What is a Covered Entity?

With the creation of the 340B Drug Pricing Program in 1992, Congress aimed to strengthen healthcare providers that care for patients who often struggle to afford essential services. By reducing the cost of outpatient prescription drugs for qualifying organizations, the program sought to help safety-net facilities maintain access to care for the people who need it most. However, since then, the 340B’s lack of guidance and oversight have allowed a rate of growth that threatens the sustainability of the program.

Understanding today’s policy debates begins with understanding how the program functions. Covered entities, which are organizations that meet federal eligibility criteria, are permitted to purchase outpatient drugs at significantly discounted prices. They can then use the resulting savings to support care for low-income, uninsured, and otherwise vulnerable patients, a purpose that has been central to 340B since its inception.

Six categories of hospitals qualify for participation: disproportionate share hospitals, children’s hospitals, cancer hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, and critical access hospitals. Additionally, grantees like community health centers, who primary goal is to bring medical care directly to underserved neighborhoods, are among the program’s key beneficiaries. Each facility must confirm its eligibility with the Office of Pharmacy Affairs every year, a process designed to ensure that participation remains limited to organizations that meet the program’s intended criteria.

Across the country, many of these facilities serve as the backbone of the healthcare safety net. Rising medical costs continue to make routine and preventive care difficult for many families, and patients in financially strained communities rely on discounted services and charity care to maintain their health without sacrificing other basic needs.

The scale of the program has changed dramatically since it began. When 340B was launched over 30 years ago, only 389 covered entities were registered. Today, more than 53,000 care sites are tied to about 30,000 covered entities. This rapid expansion has altered how the program operates and has raised concerns that it has drifted away from its original mission.

One factor contributing to this shift is the ability of a large health system to qualify for 340B by registering a single disproportionate share hospital. Once eligible, the system can extend 340B pricing to affiliated child sites, including sites located in higher-income areas far from the parent hospital. A child site is an off-site department that is technically or professionally integrated with the parent hospital, but does not need to demonstrate it provides care to vulnerable populations. Research indicates that a majority of these child sites operate in different zip codes than the qualifying hospital, and many are located in neighborhoods with significantly higher median incomes.

The financial footprint of the program reflects this growth. In 2024, covered entities purchased more than $81 billion in outpatient drugs through 340B, creating over $66 billion in discounts. Disproportionate share hospitals accounted for most of these purchases, and the program grew by 23% in a single year. 

Despite the immense scale of these savings, there is limited evidence that patient benefits have kept pace. Investigations continue to identify problems such as inflated drug markups, misuse of revenue, and compensation practices that appear inconsistent with the program’s purpose.

As discussions about 340B reform move forward, ensuring accountability will remain essential to preserving the program’s original intent and strengthening care for the patients it was designed to support.