CMS’ Blunt Solution to 340B Problems

Earlier in July, CMS issued a proposed rule outlining changes to the 340B program, an initiative through which qualifying hospitals can purchase outpatient drugs at a discount while receiving CMS payments for the average sale price plus a bonus. The rule dramatically cuts the reimbursements for certain drugs, attempting to achieve parity between actual drug costs and payments, though it removes a significant source of revenue for hospitals. Despite the outcry from hospital organizations and industry advocates, government studies suggest that the 340B program has significant flaws and that CMS and the Health Resources and Services Administration (HRSA) should act decisively to fix them.

The main issue with the 340B program has been its rapid growth and associated spending. Originally intended as a cost relief mechanism for safety-net and certain specialty facilities, such as children’s and free-standing cancer hospitals, the program has grown to include 2,428 hospitals according to Definitive Healthcare data, compared to 583 in 2005. The increase in hospitals has been accompanied with greater spending, reaching $3.5 billion in 2013, up from $0.5 billion in 2003, though not all of it can be attributed to the higher number of hospitals participating in the program. According to a 2015 MEDPAC report, while more facilities benefitted from 340B discounts after the ACA expanded eligibility, 73 percent of the cost growth stemmed from hospitals already in the program. Analysts predict the 340B program will continue to swell in volume, reaching $23 billion in total sales (by discount price) in 2021, a figure that would exceed all Medicare part B reimbursements in 2014.

340B and Non-340B Hospitals, Selected Statistics, 2017


  340B Hospitals Non-340B Hospitals
 Total Hospitals  2,427 3,500
 Median Staffed Beds  48 98.5
 Median Total Uncompensated Care Costs (M)  $3.5 $4.5
 Total DSH Hospitals  1,300 1,493
 Median Pharmacy Costs (M)  $4.2 $4.0
 Median Private Payor Mix  43.5% 51.7%
 Median Medicaid Payor Mix  8.0% 5.4%
 Median Medicare Payor Mix  43.9% 40.3%


The rapid growth of the program poses the risk that it will stray from 340B’s original purpose of providing financial assistance to hospitals in need, becoming a bonus revenue source instead. While it restricts discounted drug utilization to a specific patient population, the program does not dictate how hospitals must use the difference in savings from the discounted price and Medicare’s reimbursement. The funds can be reserved for charity care, general operations, or anything else, giving hospitals a financial incentive to cover as many patients as possible under the program. In addition, restrictions on the type of patient that can benefit from the discounted medication haven’t always been clear. Though HRSA attempted to clarify the guidelines in early 2015, a list of 39 completed audits as of early July 2017 found that nine organizations, or about 23 percent, either diverted drugs to ineligible patients, applied for duplicate discounts, or both, benefitting from unintended savings. The rate for FY 2016 was even higher, with over 100 out of 199 audits revealing diversion or duplication.

In addition to the risks of nonadherence to program standards, there is also evidence that 340B program hospitals have higher unnecessary drug spending. A 2015 GAO report determined that beneficiaries at 340B hospitals were prescribed more drugs or more expensive medications than at facilities not participating in the program. In 2012, 340B hospitals receiving disproportionate share hospital (DSH) payments spent an average of $144 in Medicare part B spending per beneficiary compared to $62 at non-340B DSH facilities. The discrepancy could not be explained by health, income, or patient preferences, and the authors suggest a financial incentive could be at work.

Given the apparent problems with the program, the proposed CMS rule does seem to target them, albeit in what may be the bluntest way possible. Presumably in order to combat any excess spending or financial incentive to prescribe more or include ineligible patients, the rule lowers Medicare payments to hospitals for 340B drugs from six percent above the average sale price (ASP), which is the amount hospitals both inside and outside of the program currently receive, to 22.5 percent below the ASP. The figure was derived from the same 2015 MEDPAC study, which estimated that participating hospitals receive a median 22.5 percent discount from drug manufacturers. The proposed rule appears to apply to all 340B drugs, which would mean some hospitals would pay more for the discounted medications than they would be reimbursed for, but CMS notes that the figure is merely an estimate and will be fine-tuned later.

CMS predicts the rule would decrease overall 340B spending by $900 million, though the adjustment is designed to be budget neutral and participating hospitals would see corresponding reimbursement increases for other outpatient services. Of course, some hospitals would lose out on revenue, and advocacy group 340B Health said about 60 percent of its hospital members would withdraw from the program if such reimbursement cuts took effect. If the 22.5 percent cut stands, it’s likely that the only providers remaining in the program would be those that already have exceptionally low discounts and would gain from switching to the six percent bonus reimbursement system. The final rule should strike a balance between limiting cost growth and maintaining strong program participation, but it’s possible that the current proposal goes too far, and may even have the opposite effect.

Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our information includes data on a variety of CMS programs and initiatives, as well as physician drug market analytics features.

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July 25, 2017 | CMS Programs| Drugs| Hospitals & IDNs
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