CMS plan to slash 340B payments under fire by hospitals


Here are four ways CMS’ final rule related to the 340B Drug Pricing Program could affect the healthcare industry.

CMS will significantly slash drug payments to hospitals that use the 340B Drug Pricing Program by $1.6 billion. The changes, under the “Hospital Outpatient Prospective Payment (OPP) and Ambulatory Surgical Center Payment Systems and Quality Reporting Program” final rule, take effect January 1.

The American Hospital Association, America’s Essential Hospitals, and the Association of American Medical Colleges say they plan to sue CMS, because the rule threatens access to care.

The 340B Drug Pricing Program allows certain hospitals and other providers-“covered entities”-to obtain discounted prices on “covered outpatient drugs” (prescription drugs and biologics other than vaccines) from drug manufacturers, according to MedPAC.


“The proposed reductions to the 340B program will take a big bite out of health system margins,” says Neil Smiley, CEO, Loopback Analytics. “Some may say that the program has been overused. However, now health systems are dependent on 340B margins to maintain profitability.”

 “CMS’ move to cut payments to hospitals through the Hospital OPP System rule is a backdoor means to assume some fiscal control over the program,” says Julius Hobson, Jr., senior policy advisor, at Polsinelli law firm. “Although I fully support efforts to sue CMS over the final rule, I am not confident plaintiffs will prevail. CMS appears to have followed the

to the letter. The question may rest on whether CMS made its decision based on legal authority and sound policy analysis.”

Here are four ways the final rule could affect the healthcare sector:

1.     Pharmacy operations that are now profitable on 340B margins could be thrown into the red, requiring significant cuts to operating system costs

“Many of these same health systems will be hit by the loss of high-margin knee replacement cases to ambulatory surgery centers,” Smiley says. “I would expect to see more acquisitions and consolidations as folks jockey for market share.”

2.     The rule reduces payments from average sales price (ASP) plus 6% to minus 22.5%


“This amounts to almost a 30% reduction in payments to hospitals,” Hobson says. “The rule suggests this will result in a reduction in the price of drugs. I strongly disagree. All the change does is reduce payments to hospitals and does nothing with regard to the price of drugs. Pharmaceutical manufacturers have been successful in lobbying both the Congress and the Administration with a claim that the hospitals are responsible for higher prescription drug prices. None of this is accurate.”

The 340B drug purchasing program would be subjected to a “very significant haircut,” agrees Jay Wolfson, DrPH, JD, distinguished service professor, Public Health, Medicine and Pharmacy, and senior associate dean, Morsani College of Medicine, University of South Florida Health.


“Currently, participating hospitals and others can receive 6% above the ASP for the drugs they obtain,” Wolfson says. “While the margin has been difficult to empirically justify, because there are poor data on sales prices, and there are questions about eligibility of hospitals and patients, the original Congressional intent appears to have included the ability to cost-shift from the margins enjoyed on the reimbursement of these drugs to other operations in the hospital or community health service. Cost-shifting was early on recognized by Congress as an important and practical way for healthcare institutions to cover their losses associated with bad debt and indigent care. CMS’ final rule is based, in good part, on a perceived lack of accountability as to how these funds are spent, how the prices for them are determined, and how both hospitals and patients are determined to be eligible for participation in the discount program.” 

3.     The rule continues forced de-hospitalization.

A list of “inpatient-only” procedures will be amended to permit knee arthroplasty and other procedures to be performed in outpatient settings, while reducing substantially inpatient reimbursement for these procedures by 30%, according to Wolfson. 

“This continues a several decades ‘forced de-hospitalization’ of many procedures designed to push services into outpatient settings when there are data supporting safety, quality, and cost effectiveness,” Wolfson says. “These are historically good, if not high margin hospital procedures. The cuts would be adverse to bottom lines. It started with cataracts decades ago, and by this new rule would extend to orthopedic surgeries and percutaneous transluminal revascularization of occlusion during myocardial infarction-unthinkable a decade ago.” 


4.     The 340B money originates directly from big pharma in the form of discounts.

“The program is not taxpayer funded, per se. Congress wrested the discounts from Big Pharma primarily for the benefit of safety-net hospitals,” says Joe Lupica, chairman, Newpoint Healthcare Advisors, a healthcare advisory firm based in Denver with offices across the country. “Now CMS wants to swipe those pharma industry discounts back from those hospitals. And this time, the giveback comes primarily from safety net hospitals, who are already struggling-according to the government’s own definitions.” 


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