US CMS proposes 340B remedy for CY 2018-2022

The Centers for Medicare and Medicaid Services (CMS) and the US Department of Health and Human Services (HHS) have released a proposed rule describing how the agencies propose to repay affected 340B covered entity hospitals by making an additional one-time lump sum payment for calendar years (CY) 2018-2022 (Proposed Rule). The long-awaited Proposed Rule endeavors to make hospitals whole for the underpayments they received during this period where HHS dramatically reduced the payment rate for drugs purchased through the 340B drug discount program (340B program).

Under the 340B program, drug manufacturers are required to provide discounts on outpatient drugs to specific categories of eligible hospitals including those that serve a certain percentage of low-income patients as measured by the disproportionate share hospital adjustment percentage. In the CY 2018 Outpatient Prospective Payment System (OPPS) final rule, Medicare changed the payment rate for 340B drugs to average sales price (ASP) minus 22.5 percent to "reflect more accurately the actual costs incurred by 340B hospitals when acquiring 340B drugs." Historically, outpatient drugs were reimbursed at the rate of ASP plus 6 percent. Consequently, hospital and provider groups challenged the payment rate cuts through litigation.

In 2018, the federal district court ruled the cuts exceeded the authority of HHS under the 340B statute. In 2020, the US Circuit Court of Appeals for the District of Columbia Circuit reversed the federal district court and permitted the reimbursement cuts for drugs purchased through the 340B Program. Estimating that the changed reimbursement would save the government US$1.6bn in 2018, HHS redistributed the savings through increases in other Part B reimbursement rates. In an unanimous opinion, the US Supreme Court held in 2022 that HHS policy was "contrary to the statute and unlawful" and that the ability to vary reimbursement rates by hospital groups "depends on whether HHS has obtained acquisition cost survey data from hospitals." In January 2023, the District Court remanded to HHS the 2018-2022 OPPS final rules to remediate the underpayments.

On Friday, the Proposed Rule pronounced a lump sum, one-time, payment to affected providers for 340B-acquired drugs for the period of CY 2018 through the third quarter of 2022. According to agency estimates, affected providers received US$10.5bn less in 340B payments than they should have during this period. HHS/CMS further surmise that following the September 27, 2022 vacatur of the unlawful policy by the Supreme Court, eligible 340B providers have received US$1.5bn in payments in remedy to the flawed policy. The Proposed Rule provides calculations of the amounts owed to each of the approximately 1,600 affected hospitals. The lump sum payment is also meant to account for beneficiary cost sharing associated with these payments.

Consequently, the Proposed Rule states that "budget neutrality in OPPS serves the important interest of limiting expenditures under Part B and thus protecting the public fisc." During CY 2018-2022, Medicare "budget neutralized the 340B payment policy" by increasing reimbursements for non-drug items and services, resulting in US$7.8bn in additional spending. "In other words, all hospitals were paid more under the OPPS for non-drug items and services for CY 2018 through CY 2022 than they would have been paid in the absence of the 340B payment policy." HHS/CMS believe these payments were an "unwarranted windfall, and the [Medicare] Trust Fund has a strong interest in recovering them." In response, they propose to reduce future non-drug item and service payments by adjusting the OPPS conversion factor by a negative 0.5 percent beginning in CY 2025, estimating that it will take 16 years to accomplish the offset.

Thus, a certain subset of hospitals will now also pay for the failed policy position of the agencies, shifting one set of financial burdens to another set of hospitals.

The 60-day comment period will close on September 5, 2023.

Our health law lawyers will continue to provide relevant updates for healthcare providers related to the 340B program.