Medicare Proposes Deeper Drug Payment Cuts to 340B Hospitals

Baker Donelson

Baker Ober Health Law

On August 4, 2020, CMS issued a proposed rule to further reduce outpatient drug payment rates under Medicare to certain hospitals participating in the 340B drug pricing program. As part of the 2021 OPPS Proposed Rule, CMS proposes to reduce payment to 340B hospitals from the current rate of average sales price (ASP) minus 22.5 percent to ASP minus 28.7 percent.

The proposal comes days after the D.C. Circuit Court of Appeals issued a decision reversing a lower court decision and upholding the current Medicare payment policy for 340B hospitals, which has been in effect since 2018. In light of the decision, CMS proposes to continue the current payment policy for 340B hospitals next year as an alternative to the deeper payment cuts also proposed, and CMS is soliciting comments on both proposals. Comments are due on October 5, 2020.

See Baker Donelson's analysis of the D.C. Circuit Court decision upholding the current Medicare payment cuts here.

Deeper Payment Cuts Proposed For 2021

For calendar year (CY) 2021, CMS proposes to pay 340B hospitals under Medicare Part B for separately payable drugs without pass-through status at ASP minus 28.7 percent. If this proposal is finalized, 340B hospitals would see a reduction in payment equal to six percent of a drug’s ASP, as compared to the current payment rate of ASP minus 22.5 percent. CMS estimates that the total payment reduction would amount to $427 million. The reduction would be budget neutral and would be offset by an increase in payment under the OPPS for non-drug services.

Prior to 2018, CMS paid both 340B and non-340B hospitals at the same rate of ASP plus six percent. In 2018, CMS reduced 340B hospital payments to ASP minus 22.5 percent and continued to pay non-340B hospitals at ASP plus six percent. The proposed rate for 340B hospitals, if finalized, would be roughly one third less than the non-340B hospital rate and what Medicare paid 340B hospitals prior to 2018.

CMS proposes to continue to exempt from the payment cuts free-standing children's and cancer hospitals as well as rural sole community hospital (SCHs). The payment reduction does not apply to critical access hospitals, as they are not paid under the OPPS.

In setting the proposed payment rate at ASP minus 28.7 percent, CMS first estimated the "typical" 340B drug acquisition cost as ASP minus 34.7 percent. CMS then proposed an add-on payment of six percent of ASP to cover overhead and other administrative costs. The add-on payment would result in a net payment rate of ASP minus 28.7 percent.

CMS also includes an alternative proposal to continue the current payment cut in 2021. In putting forward this alternative proposal, CMS indicates that the agency continues to believe that the current payment rate for 340B hospitals is appropriate and references the fact that the D.C. Circuit recently held that CMS's current payment policy was based on a reasonable interpretation of the Medicare statute.

Proposed Payment Rate Based on Hospital Survey Data

CMS proposes the lower payment rate based on drug acquisition cost data collected through a survey of more than 1,400 340B hospitals conducted between April 24, 2020 and May 15, 2020. CMS requested that hospitals provide their average acquisition cost for each Specified Covered Outpatient Drug (SCOD) purchased under the 340B program during the last quarter of CY 2018 and/or the first quarter of 2019. CMS defined a purchase under the 340B program as the 340B ceiling price, a 340B sub-ceiling price, or another discount, depending on the price paid by the hospital.

CMS allowed hospitals to choose a "detailed survey option" and manually provide average acquisition cost data, or a "quick survey option," through which the hospital indicated that it "preferred that CMS utilize the 340B ceiling prices obtained from HRSA as reflective of their hospital acquisition costs."

CMS received responses from 880 hospitals, or 62 percent of the hospitals that received the survey. Of the responding hospitals, seven percent (100) used the detailed survey option, and 55 percent (780) used the quick survey option. Thirty-eight percent of hospitals (542) did not respond. CMS indicated that it would apply 340B ceiling prices for hospitals that did not respond to the survey or that left survey responses blank.

Prior to conducting the survey, CMS proposed its intent to survey hospitals through a proposed information collection request (ICR) and collected feedback through two notices published in the Federal Register. In response to the proposed ICR, hospitals expressed concern over the burden of completing surveys as well as whether the Medicare statute grants CMS the authority to conduct such a survey of only 340B hospitals and not of other hospitals.

As required under the Paperwork Reduction Act, the Office of Management and Budget (OMB) reviewed the proposed ICR and, in granting approval, indicated that the survey is "approved consistent with the understanding that CMS will prepare a report providing a nonresponse bias and standard error analytical results and share with OMB prior to utilization of data for future publications, including rulemaking." OMB also required that CMS clearly describe "any limitations in the generalizability of the information collected, in any publications and documents utilizing the data." The proposed rule does not reference information CMS may have shared with OMB in response to OMB's instructions.

Estimation of Average 340B Discount

In using the survey data to set the proposed payment rate, CMS chose to propose a payment rate using a single, aggregated discount amount off of ASP, instead of setting drug-specific payment rates. In explaining this decision, CMS acknowledged that the average discount data collected through the survey was skewed towards 340B ceiling prices, given that the majority of hospitals either did not respond or used the quick survey option, resulting in the use of the ceiling prices as a proxy for acquisition costs. CMS also expressed concern that using drug-specific rates could reveal "sensitive or protected pricing information."

CMS made several adjustments to the survey data to calculate the proposed payment rate, culminating in an estimate of the "typical" 340B drug acquisition cost at ASP minus 34.7 percent. CMS based this estimate on the geometric mean discount off of ASP from both survey quarters, and the agency volume-weighted the drug discounts to account for drug utilization rates across all hospitals under the OPPS. In cases where Medicare pays for multiple drugs under the same HCPCS code, CMS used the highest acquisition cost of any drug paid under the HCPCS code to determine the average 340B discount.

Lastly, CMS excluded from its calculations drugs sold at $0.01, which occurs in certain extreme cases due to a penalty assessed against manufacturers that increase the price of a drug faster that the rate of inflation. When the inflationary penalty is so large that it results in a 340B price calculation of $0.00, HRSA regulations require the manufacturer to sell the drug for $0.01. CMS expressed concern that including penny-priced drugs in the calculation could inappropriately skew the results, given that inflationary penalties vary by quarter and a drug sold at a penny in one quarter may not be sold at a penny in another quarter.

Implications for Hospitals

In light of the decision by the D.C. Court of Appeals upholding the current policy, CMS has left the door open to continuing the current payment rates to 304B hospitals next year. However, CMS appears to characterize its proposal to further reduce payments to 304B hospitals as the primary proposal, referring to the continuation of the current rates as an "alternative" proposal. CMS is soliciting feedback on both proposals and will issue a final rule before the end of the year indicating what the payment rate for 340B hospitals will be effective January 1, 2021.

In the meantime, hospitals have the option to continue to litigate the legality of the current payment policy, either by requesting a hearing en banc before the entire panel of judges in the D.C. Circuit or appealing the decision to the U.S. Supreme Court. However, CMS's proposal to further reduce payments based on hospital survey data rests on a different statutory authority than the authority CMS relied upon for the current payment policy. As such, CMS's authority to proceed with the deeper payment cuts is not the subject of the current litigation.

Nevertheless, hospitals may raise questions about the appropriateness of setting reimbursement rates based on the survey data given the concerns hospitals previously expressed to CMS and OMB regarding CMS's authority to survey 340B hospitals and the concerns OMB raised in its approval of the survey.

Baker Donelson will continue to monitor and provide updates on the litigation challenging 340B hospital payment cuts and OPPS rulemaking and will provide updates. Baker Donelson attorneys and policy advisors are also available to assist clients with the drafting of comments in response to the 2021 OPPS proposed rule before the October 5, 2020 deadline.

Payment Matters Editors:

  • Leslie Demaree Goldsmith,
  • Tracy E. Weir

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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