CMS’s 340B Proposal Is Likely Unlawful—Here’s Why

Hospital Industry Viewpoint

August 03, 2017

The agency’s recent proposal to reduce certain drug reimbursement is unprecedented and not based on a reasonable interpretation of its statutory authority.

As has been widely reported in the trade press, the Centers for Medicare & Medicaid Services (CMS) recently promulgated an extraordinary proposal under Medicare to reduce reimbursement for drugs used in hospital outpatient departments when those drugs have been purchased under the 340B Program. In announcing this proposed change, CMS furnished scant legal support for its proposed action, and indeed none exists. For all of the following reasons, CMS’s proposed policy is likely unlawful, and certainly unprincipled, and safety net providers should steel themselves to the need for action to prevent it from being finalized.

What does the proposed policy purport to do?

CMS proposed to reduce the reimbursement rate for most separately payable drugs under the hospital outpatient fee schedule to a rate of average sales price (ASP) minus 22.5% for those hospitals that purchased the drugs through the 340B Program. This is a significant reduction from the current rate of ASP plus 6%. CMS claimed that this measure is necessary because the purported profitability of the 340B Program for safety net providers has led to overutilization of 340B Program drugs. CMS also claims that the frequent use of 340B drugs has resulted in an excess co-insurance rate. Hospitals that use a modifier indicating that they are not purchasing drugs under the 340B Program will not be subject to the reduction. CMS intends to make the reimbursement reduction budget neutral, meaning that, at least in theory, the amounts saved will be reallocated to the reimbursement for other services.

What are the implications for safety net providers?

The implications of this proposed payment reduction go beyond just the Medicare program. Many private payers also pay for services on the basis of the Medicare rate. Consequently, many safety net providers may find it challenging to participate in the 340B Program for physician-administered drugs going forward in light of this substantial payment reduction and the significant costs associated with 340B Program compliance. Indeed, the sizable and ongoing compliance costs associated with the 340B Program would outweigh the lack of any meaningful financial benefit for participation in the program if this proposal were finalized. Ironically, the only part of the program from which safety net providers could continue to derive a benefit would be contract pharmacy utilization, which has been the subject of heightened scrutiny by Congress and various enforcement authorities.

Are there other means toward achieving the same goal?

Yes. CMS could create more stringent coverage rules for each of the drugs that it believes is the subject of overutilization. As to concerns with co-insurance rates, CMS is ignoring that safety net providers are all required by law to have indigent care policies, which allow for co-insurance waivers where necessary. CMS’s policy would serve as a blunt instrument, reducing co-insurance rates for some beneficiaries who do not need the reduction while removing a revenue source from hospitals eager to help the financially needy.

Are manufacturers likely in favor of the policy? What about for-profit hospitals?

No and no. For manufacturers, the policy amounts to a wealth transfer to the Medicare program and other payers. Manufacturers will still be obligated to sell their drugs at the 340B rate. However, CMS and other payers then capture that benefit through their payment reductions, leaving the hospitals with no benefit at all. Given the choice of furnishing a quasi-“rebate” to CMS and other payers or helping hospitals to help their patients, most manufacturers would prefer that the hospitals get use of the funds. If an actual rebate to Medicare were somehow proposed in Congress, at least manufacturers would have an opportunity to voice their concerns to their legislators, who would be obliged to take their constituents’ interests into consideration—but here, CMS is essentially cutting manufacturers out of the process by indirectly appropriating the benefit of 340B Program pricing through reimbursement reductions.

It’s true that for-profit hospitals will receive some benefit from this policy through the supposed reallocation of savings, but they should be concerned about the ripple effect of this policy. If CMS can target safety net hospitals because of the purported encouragement of overutilization resulting from a reduced cost structure, why not target for-profit hospitals that benefit from GPO pricing to keep their costs down?

Given the above, the policy appears inequitable, but might it also be unlawful?

Arguably yes. First, the Medicare statute does not allow CMS to create differential payments based on differential costs to a particular hospital. As a general matter, CMS is required to pay hospitals for their median or mean costs for a particular type of service, and not their hospital-specific costs.[1] As to certain drugs, referred to as specifically covered outpatient drugs, CMS is required to pay the “average” acquisition cost, or in the absence of cost data, the ASP rate.[2] ASP data expressly excludes 340B drug pricing.[3] Not only does discrimination against safety net hospitals violate these statutory provisions, it also violates their purpose—a prospective payment pays the same, irrespective of cost, so as to ensure that hospitals are encouraged to be as efficient about purchasing as possible.

Just as importantly, CMS’s proposal also violates Section 340B of the Public Health Service Act. The 340B statute clearly requires that Medicaid programs receive the benefit of rebates to which they are entitled under the Medicaid Drug Rebate Program.[4] This is accomplished by requiring safety net providers either to forego 340B Program purchasing for Medicaid utilization or to charge less to Medicaid. Congress could have created a similar rebate program for Medicare, along with a process for Medicare to capture 340B Program benefits, but it has not done so. CMS is therefore acting ultra vires to its statutory authority with its new proposal. And it is also violating the intent of the 340B Program, which is to allow for funding to safety net providers to fulfill their charitable missions. Since commercial insurers will almost certainly follow suit if CMS’s policy is finalized, CMS will in effect have dismantled part of the 340B Program, causing significant disruption to the healthcare marketplace.

What can safety net providers do to prevent the policy from going into effect?

First and foremost, safety net providers should work with their trade associations to ensure coordinated submission of comment letters and contacts to their legislators. Additionally, safety net providers should urge their trade associations to prepare for litigation to enjoin the implementation of the policy if CMS moves forward notwithstanding the comments it receives. Although many aspects of the outpatient fee schedule are immune to lawsuits, some portions of the statute applicable here are not exempt—therefore CMS could still be held to task to follow both the letter and the spirit of the law.


Washington, DC
Andrew Ruskin

[1] Section 1833(t)(2)(C) of the Social Security Act (the Act).

[2] Act § 1833(t)(14(A)(iii).

[3] Act § 1847A(c)(2)(A).

[4] Section 340B(a)(5)(A) of the Public Health Service Act.