McDermottPlus is pleased to bring you Regs & Eggs, a weekly Regulatory Affairs blog by Jeffrey Davis.
In the buffet of regs (and eggs) released a couple of weeks ago, the fried egg served up by the Centers for Medicare & Medicaid Services (CMS) was the 340B Remedy Final Reg. Unlike the other final regs that will affect calendar year (CY) 2024 payments for physician and outpatient hospital services, this reg has long-term impacts on payments, as it finalized a blunt cut that will last more than a decade. To help me describe the impact this reg will have on outpatient hospital services going forward, I’m bringing in my colleague Katie Waldo.
340B hospitals disproportionately serve patients in low-income and rural communities and are able to purchase drugs at discounted rates. In 2018, to take into account the lower acquisition costs for drugs under Medicare Part B (drugs administered in the hospital or another outpatient setting), CMS lowered the payment that 340B hospitals receive under the Outpatient Prospective Payment System (OPPS) for acquiring, storing and handling drugs. CMS reduced this payment from the average sales price (ASP) plus 6% to ASP minus 22.5%, representing an almost 30 percentage point reduction. Some 340B hospitals paid under OPPS were excepted from this reduction, including rural sole community hospitals, Prospective Payment System (PPS) exempt children’s hospitals and PPS-exempt cancer hospitals. CMS states that 1,686 hospitals were affected by this policy. Hospitals subject to the payment cuts sued CMS, and the case was ultimately heard by the Supreme Court of the United States. In 2022, the Supreme Court issued a ruling invalidating the 340B payment cuts. Consistent with this ruling, in the CY 2023 OPPS final reg, CMS restored payments for 340B drugs under OPPS to the full ASP plus 6% rate. CMS also had to find a way to restore to 340B hospitals the payments that were cut between 2018 and 2022 because of the now-invalidated policy. This reg addresses that remedy.
Interestingly, the concept of budget neutrality plays a major role here. We like to describe budget neutrality as the great equalizer to Medicare payments. It works like gravity—what goes up must come down. In other words, if payment rates increase, then CMS must make an overall cut to ensure that overall spending does not increase. The original cut CMS made to 340B payments between 2018 and 2022 was implemented in a budget-neutral manner. Unlike what we are used to seeing in Medicare, CMS actually increased overall payments to all hospitals to ensure that overall spending didn’t decrease (almost like reverse gravity, if that’s a thing). Our colleagues at McDermott Will & Emery discuss budget neutrality in more detail here.
Since CMS “giveth” during the 2018–2022 period, CMS now has decided to “taketh away.” In the 340B remedy final reg, CMS announced a plan to pay back the 1,686 340B hospitals that saw reduced payments. Medicare Administrative Contractors will make a one-time lump sum payment to these hospitals totaling $9 billion within 60 days of receiving specific guidance from CMS. However, CMS also applied the same budget neutrality provision that it did during the 2018–2022 period in a reverse fashion. CMS estimates that all hospitals paid under the OPPS received a total of $7.8 billion in additional payments during that period. Now, CMS will claw back payments to recoup that $7.8 billion. You see: like gravity, what goes up must come down!
Beginning in CY 2026, CMS will reduce all OPPS payments for non-drug items and services to hospitals (except hospitals that enrolled in Medicare after 2018) by 0.5% each year until the $7.8 billion is offset. CMS estimates that this recoupment will take about 16 years.
CMS estimates that this blunt reduction to payment won’t have an immediate impact on hospitals and won’t be overly financially burdensome on impacted entities, especially those in rural communities. However, it is important to understand this reduction in light of other policies that artificially lower Medicare payments. One often-forgotten blunt instrument that applies to most Medicare payments, including OPPS payments, is sequestration. Every time the federal government cuts a check to a provider or facility for a service, the payment that the provider or facility would otherwise receive is reduced by 2%. That 2% cut, which was temporarily halted during the COVID-19 pandemic but has now been fully restored, will likely go on for years. It is currently set to expire six months into 2032 but may be extended.
With the 340B remedy, we now have another long-term reduction to add to the mix. While ending sequestration seems to be a “lost cause” at this point, it appears likely that hospitals will challenge the application of budget neutrality in the 340B remedy reg. In fact, litigation as to the remedy is ongoing: the Supreme Court remanded the original payment cut case back to the US District Court for the District of Columbia, and several other groups of hospitals filed lawsuits before this remedy reg was finalized. We will wait and see how these legal challenges play out and what the final outcome to the remedy policy is.
Before concluding, I want to note a scheduling change. Next week’s Regs & Eggs—or Regs & Turkey Legs—will come out on Wednesday since Thursday is Thanksgiving!
Until then, this is Jeffrey (and Katie) saying, enjoy reading regs with your eggs.
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