Despite hospitals' pleas to the Centers for Medicare and Medicaid Services to recoup 340B payments without instituting reimbursement cuts, it's unlikely the agency would eliminate the program's budget-neutral framework.
Since the law was created in 1992, the 340B drug discount program has given hospitals that treat low-income and uninsured patients drug discounts as steep as 50%. Hospitals, particularly those in rural areas, say the program is vital, especially as providers grapple with higher labor and supply costs.
The heavily litigated program has come under scrutiny as the number of 340B-eligible hospitals and clinics increased six-fold from 2000 to 2020, according to data from the University of Southern California Schaeffer Center. More than 2,600 hospitals participate in the program, about half of all acute-care hospitals.
CMS proposed a rule last week designed to make 340B hospitals whole after the Supreme Court invalidated the agency’s roughly 30% reduction for Medicare 340B payments from 2018 through Sept. 27, 2022. Under its proposed rule, CMS would pay more than 1,600 hospitals $9 billion via a lump-sum to be doled out at the end of the year or in early 2024. Roughly 250 hospitals would get more than $10 million, while about 500 hospitals would receive between $1 million and $10 million.
Since the program would be budget-neutral to keep annual Medicare expenditures consistent, the agency proposed limiting future non-drug item and service payments by reducing outpatient reimbursement rates by 0.5% over a 16-year period, amounting to $7.8 billion. When CMS lowered 340B reimbursement from 2018 to 2022, it boosted the payments for non-drug items and services under the Outpatient Prospective Payment System. The agency said in the proposed rule that the $7.8 billion amount “reasonably approximates the results that would occur if we simply re-ran the claims after eliminating the 340B adjustment.”
While hospital associations applauded the proposed lump-sum remedy, they were disappointed that it would be budget-neutral. Hospital associations also asked for interest to be included in the lump sum, but CMS said it does not have the authority to do so.
CMS has been consistent in its position that any remedies for 340B drug payment cuts must be done in a budget-neutral manner, said Kelly Cleary, a partner at law firm Akin Gump and former deputy general counsel at the Health and Human Services Department.
The agency "explained thoroughly in the preamble why budget neutrality is statutorily required,” said Cleary, adding that the American Hospital Association brought it up when the matter was being litigated, but the court did not address it. “There has been some disagreement [regarding budget neutrality], and it seems the agency is trying to insulate itself from other legal challenges.”
It’s unclear whether the hospital associations will sue the federal government if the final rule, expected before Nov. 1, is budget-neutral. The AHA, which filed a 2017 lawsuit along with the Association of American Medical College and America’s Essential Hospitals challenging the 340B payment cuts, said in a statement it is preparing its comments on the proposed rule and will not comment or speculate on litigation until a final rule is released.
Budget-neutral policies are challenging since there are always winners and losers, said Michael Strazzella, senior principal of government relations at law firm Buchanan Ingersoll & Rooney.
“The fact that CMS made the proposed rule budget-neutral by reducing payments for non-drug items and services over 16 years is a hard pill for hospitals to swallow,” he said.
The rate cut for non-drug items would affect all hospitals that enrolled in Medicare before 2018, not just 340B hospitals. About 300 hospitals that enrolled in Medicare after 2018 would be exempt.
Still, there are many examples of associations being able to limit hospitals' exposure to looming reimbursement rate reductions, such as the often-delayed cuts to Medicaid disproportionate-share hospital payments, said Sayeh Nikpay, associate professor of health policy and management at the University of Minnesota.
“Past health policy experience has shown us many times when cuts are spread out over a long period of time in an incremental way, there is a lot of time for parties to sue, and there is also a strong political coalition of groups representing hospitals,” she said.
CMS said in the proposed rule that it is considering whether hospitals need additional time to prepare for any finalized policy, welcoming comments on potentially delaying the proposed cuts for non-drug items from 2025 to 2026.
The Medicare wage index reclassification and site-neutral payment policy were also budget-neutral. The Medicare wage index, which uses regional labor expense data to set hospital payments, was adjusted in 2020 to rectify a series of overpayments. While stakeholders "urged CMS to implement the changes in a non-budget-neutral manner," then-CMS Administrator Seema Verma said by law the agency couldn't do so.
“This is not the first proposal to be done in a budget-neutral fashion. CMS was cautious in spelling out that they have the authority, and that budget neutrality is statutorily required under section 1833 [of the Social Security Act],” said Miranda Franco, senior policy advisor at law firm Holland & Knight. “I think they are trying to read the tea leaves in that hospitals will try to find any loopholes in their statutory authority to implement a budget-neutral policy.”
Hospitals are reviewing the remedy payment amounts to ensure that they match their calculations regarding the 340B payment adjustments.
The amount of remedy payment each hospital will receive under the proposed rule varies widely. The University of Kansas Hospital in Kansas City, for instance, would receive more than $100 million, while nearly 900 hospitals would receive less than $1 million, according to an addendum to the proposed rule issued by CMS.
If finalized, the payments would be distributed through Medicare contractors. The chances of misallocation are relatively low, said Brenda Maloney Shafer, a partner at law firm Quarles& Brady
While CMS didn’t include any formal appeals process in the proposed rule, hospitals should comment by Sept. 11—the end of the comment period—if they find a discrepancy between CMS' remedy payments and their own calculations, said Kelly Carroll, a partner at law firm Hooper Lundy. No comments had been filed as of Thursday.
“This may be the only shot to do that,” Carroll said.