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CMS Finalizes Drastic 340B Reimbursement Cut for 2018

Stephen Barlas

Hospital trade groups representing nonprofit and safety-net operators have gone to court in an effort to force the Trump administration to roll back a decision to drastically reduce reimbursement for outpatient drugs bought by the hospitals in the 340B program.1 Hospitals with high proportions of Medicaid patients can buy drugs at discounts of up to 50% and then bill the Medicare program when Medicare patients buy the drugs for the average sales price (ASP) plus 6%. The difference between the lower price they pay and the higher price they receive from Medicare funds services the hospitals ostensibly provide for their low-income, uninsured patients. The hospitals can also earn “the spread” on patients with commercial insurance.

The Trump Centers for Medicare and Medicaid Services (CMS) will cut reimbursement to ASP minus 22.5% starting January 1, 2018.2 The CMS argued that hospitals are making too much money off the spread and, as a result, Medicare patients are paying too much for medications because many seniors face high deductibles and coinsurance for drugs. Many of the most expensive drugs are provided by hospitals in Part B Medicare, which requires seniors to pay a 20% copay. Hospitals would lose at least $900 million if reimbursement drops to ASP minus 22.5%, according to the agency’s own estimates, or $1.65 billion, according to hospital industry estimates.1 Whatever the dollars saved by Medicare, the agency will distribute those savings to for-profit and nonprofit hospitals by increasing payment for some services that have not been identified.

The American Hospital Association (AHA), America’s Essential Hospitals, the Association of American Medical Colleges, and others have filed a lawsuit in federal court in an effort to make the CMS reverse its decision. They allege the agency doesn’t have the authority to make the cuts, citing arcane features of laws related to complicated calculations on the acquisition costs of drugs. The CMS dismissed those arguments when the hospital groups made them in their comments on the proposed rule. Moreover, the hospital associations say that the 340B program was created by Congress in 1992 to provide revenue to hospitals treating large numbers of uninsured patients. There is no provision in that 1992 law that specifies how hospitals can use their 340B revenue.1

About 14,000 providers, including various health clinics, use the 340B program, including about 45% of all hospitals. The number of hospitals participating in the program has grown from 583 in 2005 to 1,365 in 2010 and 2,140 in 2014, according to a Medicare Payment Advisory Commission (MedPAC) report in May 2015.3 That expansion is attributable to the Patient Protection and Affordable Care Act, which added a number of eligible hospitals and clinic types to the 340B program.

Oncologists have been major backers of the reimbursement reduction. They have argued that over the past few years hospitals have gobbled up oncology practices and integrated them into their outpatient infusion centers to swell the numbers of Medicare patients who are eligible for the normally high-priced 340B drugs paid for by Medicare Part B.

The absorption of free-standing oncology centers helps in part to explain why 340B hospitals have increased their Part B spending faster than non-340B hospitals. MedPAC looked at a five-year period from 2008 to 2012 and found that “Medicare spending grew faster among hospitals that participated in the 340B program for all five years than among hospitals that did not participate in the 340B program during that time frame.” 3

Normally, the hospitals opposed to the CMS decision would go to Congress hoping to get legislation passed voiding the decision. Representative David McKinley (R-West Virginia) introduced a bipartisan bill (H.R. 4392) on November 14 that would cancel the 340B reimbursement cut.4 One House source says, “there appears to be interest” within the two House committees with jurisdiction “in addressing the rule in some form.” No companion bill has been introduced in the Senate, but Marie Johnson, a spokeswoman for the AHA, says that group is working toward getting one introduced.

But it could be an uphill battle to reverse the CMS decision because the agency has made the case it is reducing drug prices for Medicare recipients. The cost-sharing obligation for Medicare beneficiaries is generally 20% of the Medicare payment rate under Part B. While many Medicare beneficiaries may have supplemental coverage that covers some or all of their out-of-pocket expenses, not all beneficiaries have such coverage. The CMS argues the new policy will lower both the amount that a beneficiary is responsible for paying as well as the amount that any supplemental insurance, including the Medicaid program, will have to pay on behalf of the beneficiary.

The CMS did make one concession in the final rule with regard to the reimbursement cut. It had originally wanted hospitals to report to the agency which drugs were purchased under 340B and which were not. In an effort to meet concerns about potentially large outlays to revamp drug administration and billing software, the CMS dropped its plan to have new codes for both 340B and non-340B drugs. Instead, hospitals will only have to use modifier “JG” (drug or biological acquired with 340B Drug Pricing Program Discount) to identify if a drug was acquired under the 340B program. This requirement is aligned with the modifier requirement already mandated in several states under their Medicaid programs.

Author bio: 
Mr. Barlas is a freelance writer in Washington, D.C., who covers issues inside the Beltway. Send ideas for topics and your comments to


  1. American Hospital Association et al. v. Eric D. Hargan. Case 1:17-cv-02447—Document 2-1 November 13, 2017; Available at: Accessed November 22, 2017
  2. Centers for Medicare and Medicaid Services. Medicare program: hospital outpatient prospective payment and ambulatory surgical center payment systems and quality reporting programs. Fed Regist 2017;82;(138):33558–33724. Available at: Accessed November 21, 2017.
  3. Medicare Payment Advisory Commission. Overview of the 340B drug pricing program May 2015; Available at: Accessed November 22, 2017
  4. McKinley DB. H.R. 4392—To provide that the provision of the Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs final regulation relating to changes in the payment amount for certain drugs and biologicals purchased under the 340B drug discount program shall have no force or effect, and for other purposes. 115th Congress (2017–2018) November 14, 2017; Available at: Accessed November 22, 2017