What is the 304B Drug Pricing Program?

Drug manufacturers participating in Medicaid provide outpatient drugs to hospitals and other health care providers for discounted prices under 304B Pricing. We ask what the 304B drug pricing program is and whether it is effective.

When was 304B Established?

304B started in 1990 as a Medicaid rebate program and was modified in 1992 to control Medicare and Medicaid drug prices. The full name of the act is 304B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation.

It is section 304B of the Public Health Service Act created under section 602 of the Veterans Health Care Act of 1992. The Office of Pharmacy Affairs (OPA) administers it. President George HW Bush signed 304B into law.

304B requires pharmaceutical manufacturers to consent to a pricing agreement (PPA) with the HHS secretary. They agree to give front-end discounts on covered outpatient drugs purchased by providers called “covered entities.” A list of eligible organizations may be found on the Health Resources and Services Administration website.[1]

What does 304B do?

The 304B program makes Medicaid a “preferred provider” so that it gets the best price given to any health insurance provider. It sets a ceiling price for what manufacturers can charge providers for drugs given to “qualified patients” during outpatient service. It does not set the price charged to patients.

You can read about the program detail in Overview of the 304B Drug Pricing Program. It is designed to provide a fixed number of widely used outpatient drugs to “covered entities” at reduced prices.[2] The May 2015 Report to the Congress Overview of the 304B Drug Pricing Program is also a useful reference.[3]

ACA Changes

The ACA Medicaid expansion changed 304B in an attempt to correct some of its problems. The number of eligible entities grew. Also, the Health Resource Service Administration (HRSA) gained the power to set and track ceiling prices as well as to enforce penalties for overcharging and correcting practices that allow it to occur.

Problems with 304B

304B is a complex program full of suggestions but lacking both the requirement to pass savings along and efficiency.[4]

As 304B currently stands, calculations that are used to identify facilities serving a disproportionate share of low-income patients (DSH) are based on the number of Medicaid and Medicare patients treated at a facility rather than the number of uninsured low-income patients treated. Thus, the uncompensated care that the 304B program was set up to provide for is not directly related to the current usage of the program.

Also, “Covered entities” can purchase discounted 340B drugs for all patients. Patients’ Medicare or private insurance may then reimburse the medical facility for the full price of the drug, not the discounted price. The medical facility can use the profit however it wishes, whether to offset the cost of services given to low-income individuals or for some other purpose. Although the proceeds were intended to finance uncompensated care, there is no requirement that they are used for that purpose.

The Future of 304B

Tom Price said that cuts to the amount that the program pays for outpatient drugs would be part of a solution to high drug prices for those on Medicare.[5] We will have to see if his strategy is implemented and if it works.

It may take some time to discover what the program’s policy changes will do since new policies were supposed to take effect on March 6, 2017, but have now been postponed to October 1, 2017.[6]


  1. Eligible Organizations
  2. Overview of the 304B Drug Pricing Program
  3. May 2015 Report to the Congress Overview of the 304B Drug Pricing Program
  4. Primer: Understanding the 340B Drug Pricing Program
  5. Trump Administration Taking Action on Drug Prices
  6. 340B Drug Pricing Program