosStmnt-Final.pdf
  11. https://www.modernhealthcare.com/payment/cms-moves-forward-site-neutral-payments-slashes-340b-payments
  12. https://www.gao.gov/products/GAO-20-108
  13. Medpac, March 2020 Report
  14. American Cancer Society. Cancer Facts & Figures 2019. Atlanta: American Cancer Society; 2019
  15. Mather M, Jacobsen LA, Pollard KM. Population Bulletin: Aging in the United States, 2015. http://www.prb.org/pdf16/aging-us-population-bulletin.pdf
  16. The Lancet Oncology, Volume 20, Issue 6, June 2019
  17. https://www.hhs.gov/about/news/2020/07/24/trump-administration-announces-historic-action-lower-drug-prices-americans.html
  18. https://www.hfma.org/topics/news/2020/08/hospitals-decry-appeals-court-decision-upholding-340b-cuts.html
  19. https://www.cms.gov/newsroom/fact-sheets/cy-2021-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center
  20. https://obroncology.com/article/total-cost-of-care-site-of-care-shift-and-340b-drive-total-cost/
  21. http://www.medpac.gov/docs/default-source/reports/chapter-3-part-b-drug-payment-policy-issues-june-2015-report-.pdf
  22. https://www.businesswire.com/news/home/20200515005414/en/21st-Century-Oncology-Becomes-Part-of-Australia%E2%80%99s-GenesisCare-to-Increase-Access-to-World-Class-Cancer-Care-in-the-U.S.
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