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Analysis

340B Ruling Helps Hospitals' Bottom Lines

By John Commins  
   January 07, 2019

Moody's says that reimbursements for non-profit hospitals will immediately revert to levels before the cuts were imposed in 2018, improving operating performance.

A federal judge's ruling late last month blocking the Department of Health and Human Services' 22% cut in 340B reimbursements is a credit positive for non-profit hospitals, according to Moody's Investors Service.

"Reimbursements will immediately revert to levels before the cuts, improving operating performance," Moody's said in a credit brief this week.

"About 45% of acute care hospitals participate in the 340B program. Although the savings and effect on each hospital's margins are not publicly disclosed, the income gained from this program can account for as much as 25% of not-for-profit hospital's operating cash flow," Moody's said, citing its own surveys.

The 340B drug pricing program requires drug makers to provide Medicare discounts to safety-net providers. The program covers pharmacy drugs and provider-administered drugs covered under Medicare Part B.

The ruling issued December 27 by U.S. District Judge Rudolph Contreras sided with the American Hospital Association and other hospital stakeholders who asked that he vacate the 22% cut in 340B payments that Azar had announced late last year.

"While in certain circumstances the Secretary could implement the rate reduction at issue here, he did not have statutory authority to do so under the circumstances presented," Contreras said in his 36-page ruling.

In the past year, Medicare Part B reimbursed hospitals for Medicare patients at the drug's average selling price minus 22.5%. Reimbursement for those same drugs will revert to average selling price plus 6%, as it was before 2018.

Contreras also ordered the hospitals and HHS to jointly determine if hospitals can recoup some or all of the money lost. HHS estimates Medicare saved $1.6 billion from the cuts in 2018.

Moody's said the ruling will have "a negligible effect" on for-profit hospitals because they do not participate in the 340B program.

"However, in 2018, for-profit hospitals did benefit slightly from the 340B cuts because Medicare redistributed savings from the 340B program to all hospitals, including the for-profits, which contributed to their strong outpatient pricing in 2018," Moody's said.

"In addition, it is not yet clear if or how the 2018 money distributed among all hospitals, including the for-profits, will be recouped," Moody's said. "If Medicare is successful in recouping those funds, it would be modestly credit negative for for-profit hospitals and other non-340B hospitals that received redistributed funds in 2018."

The effect for drug makers "will be negligible because the purchase of eligible drugs at a discount remains unchanged," Moody's said.  

John Commins is a senior editor at HealthLeaders.


KEY TAKEAWAYS

The income gained from 340B can account for as much as 25% of a not-for-profit hospital's operating cash flow.

It's not clear how Medicare will recoup the 340B money from all hospitals, including for-profit hospitals, but that could be a modest credit negative for non-340B hospitals that received redistributed funds in 2018.


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