Breaking 340B: What Happens After Medicare Payment Cut?

CMS’ reduced payment for drugs purchased at 340B prices went into effect January 1 – but still faces potential legal and legislative challenges. But the real question is what will happen if it sticks?

As of Jan. 1, Medicare is paying hospital outpatient providers a dramatically lower amount for prescription drugs purchased at the 340B discount price: Average Sales Price minus 22.5% rather than the standard ASP+6%.

The Centers for Medicare & Medicaid Services made the change as part of the Hospital Outpatient Prospective Payment System rule for 2018 – over the loud objections of safety net hospitals who will see potentially significant cuts in reimbursement as a result. (Also see "Medicare Lowers Payments For 340B Drugs: Promising Sign For Further Reform?" - Pink Sheet, 2 Nov, 2017.)

Hospitals sued to block the rule, but on Dec. 27, DC federal court Judge Rudolph Contreras dismissed the case on procedural grounds, ruling that the hospitals could not sue until after they had been denied reimbursement. There is also bipartisan legislation pending in Congress to reverse the policy – though the prospects for that bill likely depend on whether Congress is ready to move forward with more comprehensive reforms to the program. (See sidebar.)

So there is still considerable uncertainty about whether CMS can make the cuts stick. But that is nothing compared to the uncertainty of what happens if they do stick. The history of the 340B program is rife with unintended consequences – for that matter, the program itself was created largely to deal with an unintended consequence of the Medicaid rebate law – so it is best to expect the unexpected.

We can think of at least five questions that will be critical to answer as hospitals adjust to the new policy:

• Will Drug Purchasing Patterns Shift? In the regulation, CMS estimated savings of $1.6 billion from the reduced payment in 2018, but noted that its estimate assumes no changes in buying patterns as a result of the reimbursement cut. That assumption will almost certainly not match reality. Hospitals will presumably look very carefully at the new payment rates and determine whether and how to maximize the remaining “spread” between 340B prices and the new rates. Some may also conclude that they are better served dropping out of the program and reverting to GPO pricing for their products.
• Will Shifts Help or Hurt Individual Products? On paper, the “savings” from the rule do not accrue to manufacturers; they still collect the 340B price, and Medicare just pays the hospital less of a spread. However, if hospitals do change buying patterns, there are likely to be winners and losers. For example, the new payment rate (ASP-22.5%) is so close to the minimum Medicaid rebate (and therefore the minimum 340B discount), that it may make it unattractive to use 340B for newly launched drugs. Hospitals may decide that paying list price but collecting ASP+6% is more attractive in those cases. Alternatively, hospitals may resist adopting newer therapies until 340B pricing comes down, and use older brands or generics more aggressively.
• Will Consolidation In Hospital-Based Oncology Practices Reverse? One of the political drivers behind the effort to reform 340B has been claims by community oncologists that they face a competitive disadvantage versus hospital outpatient departments who have access to 340B pricing – and that has been driving consolidation of practices with potentially adverse consequences to patient care. Those claims are heavily disputed by 340B providers, and it is of course devilishly difficult to tease out any one factor in the always evolving health care sector as a sole driver of consolidation. Still, given the primacy of Medicare Part B in oncology, the payment change would seem to re-set those competitive dynamics. It will be interesting to watch if the pace of practice consolidation slows or even reverses as a result.
• Will the Safety Net Suffer? Another point of debate over 340B relates to the use of the savings from the discount by hospitals. Unlike most covered entities, hospitals are not required to report dollar-for-dollar accounts of how they apply the discount to safety net services. However, it seems difficult to image that $1.6 billion could be taken out of the DSH hospital system without some programs and services being cut – especially since the hospitals have every reason to advertise the damage the cuts are causing.
• Will 340B Providers Stay United? DSH hospitals are by far the biggest purchasers under the 340B program, but vast majority of 340B covered entities (community health centers and other Public Health Service grantees) are not affected by the payment cut. Historically, the political strength of the program has reflected the breadth and diversity of the provider groups that use 340B. Any push to reverse the payment cuts via legislation would require that coalition to stay together to demand action in Congress.

Those questions will be important to answer in 2018 and beyond, assuming CMS’ defends its new policy in court.

From the editors of the RPM Report

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