How hospitals buy drugs

Between Jan. 1 and April 7, 2026, Medicare asked every hospital paid under its outpatient payment system what it had paid for each separately payable drug. In July, the Centers for Medicare & Medicaid Services used the answers to propose¹ paying hospitals average sales price (ASP) minus 33.4 percent for drugs bought at discounts through the federal 340B program, starting in 2027. Drugs bought any other way would stay at ASP plus 6 percent, the same ASP-based formula Medicare Part B uses for drugs given in clinics.

The survey was a rare public look inside hospital drug purchasing, which runs mostly through private contracts. It also showed how much the price a hospital pays depends on the channel it buys through. CMS estimated that hospitals paid about ASP plus 2.7 percent for drugs bought outside 340B, a figure it said did not incorporate discounts from group purchasing organizations and may overstate what hospitals actually net out.

The pharmacy and the formulary

Every hospital in Medicare must meet a federal condition of participation for pharmaceutical services. Under 42 CFR 482.25⁶, a hospital must have a pharmacy directed by a registered pharmacist or a drug storage area under competent supervision, and "a formulary system must be established by the medical staff to assure quality pharmaceuticals at reasonable costs."

A formulary is the hospital's list of the drugs it stocks and the products it has chosen for each. For an old generic injectable sold by several makers, the choice of which product to stock can come down to purchasing terms. Our explainer on sterile injectable shortages describes why those products run short so often.

Wholesalers and purchasing groups

Most hospital drug purchases move through wholesalers. A February 2026 memo from House Energy and Commerce Committee majority staff⁷ said three wholesalers account for more than 90 percent of US wholesale drug distribution, and cited an industry report estimating that distributors handle 95 percent of prescription medicine sales. The memo listed their primary services as receiving and repackaging products for distribution, inventory management and financial risk management. Our explainer on what drug wholesalers do covers their business.

Prices for much of what moves through those wholesalers are negotiated by group purchasing organizations (GPOs), which contract with manufacturers on behalf of member hospitals. The same memo said about 68 percent of hospitals used a GPO for primary purchasing in 2000 and 98 percent did in 2014, and that the four largest GPOs account for 90 percent of medical supplies. The fees GPOs collect from vendors are protected by a safe harbor that HHS created under a 1987 law. GxRadar's explainer on GPOs and hospitals has the details.

Federal officials have questioned how those contracts treat cheap generics. In a 2024 white paper on drug shortages⁸, HHS said concentrated intermediaries give "most, if not all, the negotiating power" to GPOs, benefit managers and wholesalers, and cited low-price clauses that let a buyer walk away from a contract if another manufacturer offers less. It also said the erosion of failure-to-supply clauses in GPO contracts "may be associated with drug shortages."

The 340B program

Created in 1992, the 340B Drug Pricing Program requires drug manufacturers that take part in Medicaid to sell outpatient drugs to eligible providers at or below a ceiling price. The 340B statute⁴ lists the eligible entities, among them federally qualified health centers, Ryan White HIV/AIDS grantees, disproportionate share hospitals, children's hospitals and other safety-net providers.

Under the same statute, the ceiling price is the drug's average manufacturer price (AMP) in the previous quarter minus a "rebate percentage" tied to the Medicaid rebate. For generic drugs, the basic Medicaid rebate is 13 percent of AMP⁵ for rebate periods after 2009, with an additional rebate when a generic's price rises faster than inflation. So a generic's 340B ceiling price is at least 13 percent below AMP, the confidential figure explained in our AMP explainer.

That statute also shapes how 340B hospitals buy. A general acute care hospital qualifies if, among other things, its disproportionate share adjustment percentage exceeds 11.75 percent and it "does not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement." Children's hospitals and free-standing cancer hospitals face the same GPO rule.

Medicare's payment for those drugs has been contested for most of a decade.

In American Hospital Association v. Becerra³, a unanimous Supreme Court held that HHS could not vary payment rates by hospital group without first surveying hospitals' acquisition costs. CMS's November 2023 remedy rule² paid affected hospitals a lump sum and set up the offset. The 2026 survey was CMS's answer to the Court's objection, which is why the 2027 proposal rests on it. Comments closed Aug. 31, 2026. Our explainer on assistance programs and 340B covers the patient side.

When drugs run short

Shortages land heavily on hospitals because so many short drugs are injectables. Of the 69 drugs FDA listed in current shortage on Oct. 30, 2026, 49 were injections, according to GxRadar's analysis of FDA shortage data published through openFDA¹⁰; another 161 were listed as to be discontinued. FDA counts differently in its annual report to Congress¹¹, which put ongoing shortages at 93 at the end of 2025.

Much of the cost lands on staff time. HHS's 2024 white paper cited estimates that hospitals spend at least $600 million a year managing shortages, including diverting personnel needed for direct patient care to find alternatives. Our explainer on 503A and 503B compounding covers one fallback, outsourcing facilities that may compound drugs on FDA's shortage list. GxRadar's shortage tracker follows the federal list.

Medicare has started to pay for resilience directly. In its fiscal 2025 inpatient payment rule, CMS finalized a separate payment⁹ for small, independent hospitals to establish and maintain a buffer stock of essential medicines, saying such hospitals "lack the resources of hospitals that are larger and/or are part of a chain organization." The 2027 outpatient proposal went further and asked for comment on a separate inpatient payment for domestic procurement of protective equipment and essential medicines.

CMS has not yet issued the final 2027 outpatient rule. As of Nov. 3, 2026, it had not appeared in the Federal Register, and its 340B rate, whether ASP minus 33.4 percent or something else, will set what Medicare pays for 340B drugs starting Jan. 1, 2027.