On November 3, the Centers for Medicare & Medicaid Services (CMS) issued an update to its Medicare Part B drug payment policy for hospitals participating in the 340B drug pricing program and reversed payment cuts in place since 2018. CMS included the policy change in the 2023 Outpatient Prospective Payment System (OPPS) Final Rule (Final Rule), which outlines the payment rates CMS will use in calendar year 2023 for hospitals paid under the Outpatient Prospective Payment System (OPPS). The policy change follows a Supreme Court decision issued in June, finding that CMS’s prior payment policy for 340B drugs was not allowed under the Medicare statute. Under the new policy, Medicare will pay higher rates to most 340B hospitals for Part B drugs, and Medicare will pay lower rates to all OPPS hospitals for non-drug services.

Changes to 340B Payment Policy for 2023

Beginning January 1, 2023, Medicare will pay 340B hospitals under Medicare Part B for certain outpatient drugs (high-cost, separately paid drugs) at the drug’s average sales price (ASP) plus 6%, the same rate used for non-340B hospitals. The new policy reverses payment cuts implemented in 2018 when Medicare began paying most 340B hospitals for separately paid Part B drugs at ASP minus 22.5%. CMS based the reduced payment rate for 340B hospitals on an estimate of the average minimum 340B discount, intending to pay 340B hospitals at a rate that is more closely aligned with 340B drug acquisition costs.

Public and nonprofit hospitals paid under the OPPS qualify for the 340B program based on their high volume of care to patients with low incomes. Hospitals access 340B savings by providing reduced-price drugs to patients and generating insurance reimbursement, using the savings to support patient care. Before 2018, Medicare paid both 340B and non-340B hospitals at ASP plus 6%. 340B hospitals argued that the payment reduction resulted in the loss of 340B savings that Medicare transferred to other hospitals.

CMS’s reversal of the 340B payment reduction is in response to the Supreme Court’s decision in American Hospital Association et al. v. Becerra, finding CMS’s payment policy in 2018 and 2019 unlawful. 340B hospitals first challenged the payment policy in 2018, arguing that the Medicare statute did not authorize the payment reduction.

Although CMS is reversing the payment cuts, the agency is continuing its 340B modifier policy. Since 2018, CMS has required 340B hospitals paid under the OPPS to attach one of two modifiers to claims for 340B drugs, depending on whether the hospital is subject to the payment reduction. CMS exempted rural sole community hospitals (SCHs) and free-standing children’s and cancer hospitals participating in 340B from the payment cuts and has required those hospitals to use the “TB” modifier to identify 340B claims for informational purposes. All other 340B hospitals paid under the OPPS have used the “JG” modifier to identify 340B claims and trigger the lower 340B payment rate. Under the Final Rule, rural SCHs and children’s and cancer hospitals should continue to use the “TB” modifier, and all other 340B hospitals paid under the OPPS should continue to use the “JG” modifier, even though it will not impact payment rates. (Note that critical access hospitals are not paid under the OPPS and are not subject to the modifier requirement.)

Impact on Overall Hospital Payments

Because CMS implemented the 340B payment reduction in a budget-neutral manner, the savings to Medicare from the drug payment cuts have been offset by a corresponding increase in OPPS payments for non-drug services to all hospitals. Under the Final Rule, this increase will go away. CMS indicated that Medicare would decrease OPPS payments for non-drug services to account for the rise in payments for 340B drugs. Specifically, CMS is implementing a budget neutrality adjustment of -3.09% for 2023 to offset the 3.19% increase in payment for non-drug services implemented in 2018.

CMS estimates that removing the 340B payment reduction will increase payments to all hospitals by 0.9%. Payments to nonprofit and government-owned hospitals will increase, as many participate in 340B and have been subject to the payment reduction. Urban hospitals, teaching hospitals, and hospitals with higher disproportionate share (DSH) percentages will see the largest payment increases. Rural SCHs hospitals will see a 1.8% payment reduction, given that they have been exempt from the 340B payment cuts. Payments to for-profit hospitals that are not eligible for 340B will decline by 2.7%.

Remedy for Prior Years

The Supreme Court did not address the remedy for hospitals paid under the unlawful policy going back to 2018. The Court instead remanded the issue to the D.C. Circuit Court of Appeals, which in turn remanded the issue to the federal District Court for the District of Columbia. On September 28, 2022, the D.C. District Court weighed in on the remedy for the remainder of 2022, prospectively vacating the 2022 payment reduction and finding that CMS must immediately resume paying 340B hospitals at the same rate used for non-340B hospitals. In response to the court’s order, CMS indicated that the agency was uploading revised OPPS drug files to apply payment at ASP plus 6% for 340B drugs for the rest of the year and will reprocess claims paid on or after September 28, 2022, at ASP plus 6%.

The D.C. District Court continues to consider a separate question as to what the remedy should be for 340B payments made prior to September 28, 2022. In the meantime, Medicare Administrative Contractors (MACs) have issued guidance outlining the remedies currently available to hospitals in light of the court’s order. In one case, a MAC indicated that it would apply automatic adjustments to claims paid on or after September 28, 2022, and hospitals can also request adjustments on any claim submitted for a date of service in 2022 and paid before September 28, 2022.

CMS solicited comments in the 2023 OPPS Proposed Rule on potential remedies for 2018-2022. CMS indicated in the Final Rule that the agency is continuing to evaluate how to apply the Court’s decision to previous years and will consider comments for a separate rulemaking that CMS will publish prior to issuing the 2024 OPPS proposed rule.

A key question raised by CMS and the court is whether CMS must apply a potential remedy in a budget-neutral manner, which could involve the recoupment of increased payments for non-drug services resulting from the reduction in payments for 340B drugs. Hospital groups have argued that there should be no recoupments.

Future Payment Rates

Although the Supreme Court found Medicare’s payment policy for 340B hospitals to be illegal, the Court also noted that CMS might be able to justify reduced payment rates to 340B hospitals based on a survey of hospital drug acquisition costs. The Court ruled that, under the Medicare statute, Medicare cannot vary payment rates by hospital groups unless the agency has first surveyed acquisition costs. Because CMS did not rely on survey data to justify the reduced payment rates to 340B hospitals, the Court held that the payment rates for 340B hospitals were unlawful. Moving forward, however, the Court noted that CMS could vary payment rates by hospital groups if the agency first surveys hospital acquisition costs. CMS attempted a survey of 340B hospitals for the first time in 2020 and, as part of the 2021 OPPS Proposed Rule, proposed to further reduce payment rates to 340B hospitals based on the survey results. However, CMS did not finalize the proposal.

In response to the 2023 OPPS Proposed Rule, some commenters urged CMS to set future payment rates for 340B drugs based on a survey of 340B hospital drug acquisition costs. In response, CMS noted that the statute does not obligate CMS to conduct a survey and highlighted the burden that surveys can place on hospitals. CMS also emphasized that the Government Accountability Office (GAO) has recommended that CMS only occasionally survey hospitals on drug acquisition costs, given this burden. However, CMS indicated that the agency would consider the request for Medicare to base 340B drug payment rates on survey data in future rulemaking.

Implications for Hospitals and Next Steps

The immediate financial impact of CMS’s updated payment policy for 340B drugs in 2023 will differ by hospital, depending on a hospital’s 340B program participation status and its mix of drug and non-drug services paid under the OPPS. CMS has published facility-specific impact files in conjunction with the Final Rule that compare estimated OPPS payments in 2023 to estimated payments in 2022.

Concerning remedies for prior payments, 340B hospitals should follow instructions from their MAC regarding the options currently available, including possible options to request adjustments of claims paid in 2022. Moving forward, hospitals should monitor the D.C. District Court’s consideration of potential remedies for prior year payments and future rulemaking that CMS intends to issue before July 2023 addressing potential remedies.

Meanwhile, 340B hospitals should continue to use the “JG” and “TB” modifiers, as appropriate, even though the modifiers will be informational only and will not impact payment rates.

Please contact the author if you have any questions about Medicare payments to 340B hospitals or other 340B program matters.