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340B Drug Reimbursement Reduction under Medicare Part B

The 340B Program was established by Congress in 1992 and is administered by the Health Resources and Services Administration (HRSA). The Program allows participating hospitals and other health care providers to purchase certain "covered outpatient drugs" from drug manufacturers at discounted prices. Congress's stated rationale for the 340B Program was to maximize scarce Federal resources as much as possible, reaching more eligible patients, and providing care that is more comprehensive.

Interestingly, the Centers for Medicare and Medicaid Services (CMS) appears to have concluded that the 340B Program was not maximizing Federal Medicare resources. In fact, the final OPPS rules published in the Federal Register on November 13, 2017, reduce Medicare payment for drugs purchased with a 340B discount, based on a theory developed by MedPAC and adopted by CMS that the participating hospitals and other health care providers are profiting too much under the Medicare program on those discounted drugs.

In comments published with the new regulations, CMS reiterated findings from a 2016 MedPAC Report to Congress that there is a difference in Medicare Part B drug spending between 340B hospitals and non-340B hospitals. There CMS concluded that, on average, beneficiaries at 340B disproportionate share hospitals (DSHs) were either prescribed more drugs or more expensive drugs than beneficiaries at the non-340B hospitals in GAO's analysis. The Office of Inspector General (OIG) estimated that discounts across all 340B providers averaged 33.6 percent of ASP, allowing those providers to generate significant profits from their administration of Part B drugs.

Under the new regulations, the Medicare Part B drug payment methodology for 340B hospitals will change effective January 1, 2018. Historically, drugs have been reimbursed at average sales price (ASP) plus 6 percent. That will be decreased to ASP minus 22.5 percent for 340B providers, with some exceptions. Rural sole community hospitals (SCHs), children's hospitals, and PPS-exempt cancer hospitals will not be subject to this payment adjustment in CY2018.

Critical access hospitals are not subject to the Medicare payment methodology change affecting 340B drugs, since they are cost-reimbursed. Effectively, by virtue of CAH cost reimbursement, the Medicare reimbursement for 340B drugs already reflects the lower cost of the 340B discounted drugs.

CMS discussed at length the benefit to Medicare beneficiaries of the new Part B payment methodology for 340B drugs. To the extent that the 340B discount has not been passed on to the consumer, and drug prices have generally increased over the years, the copayment amount paid by the beneficiary has increased along with the reimbursement paid by Medicare. CMS reports that 16 percent of Medicare beneficiaries do not carry Medicare supplemental insurance which would in many cases cover the copayment on the 340B drugs. CMS hopes that as the benefit of lower 340B drug reimbursement under Medicare reduces co-insurance costs to Medicare supplemental insurers, their premium rates will go down to the benefit of the Medicare beneficiaries.

Initially, under the proposed rules, claims for non-340B drugs were to be submitted with a particular modifier. This would have meant that hospitals that were not qualified to participate in the 340B program would have had to submit all claims for Part B drug reimbursement with the modifier. Hospitals participating in the 340B Program would have had to use the modifier for non-340B drugs. Ultimately, CMS reversed its position on the modifier. The final rule requires that 340B participating hospitals that are not excepted for CY2018 must report modifier "JG" (Drug or biological acquired with 340B Drug Pricing Program Discount) to identify if a drug was acquired under the 340B Program. Claims for drugs that were not acquired under 340B should not include that modifier. The modifier will trigger payment at ASP minus 22.5 percent. The hospitals that are excepted from the new payment methodology for CY2108 will be required to use the modifier "TB" to allow CMS to gather information during that year. This modifier will allow reimbursement at ASP plus six percent.

CMS notes that state Medicaid programs should be watchful for claims submitted with modifier "JG," for beneficiaries who are dually eligible for both Medicare and Medicaid, since 340B drugs are not generally to be used for Medicaid beneficiaries. Thus, use of this modifier would signal an improper use of the discount.

Commenters on the proposed regulations raised a number of theories as to why CMS did not have the authority to make this payment adjustment for 340B discounted drugs. It is expected that many industry groups will be pursuing those theories in litigation to reverse the change in payment methodology under Medicare Part B. Commenters made a compelling argument that while hospitals did not necessarily pass the 340B discount savings to the patients, they used the profits from the discounted drugs to improve access to health care services that might otherwise be unsustainable at those hospitals, such as emergency services, oncology treatment, etc.


Barbara E. Person

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