Keith Harvey is CEO of Cook Area Health Services, better known as Scenic Rivers Health, a group of nonprofit medical and dental clinics in the northeast Minnesota hinterlands.
Scenic Rivers Health struggles to make the most of a mysterious federal government program with the unappealing name of 340B. In 340B, a qualifying nonprofit hospital like Scenic Rivers gets discounts on their prescription drug purchases.
Harvey lamented the administrative burden of tussling with multinational pharmaceutical giants.
Related: Minnesota hospitals profit from law meant to provide drug discounts
“From a 340B standpoint, we’re seriously looking at whether it’s even worth continuing on,” Harvey said in a video call from his sparsely appointed Cook office.
While it remains subject to legal debate, states have discretion in how 340B operates. A bill at the Minnesota Capitol aims to give hospitals greater leverage in their dealings with pharmaceutical companies.
State Sen. Matt Klein
“Hospitals have never been in such a critical situation and 340B funding is essential to ongoing operations and the way they care for Minnesotans,” state Sen. Matt Klein, DFL-Mendota Heights, told reporters last month. “Without these funds, Hennepin County Medical Center would close.”
Klein, a physician who is running for Congress, said that he is fighting for the people of Minnesota against “Goliath” drug companies who “spent a million dollars a day” to lobby against his bill.
But the Minnesota Hospital Association lobbies, too.
Association members include Cook but also larger nonprofits Fairview Health Services and Allina Health that generate hundreds of millions of dollars annually from 340B. These bigger healthcare entities can handle the administrative burden.
In fact, Sayeh Nikpay, a healthcare economist at the University of Minnesota and consultant for the Minnesota Department of Health, deemed 340B “insidious.”
Because while Klein, his DFL colleagues and some Republicans, say 340B helps patients, it may mostly enrich hospital and pharmacy chains.
To those whose life mission is to provide access to affordable healthcare, legislation around 340B reflects the upsetting trade-offs inherent to the U.S. patient care system.
“The program is not well targeted,” said Rep. Tina Liebling, DFL-Rochester. “But if it comes down to a fight between the drug industry and the hospitals, I certainly don’t want to hurt the hospitals especially because some of them are teetering on the brink.”
The standard is low
Nikpay is fresh off a two-year research project divining what Congress was thinking when they passed the 1992 Public Health Service Act. The 34-year-old law includes an eight-page clause under section 340B with an unprecedented plan to help healthcare providers.
As far as she can tell, 340B’s intent was to help clinics like Scenic Rivers that already receive federal grants, care for a high proportion of low-income patients, and operate in locations with limited healthcare alternatives.
The law implores drug companies to either discount the prescriptions they sell to qualified hospitals and clinics, or get booted off Medicaid.
According to a federal audit, the discounts are “substantial,” running between 20% to 50%.
The rules around 340B, which are governed by the federal Health Services and Resources Administration, allow an array of healthcare centers to accept these discounts. Generally, a hospital that is not for profit and logs 11.75% of its patient days caring for those on Medicaid or very low income Medicare qualifies.
“The standard is low and most hospitals have a higher share of low-income patients than is required,” said Ryan Knox, a health and policy law professor at DePaul University who has published studies on 340B. “It is not super hard to meet.”
Qualifying hospitals get discounts not just on drugs prescribed to their low-income patients but to all their patients, even those of quite high incomes.
Nikpay used the example of a hospital being able to even get discounts on drugs it prescribed to Timberwolves partial owner Alex Rodriguez.
Also, 340B “doesn’t regulate based on medical necessity,” Knox said, which means drugs ranging from Humira for autoimmune disorders to Wegovy for weight loss get the discount.
Roughly, here is how hospitals turn drug discounts into revenue.
Spazzing out over my putrid skin, I visit a doctor at my local hospital, which takes part in the 340B program.
My doctor prescribes me a retinoid and I go pick it up at my nearest Minneapolis pharmacy.
My hospital has a 340B participation contract with my local pharmacy.
So, Galderma, or whatever company made the cream, sells it at a discount to my hospital, which instructs Galderma to dispense it at my pharmacy.
My pharmacy, however, charges me full price for the retinoid, a cost mostly paid for by my health insurer.
The difference between the discount price purchasing the drug and the full price reselling it to a patient is the hospital’s revenue. Through a mechanism laid out in its contract with the hospital, a cut of this revenue goes to the pharmacy.
Nationally, hospitals made $81 billion in 340B revenue in 2024, according to the Health Services and Resources Administration.
In Minnesota, hospitals made $1.3 billion in 2024 on 340B payouts, per the state’s Department of Health. These hospitals also paid out $120 million in total costs to their contract pharmacies.
The large entities that can take better advantage of 340B
Nearly half of the $1.3 billion that 198 Minnesota providers collectively generated in 340B revenue for 2024 was raked in by just three hospitals: M Health Fairview University of Minnesota Medical Center, Abbott Northwestern Hospital, and Hennepin County Medical Center.
The U of M Medical Center alone generated $335 million, or over a quarter of $1.3 billion, according to the Health Department.
That Minneapolis hospitals the size of college campuses have drastically higher proceeds than tiny clinics in healthcare deserts makes some sense. But smaller clinics say they are getting a raw deal.
“We get thrown into a group that is supposed to think 340B is such a great, positive thing,” said Harvey, the Scenic Rivers CEO. “Maybe it is for certain entities like the large entities that can better take advantage of it.”
Harvey hired an administrator to help with paperwork from drug companies, and also hammer out contracts with nearby pharmacies.
But area pharmacies, most of which are not Walgreens or CVS but independent outfits, “want nothing to do with 340B” because of chores like updating IT to adhere to a pharmaceutical company’s data portal.
To better understand Harvey’s frustration, let’s say my skin breaks out during a Boundary Waters trip. I visit the Scenic Rivers clinic and get prescribed a retinoid.
Scenic Rivers has a 340B contract with just one pharmacy, the in-house dispensary at Valley Hospital in Big Fork.
If I take the scenic hourlong drive to Big Fork, Scenic Rivers grabs the 340B discount. But if I ask to pick up the cream at my local Minneapolis pharmacy, or literally any other dispensary besides Valley Hospital, Cook cannot snare the discount.
In a good year, Scenic Rivers garners between $200,000 to $300,000 in 340B revenue, Harvey said.
“We get thrown into a group that is supposed to think 340B is such a great, positive thing. Maybe it is for certain entities like the large entities that can better take advantage of it.”
Keith Harvey, CEO, Scenic Rivers Health
Kate Surbaugh, CEO of Sawtooth Mountain Clinic in Grand Marais, operates from a similar geographic disadvantage.
The clinic, whose regulars include patients from the Grand Portage Indian Reservation, used to work with two nearby pharmacies “but during the pandemic in 2020 both of our local pharmacies closed,” Surbaugh said in a video call from her car.
“We very quickly had to set up an in-house pharmacy because the next closest pharmacy for our patients was over 50 miles away,” Surbaugh explained.
Sawtooth’s in-house pharmacy gets the 340B discount, but its chances of increasing 340B revenue are almost nil.
Like Scenic Rivers and Sawtooth, many smaller clinics do not have more than one pharmacy contract, Nikpay said.
However, according to the Minnesota Health Department report that Nikpay consulted on, the state’s 200 clinics and hospitals combine to have nearly 2,500 total contracts with pharmacies.
In other words, the largest hospitals have contracts with dozens of individual pharmacies to ensure they get 340B discounts.
For pharmacies, these arrangements can be a compliance headache if there are scant customers from 340B hospitals, but are a major payday if they can operate on sufficient volume. A 2018 federal Government Accountability Office audit scuba dived into the ocean of 340B contracts between hospitals and pharmacies, and determined that pharmacies often get paid flat fees by hospitals by each prescription dispensed.
The Minnesota pharmacy lobby has vociferously argued that its members ought to enter into contracts with as many 340B providers as they please.
Writing in “strong support” of Klein’s bill, Benjamin Anderson, president of the Minnesota Society of Health Systems Pharmacists, railed against drug “manufacturer restrictions on contract pharmacies.”
The Health Department did not make available data regarding what hospitals have contracts with which pharmacies.
But it is apparent that some Minnesota hospitals have 340B contracts with pharmacies across the country, catering to snowbirds with the means to fly south during the winter. Others focus on affluent suburbs where patients tend to have pricey commercial health insurance.
“A lot of hospitals disproportionately put their contract pharmacies in places where people are wealthy,” Nikpay said.
Hospitals are also incentivized by 340B “to prescribe more expensive branded drugs instead of less expensive generics,” said Karen Mulligan, a research scientist at the University of Southern California who studies drug prices.
Mulligan gave the example of a doctor incented to prescribe a brand name drug with a list price of $1,000 instead of a generic for $100. In each instance, let’s say the hospital gets a 50% discount.
For the brand name, the hospital ends up purchasing the drug for $500 and charging commercial insurance the market price of $1,000, making $500 in the deal.
With the generic, the hospital buys for $50, sells for $100, and collects just $50.
“The spread for the hospital is going to be higher the more expensive the list price,” Mulligan said.
Goliath invades St. Paul
As hospitals pushed the limits of maximizing 340B dollars, the pharmaceutical industry pushed back. In 2020, the Pharmaceutical Researchers and Manufacturers of America, better known as PhRMA, began encouraging members not to honor contracts between hospitals and multiple pharmacies.
So, if PhRMA ruled the world, my hospital could only get the discount on my retinoid if I scooped it up at my hospital’s one designated 340B pharmacy.
States including Arkansas responded by passing laws demanding pharmaceutical companies honor all contracts between 340B providers and pharmacies. PhRMA sued, arguing federal law preempted state statutes.
But, astonishingly, the federal law creating 340B does not even use the word pharmacy, much less spell out how discounted drugs should be dispensed.
“The text of 340B is silent about delivery of drugs to patients,” wrote U.S. 8th Circuit Court of Appeals Judge Michael Joseph Melloy in a 2024 decision that ruled for the state of Arkansas and against PhRMA. “Congressional silence on pharmacies in the context of 340B indicates that Congress did not intend to preempt the field.”
The Arkansas decision galvanized the 340B bill now before the Minnesota Legislature, according to a House DFL spokesperson.
Current Minnesota law compels drug companies to honor all contracts 340B providers have with pharmacies. But there is no enforcement mechanism, and the law sunsets next year.
Klein’s bill lifts the sunset and empowers the Minnesota Attorney General’s office to enforce the law. Its House companion is not sponsored by a DFLer, but instead Republican Natalie Zeleznikar, a former healthcare administrator from a rural district just northwest of Duluth.
Rural providers like Scenic Rivers are guardedly optimistic the legislation would give them a leg up when engaging drug companies and contracting with pharmacies.
But at a March hearing of the House Health Finance and Policy Committee, Zeleznikar enraged her DFL colleagues when she proposed an amended version of the bill that erased the Attorney General’s enforcement power.
Rep. Robert Bierman, DFL-Apple Valley, tartly responded that Zeleznikar’s new version “does not really support our hospitals in the same way.”
Bierman eyed Zeleznikar and asked, “I am just wondering who you worked with for this iteration and the changes you made,” an intimation that PhRMA paid the lawmaker a visit.
Zeleznikar, who has sworn in multiple interviews that she never spoke with a drug industry representative, then went on about “how complex of an issue” 340B is.
Her amended bill failed on a party-line vote.
After the committee hearing, Bierman tried to maneuver the bill’s original version onto the House floor. Bierman presented the legislation in us-versus-them terms.
“I think we have our cards on the table here,” he said. “A green vote is for your hospitals. A red vote is for PhRMA.”
The gambit failed in the split House on a party-line vote. The measure remains in the Health Finance Committee.
Meanwhile, Klein’s bill passed the Senate in April, enforcement provision in hand, with every DFLer and eight Republicans in support. The measure advanced amid copious drug industry testimony.
“Despite the profits reaped by tax-exempt hospitals, extensive independent research shows the 340B program often fails to lower costs or improve access and instead drives higher costs for patients, taxpayers, and employers,” declared Reid Porter, a spokesperson for PhRMA at a March Senate Consumer Protection and Commerce Committee hearing.
Individual companies delivering testimony included Eli Lilly and Company and Bristol Myers Squibb. The former took $21 billion not in revenue but net income in 2025. The latter generated $7 billion in 2025 net income.
Related: Why a bill to help Minnesota hospitals may be doomed and what 340B has to do with it
“Our hospitals are not hauling in dollars in the range big pharma is,” Klein told reporters after his bill passed.
But on the Senate floor, a few Republicans focused not on the messenger but PhRMA’s message that 340B benefits hospitals but not the patients themselves. Sen. Jordan Rasmusson, R-Fergus Falls, specifically turned his ire to Fairview Health Services.
In 2024, the nonprofit totaled over $8 billion in revenue, and $41 million in net income (put another way, profit), according to its audit. Fairview reported spending $24 million in executive compensation including $4.8 million to pay its CEO, James Hereford.
“There’s a government program that’s providing $1.3 billion in funding to Minnesota hospitals, some of which I think use this money very appropriately,” Rasmusson said. “To provide charity care. To provide access to rural healthcare. But others are providing pennies on the dollars in charity care. And they’re paying their CEO $5 million.”
Klein responded, “Fairview, like all of our hospitals, is performing an essential function across the metro area and doing so on very tight margins. We need those hospitals to stay alive.”
The state Health Department tracks charity care, which is basically what it sounds like, care health providers furnish at no charge. To meet their nonprofit, tax-exempt status, 340B providers must have some charity care.
In 2024, M Health Fairview University of Minnesota Medical Center performed less than $8 million worth of charity care, or 2% of their 340B revenue. The uncompensated care figure climbs a bit when bad debt, or care the hospital awaits payment for, gets tacked on.
Overall, uncompensated care at the U of M Medical Center stood at $16 million in 2024.
As Rasmusson noted, not all large 340B hospitals provide pennies on the dollar in uncompensated care. Hennepin County Medical Center, which is clamoring for a financial life raft from the Legislature, provided $90 million in 2024 uncompensated care.
“HCMC is an incredible pillar of the healthcare safety net,” Nikpay said.
On a bright, cool spring morning I drove six miles east from the state Capitol to visit Health Commons East, a drop-in clinic run by Fairview in partnership with Augsburg College, which provides student nurses.
To the few patients who stopped by, the clinic gave “basic foot care,” said Nawal Hirsi, a patient and community educator specialist. “That usually entails a warm foot soak, scrubbing to remove some calluses, trimming of the nails.”
The patients I spoke with dwelled in nearby senior living. Foot care is serious business at their age, they noted, as it helps the blood circulate.
But they also ventured to the clinic for its social aspect.
“This is a great place,” said Jim, a military veteran who showed on his phone fairly impressive landscape paintings of his. “They give you a big hug and that means a lot.”
Jim stopped by that day because, “My toenails were getting pretty long.”
Fairview highlighted Health Commons East as one of an array programs where the patient does not pay, but it does not count toward uncompensated care because there is no potential billing aspect.
“Charity care alone is an incomplete picture of how we support vulnerable populations,” Fairview emailed in a statement. “Fairview’s 340B savings help sustain the safety net that many patients depend on.”
Mark Bengtson, left, of Maplewood, chats with nursing student Yelena Borissyuk after receiving foot care at Fairview’s Health Commons East on Wednesday, April 29, 2026, in St. Paul, Minn. Borissyuk volunteers as part of her nursing program at Augsburg to administer free health and wellness services at the center. Credit: Ellen Schmidt/MinnPost/CatchLight Local/Report for America
The nonprofit pointed me toward its community impact report, which gets into low or no-cost programs it offers low-income patients such as “tailored food programs, free immunizations, and cancer screenings.”
As to the U of M Medical Center’s $335 million in 340B revenue for 2024, Fairview noted that the center “treated patients from every Minnesota county and every state except Rhode Island the last two years. The scale of 340B savings at academic and referral hospitals reflects the volume and complexity of care provided” and “not excess margins or profit.”
Allina Health, which operates Abbott Northwestern, made similar points.
“Charity care is an important way we support patients, but it represents only part of the broader commitment to the communities we service,” Allina Health said in a statement, noting that the nonprofit offers “community health initiatives” that “improve access to care across Minnesota and western Wisconsin.”
Scholars recognize 340B has hard to quantify benefits. A 2023 study by Knox at DePaul found that while larger hospitals do not necessarily put their 340B revenue back into charity care, they might use it to improve staff pay or open specialty clinics.
But there are also reasons to believe 340B hurts patients.
Of the $1.3 billion Minnesota providers generated in 2024 340B revenue, 45% came out of the pocket of commercial insurers, who were assessed full price for the drugs hospitals obtained at a discount.
“Over the long run what we expect to observe is that when the cost of healthcare increases insurance companies are going to pass on the costs to patients,” said Mulligan at the University of Southern California.
Also, if drug companies truly are dastardly, why would they not mark up prices to account for 340B? PhRMA did not respond to questions on this subject.
According to Nikpay, there is not sufficient evidence either way on whether drug companies bump prices due to 340B. What is evident, Nikpay said, is that, “We haven’t solved the problem of how to give patients affordable drugs.”
Zeleznikar’s bind
In the last week of April, Daniel Traynor, a federal judge, struck down a North Dakota 340B law similar to the one Klein has proposed. Traynor’s ruling reads like a turbocharged Jordan Rasmusson Senate floor speech.
“Big pharma garners little sympathy,” he wrote. “Manufacturers have money, medication prices are rapidly rising, and they love to litigate. These things may be true, but they do not mean manufacturers should be fleeced by enterprising states and hospital conglomerates that wield power in legislative lobbies.”
Traynor leveled that hospitals and contract pharmacies are “in coordinated collusion” to “exploit Congress’s inattention to a federal program.”
The judge’s ruling came one day before House Republicans met behind closed doors to discuss priorities with three weeks left in the legislative session.
According to Zeleznikar, the 340B legislation was not brought up. While a North Dakota court ruling is nonbinding in Minnesota, Zeleznikar gave me the sense that Republicans might use it as reason to not advance her bill.
Zeleznikar indicated that she would like to advance it, with an enforcement provision.
“The best thing is to have it in the lane of the state attorney general’s office,” she said, noting that the scope of 340B is too great for a smaller enforcement body.
The second-term lawmaker, who hails from a purple district, said that she has talked to 20 hospitals about the importance of 340B. Zeleznikar still has not taken calls from drug companies.
“There is no point in me meeting with them right now,” she said. “I know what their perspective is.”
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