CMS Proposes Fundamental Reimbursement Methodological Change for 340B Drugs Used in Hospital Outpatient Setting

By Thomas Barker
Foley Hoag LLP
Jul 25, 2017

We have noted before the link between the Medicaid prescription drug rebate program and the 340B program. As a refresher, in order to have its outpatient drugs covered by Medicaid, the manufacturer must agree to three separate requirements. First, the manufacturer must agree to provide a rebate to Medicaid equal to the greater of 23.1% of the average manufacturer price (AMP) of the drug, or AMP minus the best price of the drug. This first requirement ensures that Medicaid is getting, with some exceptions, the lowest price offered to any purchaser for the drug.

Second, the manufacturer must agree to sell the drug via the Federal Supply Schedule to the Department of Veterans Affairs, the Department of Defense, the Coast Guard, and public health service agencies such as the Indian Health Service. This second requirement ensures that these agencies also get a significant discount off of the AMP for the drug – one that typically exceeds the Medicaid discount.

Third, the manufacturer must agree to participate in the 340B program. This program – named after its statutory location in the Public Health Service Act – permits certain “covered entities” to purchase a covered outpatient drug at the Medicaid price (or, if the covered entity participates in the “prime vendor program”, at an amount even lower than the Medicaid price). Covered entities include organizations such as community health centers and heavily disproportionate share acute care hospitals. In addition, the Affordable Care Act (ACA) added to the list of covered entities cancer hospitals, pediatric hospitals, critical access hospitals, sole community hospitals, and rural referral centers. The “link” between the 340B program and Medicaid is this: if a manufacturer refuses to make 340B prices available to covered entities, it cannot have its drugs covered under Medicaid (or Medicare Part B in the case of separately payable physician administered drugs).

The 340B program is administered by the Health Resources and Services Agency (HRSA), a sister agency of the Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Services (HHS). The 340B program is administered mainly through program guidance; the statute gives HRSA very limited authority to issue regulations to implement the program. In fact, a federal court decision from 2014 struck down an attempt by HRSA to regulate in one particular area of the program. See PhRMA v. HHS, 43 F. Supp. 3d 28 (D.D.C. 2014).

Earlier this month, CMS proposed a major change in Medicare reimbursement policy when 340B hospitals purchase drugs under the 340B program for use in an outpatient setting. This policy change will surely be vehemently opposed by hospitals. CMS believes, however, that it has strong empirical support – through the Medicare Payment Advisory Commission (MedPAC), the HHS Office of Inspector General, and the Government Accountability Office, among other organizations – for the policy change. Recently, Congress has also enhanced its scrutiny regarding oversight of the 340B program, including its relationship with Medicare Part B.

Under current law, outpatient services under the Medicare program are reimbursed under the hospital outpatient prospective payment system, or HOPPS. Most drugs used in outpatient procedures are reimbursed separately from the HOPPS amount and are paid at an amount equal to the average sales price (ASP) for the drug, plus 6%. For example, if the ASP for a cancer drug is $2,000 per dose, the hospital receives a payment of $2,120 ($2,000 + (.06)*( $2,000)) for the drug. Because hospital outpatient services are a Part B benefit under Medicare, the Medicare beneficiary faces a copayment of 20% for the service – so in this example, a copayment of $424, while Medicare pays the remaining $1,696.

If the hospital using the cancer drug is a 340B covered entity, however, it likely paid far less than the ASP of $2,000 for the drug. A MedPAC study from 2015 noted that 340B hospitals received a minimum discount of 22.5% for 340B drugs, and also noted that the discount is likely significantly higher. Using the MedPAC-estimated discount for illustrative purposes, the hospital would have paid $1,550 for the cancer drug in the above example, but would receive $2,120 from a combination of Medicare payments and beneficiary cost sharing, for a profit of $570. It is this excess payment – $570, in the cancer drug example – that CMS has targeted in the proposed hospital outpatient rule.

Under the CMS proposal, a 340B covered entity that is a hospital would no longer be paid ASP plus 6% for most outpatient drugs. Rather, the 340B hospital would be paid at a rate of ASP minus 22.5% for most separately payable outpatient drugs paid under HOPPS. CMS states that the proposed reasons for the rule are, first, to better match payment and acquisition costs of the drug. Second, the policy is designed to reduce spending by Medicare beneficiaries (in terms of lower cost sharing) and the Medicare program overall. As such, the proposal can be seen as part of the Trump Administration’s initiatives to lower prescription drug spending.

Under the proposed rule, CMS would assume that the hospital billing for the drug is a 340B covered entity; hospitals that are not would need to enter a modifier on the claim for the service indicating that it is entitled to the higher (ASP+6%) payment. CMS intends to provide further details on the modifier when it finalizes the HOPPS rule, but the agency stated the modifier would become effective beginning January 1, 2018. CMS also intends to address billing for drugs dispensed to dual-eligible beneficiaries, as drugs dispensed to Medicaid beneficiaries do not qualify for 340B pricing.

CMS would exclude from its policy covered outpatient drugs that are subject to the OPPS new drug pass-through, on the grounds that the statute mandates a specific payment rate for those drugs. In addition, the policy would not apply to vaccines. The agency also solicits comments on whether other types of products, such as blood clotting factors, should be excluded. And although the agency does not address it in the proposed rule, CMS will likely receive comments urging the agency to not apply the policy to orphan drugs, at least when billed under HOPPS by the ACA-expanded list of covered entities, on the theory that those entities cannot, by statute, receive 340B pricing on orphan drugs.

The proposal is likely to achieve significant savings if implemented as proposed. CMS is soliciting comments on whether to use those savings to either increase payments under the HOPPS generally, or else apply the savings across the board by increasing the HOPPS conversion factor.

Overall, the CMS proposal is a fundamental change in policy that is likely to be strenuously opposed by hospitals. Although pharmaceutical and biological manufacturers have criticized the growth in the 340B program over the past ten years, the proposed change does not benefit manufacturers, so it is not clear how aggressively they will support the provisions in the proposed rule. It is likely that manufacturers believe that additional reforms to the 340B program are necessary. On that point, manufacturers and covered entities likely agree.