The 340B drug discount program grew to an eye-popping $100 billion in drug sales in 2025, making it the largest government program most people have never heard of.
Enacted under the Public Health Service Act to require drug manufacturers to provide outpatient drugs at steep discounts to safety-net hospitals serving low-income patients, 340B has metastasized into a massive revenue engine for big nonprofit hospital systems. They use it to pocket billions in discounts that are not passed on to patients, while billing employers and taxpayers the full price that they don’t have to pay. It’s become a massive scam, and one of the principal ways notionally “nonprofit” hospitals rack up massive tax-exempt profits.
Fortunately, the Centers for Medicare and Medicaid Services has this disaster in its sights for reform under the leadership of Dr. Mehmet Oz.
On July 2, 2026, CMS issued a new proposed payment rule that links payments from taxpayers and employers to what hospitals actually paid for drugs. This commonsense update, which aligns what Medicare pays hospitals to administer these drugs with what the drugs actually cost them, is estimated to save Medicare an eye-popping $4.55 billion and reduce patient out-of-pocket costs by $1.15 billion in just the first year.
Those calculations are CMS’s best estimates, but still likely underestimate the savings because many 340B-exploiting hospitals hide their data. When CMS asked hospitals to report what they actually pay for drugs, 340B institutions showed up far less than everyone else, complying at roughly half the rate of non-340B hospitals — just 28.6%.
CMS uncovered significant disparities between what nonprofit hospitals pay for drugs acquired through 340B versus what they pay for the exact same drugs outside the program. In some instances, a patient’s coinsurance payment, typically 20% of the total payment, was by itself more than the total amount the hospital paid for the drug under 340B.
These tax-exempt “nonprofit” hospitals enjoy doubly privileged status by paying no taxes on any of their operations. The 340B program lets them layer deep government-mandated drug discounts that they don’t have to pass along to patients on top of that status, and they have been operating with almost zero accountability for either benefit. Many of them pay their administrators lavish salaries, deck out their lobbies in luxury marble, and spend heavily on brand advertising and sports sponsorships while they pocket these discounts in the name of the poor.
Meanwhile, many other entities, including the for-profit hospitals that pay their taxes, can’t participate in the program and receive no special discounts.
The fix here is a matter of simple fairness. CMS wants Medicare reimbursement to reflect what hospitals actually pay for drugs — not an inflated amount that lets them pocket the spread. That not only means big savings, but it means a level playing field for hospitals, pharmacies, and other medical providers that administer drugs. It moves us toward competition and choice and away from a system that stacks unlimited subsidies on the largest hospital systems.
THE $80 BILLION HEALTHCARE LOOPHOLE DISGUISED AS CHARITY
These savings are not raided out of Medicare. Because Medicare’s outpatient drug payment adjustments are budget-neutral, every dollar clawed back from the big systems gaming 340B is shifted to higher nondrug payments to all hospitals, including the small and rural hospitals that never had the scale to work the program. Critical access hospitals and rural emergency hospitals are exempt from the change entirely, so they lose nothing. For anyone who says they want to protect rural hospitals, the ones running the thinnest margins and the first to drop service lines when money gets tight, this rule actually does it.
The big tax-exempt hospital systems are, of course, howling in protest. But that is exactly why CMS should ignore them and finalize the payment rule.
Phil Kerpen is president of American Commitment and principal at the Committee to Unleash Prosperity.