Six Questions and Answers About CMS’ Recommended Changes to 340B Medicare Reimbursement

In March, I posted about the Uncertain Future of the 340B Drug Discount Program.  When opining about What Could Happen Next I speculated about possible changes to government reimbursement for 340B drugs “so that government safety net programs share in 340B savings.”

I reasoned that CMS already knew that “Medicare pays more for 340B drugs than the covered entities’ acquisitions cost.”  And I noted that “the profits are especially steep for physician administered drugs” in Medicare Part B where reimbursement is set at Average Sales Price (ASP) plus 6%.  My authorities for these statements were (i) my prior post on a November 2015 report by HHS-OIG analyzing the impact of potential changes to Part B reimbursement for 340B drugs, and (ii) my prior post on the 2016 Medicare Payment Advisory Commission (MedPac) recommendation to reduce  hospital’s Medicare reimbursement for 340B drugs.  Given that CMS had already required the states to cap Medicaid reimbursement for 340B drugs at 340B ceiling prices, I thought that CMS might try to take action to reduce Medicare reimbursement levels.

I will resist the temptation to say that I told you so, but I will say that late in the afternoon of July 13, 2017, CMS issued a proposed rule on Outpatient Medicare Payment Systems with major implications for 340B covered entities.  In extended commentary to the proposed rule, CMS states its intent to implement an alternative payment methodology for Medicare Part B reimbursement for 340B drugs, the effect of which would be to cut Medicare Part B reimbursement for many covered entities by close to 30% starting in January 2018.  Interestingly enough, while the substance of the proposal was discussed at length by CMS, the exact text through which the proposal would be implemented was not provided.

The proposed rule and accompanying commentary won’t be formally published until July 20th, and the Comment Period for the proposal will be open through September 11, 2017.  But I have already heard from many of my contacts about the implications of the CMS proposal to alter Part B reimbursement for 340B drugs.

Here are the six top questions I have fielded to date about the CMS proposed change to Medicare Part B reimbursement for 340B drugs.

  1. What is the Proposed Change in Medicare Part B Reimbursement?  Effective January 2018, CMS would reduce Part B reimbursement for 340B drugs from ASP plus 6% to ASP minus 22.5%.  The reduction would only be applicable to covered entities which are hospitals, Community Mental Health Centers, and Ambulatory Surgical Centers, and would be implemented as part of changes to the Outpatient Prospective Payor System (OPPS).  Drugs which are on pass-through status and vaccines would be excluded from the payment reduction.  In order to implement the change, CMS would also establish a new modifier that would be used to identify whether a drug billed through the OPPS was purchased through 340B.
  2. Does the Proposed Change Apply to All 340B Covered Entities? It appears the change would not be applicable to all 340B Covered Entities.  The mechanism for the change is a revision to the OPPS and CMS is explicit that the change is intended to impact reimbursement for hospitals, Community Mental Health Centers, and Ambulatory Surgical Centers.  Further, as discussed below, the legal basis for the change is statutory authority specific to hospital outpatient reimbursement.  However, it is difficult to know for sure because the change was not codified in a proposed rule and the exact text of the proposal was not provided.
  3. Is this CMS’ Idea or Did it Adopt an Outside Recommendation? The CMS proposal is actually a hybrid of previous recommendations made by MedPac and HHS-OIG.  MedPac proposed reducing Part B reimbursement to hospitals for 340B drugs by 10% of ASP.  HHS-OIG had offered several proposals, ranging from minor to extreme.  The middle-of-the-road HHS-OIG proposal reduced Part B reimbursement for all 340B drugs to ASP minus 14.4% so that “340B savings are approximately equally split between covered entities, Medicare and its beneficiaries.”

CMS adopted parts of both proposals, limiting the reduced reimbursement to just certain types of covered entities but increasing the discount in an attempt to align Medicare reimbursement with the estimated (and confidential) 340B ceiling price.   At the end of the day, CMS justifies its proposed reimbursement reduction because “we do not believe that Medicare beneficiaries should be liable for a copayment rate that is tied to the current methodology of ASP +6 percent when the actual cost to the hospital to purchase the drug is much lower.”

  1. How Much Would Medicare Reimbursement Be Reduced and What Does CMS Propose to Do with the Money Saved Under its Proposal? Because this proposal is part of the OPPS rule, technically it has to be budget-neutral.  CMS estimates that the covered entities impacted would see a reduction in Medicare reimbursement of approximately $900 million, but the Medicare savings would be used to increase reimbursements for other items and services paid under the OPPS.
  2. Does CMS Have Legal Authority to Unilaterally Implement the Change? Really good question.  As noted above CMS did not publish the text of this proposal.  Additionally, although the proposed change was included as part of a propose rule, CMS is not proposing to implement it through rulemaking.

Medicare Part B reimbursement is set by statute – the reimbursement rate of ASP plus 6% was implemented as part of the Medicare Modernization Act of 2003 (MMA).  In its commentary to the proposed rule, CMS states it will implement the proposed reimbursement reduction for 340B drugs under 42 U.S.C. §1395I(t)(14)(A)(iii)(II), which gives the Secretary authority to “adjust” hospital payments for outpatient drugs, including those based on ASP methodology, based on the hospital acquisition cost data or if such is not available, by the average price for the drug “as calculated and adjusted by the Secretary as necessary for purposes of this paragraph.”   Because CMS does not have 340B drug acquisition data from hospitals, and given the various published reports on hospitals’ 340B profits, CMS believes its adjusted Part B reimbursement rate is an appropriate calculation of the average price of the drug.

However, when CMS proposed a controversial “model” to modify Part B drug reimbursement for physicians in 2016, it did so through a proposed new rule that would be part of 42 CFR Chapter 511 – a proposal that was never finalized or implemented.  In the absence of Congressional action, I expect that any attempt by CMS to unilaterally alter the MMA-established Part B reimbursement methodology will be the subject of legal challenges.

  1. Is CMS Open to Alternatives? CMS indicated that it wants to receive comments from stakeholders on a variety of issues, including:
  • Whether specific drugs, such as blood clotting factor drugs, should be excluded from the reduced payment?
  • Whether certain types of hospitals should be exempt from the reduced payments, such as rural sole-community hospitals?
  • Whether its finding from various reporting that ASP minus 22.5% is “the lower bound of the average discount received by 340B hospitals for drugs paid under the OPPS” and thus an accurate estimate of average price, or whether another measure might more accurately reflect hospital acquisition cost without violating the confidentiality of 340B pricing?
  • As an alternative, whether Medicare should require hospitals to report actual acquisition cost for 340B drugs on a drug-specific basis, even though such acquisition cost may reveal the otherwise confidential 340B ceiling price?
  • Whether the reduction in reimbursement should be phased in over time or is the January 2018 implementation warranted given the potential savings to beneficiaries due to Medicare co-payment requirements?
  • Whether the proposed savings generated should be used to increase payments for specific services paid under the OPPS or under Part B generally? Should it be targeted to hospitals that treat larger shares of indigent or uninsured patients?

What is Next? 

It is likely not an accident that this proposal was introduced days before a scheduled July 18, 2017 Congressional Hearing on 340B Program Oversight.  While a representative from CMS is not scheduled to testify at the hearing, representatives from HRSA and HHS-OIG will be present and testifying.  It will be interesting to see if the proposed reimbursement change comes up for discussion.

Additionally, last month Washington was abuzz with word of a pending Executive Order on Drug Pricing that would include provisions targeting 340B.  And in late June, multiple media outlets reported on a leaked draft of the order, which required HHS to rescind or revise administrative actions that have purportedly “allowed” the benefits of the 340B program to accrue to individuals and entities other than the vulnerable citizens the program was intentionally intended to help.  While the order has yet to issue, and may be substantially revised before it is issued, 340B is clearly front and center.

So the one thing that is certain is that what I wrote in March remains true:  the future of the 340B program is uncertain.   Stay tuned.

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