I. History and Development of Health Services for the Poor

The 340B program and FQHCs are, in essence, small segments of the social safety net in the United States, designed to support health services for the poor. To understand the development and implementation of the 340B program as they are utilized by FQHCs and how the program fits within the broader U.S. health system landscape, it is helpful to look at the roots of the modern U.S. welfare system and the origins of health care services for the poor.

Stemming from the laws of Elizabethan England, the United States developed their own “poor laws” to address maintenance and support of the poor.Footnote ²¹ Local rule was an important feature of these first social welfare laws, which kept impoverished people under the purview and responsibility of the governments that oversaw their residences.Footnote ²² Local governments determined who was a member of the community and therefore eligible for assistance.Footnote ²³ This concept of local responsibility and control provides the historic foundation for many policies we see today, where local and state governments are primarily responsible for managing and administering poverty alleviation programs, such as income assistance (Temporary Assistance for Needy Families (TANF)), food assistance (Supplementary Nutrition Assistance Program (SNAP)), and medical assistance (such as Medicaid).Footnote ²⁴

In addition to creating a local control over the maintenance and support of impoverished citizens, the “poor laws” also designated who was deserving of support.Footnote ²⁵ A prevalent idea at the time was that providing material support for the poor created a permanent reliance on the government, encouraging a morally abhorrent laziness.Footnote ²⁶ Therefore only the blameless poor, i.e. the orphan, widow, or elderly and disabled veteran, were seen as deserving of assistance.Footnote ²⁷ Other poor relief was either not available or was provided in a punitive manner, designed to discourage people from seeking it.Footnote ²⁸ This concept of “deserving poor” also influenced the development of health care delivery, especially with regard to who was deemed worthy of accessing care. Needless to say, the existence of chattel slavery at the time of the development of the first social welfare programs also influenced conceptions of who was worthy of care.Footnote ²⁹ In order to justify the system of slavery, Black people were commonly depicted as inferior to their White counterparts. Any provision of health care for enslaved people was primarily driven by the economic interest to maintain a sufficiently healthy labor pool rather than the idea they were deserving of care.Footnote ³⁰

The U.S. health care system as we know it today developed after World War II.Footnote ³¹ Prior to that time, most hospitals and clinics were designed to provide community service and charity care to the deserving poor, funded by local religious and charitable institutions.Footnote ³² Health care for people of even modest means was paid for out of pocket and provided in the home.Footnote ³³ For patients that could not afford this and did not meet the criteria established by these private hospitals, some larger cities opened public hospitals similar in structure and purpose to almshouses (charitable housing provided to people belonging to the local community).Footnote ³⁴ These new public hospitals provided care for people who lacked the social ties to support them if they became ill, though most admitted patients would die before discharge.Footnote ³⁵ It is worth remembering as well that segregation was still a component of the U.S. health care system at this time, and Black patients received care through separate and inadequately resourced providers.Footnote ³⁶

After World War II, advances in medical care, and public health initiatives helped maintain a healthy civilian and military population and were framed as key initiatives in support of national security.Footnote ³⁷ Hospitals were no longer seen as simply places to die, and medications were understood to be capable of curing disease rather than only alleviating pain.Footnote ³⁸ Returning service men and women demanded access to improved medical care through coverage in a new type of insurance product for hospital and physician services.Footnote ³⁹ However, employers balked at the idea of paying for health insurance. Therefore, the federal government made premiums paid to private health insurance companies on behalf of employees one hundred percent deductible from federal corporate tax liability.Footnote ⁴⁰ This removed economic barriers for millions of Americans, but tied health insurance to employment (specifically to employers who were willing and able to purchase insurance from a private health insurance industry).Footnote ⁴¹ Therefore, millions more were excluded from this new employer-based system, particularly the most vulnerable and high-risk populations in terms of care: the poor and elderly.Footnote ⁴²

The provision health care services to poor Americans became a pressing issue under President Lyndon Johnson’s War on Poverty and Great Society, resulting in Congress’s passage of Medicare, a program covering older workers who had contributed payroll taxes through employment.Footnote ⁴³ Medicaid, which covered health services for the poor, blind and disabled, was passed as an afterthought through the 1965 amendments to the Social Security Act.Footnote ⁴⁴

Medicaid’s roots in the “poor laws” are evident in the local administration of this shared federal-state program, as well as the continuing bias against providing government assistance to the “undeserving poor.”Footnote ⁴⁵ Medicaid is not a unified federal program, and therefore varies widely from state-to-state.Footnote ⁴⁶ While the federal government sets parameters for the program, state-level legislation determines who is covered, what is covered, and how much the state pays for care.Footnote ⁴⁷ Medicaid was not intended or designed to provide comprehensive health services for all people living in poverty; in fact, it codified categories of deserving poor.Footnote ⁴⁸ In addition, Medicaid continued the practice of reimbursing providers less than privately insured patients, reenforcing the concept that assistance to the poor should be designed to discourage people from taking it.Footnote ⁴⁹ Finally, because Medicaid is regulated and limited by each states’ budgetary requirements (some with constitutional provisions compelling annual balanced budgets), the program cannot easily adapt to increased costs driven by demand, new technology or pharmaceuticals.Footnote ⁵⁰

II. The Emergence of the Community Health Center Model and FQHCs

While the Medicaid program was developing to address inadequate health coverage for the elderly poor, blind and disabled, Black Americans’ demand for equitable health care was becoming a significant component of the civil rights movement.Footnote ⁵¹ During what was later christened “Freedom Summer of 1964,” activists from across the country began voter registration initiatives in the South, primarily in Mississippi.Footnote ⁵² Physicians who had initially been involved providing health services to activists soon realized that full and free engagement in all aspects of civic life was limited for Black Mississippians due to barriers to health care, and access to the social drivers of health — food, clean water, education, and economic development.Footnote ⁵³ The demands for health equity initiatives made by civil rights activists — like members of the Medical Committee for Human Rights, and Fannie Lou Hamer of the Freedom Democratic Party — caused the incorporation of health equity improvement into President Johnson’s War on Poverty initiatives.Footnote ⁵⁴

One such initiative was a grant directed at “changing the organizational framework through which health services were delivered to poor people.”Footnote ⁵⁵ A “Community Health Center” model was proposed as a means to address the social drivers of health for medically isolated Black communities by providing health care and related services to individuals.Footnote ⁵⁶ Grant funding from the Office of Economic Opportunity for a demonstration project created the nation’s first community health centers (one in Boston, the other near the rural town of Mound Bayou, Mississippi), and birthed the “Health Center Movement.”Footnote ⁵⁷ The small two clinic pilot evolved into a competitive block grant initiative and ultimately became the current program established in Section 330 of the Public Health Services Act of 1975.Footnote ⁵⁸

This legislation defined the purpose of FQHCs as providing comprehensive primary care to underserved patients and populations.Footnote ⁵⁹ The program is administered by the Health Resources and Services Administration (HRSA), which sets the requirements for “federally qualified” designation.Footnote ⁶⁰ Section 330 requires that FQHCs serve an underserved area or population by providing comprehensive care to all individuals, regardless of ability to pay or insurance status, requiring that they offer a sliding fee scale for services based on income and document the policy for how this sliding fee scale is implemented.Footnote ⁶¹ Additional requirements are related to administration and governance, including maintaining a governing board composed of a majority of patient members, collecting and reporting clinical and quality metrics, and complying with licensure, certification laws and regulations.Footnote ⁶² The requirement of local patient-centered governance is rooted in the civil rights movement and is central to the community health center model.Footnote ⁶³

Today there are 1,370 FQHCs spanning all fifty states, the District of Columbia, as well as Puerto Rico, the U.S. Virgin Islands, the Commonwealth of Northern Mariana Islands, Guam, and the Freely Associated States.Footnote ⁶⁴ In 2024, FQHCs provided care to nearly one in seven Americans.Footnote ⁶⁵ These organizations have also proven to be cost effective providers of high-quality health care.Footnote ⁶⁶ Despite serving patients with high rates of chronic disease and socioeconomic instability, FQHCs have been shown to reduce health care spending compared to patients receiving primary care through other settings and demonstrate equal or better performance compared to private practice primary care providers on key quality measures.Footnote ⁶⁷ The impact and importance of FQHCs as part of the health care safety net is evident through the size and scope of care provided by these organizations, and the community health center model continues to discharge the objectives of the civil rights movement by striving to achieve health equity through community-driven leadership.Footnote ⁶⁸

III. Who Receives Care from FQHCs

HRSA requires FQHCs to track and report on clinical and quality metrics through a standardized reporting system known as the Health Center Program Uniform Data System (UDS).Footnote ⁶⁹ Every year grantees report data on patient demographics, services provided, clinical processes and health outcomes, which are compiled and shared by HRSA.Footnote ⁷⁰ This allows for collection and distribution of critical information used to evaluate both the quality of care provided by FQHCs as well as the impact program changes have on patient access and health outcomes.Footnote ⁷¹ For example, the UDS indicates that the number of patients served by FQHCs has continued to increase year over year, and in 2022, health centers served one in three people living in poverty, and one in four racial and ethnic minorities.Footnote ⁷² While the largest percentage of patients served by FQHCs are white, racial and ethnic minorities are over-represented when compared to the U.S. population.Footnote ⁷⁴ For FQHC patients whose ethnicity is known, 39.4% are Latino, 40.8% White, of FQHC patients whose race is known, 20.6% are Black, and 1.8% are Native American.Footnote ⁷⁵ When compared with the overall U.S. population, this is a larger percentage of Black, Latino and Native Americans who make up FQHC patients.Footnote ⁷⁶

Figure 1.

Demographic comparison of the US Population with the racial and ethnic demographics served by FQHCs.Footnote ⁷³

FQHCs are also an essential primary care provider for patients who are uninsured or are Medicaid beneficiaries. Health center patients are more than twice as likely to be uninsured compared to the general U.S. population, and more than two and a half times as likely to be insured by Medicaid alone.Footnote ⁷⁷ Community health centers provide care to roughly one in six Medicaid beneficiaries, and twenty-one percent of uninsured individuals nationwide.Footnote ⁷⁸ Close to 90% of FQHC patients are at or below 200% of the federal poverty level.Footnote ⁷⁹ While more than half of FQHCs are located in urban areas, one in five rural residents were served by an FQHC in 2024.Footnote ⁸⁰

In addition to demographic information, FQHCs also report on the health conditions treated annually. Common conditions treated by FQHCs are diabetes, cardiovascular disease, depression, and asthma; health center patients are more likely to have been diagnosed with these chronic conditions than the general U.S. population.Footnote ⁸¹ All this data illustrates how critical FQHCs have become in providing primary care to low income and underserved communities, and how they have remained true to the original goals of the community health center model.

Since their inception, FQHCs have been part of the health care safety net and are a critical component in addressing health disparities.Footnote ⁸² Primary care has been acknowledged as a first line of defense in addressing health disparities, and as a mechanism for maintenance of individual and population health.Footnote ⁸³ In addition to care for chronic conditions, FQHCs also provide vaccinations and screening for infectious disease.Footnote ⁸⁴ Therefore, they are also an important mechanism for preventative care and improving population health.Footnote ⁸⁵ Primary care, however, is most often funded through private health insurance, and long standing racial and ethnic disparities in insurance coverage also contribute to disparities in health outcomes.Footnote ⁸⁶ The requirement that FQHCs provide comprehensive primary care to individuals regardless of insurance makes these entities critical players in addressing the health needs of underserved racial and ethnic minorities. This is borne out by analyzing FQHC utilization data, which shows that the presence of an FQHC is correlated with a greater likelihood of patients seeking care.Footnote ⁸⁷ This indicates that FQHCs improve access to preventative care among marginalized and underserved communities.Footnote ⁸⁸ In addition, federal financial support for FQHCs has expanded under the ACA and the more recent American Recovery and Reinvestment Act, leading to an even greater reliance on FQCHs to provide primary care in the United States.Footnote ⁸⁹

IV. How FQHCs Are Funded

The funding mechanism for FQHCs is not immune from the byzantine financing structures of health service providers in the United States and they rely on a combination of funding and policies to support the work of these programs.Footnote ⁹⁰ This combination is a three-legged stool consisting of federal grants as the first leg, Medicaid reimbursements as the second leg, and other state and municipal grants, philanthropic gifts and 340B revenue making up the last leg.Footnote ⁹¹

The first leg of the stool is Section 330 of the Public Health Service Act, which authorizes HRSA to issue federal grants to fund FQHCs.Footnote ⁹² The federal health center appropriation grants administered by HRSA are the principal funders for FQHCs, and the funding mechanism is tied to the regular congressional budgetary process.Footnote ⁹³ A combination of mandatory funding through the Community Health Center Fund (CHCF), a multi-year grant established by the Patient Protection and Affordable Care Act (ACA) that requires periodic renewal, and discretionary appropriations, which must be allocated every year, comprise the primary sources of federal funding for FQHCs.Footnote ⁹⁴ The purpose of the CHCF is to provide sustainable federal funding to cover the cost of providing health care to uninsured and underinsured patients, as well as to expand services provided, respond to public health priorities and increase access to care.Footnote ⁹⁵ However, the CHCF does not have a fixed renewal schedule, and Congress has extended this funding through various pieces of legislation over time.Footnote ⁹⁶ For example, the CHCF was initially extended through the Medicare Access and CHIP Reauthorization Act of 2015, and most recently provided an extension through the continuing resolution which expired on September 30, 2025.Footnote ⁹⁷ This variability in funding renewal and dependence on congressional priorities when the appropriation expires generates uncertainty around funding stability, which creates challenges for FQHCs in budgeting for services, paying for infrastructure improvements to facilities, and recruiting new providers.Footnote ⁹⁸

Reimbursement from Medicaid for services provided makes up the second leg of the funding stool, as the largest proportion of FQHC patients get their insurance through Medicaid.Footnote ⁹⁹ Indeed, Medicaid reimbursement for services makes up the largest source of funding for FQHCs.Footnote ¹⁰⁰ Unfortunately, lower reimbursement rates compared to health insurance providers like Medicare and private employer-based insurers means that Medicaid covers only eighty-two percent of the costs incurred in providing care for these patients.Footnote ¹⁰¹ This results in health centers losing money for each Medicaid-covered patient they serve. Even so, cuts to Medicaid through reduction of federal matching funds or the implementation of eligibility restrictions reducing the number of patients insured under the program will have a negative impact on FQHC funding.Footnote ¹⁰²

The third leg of the FQHC funding “stool” is comprised of all other revenue sources for FQHCs, the most significant of which is the 340B Drug Pricing Program.Footnote ¹⁰³ This program enables health centers to both offer prescription medications to their patients at reduced costs, as well as reinvest revenue generated through the program back into services and programming that would otherwise go unfunded.Footnote ¹⁰⁴ These dual purposes, explicitly stated by Congress during the program’s development, are aligned with the mission and purpose of FQHCs, to provide high quality comprehensive care to all individuals, regardless of ability to pay.Footnote ¹⁰⁵ Although all three sources of funding are uncertain, destabilization of any of the three threatens the ability for FQHCs to fulfill their mission.

V. The Creation of the 340B Program

The development of the 340B program through Veteran’s Health Care Act of 1992 was in response to an unintended consequence of another Medicaid program, the Medicaid Prescription Drug Rebate Program.Footnote ¹⁰⁶ This program, as the name implies, requires drug manufactures to provide rebates on prescription drugs to state Medicaid programs for medications purchased by those plans.Footnote ¹⁰⁷ Prior to the Medicaid Prescription Drug Rebate Program, manufacturers would routinely provide discounted medications to safety-net providers.Footnote ¹⁰⁸ However, after the program was implemented these discount contracts and special-price practices were discontinued.Footnote ¹⁰⁹ This led to dramatic increases in costs for safety net providers including public hospitals, community health centers, and the Veterans Health Administration who were forced to reduce their services and see fewer patients.Footnote ¹¹⁰ To address this new challenge, Congress passed the 340B Drug Pricing Program to guarantee upfront discounts on medications for safety-net health care providers.Footnote ¹¹¹

The 340B program requires drug manufacturers to sell their outpatient medications at a discounted rate to eligible health care providers in order to participate in Medicaid and Medicare Part B coverage.Footnote ¹¹² These providers are known as “covered entities” and must meet eligibility criteria established by the program, including a key condition that the covered entity serve low-income populations or provide a large amount of uncompensated care.Footnote ¹¹³ As Medicare and Medicaid are two of the largest reimbursement sources for drug companies, participation in the program has been nearly universal.Footnote ¹¹⁴ By requiring that drug manufacturers give covered entities discounts on the drugs they buy, Congress intended to provide a mechanism for these entities to “stretch scarce [f]ederal resources as far as possible” to provide comprehensive services to more patients than otherwise possible.Footnote ¹¹⁵ Participation in the 340B program allows covered entities to not only save on the cost of prescription medications, but also to generate revenue to fund additional services.Footnote ¹¹⁶ FQHCs utilize this program to advance the mission of these community health centers and provide critical services that are unfunded or underfunded through other sources.Footnote ¹¹⁷ A recent survey of community health centers, conducted by the National Association of Community Health Centers, indicates that ninety-two percent of community health centers utilize 340B savings to increase access to care for low-income patients and that participation in the program has led to improved medication adherence and clinical outcomes.Footnote ¹¹⁸ Ultimately, the 340B program has been critical over the last three decades in supporting one of the most cost-effective primary and preventive care providers in the country.Footnote ¹¹⁹

VI. How the 340B Program Functions

HRSA set forth guidance on program implementation which governs how the program functions.Footnote ¹²⁰ Covered entities must apply to the Office of Pharmacy Affairs (OPA) through their information system (OPAIS) to participate in 340B.Footnote ¹²¹ The covered entity can then purchase “covered outpatient drugs” at the 340B discounted rate.Footnote ¹²² This discounted rate, also called the 340B ceiling price, is determined by a negotiated agreement, also known as a pharmaceutical pricing agreement (PPA), between the Department of Health and Human Services (HHS) and the drug manufacturers.Footnote ¹²³ The discounts are calculated by taking the average manufacturer price of a drug and subtracting the average Medicaid rebate for that drug during the preceding calendar quarter.Footnote ¹²⁴ Some medications can be subject to greater than a one-hundred percent discount rate because Medicaid imposes additional rebates for price increases that outpace inflation, meaning some drugs end up costing only a penny under the PPA.Footnote ¹²⁵ These drugs can then be provided to patients of the covered entities.Footnote ¹²⁶ Discounts are not limited to prescriptions to uninsured or low-income patients — in fact, covered entities can charge insurers non-discounted prices for the medications, and keep the difference between the 340B discounted price and the reimbursement rate as revenue.Footnote ¹²⁷

This reimbursement model was designed by Congress with the express intent of providing care for more patients and delivering additional patient services.Footnote ¹²⁸ These funds are reinvested by FQHCs into infrastructure improvements, care management services, and to cover unreimbursed care.Footnote ¹²⁹ There are no explicit requirements or guidelines in the regulations on how the revenue from the 340B program must be spent, rather, covered entities are allowed to use the revenue generated in whatever way the participants choose to best facilitate providing safety net care.Footnote ¹³⁰ That said, most FQHC programs have been found to reinvest those funds into services for their patient communities.Footnote ¹³¹

Discounted prices are typically available through a covered entity’s wholesaler unless the manufacturer requires that its drugs be purchased through some other channel, such as a specialty distributor.Footnote ¹³² Manufacturers cannot charge covered entities more than 340B ceiling price, and covered entities can negotiate sub-ceiling prices.Footnote ¹³³ A drug’s eligibility for the discounted prices is based on the following requirements: the covered entity must have a relationship with the patient prescribed the medication, and maintain record of care for that patient; the services provided to the patient must be performed by a health care professional employed or contracted with the covered entity; the services provided must be within the scope of practice or project of the grantee, the services provided must be beyond simply dispensing medication, and the medications must be administered at an outpatient location or 340B contract pharmacy.Footnote ¹³⁴ A 340B contract pharmacy is a retail or community pharmacy that contracts with a covered entity to dispense discounted outpatient drugs purchased by the covered entity to the provider’s eligible patients on their behalf.Footnote ¹³⁵ Since many covered entities do not own their own pharmacies, contract pharmacies provide greater access to 340B discounted drugs, and revenue.Footnote ¹³⁶

VII. Criticisms of the Program: Transparency, Duplicate Discounts and Diversion

The 340B program was designed to help serve low-income and vulnerable communities by both lowering the costs of medications and allowing covered entities to reinvest those savings into care.Footnote ¹³⁷ A repeated criticism of the program is a lack of transparency around exactly how these savings are used, and whether they are in fact reinvested into underserved patient care rather than diverted to support broader organizational operations.Footnote ¹³⁸ The complexity of the drug discount formula, the multiple layers of administration, and the inclusion of contract pharmacies lends validity to the criticism of 340B’s lack of transparency for drug pricing.Footnote ¹³⁹ Additionally, there is some evidence that hospitals have used 340B savings from the program to expand services in areas that are not poor, potentially subverting the goals of the program to stretch federal dollars to serve more patients and provide expanded services for existing patients that are underserved.Footnote ¹⁴⁰ However, in the case of FQHCs, even utilization of this revenue for broader operations is entirely consistent with the express purpose of 340B, as the majority of patients served by FQHCs are uninsured, underinsured, or Medicaid beneficiaries.Footnote ¹⁴¹ The cost to the FQHC for caring for these patients is not fully covered by grants, insurance reimbursement or the sliding fees collected, so these 340B funds can cover these operational budget gaps.Footnote ¹⁴² Even so, the lack of oversight and accountability for how 340B funds are utilized and how these actions support the purpose of the program has been an avenue to undermine the program.Footnote ¹⁴³

The question of oversight and accountability relates to two other common criticisms of the 340B program: duplicate discounting and diversion. Manufacturers are not required to provide a discounted 340B price and a Medicaid drug rebate for the same drug.Footnote ¹⁴⁴ This statutory prohibition on “duplicate discounts” requires covered entities to choose whether to use 340B drugs for Medicaid patients or to procure medications for those patients from other sources.Footnote ¹⁴⁵ Another requirement of the 340B program is that medications purchased with 340B discounts must be provided to patients of the covered entity.Footnote ¹⁴⁶ Selling discounted medications to non-patients is known as diversion. Patients are not defined by the language of the 340B statue itself, and HRSA has issued guidance to define eligible patients to avoid diversion.Footnote ¹⁴⁷ FQHCs ensure program compliance with these and other program requirements through training, internal auditing, and operational site visits.Footnote ¹⁴⁸ In addition, HRSA conducts its own audits on a number of covered entities, including FQHCs each year, providing an external check on program compliance.Footnote ¹⁴⁹

The 340B compliance mechanism, an exercise in regulatory alphabet soup, requires FQHCs to register with the Medicaid exclusion file (MEF) and indicate whether they will “carve in” or “carve out” Medicaid fee-for-service claims.Footnote ¹⁵⁰ If carving in, they must list the states they bill along with their Medicaid provider numbers (MPNs) and national provider identifiers (NPIs), so that Medicaid can cross-reference and exclude those claims from rebate requests.Footnote ¹⁵¹ For managed care organization (MCO) claims which do not use the MEF, FQHCs must use claim-level indicators and coordinate with each MCO’s protocols to prevent duplicate discounts.Footnote ¹⁵²

FQHCs must ensure that their data is accurate and consistent across electronic medical records, third-party administrators, billing platforms, and pharmacy software to avoid mismatches that could lead to compliance violations.Footnote ¹⁵³ The cost of compliance for FQHCs is a major factor for these programs, because unlike large hospital systems, many lack the information technology infrastructure and dedicated compliance personnel needed to manage 340B operations efficiently.Footnote ¹⁵⁴ This can lead to missed savings opportunities, and increased risk of errors and compliance violations.Footnote ¹⁵⁵

The concern over duplicate discounting and diversion has led drug manufacturers to restrict drug delivery to contract pharmacies, and to limit drug delivery for FQHCs (many of which lack their own pharmacy) to a single contract pharmacy.Footnote ¹⁵⁶ For FQHCs with several clinic locations, dispersed over large geographic areas, this limitation effectively prohibits their patients from utilizing the program.Footnote ¹⁵⁷ For example, a Chicagoland FQHC, Erie Family Health Centers (Erie), has a single pharmacy owned and operated by the organization and relies on contract pharmacies like Walgreens and CVS or mail order pharmacies to meet the needs of their patients that are dispersed over their thirteen locations throughout Chicago, suburban Cook, and Lake counties.Footnote ¹⁵⁸ Patients from the Waukegan, Illinois location would need to travel hours to pick up medications at the clinic owned pharmacy in the Humboldt Park neighborhood in Chicago, Illinois if the proposed limitations to contract pharmacies are allowed.Footnote ¹⁵⁹ This is not a feasible drug delivery system, and the likely outcome is that many patients would go without needed medications without access to 340B discounted medications.Footnote ¹⁶⁰ Capacity limitations are also a concern for FQHCs that serve large populations; for example, Erie (which served more than 95,000 patients in 2024) processing all medications through their sole pharmacy would be incompatible with high quality efficient health service for their patient population and would ultimately undermine the purpose of the FQHC and 340B programs.Footnote ¹⁶¹ For FQHCs that do not have self-managed pharmacies and rely exclusively on contract pharmacies to distribute 340B medications, limiting use to a single contract pharmacy would likewise reduce access to medications for their patients.Footnote ¹⁶²

Inadequate oversight and enforcement of the 340B program by HRSA are the primary concerns stated by drug manufacturers.Footnote ¹⁶³ However, contrary to these criticisms, FQHCs operate under a comprehensive regulatory framework and adhere to rigorous oversight and compliance processes that incorporate strict 340B compliance protocols.Footnote ¹⁶⁴ Health centers participating in the 340B program are required to report data on 340B purchased drugs, costs and revenue generated, and information on patients served annually through the UDS.Footnote ¹⁶⁵ In reality, duplicate discounts and diversion to ineligible patients do not make up the majority of the HRSA’s findings in their annual audits.Footnote ¹⁶⁶ In 2024, the primary health center audit findings were related to inaccurate OPAIS entries, with duplicate discounts and diversion making up much smaller percentage of all audit findings.Footnote ¹⁶⁷ Examples of OPAIS audit findings for FQHCs were errors related to incorrect addresses, listing ineligible offsite outpatient facilities, and failing to remove closed contract pharmacies or duplicate registrations from OPAIS.Footnote ¹⁶⁸ While these errors are important to record and correct, they do not provide evidence of widespread misapplication of the program discounts, fraud, and abuse within the FQHCs utilizing the program. As a result of the strict regulatory and compliance requirements already in place for FQHCs, they have been proven to be models of compliance rather than a source of misuse of the 340B program.Footnote ¹⁶⁹

VIII. Challenges to HRSAs 340B Interpretation and Enforcement Authority Creates Uncertainty for FQHC Funding

The 340B statute does not mention contract pharmacies, nor does it require a specific mechanism for delivering the discounted price to covered entities.Footnote ¹⁷⁰ This ambiguity in interpretating the language and intent of the statute, coupled with the continued growth of the 340B program has led to litigation from both covered entities and drug manufacturers seeking to clarify the regulatory regime and protect their interests.Footnote ¹⁷¹

Initially, HRSA guidance relating to contract pharmacies limited their use.Footnote ¹⁷² However, in 2010 HRSA rescinded this guidance, instead advising that covered entities were not limited in the number of contract pharmacies they could work with.Footnote ¹⁷³ Since then, the number of contract pharmacies has increased rapidly; many FQHCs lack “in-house pharmacies,” and conveniently located community pharmacies make receiving medication easier for patients.Footnote ¹⁷⁴ This shift allowed more covered entities to provide more discounted medications to more patients and led to the rapid increase in the revenue generated from the program, consequently reducing revenue for drug manufacturers.Footnote ¹⁷⁵

For ten years after the restriction on contract pharmacies ended, manufacturers did not challenge the HRSA guidance. However, in 2020, several manufacturers announced objections to this policy, with some companies restricting delivery to a single contract pharmacy for covered entities who did not have in-house pharmacies, and others requiring claims data for all contract pharmacy prescriptions in order to confirm covered entity compliance with the duplicate discount and diversion prohibitions.Footnote ¹⁷⁶ In response, HRSA issued an advisory opinion stating that manufacturers could not restrict delivery of 340B medications to contract pharmacies and attempted to force compliance with this advisory opinion by issuing 340B “violation letters” to the manufacturers.Footnote ¹⁷⁷ The manufacturers sued HRSA on the basis that HRSA does not have the authority to enforce 340B compliance.Footnote ¹⁷⁸ The courts had limited HRSA’s authority to enforce violations of the 340B program through non-binding guidance,Footnote ¹⁷⁹ creating confusion around the permissible actions by drug manufacturers and the extent to which HRSA can effectively manage the program.Footnote ¹⁸⁰

Two federal district courts found HRSA violated the Administrative Procedures Act by issuing the advisory opinion prohibiting restrictions on use of contract pharmacies.Footnote ¹⁸¹ The U.S. District Court for the District of Delaware found that the plain language of the 340B statute does not require the advisory opinion’s interpretation and therefore was “legally flawed” and not entitled to deference.Footnote ¹⁸² Similarly, the District Court for the Southern District of Indiana vacated the advisory opinion as arbitrary and capricious in violation of the Administrative Procedures Act.Footnote ¹⁸³ The Third Circuit Court of Appeals ultimately held that HRSA could not enforce its reading of the 340B statute against the drug manufacturers, as the language of the statutory text was silent on the use of contract pharmacies and the agency’s reading was not entitled to deference.Footnote ¹⁸⁴ Similarly, the courts have held that HRSA exceeded its authority in issuing the violations letters prohibiting the restrictions on contract pharmacies.Footnote ¹⁸⁵

Another ambiguity in the 340B statutory language is its lack of a specific mechanism to provide the discounts on medications, allowing pharmaceutical companies wide discretion in deciding how to provide the discount. For example, pharmaceutical companies have begun to impose rebate models for providing discounted drugs, rather than continuing the decades long practice of covered entities purchasing these medications at an upfront discount.Footnote ¹⁸⁶ This significant departure in practice undermines the congressional intent of the program by placing huge financial burdens on health centers.Footnote ¹⁸⁷ Recently, the District Court for the District of Columbia rejected manufacturers’ lawsuit claiming they could unilaterally implement a rebate mechanism to participate in the 340B program.Footnote ¹⁸⁸ This case indicates that with HRSA’s approval, a rebate model could be permissible.Footnote ¹⁸⁹

In light of this decision, HRSA issued a notice for a one-year 340B Rebate Model Pilot Program identifying a select group of drugs for which covered entities would pay the full cost of the medication up front rather than the 340B discounted rate.Footnote ¹⁹⁰ Each manufacturer of those drugs is meant to refund the difference between full cost and the low 340B cost within ten calendar days of submission or provide documentation in support of a denial.Footnote ¹⁹¹ Additionally, putting aside the administrative barriers to implementing this pilot model, manufacturers could also outright deny the rebate — forcing covered entities to navigate an administrative dispute resolution process to challenge whether that denial was warranted.Footnote ¹⁹²

The proposed rebate model poses several problems for FQHCs’ ability to provide discounted medications to patients, as well as fulfill their mission of providing high-quality affordable comprehensive care by limiting access to 340B generated revenue. This change would limit the range and volume of medications that FQHCs can afford to stock, as paying the full retail price for some medications would quickly exceed an FQHCs available cash on hand.Footnote ¹⁹³ The proposed rebate program would also prevent FQHCs from offering deeply discounted medications to patients at the point of sale to their patients, as well as require additional compliance costs to navigate the various data submission requirements and systems.Footnote ¹⁹⁴ These changes will result in health centers making difficult decisions on how to utilize limited resources, which could result in reduction of services.Footnote ¹⁹⁵

To illustrate the impact of this proposed rebate model, a covered entity that pays $50,000 per month for the pilot drugs could potentially pay over $1,125,000 per month under the pilot, in hopes of getting the difference back promptly.Footnote ¹⁹⁶ Delay, or denial would jeopardize a covered entity’s ability to operate. This model puts additional administrative burdens on safety net providers as well as financial exposure on providers that already operate at slim margins.Footnote ¹⁹⁷

Since 2020, restrictions on utilization of contract pharmacies have worsened FQHC’s ability to provide discounted medications to patients by affecting the ability to use 340B revenue to increase access by maintaining or expanding services and jeopardizing improved medication adherence, clinical outcomes and access to care.Footnote ¹⁹⁸ Litigation challenging the 340B program is ongoing, meaning continued uncertainty for FQHCs on whether they can rely on current contract pharmacy procedures and current levels of 340B savings for budgeting purposes.

IX. Potential Legislative Interventions

There have been a variety of state and federal legislative actions designed to address the challenges raised by advocates and critics of 340B.Footnote ¹⁹⁹ For example, several states have enacted laws protecting covered entities’ access to 340B pricing with contract pharmacies; these states have so far been successful in defending against federal preemption challenges.Footnote ²⁰⁰ These laws allow FQHCs to continue to access discounted medications from contract pharmacies, a critical tool for effective distribution of these drugs to their patients.Footnote ²⁰¹ State control over discrete mechanisms within the program such as regulations on the use of contract pharmacies and reporting on use of 340B funds are in line with the history of local governance over health care services for the poor, and may serve to maintain the benefits the 340B program provides to FQHCs’ vulnerable populations.

Efforts at federal legislative solutions have yet to be enacted, with the current state of congressional gridlock not providing much hope that these (previously bipartisan) proposals will be successful in the near future.Footnote ²⁰² Currently, the 340B Affording Care for Communities and Ensuring a Strong Safety-net Act (ACCESS), introduced in Congress in 2025, is aimed at addressing claims of program misuse.Footnote ²⁰³ This proposal restores unrestricted access to contract pharmacies but requires additional transparency and accountability measures, which (as discussed above) are redundant administrative burdens for FQHCs who already have robust compliance mechanisms as well as program quality and funding reporting requirements.Footnote ²⁰⁴ Key provisions of ACCESS define specific criteria for covered entities to qualify for 340B discounts, authorizes audits from the Secretary of HHS to examine how participating covered entities are using 340B savings, introduces stricter guidelines on patient eligibility to prevent improper distribution of discounted drugs, and creates a claims data clearinghouse to identify duplicate discountsFootnote ²⁰⁵ Most critically for patients of FQHCs, the 2025 ACCESS Act does not protect the traditional front-end discount model where providers purchase drugs at a reduced price, potentially allowing for rebate mechanisms to provide the discount on medications.Footnote ²⁰⁶

X. Recommendations for Limited Program Reforms

If federal legislation aimed at reforming 340B moves forward, these reforms should align with the program’s original intent and enable continued funding for comprehensive services to more people than would otherwise be possible. A critical reform would be the codification of the traditional up-front discount mechanism for discounted drug purchase by covered entities. This would allow FQHCs access to the full range of medications available through the program at an affordable price that they could then offer to their patients, the vast majority of which are at or below 200% of the federal poverty level.Footnote ²⁰⁷ This would also eliminate the financial strain of purchasing drugs at the full retail price and waiting for a manufacturer to approve a rebate; many FQHCs operate on very tight margins, meaning this additional financial burden would be unsustainable.Footnote ²⁰⁸ If a rebate model is adopted, however, FQHCs in-house pharmacies should be exempt, as requiring their participation would be cost prohibitive and subvert the purpose of the program.

Next, because FQHCs already operate under a comprehensive regulatory framework and adhere to rigorous oversight and compliance processes that incorporate strict 340B compliance protocols, FQHCs should be exempt from additional reporting requirements.Footnote ²⁰⁹ Health centers participating in the 340B program are required to report data on 340B purchased drugs, costs and revenue generated, and information on patients served annually through the UDS.Footnote ²¹⁰ Tracking, auditing, and monitoring compliance with these requirements are a major cost for FQHCs, additional data reporting to either manufacturers or a separate claims data clearinghouse is redundant and will add unnecessary expenses, thereby reducing available funds for providing health care services.

Finally, more states should continue to pass legislation that fills the silence left by the federal 340B statute on the regulation of the use of contract pharmacies.