[co-author: Samuel Gilkeson, Law Clerk*]
On November 13, 2017, the Centers for Medicare & Medicaid Services (CMS) issued the final rule, “Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs” (“Final Rule”). The Final Rule, in addition to the usual collection of annual Medicare payment updates and adjustments for the coming year, includes provisions that substantially lower reimbursements for hospitals that purchase prescription medications under the 340B Drug Pricing Program (the “340B Program”).
Because the imminent possibility/probability of 340B Program cuts were previously revealed by the Trump Administration on July 13, 2017, when the related proposed rule was published, the hospital community was not caught off guard by the Final Rule’s reductions. As evidence of the foregoing, immediately after the Final Rule was published on November 13, 2017, three hospital advocacy groups – the American Hospital Association (“AHA”), the Association of American Medical Colleges and America’s Essential Hospitals – filed a Motion for a Preliminary Injunction to prevent the Final Rule from taking effect.
The 340B Program, originally promulgated in 1992 as Section 340B of the Public Health Services Act, requires pharmaceutical manufacturers to offer covered outpatient drugs to eligible health care facilities, clinics, and hospitals (termed “covered entities”) at a discount based on the average sales price of the drug. Covered entities include Federally Qualified Health Centers, state-operated AIDS clinics, black lung clinics, certain children’s hospitals and other safety-net hospitals. To ensure drug discounts are passed on to patients, the 340B Program only allows resale of the discounted drugs to the covered entity’s patients. According to the Health Resources and Services Administration (HRSA), which administers the program, the 340B Program is designed to enable covered entities to “stretch scarce federal resources as far as possible,” in order to cover more patients and provide more services.
Currently, CMS reimburses participating hospitals that purchase prescription medication through the 340B Program at the average sales price of the drug plus 6%. The new rule requires CMS to begin reimbursing hospitals for the average sales price minus 22.5% starting on January 1, 2018. The final rule exempts some covered entities from the 2018 reimbursement cuts, including rural sole community hospitals, children’s hospitals, and certain cancer hospitals. CMS estimates that the change will lead to about $1.6 billion in reimbursement cuts. To keep the rule budget neutral, CMS will use the cuts to the 340B Program to increase non-drug pay rates for all hospitals under the Hospital Outpatient Prospective Payment System.
As we mentioned back in February, attempts to scale back the 340B Program predate the Trump Administration, and a pending regulation containing cuts to the program was in the process of being reviewed by the Office of Management and Budget (OMB) at the time of President Trump’s inauguration. Not surprisingly, President Trump’s January 20, 2017 Memorandum directing executive agencies to immediately withdraw all unpublished regulations pending before OMB was welcomed at the time by the AHA and hospital advocacy groups. Now, however, these groups argue that CMS has overstepped its statutory authority in issuing the Final Rule.
While it is uncertain how this litigation will ultimately be decided, it is clear that the safety net hospitals at risk of losing funding over these cuts do not appear to be going down without a fight. We will keep you posted as this unfolds in the coming weeks and months.
*Samuel Gilkeson is a Law Clerk at Sheppard Mullin in the firm’s Century City office.
 340B Drug Pricing Program, Health Resources & Services Administration.