Medicaid loses billions as 340B program expansion collides with state budgets

The 340B Drug Pricing Program diverted $6.5 billion in rebates away from Medicaid in 2024, with state governments shouldering $2.3 billion of these losses, according to a July 2025 study by the Berkeley Research Group (BGR). This financial hemorrhaging stems from a fundamental design flaw where federal duplicate discount prohibitions create perverse incentives that simultaneously drain state healthcare budgets while enabling systematic exploitation of taxpayer-funded programs.

The study, commissioned by the Pharmaceutical Research and Manufacturers of America (PhRMA), represents the first comprehensive state-by-state analysis of how the 340B program's expansion into managed care environments undermines Medicaid's drug rebate collections. While the pharmaceutical industry's funding raises legitimate questions about methodology and framing, the underlying financial mechanics reveal a critical policy failure that demands immediate federal intervention.

The managed care loophole: How billions slip through regulatory gaps

The crux of the problem lies in the structural incompatibility between the 340B program's provider-based discount model and Medicaid's claims-based rebate system. Federal law prohibits manufacturers from providing both a 340B discount and a Medicaid rebate on the same drug unit—a sensible protection against duplicate discounts that becomes problematic when applied across different payment systems.

In fee-for-service Medicaid, this works as intended. Federal regulations under 42 CFR 447.512(b) require states to reimburse pharmacies at the actual acquisition cost, which is the discounted 340B price plus a dispensing fee. Lost rebate revenue gets offset by reduced reimbursement, maintaining fiscal neutrality.

Managed care environments tell a completely different story. The BRG analysis found that "managed care plans generally do not reduce reimbursement for 340B drugs—and in some cases are statutorily prohibited from doing so—the loss in rebate revenue from 340B expansion is not offset and drives up the net cost of prescription drug coverage for states and the federal government." Managed care organizations negotiate rates that typically exceed the discounted 340B price, with covered entities and contract pharmacies capturing the difference as revenue. At the same time, states forfeit manufacturer rebates without corresponding savings.

This distinction matters because managed care now dominates Medicaid delivery, covering approximately 72% of beneficiaries. The scale of this shift has transformed what was once a manageable tracking challenge in fee-for-service environments into a massive revenue diversion that states struggle to monitor, let alone prevent.

State-by-state devastation reveals policy choices and fiscal impact

The geographic distribution of losses illuminates how state policy decisions shape financial outcomes. Pennsylvania faces the steepest hit, with $634.8 million in total ineligible rebates, translating to a direct state budget impact of $265.3 million after accounting for federal matching funds. Illinois follows with a total of $544.3 million ($238.4 million state share), while Massachusetts sees a total of $433.5 million ($189.9 million state share).

These figures represent real money that could fund healthcare access, improve provider reimbursement, or provide budget relief for cash-strapped state programs. For context, Pennsylvania's $265 million loss exceeds the entire annual budget of many state health departments.

Notably, fifteen states appear as "N/A" in the analysis, indicating their Medicaid program structures prevent these specific costs. The BRG methodology "accounts for the 340B/Medicaid policies specific to each state," suggesting these states have implemented carve-out policies or other structural protections that eliminate managed care 340B dispensing to Medicaid beneficiaries.

California and New York exemplify this approach, having transitioned prescription drug coverage out of managed care partly due to 340B program costs. While these carve-outs protect rebate revenue, they require states to directly manage pharmaceutical benefits—a complex undertaking that smaller states may lack the resources to implement effectively.

Secondary market distortions compound direct fiscal harm

The BRG study acknowledges that rebate losses represent only part of the 340B program's broader impact on Medicaid spending. The analysis notes: "Our analysis does not account for other pathways through which the 340B program may be contributing to increased spending in Medicaid. The 340B program has been associated with a shift in care toward hospitals, for example—generally a higher-cost setting."

This observation aligns with research showing that 340B eligibility incentivizes provider consolidation and shifts in care settings. A 2018 Health Services Research study found that the 340B program has a significant impact on cancer care site selection and spending in Medicare, while a 2016 Milliman analysis documented how cost drivers shift across different care settings. When hospitals acquire physician practices or expand outpatient departments to capture 340B revenue, patient care migrates from lower-cost settings to higher-cost hospital environments. For Medicaid programs operating under global budgets or facing legislative pressure to control spending, these cost shifts compound the rebate revenue losses documented in the BRG analysis.

The study also references evidence that "340B covered entities tend to use more and/or more costly drugs for their patients, potentially because 340B drug margin (the difference between acquisition cost and reimbursement) is often greater for more expensive medicines." A 2015 Government Accountability Office (GAO) report found that financial incentives were used to prescribe 340B drugs at participating hospitals. A 2022 Milliman analysis of commercial outpatient drug spending at 340B hospitals and a 2025 Journal of Health Economics study on physician agency in 340B expansion document these utilization patterns. This dynamic creates perverse incentives where financial considerations may influence prescribing patterns, driving up both drug costs and Medicaid expenditures beyond the direct rebate losses.

Federal regulatory abdication enables systematic exploitation

The scope of revenue diversion revealed in the BRG study reflects broader failures in federal oversight and program integrity. A 2020 GAO report found that 25% of audited 340B programs had duplicate discount errors, with 264 of 429 cases caused by inaccuracies in the Medicaid Exclusion File system itself—the very mechanism supposed to prevent these problems.

More troubling, GAO found that only 4 of 13 covered entities had accurate descriptions of state Medicaid policies, suggesting systematic confusion about compliance requirements. When the federal oversight agency's own tracking system contains errors and covered entities lack a basic understanding of duplicate discount rules, billions in revenue diversions become inevitable.

The Centers for Medicare & Medicaid Services (CMS) "provides limited oversight of state Medicaid duplicate discount prevention efforts, leaving this responsibility to states, which are not always sufficiently funded or staffed to meet this responsibility," according to the BRG analysis. This abdication of federal responsibility creates a regulatory vacuum where systematic revenue diversions can occur without detection or accountability.

As we documented in our June 2025 analysis, CMS's refusal to mandate federal claims modifiers in its Medicare Drug Price Negotiation Program guidance exemplifies this regulatory failure. Claims modifiers represent existing, proven technology that could enable automated duplicate discount prevention, yet CMS has chosen to perpetuate complex, error-prone manual processes that enable continued exploitation.

Context of federal cuts amplifies the crisis

The timing of these revelations proves particularly concerning given broader federal policy changes affecting safety-net healthcare financing. As detailed in our July 2025 analysis of the One Big Beautiful Bill Act, proposed Medicaid cuts threaten to force 200,000 people living with HIV off coverage while simultaneously reducing Ryan White HIV/AIDS Program capacity to serve as a safety net.

When federal cuts increase provider dependence on 340B revenue precisely as that revenue diverts billions from state Medicaid programs, the result is a death spiral for safety-net financing. States lose revenue they need to maintain Medicaid access while providers chase 340B margins to replace vanishing federal funding. People living with HIV and other vulnerable populations get caught in the middle as both funding streams face pressure.

This dynamic transforms the 340B program from a targeted safety-net support into a massive wealth transfer from taxpayer-funded Medicaid programs to hospital systems and contract pharmacy networks. The BRG study's $6.5 billion figure likely represents a conservative estimate given the secondary spending effects and ongoing program expansion.

Immediate federal intervention required

Immediate federal action to implement mandatory claims identification systems and comprehensive program transparency is urgently needed. Claims modifiers represent proven technology already used in Medicare that could enable real-time duplicate discount prevention without disrupting legitimate 340B access for safety-net providers.

States cannot solve this problem unilaterally. The interstate nature of managed care organizations, the federal structure of both 340B and Medicaid programs, and the technical complexity of pharmaceutical supply chains require coordinated federal leadership. Every day of continued regulatory inaction enables millions more in revenue diversions while undermining both program integrity and taxpayer confidence.

The 340B program serves legitimate safety-net functions, but systematic exploitation of regulatory gaps threatens its long-term viability while imposing unsustainable costs on state budgets. Federal agencies must choose between meaningful reform that preserves legitimate access while preventing abuse, or continued abdication that enables billion-dollar revenue diversions until political pressure forces more drastic interventions. For the vulnerable populations depending on both 340B providers and Medicaid access, the stakes of this choice could not be higher.