Legislation, Lawsuit Cloud Future of 340B Program Payment Rate Reductions

Legislation, Lawsuit Cloud Future of 340B Program Payment Rate Reductions

In Short

The Situation: A Final Rule published by the Centers for Medicare & Medicaid Services carries a provision that reduces reimbursement for most 340B Program drugs dispensed by disproportionate share hospitals and rural referral center hospitals.

The Reaction: Bipartisan legislation was introduced that would reverse the payment cuts. Separately, suit was filed against the Department of Health and Human Services alleging violations of the Administrative Procedures Act by CMS.

Looking Ahead: The impact of the Final Rule on suppliers and other stakeholders is potentially very significant. CMS will accept comments on the Final Rule until December 31, 2017.

On November 1, 2017, the Centers for Medicare & Medicaid Services ("CMS") published the Hospital Outpatient Prospective Payment System ("OPPS") and Ambulatory Surgical Center Payment ("ASC") Payment System Final Rule  ("Final Rule"), which, among other things, includes a controversial provision that significantly reduces reimbursement for most 340B Program drugs dispensed by disproportionate share hospitals ("DSH") and rural referral center ("RRC") hospitals beginning January 1, 2018.

On November 15, Representatives David B. McKinley (R-WV) and Mike Thompson (D-CA) introduced H.R. 4392 ("House Bill"), which, if passed, would reverse the 340B payment cuts contemplated in the Final Rule. The House Bill comes just two days after a number of industry stakeholders filed suit against the Department of Health and Human Services ("HHS") and Acting Secretary of Health and Human Services, Eric Hargan. These industry stakeholders allege that CMS violated the Administrative Procedures Act when it published portions of the Final Rule.

Policy Discussions Influencing CMS' 340B Changes in Final Rule

The 340B Program, a program in place since 1992 enabling certain eligible health care providers to purchase drugs at reduced prices in support of outpatient programs, has been the topic of much media and policy debate in recent years. The changes to the 340B Program made in the Final Rule (detailed below) are not surprising to some given significant media coverage and high-profile commentary often casting a negative perception on a health provider's ability to "profit" from a discounted drug that is reimbursed at standard rates.

However, Health Resources & Services Administration ("HRSA"), the agency responsible for the implementation and maintenance of the 340B Program, consistently stresses the important role of the 340B Program  to address public health concerns and services for indigent, uninsured, and underinsured patients. The public health role of the 340B Program was highlighted when HRSA recently announced accelerated enrollment processes

for health providers in Puerto Rico, Texas, and the U.S. Virgin Islands following the recent natural disasters. Despite HRSA's guidance and purpose of this critical program to stretch scarce resources to reach more patients that are eligible and provide comprehensive services, CMS' policy changes in the Final Rule could place many 340B covered entities at greater financial risk. As Congress and the current administration continue debating and attempting to make changes to health care reform, many of which, if implemented, are expected to result in more and more individuals relying on Medicaid or no insurance, the importance and role of the 340B Program to help safety net hospitals and providers stretch scarce resources is likely to increase.

For many 340B providers, the spread from drug cost to reimbursement payment helps facilitate access to health care for vulnerable individuals across the country. A 2016 Study by 340B Health found that qualifying hospitals use the savings they generate through the 340B Program to reduce the price of drugs for low-income patients, increase patient access to pharmacy services, and enhance pharmacy and other health care services to serve more patients. Without the 340B Program, health care safety net providers argue  they may be forced to offset higher drug acquisition costs by choosing among a number of bad options: (i) reducing services, (ii) modifying staff coverage, and (iii) closure of facilities.

Overview of 340B Program Changes in Final Rule

In the Final Rule, CMS cut the applicable payment rate for separately payable, nonpass-through drugs (excluding vaccines) purchased through the 340B Program by DSHs and RRCs from the average sales price ("ASP") plus 6 percent to ASP minus 22.5 percent (collectively, the "Payment Reduction"). The Payment Reduction is based on a 2015 recommendation by the Medicare Payment Advisory Commission (MedPAC). For 340B providers affected by the Payment Reduction, a drug with an ASP of $1,000 would be reimbursed at $775 compared to the current reimbursement of $1,060.

Note that the Payment Reduction will not apply to 340B covered entities that are classified as rural sole community hospitals, children's hospitals, and PPS-exempt cancer hospitals. Additionally, the Payment Reduction will not affect critical access hospitals, which are reimbursed outside of the OPPS. Because the Payment Reduction does not apply to all covered entities participating in the 340B Program, CMS has established two modifiers to identify whether a drug billed under the OPPS was purchased under the 340B Program­­—one for hospitals that are subject to the Payment Reduction and another for hospitals not subject to the Payment Reduction but that acquire drugs under the 340B Program.

With respect to comments about timing to operationalize a modifier, CMS hinted that it might communicate additional details through a subregulatory process outside of formal rule making processes that allow impacted providers the needed access for meaningful and substantive discussion. At the CMS Hospital/Quality Initiative Open Door Forum, CMS declined to provide further information regarding the January 1, 2018, modifier requirement, but advised concerned providers to expect guidance before the end of the year. 

Policy Implications: Are the 340B Changes Beyond CMS' Authority?

CMS has suggested that implementation of the Payment Reduction in a budget-neutral manner would generate an anticipated $1.6 billion in savings to the Medicare program to be reallocated equally among all hospitals paid under the OPPS. In its commentary and other guidance, CMS identifies the two primary concerns the Payment Reduction was intended to address.

First, CMS was concerned that prior reimbursement rates did not adequately reflect the 340B hospital's lower acquisition cost for the drug, which CMS believed could be leading to increased drug spending at 340B facilities. In November 2015, the Office of Inspector General ("OIG") estimated that discounts across 340B providers average 33.6 percent of ASP, allowing those providers to generate significant profits when they administer Part B drugs reimbursed by Medicare at the prior ASP plus 6 percent rate.

Second, CMS echoed earlier beliefs and concerns that seniors and other Medicare beneficiaries are paying a greater than necessary share of overall drug costs.  Medicare beneficiaries are responsible for a copayment that is equal to 20 percent of the OPPS payment rate, but according to OIG findings  in some instances, the beneficiary's copayment alone was greater than the amount the covered entity paid for the drug. This rationale is one that CMS has highlighted in both its press release  and its fact sheet regarding the Final Rule and the Payment Reduction. 

CMS' concerns and the implementation of the Payment Reductions come on the heels of a June 2015 Government Accountability Office (GAO) report entitled "Medicare Part B Drugs: Action Needed to Reduce Financial Incentives to Prescribe 340B Drugs at Participating Hospitals" ("GAO Report") and amid recent hearings on the 340B Program held by the House Energy and Commerce Committee Subcommittee on Oversight and Investigations in July and October of this year.

The GAO Report raised concerns that generally track the overarching concerns stated by CMS. Specifically, the GAO Report indicated that 340B hospitals, and particularly 340B DSHs, were being incentivized to maximize Medicare revenue by prescribing more or more expensive drugs. As support for the impact of this incentive, the GAO Report noted that 340B DSH hospitals had substantially higher per beneficiary spending on Medicare Part B drugs than non-340B hospitals, which "could not be explained by factors outside of the 340B Program, such as hospital teaching status or patient health status." After suggesting that this difference could be a response to such financial incentives, the GAO questioned whether the care being provided was unduly influenced by these financial incentives. The GAO Report further noted that, in addition to the increased cost to the Medicare program, Medicare beneficiaries would themselves be financially liable for larger copayments as a result of receiving more drugs or drugs that are more expensive.

Most importantly, the GAO Report itself noted that CMS did not have the statutory authority to reduce hospitals' Medicare Part B reimbursement for 340B discounted drugs. The American Hospital Association and others immediately called the question of whether the Payment Reduction exceeds CMS' statutory authority following release of the Final Rule. Further, in the Final Rule,

CMS addressed concerns that the Payment Reduction was inconsistent with advisory panel recommendations. On August 21, 2017, the Hospital Outpatient Payment Panel urged CMS not to finalize the then-proposed, Payment Reduction and to assess the regulatory and operational burden of a modifier on 340B participating providers and hospitals.

Potential Impact of the Final Rule

The Final Rule provides insight into CMS' interpretation of the role of the 340B Program, but is not without controversy. Many have already questioned the legal authority of CMS to implement such a rule, consistent with the GAO's position. The current litigation against HHS and CMS is important to watch and monitor with the potential for broader implications given the underlying arguments requiring CMS to comply with the Administrative Practices Act in an era of increasing agency utilization of informal guidance and subregulatory practices versus notice and comment processes.

Further, for those 340B Program providers impacted by the Final Rule and its Payment Reduction, the implementation of compliance and operational elements may prove challenging given CMS' suggestion that it will use subregulatory and informal processes outside of formal rulemaking for information on modifiers and other key components to the new requirements. A primary concern at this time is that the burden on providers and stakeholders will undoubtedly be much more significant than articulated by CMS in this Final Rule. 

Opportunity for Additional Industry Comment 

CMS will be accepting comments regarding the Final Rule through December 31, 2017.  As such, stakeholders are best served to engage in a careful and meaningful review of the Final Rule and Payment Reduction and pursue opportunities to submit comments to CMS that might affect the ultimate course of this rule and the role of the 340B Program for needed safety net providers.

Given the uncertainty surrounding the Payment Reduction in the Final Rule, 340B covered entities also should monitor closely: (i) whether the House Bill gains traction, (ii) developments in the pending litigation challenging CMS' authority to implement the Payment Reduction, and (iii) any further guidance from CMS, along with activities of other stakeholders in their discussions about the Final Rule.

Four Key Takeaways

  1. In the Final Rule, the applicable payment rate for separately payable, nonpass-through drugs (excluding vaccines) purchased through the 340B Program by DSHs and RRCs is reduced from the average sales price plus 6 percent to average sales price minus 22.5 percent. This change is anticipated to result in $1.6 billion in savings to Medicare.
  2. On November 13, a number of industry stakeholders filed suit against HHS and Acting Secretary of HHS, Eric Hargan. These industry stakeholders allege that CMS violated the Administrative Procedures Act when it published portions of the Final Rule.
  3. On November 15, Representatives David B. McKinley (R-WV) and Mike Thompson (D-CA) introduced H.R. 4392, which, if passed, would reverse the 340B payment cuts contemplated in the Final Rule.
  4. Providers impacted by the Payment Reduction need to be prepared to deal with the operational challenges of implementing the payment modifiers and other requirements in the Final Rule if the pending litigation and legislation do not bring relief before it otherwise becomes effective on January 1, 2018.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at

Adam J. Rogers

Claire E. Castles
Los Angeles

Ann T. Hollenbeck

Brittany Stockman, an associate in our Miami Office,  Kimberly Rockwell, an associate in our Detroit Office and Courtney Carrell, an associate in our Dallas office, assisted in the preparation of this Commentary.

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