How 340B Drug Discounts Are Driving Up Medicaid Costs By Billions

The rapid expansion of the federal 340B drug pricing program is significantly affecting Medicaid budgets, particularly in states where managed care plans oversee prescription drug benefits.

New analysis reveals that states are losing billions in Medicaid rebates due to ineligible claims on discounted 340B drugs, driving up the overall net cost of prescription drug coverage.

In April 2025, BRG researchers released a report examining how state laws requiring drug manufacturers to work with contract pharmacies under the 340B Drug Pricing Program could impact state Medicaid programs.

According to the report, these laws could result in an additional $1.2 billion in annual Medicaid spending, with $437 million allocated directly to state budgets.

The July update provides a closer examination of the overall financial impact of the 340B program on Medicaid.

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The Medicaid Drug Rebate Program (MDRP) is a key mechanism used by the federal government and states to reduce drug costs for low-income Americans.

Under the MDRP, pharmaceutical manufacturers are required to pay rebates on outpatient drugs dispensed to Medicaid beneficiaries.

These rebates are calculated based on a statutory formula and can often exceed a drug’s list price, especially for brand-name medications.

States collect the rebates and later share them with the federal government, with each state retaining a portion varying by its federal medical assistance percentage (FMAP).

However, a key limitation of the MDRP is that it prohibits duplicate discounts, meaning drug manufacturers are not required to pay Medicaid rebates on drugs that have already been sold at discounted 340B prices.

As the 340B program has grown, so too has the financial impact on Medicaid, particularly when drugs purchased at 340B discounts are reimbursed under Medicaid managed care plans.

Unlike the fee-for-service (FFS) model, where states reimburse pharmacies at the actual acquisition cost, including the 340B discount, managed care plans typically reimburse pharmacies based on pre-negotiated rates.

These rates often exceed the discounted 340B prices, creating drug margins that benefit covered entities and contract pharmacies. As a result, the loss in Medicaid rebate revenue is not offset, increasing the overall cost burden on state and federal budgets.

This rebate loss has become a growing concern, prompting states like California and New York to shift prescription drug coverage out of managed care systems. In states that continue to allow managed care administration of Medicaid drug benefits, the fiscal impact of the 340B program depends on local policies around the use of 340B drugs for Medicaid enrollees.

A recent impact model estimates that Medicaid rebates for managed care beneficiaries would have been $6.5 billion higher in 2024 if the 340B pricing program had not applied.

After adjusting for the federal government’s $4.2 billion share, states face a direct loss of $2.3 billion in rebate revenue. Pennsylvania, Illinois, and Massachusetts are among the hardest hit, losing $265 million, $238 million, and $190 million, respectively.

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