On July 7, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to implement a remedy in response to last year’s Supreme Court decision finding the Medicare Part B payment policy for hospitals in the 340B drug pricing program unlawful. If finalized, roughly 1,600 340B hospitals would receive one-time lump sum payments to make them whole for reduced payments between January 1, 2018, and September 27, 2022, totaling $9 billion. CMS also proposes to offset the refunds by reducing payments for non-drug services to all hospitals paid under the Outpatient Prospective Payment System (OPPS), including both 340B and non-hospitals, by 0.5% each year until 2040.

CMS plans to issue a final rule by this fall. If finalized as proposed, 340B hospitals would receive refunds in late 2023 or early 2024, and CMS would implement the reduction in payment for non-drug services in 2025. CMS is soliciting comments, which are due by September 5, 2023.

Background on Medicare Payment Policy for 340B Hospitals

At issue is a reimbursement policy implemented by CMS in 2018, when Medicare began paying most 340B hospitals for certain outpatient drugs (high-cost, separately paid drugs under the OPPS) at the drug’s average sales price (ASP) – 22.5%, a payment reduction of nearly 30%. Prior to 2018, Medicare paid 340B hospitals at ASP plus 6%, the same rate used for non-340B hospitals.

Hospital associations and hospital co-plaintiffs challenged the payment policy in federal court, arguing the Medicare statute did not authorize the payment reduction. The U.S. District Court for the District of Columbia ruled for the hospitals, but the U.S. Court of Appeals for the District of Columbia reversed. In June 2022, the U.S. Supreme Court found for the hospitals ruling that the payment policy exceeded CMS’s authority. See here for a summary of the Court’s decision.

The Court did not address the remedy for hospitals paid under the unlawful policy and 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. CMS responded by applying payment at ASP plus 6% for 340B drugs for the rest of the year and reprocessing claims paid on or after September 28, 2022, at ASP plus 6%. In November 2022, CMS issued a final rule reversing the payment reduction as part of 2023 payment rates and resuming payment to 340B hospitals at ASP plus 6%.

In January 2023, the D.C. District Court issued a separate decision remanding the matter of payments between January 1, 2018, and September 27, 2022, to CMS to propose a remedy.

Proposed Remedy: 340B Repayments

CMS proposes to issue a one-time lump sum payment to each of the roughly 1,600 340B hospitals impacted by the payment policy, with the goal of making hospitals whole for the difference between the payments they received for 340B drugs at the lower rates between January 1, 2018, and September 27, 2023, and what they would have received absent the payment reduction at ASP plus 6%. CMS would issue instructions to Medicare Administrative Contractors (MACs) to issue the payments to each 340B hospital within 60 calendar days of receiving the instructions.

CMS estimates that, in total, the payment policy resulted in a $10.5 billion reduction in payments over this period. However, CMS indicates that many 2022 claims for 340B drugs submitted prior to September 27, 2022, have already been processed or reprocessed at the higher rate, resulting in $1.5 billion already refunded. The remaining $9 billion would be issued through one-time lump sum payments. Along with the proposed rule, CMS posted an Addendum AAA listing the proposed repayment amounts for each impacted 340B hospital. Hospitals can download Addendum AAA here.

As part of the remedy, CMS proposes accounting for the fact that hospitals received lower cost-sharing payments from Medicare beneficiaries as a result of CMS’s payment policy, given that beneficiaries pay hospitals 20% of the Medicare payment amount. To address these losses without impacting beneficiaries, CMS proposes to include $1.8 billion as part of the $9 billion in total lump sum payments that would equal the payment amount hospitals would have received from beneficiaries if cost-sharing had been based on the higher payment rate. CMS specifies that the repayments should not be subject to cost-sharing, which means 340B hospitals receiving refunds should not bill beneficiaries for coinsurance on remedy payments.

Proposed Remedy: Reduction in Payment for Non-Drug Services

CMS takes the position that the Medicare statute requires CMS to implement the remedy in a budget-neutral manner, meaning CMS must offset the 340B repayments by reducing payment to all OPPS hospitals for non-drug services. When CMS first implemented the 340B payment reduction in 2018, CMS offset the reduction by increasing payment to all OPPS hospitals for non-drug services. CMS refers to the increased payments received by hospitals as a “windfall” that hospitals should not have received and must be recouped.

Both 340B and non-340B hospitals previously submitted comments to CMS urging the agency not to recoup payments from hospitals as part of any 340B remedy. However, in the proposed rule, CMS outlined its belief that the “best reading” of the Medicare statute is that the remedy payments are subject to budget neutrality rules unless the impact to Medicare would be de minimis, which would not be the case here.

CMS estimates that the increased payments to all OPPS hospitals for non-drug services totaled $7.8 billion. The agency proposes to offset these payments by adjusting the OPPS conversion factor by -0.5% starting in 2025, continuing until the $7.8 billion is offset, which CMS projects would take roughly 16 years and would end in 2040. CMS notes that the $10.5 billion to be repaid to 340B hospitals is greater than the proposed $7.8 billion offset in large part because CMS underestimated the reduction in spending on 340B drugs. As a result, the increase in payments for non-drug services was not as large as the actual reduction in spending for 340B drugs.

In proposing the offset, CMS acknowledges that new hospitals that enrolled in Medicare after the 340B payment policy began in 2018 did not fully benefit from the increase in payment for non-drug services and, therefore, applying the offset against new hospitals could recoup payments that they did not receive. To address this concern, CMS proposes excluding from the offset new hospitals that did not enroll in Medicare until after January 1, 2018. Hospitals enrolled in Medicare prior to 2018 that underwent a change in ownership and received a new Medicare provider number would not be considered new hospitals. CMS estimates that roughly 300 hospitals paid under the OPPS would be excluded, and CMS would pay them at the rate for non-drug services that would apply without the downward adjustment. CMS posted a listing of the new hospitals excluded from the offset in Addendum BBB. Hospitals can download Addendum BBB here.

CMS is also soliciting comments on other potential ways to offset the increase in payment for non-drug services, such as by offsetting a fixed dollar amount each year until the total offset is achieved.

Alternative Options Considered and Rejected by CMS

CMS considered and rejected three alternative methods to implement a remedy. First, CMS considered repaying 340B hospitals but not reducing payment for non-drug services to offset the repayments. CMS rejected this option because, as noted above, the agency takes the position that the Medicare statute requires budget neutrality and, therefore, CMS must reduce payments to all hospitals for non-drug services.

Second, CMS considered reprocessing all claims from January 1, 2018, through September 27, 2022. In discussing this alternative, CMS recognized this may be the “most perfect” way to unwind the 340B payment policy and put all parties in the position they would have been in if not for the policy. However, this option would require CMS to reprocess all OPPS claims for 340B drugs and non-drug services, which the agency found would be overly burdensome on all stakeholders and, ultimately, not feasible.

Third, CMS considered a one-time aggregate payment adjustment for each hospital that would have addressed both 340B repayments and reductions in payment for non-drug services. Although this option would be budget neutral, which CMS believes is required, it would result in CMS forcing the majority of hospitals to issue repayments to CMS, which also would have been burdensome and not feasible.

Hospitals also urged CMS to issue 340B repayments with interest. CMS did not address this request in detail but indicated a belief that the agency does not have the authority to issue interest payments.

Impact on Hospitals and Next Steps

Many 340B hospitals will view CMS’s proposal as welcome news as they have been fighting to be repaid for losses resulting from Medicare’s 340B payment policy since 2018. 340B hospitals can look up the one-time lump sum payment amount they would receive under the proposal, if finalized, using the Addendum AAA issued by CMS, available for download here.

340B hospitals should note that the lump sum payment would be offset by the future reductions in payments for non-drug services. Depending on a 340B hospital’s mix of drug and non-drug services, the net result may still be positive, especially given that CMS underestimated the 340B payment reductions and the proposed 340B repayments would be larger than the offset for non-drug services. Nevertheless, the net repayment to 340B hospitals would be less than the lump sum repayment amount after accounting for the offset.

The proposal may also have implications for Medicare Advantage (MA) plan payments for 340B drugs. Many MA plans adopted the 340B payment reduction in 2018, pursuant to contractual provisions referencing traditional Medicare rates, and paid 340B hospitals at lower rates until the U.S. District Court for the District of Columbia vacated the 2022 payment policy on September 28, 2022. Hospitals should evaluate their contracts with MA plans to consider the implications of the Supreme Court decision, subsequent court orders, and CMS’s proposed remedy.

After reviewing comments, CMS plans to issue a final rule this fall. If finalized as proposed, CMS could instruct MACs to issue lump sum payments to 340B hospitals by late this year or early next year.

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