340B pay remedy favors hospitals with the least uncompensated care

Hospitals that would receive the biggest 340B remedy payments under a new proposal to correct unlawful reimbursement cuts tended to provide proportionally less uncompensated care than other 340B-eligible hospitals.

Healthcare economists and policy experts said Modern Healthcare's analysis of estimated uncompensated care costs relative to the size of the Centers for Medicare and Medicaid Services’ proposed 340B remedy payments shows that the drug discount program may have strayed from its mission to support hospitals that carry the heaviest burden of care for low-income patients.

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The 340B drug discount program, which gives hospitals that treat low-income and uninsured patients drug discounts as steep as 50%, has faced a series of legal and regulatory challenges in recent years. One of the most recent developments stems from a six-year legal battle as hospital associations successfully sued to block the federal government’s Medicare 340B payment cuts of roughly 30% for most outpatient drugs from 2018 through Sept. 27, 2022. The Supreme Court in June 2022 invalidated the reimbursement reduction.

The litigation and CMS' proposed remedy underscores the ongoing battle between hospitals, which rely on the drug discounts to increase access to care and subsidize other services, and industry overseers that argue the program has grown too large, benefiting hospitals that provide relatively limited care for underserved communities. Some safety-net providers that offer disproportionately higher uncompensated care argue the program's benefit is limited because program dollars are spread across too many hospitals, clinics and pharmacies.

In the proposed rule issued this month, CMS would pay more than 1,600 hospitals roughly $9 billion via lump-sum payments to offset reimbursement cuts. While those payments are not based on uncompensated care levels, a Modern Healthcare analysis examined the impact of 340B-eligible hospitals.

The uncompensated care metric used in the analysis excludes hospitals’ Medicaid shortfall, which is the difference between hospitals’ care expenses for Medicaid beneficiaries and reimbursement levels, but includes charity care and bad debt costs, which represent the amount of free and discounted care hospitals provide for low-income patients plus patients’ outstanding bills for care.

The analysis compared hospitals' uncompensated care costs from 2018 to 2022 to hospitals’ operating expenses over that period to calculate the median uncompensated care cost as a percent of operating expenses. Modern Healthcare organized the results into five tiers of hospitals, separated by the amount of proposed remedy payments. The analysis excluded any hospitals that would not receive remedy payments, hospitals that filed fewer than four years of cost reports from 2018 to 2022 and those that did not report uncompensated care costs over that period. Nearly 100 hospitals were excluded from the 1,661 hospitals CMS listed in its appendix with proposed remedy payments.

Under the CMS proposal, hospitals that would receive the lowest remedy payments provided relatively more uncompensated care as a percentage of operating expenses than their peers, the Modern Healthcare analysis found.

Hospitals that would get between $1 and $500,000 in remedy payments dedicated an estimated median of 3.56% of their operating expenses to uncompensated care. That percentage drops as proposed remedy payments rise.

Hospitals that would receive at least $50 million in remedy payments dedicated an estimated median of 1.39% of their operating costs to uncompensated care. The median uncompensated care cost as a percentage of operating expenses for all hospitals receiving remedy payments was an estimated 3.04%.

“The analysis shows that the 340B program has moved away from Congress’ original intent,” said Sayeh Nikpay, associate professor of health policy and management at the University of Minnesota, who studies the 340B program and reviewed Modern Healthcare's analysis. “The program rewards providers that do less of what we consider safety-net care.”

Hospital associations and lawyers who represent hospitals argue that uncompensated care costs as a proportion of operating expenses is not a valid measure of a hospital’s overall impact to the underserved community. Excluding hospitals’ Medicaid shortfall from the analysis also shortchanges hospitals’ public benefit, they said.

“Expenses are higher at 340B hospitals, and they would be even higher if those hospitals didn’t get the 340B discount,” said James Junger, a healthcare attorney at law firm Hall Render who represents hospitals. “Generally, charity care spending by 340B hospitals dwarfs charity care spending by non-340B hospitals.”

Alicia Mitchell, senior vice president of communications for the American Hospital Association, said in a statement that Modern Healthcare's analysis is "deeply flawed and misleading, using a highly questionable and arbitrary apples-to-oranges approach that fails to recognize that 340B hospitals provide a range of services beyond uncompensated care to America's poorest patients."

It’s hard to quantify a hospital’s societal benefit, and some hospitals—especially ones in rural communities—need a different reimbursement model to remain solvent, said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation. But even those who support the 340B program and rebuff any reforms say it is not targeted perfectly well, she said.

“The analysis shows that the remedy payments are not correlated with hospitals’ share of operations that go to uncompensated care. It doesn’t seem like the way the program operates right now follows the original intent,” said Hempstead, who reviewed Modern Healthcare's analysis. “There is a growing consensus that there ought to be a way to restructure the program so the incentives are aligned.”

Calls to restructure the drug discount program have in part been driven by its significant growth. The 340B program grew from 8,100 eligible hospitals, clinics and pharmacies in 2000 to 50,000 in 2020. Discounted drug purchases under the 340B program reached $43.9 billion in 2021, a roughly 16% increase from 2020, according to Health Resources and Services Administration data. Hospitals qualify for 340B drug discounts by meeting certain criteria, such as having a minimum Medicare disproportionate-share hospital adjustment percentage.

As for the proposed remedy payment calculations, CMS said in the proposed rule that the agency “reasonably approximates the results that would occur if we simply re-ran the claims after eliminating the 340B adjustment.” Hospitals with greater Medicare volumes experienced bigger reimbursement cuts from 2018 to 2022, and as a result, would receive higher remedy payments.

Of the 50 hospitals that would receive the highest proposed 340B remedy payments, 10 spent an estimated median of 1% or less of their operating expenses on uncompensated care.

“The magnitude of hospitals’ financial gain from the 340B program is disconnected from the extent of their service to low-income patients,” said Ge Bai, an accounting and health policy professor at Johns Hopkins University who studies nonprofit hospitals’ charity care spending and reviewed Modern Healthcare's analysis. “The law’s intention and consequences are far apart.”

Meanwhile, more than 200 of the 1,571 hospitals analyzed spent at least an estimated 8% of their operating costs on uncompensated care from 2018 to 2022. One of those was John H. Stroger, Jr. Hospital in Chicago, which recorded an estimated median uncompensated care cost as a percentage of operating expenses of 29.71%. It would receive $5.9 million in remedy payments under the proposed rule. The University of Mississippi Medical Center in Jackson, which would receive $23.9 million in remedy payments under the proposed rule, dedicated an estimated median of 8.8% of its operating costs to uncompensated care. Spokespeople from each hospital said the 340B program was an essential component of increasing access to care.

Some states have pushed for greater transparency of how hospitals use 340B payments, but federal policymakers have proposed few changes to the program. Minnesota, for instance, enacted a law in May that requires 340B-eligible facilities to report their total 340B drug acquisition costs and payments.

“Lawmakers created this program for safety-net providers, but we really don’t have great way of defining who is a safety-net provider and who is not,” the University of Minnesota’s Nikpay said.