Significant Cuts Proposed to Medicare Payments for 340B Drugs

McDermott Will & Emery

McDermott Will & Emery

In Depth

As part of the Calendar Year (CY) 2018 proposed updates to the Medicare Hospital Outpatient Prospective Payment System, the US Department of Health and Human Services has proposed to decrease Medicare Part B payments to hospitals for 340B drugs by almost 30 percent. The cut in payment is explained in the Proposed Rule as necessary to slow growth in the 340B program, shift trends of growing amounts paid by Medicare for outpatient hospital drugs and reduce Medicare beneficiary cost-sharing. Savings to the Medicare program generated by the reduction in 340B payments, estimated to be approximately $900 million in 2018, are proposed to be implemented in a budget-neutral manner and redistributed across all other outpatient hospital services covered by Medicare through a 1.4 percent increase in Medicare payments (for CY 2018) for all other hospital outpatient services. If implemented as proposed, the payment cut would begin effective January 1, 2018. Public comments on the Proposed Rule may be submitted through September 11, 2017.

Summary of Proposed Change to Part B Payment for Hospital Outpatient Drugs

On July 13, 2017, the US Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS) released the Calendar Year (CY) 2018 Hospital Outpatient Prospective Payment System (OPPS) Proposed Rule (Proposed Rule). Among the proposed changes, CMS is proposing to cut Medicare Part B payments for most separately-payable drugs purchased under the 340B program and dispensed to hospital outpatients. The Proposed Rule indicates that the payment change is necessary to address growth in the number of providers participating in the 340B program, recent trends in high and growing prices in several separately payable drugs administered to hospital outpatients and related increases in Medicare beneficiary cost-sharing for Medicare-covered drugs.

Under the Proposed Rule, effective January 1, 2018, Medicare payments for all separately-payable Part B drugs dispensed to hospital outpatients, with the exception of “pass through” drugs, vaccines and drugs identified with a to-be-established modifier indicating that the drug was not purchased at the 340B price, would be subject to a reduction in payment from average sales price (ASP) plus 6 percent to ASP minus 22.5 percent. CMS derived the proposed reduction from a May 2015 report to Congress from the Medicare Payment Advisory Commission (MedPAC) in which the advisory panel found that ASP minus 22.5 percent represents the average minimum discount that 340B-participating hospitals receive for separately payable drugs under the OPPS.

Based on data from CY 2016, CMS estimates that the proposed payment reduction will result in a reduction in OPPS payments to hospitals for drugs applicable to the payment cut of as much as $900 million. CMS would implement the payment policy in a budget neutral manner such that the savings generated from the cut in drug payments would be used to increase payments for all other services paid under OPPS, and applicable to all hospitals. CMS estimates that the redistribution in payments would result in an increase in other payments under OPPS by approximately 1.4 percent.

The 340B payment cuts in the Proposed Rule are limited to certain drugs that are separately payable by Medicare Part B under the OPPS. The Proposed Rule changes would not directly affect payments for 340B drugs dispensed through most contract pharmacy arrangements, 340B drugs that are “packaged” by Medicare into the Part B payment for a related procedure or certain 340B drugs dispensed to outpatients who are subsequently admitted as inpatients. In addition, because the Proposed Rule changes relate only to payments under OPPS, payments for 340B drugs dispensed by hospitals not paid under OPPS, including Critical Access Hospitals, are not affected by the proposed payment cuts. Further, it does not appear that the proposed cuts would apply to hospital locations paid under the alternative payment rates established under Section 603 of the Bipartisan Budget Act of 2015, as such locations are explicitly not paid under OPPS and payment for Part B drugs dispensed at such locations is made at the rate established under the Medicare Physician Fee Schedule.

Requests for Comment

CMS is accepting public comments on the Proposed Rule through 5pm EDT on September 11, 2017. Comments may be submitted in writing through several means, with the preferred approach being electronic submission via Although CMS will accept public comment covering all aspects of the Proposed Rule, as to the 340B payment changes, CMS has explicitly requested comments on the following issues:

  • Redistribution of the savings generated by the payment reduction, including:
    • Whether the savings should be used to increase payments for specific services or an overall increase in OPPS payment rates;
    • Whether and how to target payment increases to benefit hospitals that treat a large share of indigent and uninsured patients; and
    • Whether redistribution of savings would result in unnecessary increases in the volume of covered services paid under OPPS;
  • Sources of and accuracy of data related to hospital costs associated with purchase of 340B drugs, including:
    • Publicly available sources of 340B pricing data or proxies for such data;
    • Whether the estimated savings of $900 million is accurate; and
    • Appropriate payment rate to account for the average discount in 340B drugs;
  • Implementation timeframe for the payment reduction and whether it should be phased-in over a multi-year period;
  • Processes for identifying the actual acquisition cost that each hospital incurs for 340B drugs and making payments to hospitals for 340B drugs at actual acquisition cost;
  • Requiring 340B hospitals to report actual acquisition cost on Medicare Part B claims for outpatient drugs;
  • Whether hospital-owned or affiliated ambulatory surgical centers have access to 340B-discounted drugs;
  • Exclusions from the payment policy, including:
    • Whether certain groups of hospitals should be excluded from the payment policy for reasons related to access to care and, if so, which hospitals should be excluded and how the payment reductions would disproportionately affect access to care at such hospitals; and
    • Whether certain types of drugs, such as blood clotting factors, should be excluded from the payment reduction.


Although the proposal in the Proposed Rule to cut Medicare hospital payments for 340B drugs was not widely expected and has taken many stakeholders by surprise, both Congress and the new Administration have recently been examining a variety of drug pricing issues, including concerns regarding growth in the 340B program. If implemented as proposed, the payment cuts and redistribution would likely result in contraction of the 340B program, both in the number of participating hospitals and volume of hospital 340B drug purchases. To the extent that the proposed cuts render administration of a hospital’s 340B program financially infeasible, currently-participating hospitals are likely to opt out of the program (either entirely or as to drugs dispensed to Medicare patients). Importantly, such reductions in 340B purchasing would likely reduce the benefit to non-340B hospitals that might otherwise benefit from redistribution of savings identified in the Proposed Rule.

Non-340B hospitals also should take note of the proposed methodology for implementation of the payment reduction, which appears to require that all non-340B drugs, including those from hospitals ineligible to access 340B pricing, be identified on Medicare Part B claims with a modifier. This would require all hospitals to implement process changes to apply the modifier to Medicare Part B drug claims. Otherwise, hospitals would see steep reductions in Medicare reimbursement for the drugs they furnish, even if not purchased through the 340B program.

The agency’s proposal is likely to face considerable push-back, especially from the hospital community. In March 2016, CMS proposed to test a new model for the payment of physician-administered drugs covered under Medicare Part B, including drugs paid separately under the Outpatient Prospective Payment System. Under the first part of the two-part model, CMS would have replaced the ASP+6 percent payment methodology with a payment rate equal to ASP + 2.5 percent, plus a flat fee of $16.80 across half of the United States. That proposal was widely opposed, and the Obama Administration ultimately withdrew the proposal. This proposal, while affecting a narrower category of providers, proposes a much steeper cut. One key difference between this most recent proposal and the 2016 proposal may be the level of objection from the pharmaceutical industry, which vigorously opposed the 2016 proposal, but has advocated for changes similar to those now proposed.

Even if finalized, providers are likely to litigate to block implementation. It is not clear that the statute permits CMS to apply such an alternative payment methodology where ASP is arguably unavailable only from a subset of hospitals and, even if it did, whether the proposed payment changes are consistent with the alternative payment approaches available under the relevant statutes.

This Proposed Rule represents a critical change in Medicare policy impacting the continued viability of the 340B program and CMS authority to make material payment changes through sub-regulatory guidance. All hospitals, whether participating in the 340B program or not, as well as individuals and entities that benefit from, or otherwise interact with, the 340B program should become familiar with the Proposed Rule and consider submitting comments to CMS regarding the proposed changes.



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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