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Section 340B overview: Medicare, Medicaid, covered entities, and more

injectable drug manufacture row

The 340B Drug Pricing Program is a great way for certain providers to get discounts on specific drugs. But the intricacies of the 340B program can be confusing for anyone: How does it affect reimbursements through Medicare? Which modifiers are used for which claims? Which covered entities get what discount rate? Here’s a small overview of some frequently asked questions related to 340B:

What is 340B?

Section 340B of the Public Health Service Act was created in 1992, under Section 602 of the Veterans Health Care Act of 1992. Section 340B states that pharmaceutical manufacturers must agree to a pharmaceutical pricing agreement (PPA) with the Dept. of Health and Human Service (HHS) Secretary in order to have their drugs covered by Medicaid and Medicare Part B. It requires pharmaceutical manufacturers to sell outpatient drugs at discounted prices to certain healthcare organizations that care for uninsured and low-income patients. The driving principle behind 340B is that these discounts would help stretch federal resources, allowing these specific healthcare organizations to use the savings to care for more underserved patients without any additional cost to the federal government.

Who is eligible to participate in 340B?

The providers that are eligible to participate and purchase drugs using the discount are called “covered entities,” which include the following categories of facilities: disproportionate share hospitals (DSH), children’s hospitals (PEDS), cancer hospitals (CAN), sole community hospitals (SCH), rural referral centers (RRC), critical access hospitals (CAH), and off-campus Provider-Based Departments (PBD). Eligible covered entities must first register with HRSA and must recertify their eligibility every year.

Does 340B involve Medicaid or Medicare?

The short answer is: yes to both. Again, Section 340B requires drug manufacturers to have a PPA with the HHS Secretary for their drugs to be covered by Medicaid and Medicare Part B. But Medicare comes more prominently into the picture when specific covered entities that are paid through the CMS-administered outpatient prospective payment system (OPPS) bill Medicare for one of the drugs. In that case, CMS reimburses the covered entities participating in the 340B program. However, since 2018, CMS has decreased the reimbursement for certain drugs when billed by some, but not all, covered entities.

When is Medicare reimbursement to the provider reduced?

Specifications for a payment reimbursement reduction include:

  • Effective January 1, 2018, Medicare pays a reduced amount equaling the average sales price (ASP) minus 22.5% for status indicator K drugs that are acquired through the 340B Program by a covered entity paid under the OPPS that is not excepted from the payment adjustment policy. (Prior to this update, status K drugs were paid ASP plus 6%.)
  • Covered entities that are subject to this reimbursement reduction and which are paid under OPPS include disproportionate share hospitals (DSH), non-rural sole community hospitals (SCH) and rural referral centers (RRC). Although non-excepted off campus provider-based departments (PBD) are not paid under the OPPS, CMS has decreased the reimbursement amount to them for status indicator K drugs as well.
  • Modifier JG, or modifier PN (for non-excepted off campus provider-based departments), is required on lines that are subject to a payment reduction.
  • Modifier JG or PN is only required on codes designated as status indicator K.
  • It is the responsibility of the covered entity to provide the correct modifier on 340B claims.

When is payment to the covered entity not reduced?

Reimbursement to providers is not reduced for the following covered entities, or in the following instances:

  • Covered entities that are not paid under OPPS are not subject to the payment reduction. These include critical access hospitals (CAH) and Maryland Waiver Hospitals and excepted off campus PBDs.
  • Covered entities that are paid under OPPS but have been excepted from the discount, including children’s hospitals (PEDS), cancer hospitals (CAN), and rural sole community hospitals (SCH).
  • These covered entities should report informational modifier TB for 340B-acquired drugs and will be paid at the ASP + 6% rate.
  • Drugs not designated status indicator K.

Section 340B faces possible changes in the future as several covered entities and hospital associations continue to challenge the particulars of the reimbursement reduction through litigation in court. In the meantime, 340B continues to function without interruption, and payers should stay vigilant to its complexities—incorrect filing can lead to unintentional overpayments that can lead to provider abrasion and excess administrative work.


For those who are subject to a reimbursement reduction under Section 340B, filing claims correctly can be challenging. Using a JG or PN modifier is not always executed properly and is often under-reported, which can lead to millions of dollars in overpayments for Medicare Advantage (MA) plans.

For help with prepay review of claims involving complicated policies, get tailored support and significant savings with Cotiviti’s Payment Policy Management solution. Payment Policy Management helps payers tailor, test, and execute best-practice clinical and payment policies, ensuring compliance and averting incorrect payments.


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About the Author

Dr. Ressler is a senior medical director in Cotiviti's content department, with expertise in leading, managing, and providing benefit-driven medical necessity reviews for coverage, case management, and claims resolution. She has been instrumental in the development of new prospective claims accuracy policies. Before her work with Cotiviti, Dr. Ressler was a double board-certified general and colon and rectal surgeon with 12+ years of direct patient care experience.

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