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CMS Cut to Outpatient Drugs Will Hit Some 340B Hospitals Hard

Analysis  |  By Gregory A. Freeman  
   November 13, 2017

The 340B program is intended to help safety net hospitals, but some others have taken advantage. A lack of transparency and accounting led to deep cuts for all participants.

Hospitals receiving drug discounts will take a big financial hit in January when the federal government sharply reduces the Medicare payment for outpatient drugs, effectively cutting a subsidy that some hospitals use to provide needed medications to those who cannot afford them.

The affected hospitals are bracing for a significant drain on their bottom lines, and some serve the neediest populations. However, some other hospitals have used the program to increase profits rather than to help underserved populations.

The U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services released a final Medicare Outpatient Prospective Payment System (OPPS) rule November 1 that cuts Medicare reimbursement for separately payable outpatient drugs purchased by hospitals under the 340B program, which helps certain hospitals and other healthcare entities pay for covered outpatient drugs. The 340B program requires pharmaceutical companies to sell drugs to these hospitals at a discount, but CMS reimburses the hospitals as if there were no discount.

CMS will cut the reimbursement rate from the current average sales price (ASP) plus 6% to ASP minus 22.5%, starting January 1, 2018.

CMS estimates that the change will result in a $1.6 billion reduction in OPPS payments to 340B hospitals for separately payable drugs. The new reimbursement rate was derived from a May 2015 Medicare Payment Advisory Commission (MedPAC) Report to Congress, which estimated that the ASP minus 22.5% rate was the "lower bound of the average discount" on drugs paid under the Medicare OPPS. However, MedPAC's March 2016 Report to Congress recommended a less drastic reduction in payment to ASP minus 10%. Under that rate, most 340B hospitals could still see a financial benefit from the program.

Instead, the adopted rate will negatively affect all 340B hospitals, says Keely Macmillan, general manager of bundled payments for care improvement with Archway Health, a Boston-based firm that works with providers to manage bundled payments.

"Right now, the hospitals make a big margin on these drugs they're purchasing and can use that money how they want," Macmillan says. "The intent of the program is commendable, to help safety net hospitals that care for our most vulnerable population, treating the uninsured and the most Medicare and Medicaid patients. The biggest failure of the 340B program has been a total lack of transparency and accountability on the dollars that flow through this program."

Researchers from the National Institutes of Health have reported that the 340B program is used to improve profits as well as to serve the needy. The 2014 study found that some hospitals and hospital-affiliated clinics served communities that were wealthier and had high rates of health insurance. "Our findings support the criticism that the 340B program is being converted from one that serves vulnerable patient populations to one that enriches hospitals and their affiliated clinics," they wrote.

"You've got hospitals that are abusing this and really shouldn't be getting these discounts. The money is supposed to go back and better serve their patient population but there's no accounting on where that margin goes," Macmillan says. "CMS has realized this and is taking this step to correct that."

Unfortunately, the cut is a blunt instrument approach to fixing the problem, Macmillan says, hurting the true safety net hospitals that need the 340B program to serve their populations instead. CMS should have crafted a more refined approach that held hospitals accountable for the money and fulfilled the intent of the program without cutting funds to all participants, she suggests.

"This will have a serious impact on some hospitals, and mostly on the ones least able to absorb it," she says. "Some of these drugs, like cancer medications, are extremely expensive. We're likely to see hospitals saying they can't provide certain services to their communities any more without this discount."

Some services could be moved to physician practices or ambulatory surgery centers, settings other than the hospital outpatient department, Macmillan says.

"Chemotherapy and other drug infusion, for instance, don't necessarily need to be provided in a hospital setting, and this may be a driver to move these services to a more cost-effective setting," she says. "There is support among some parts of the healthcare community for encouraging the move of these services away from a hospital setting. This cut could also benefit patients because it will lower their copays, so the hospital's loss is not the only effect from the CMS cuts."

Gregory A. Freeman is a contributing writer for HealthLeaders.

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