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Two efforts are underway to prevent HHS from cutting Medicare payments to hospitals participating in the 340B drug program.

The 340B drug program is under assault, with the latest action coming the from the American Hospital Association (AHA) – which, along with  the Association of American Medical Colleges (AAMC) and America’s Essential Hospitals, are suing the U.S. Department of Health and Human Services (HHS) to prevent significant Medicare payment cuts for hospitals that participate in the 340B Drug Pricing Program.  

Earlier, two U.S. House of Representatives members recently introduced a bill to prevent the Centers for Medicare & Medicaid Services (CMS) from cutting $1.6 billion from the drug discount program. Rep. David McKinley (R-W.Va.) and Mike Thompson (D-Calif.) have introduced a bill that attempts to blunt the cut.

The 340B program allows eligible hospitals, such as disproportionate-share, rural, and cancer centers, to purchase drugs at a reduced price.

First, let me commend the AHA. Since the $1.6 billion in cuts, in theory, would introduce rate increases for some hospitals in increased Outpatient Prospective Payment System (OPPS) rates to make it budget-neutral, they went to bat for the hospitals, taking the brunt of the hit.

The lawsuit argues that the 340B provisions of the CMS OPPS final rule violate the Social Security Act, and therefore should be set aside under the Administrative Procedure Act as unlawful, and exceeding the HHS Secretary’s statutory authority.

The requested injunction also would prohibit HHS from implementing these provisions of the OPPS final rule pending resolution of this lawsuit.

A statement from the AHA reads in part:

“From its beginning, the 340B Drug Pricing Program has been critical in helping hospitals stretch scarce federal resources to enhance comprehensive patient services and access to care,” said Rick Pollack, president and CEO of the AHA. “CMS’s decision to cut Medicare payments for so many hospitals for drugs covered under the 340B program will dramatically threaten access to healthcare for many patients, including uninsured and other vulnerable populations. This lawsuit will prevent these significant cuts from moving forward.”

It seems that the AHA has an uphill battle on its hands. The 1997 “Regions Hospital vs. Shalala” case set precedent supporting CMS’s position that it has the authority to make almost unfettered changes to Medicare reimbursement rules. 

The Regions case involved graduate medical education payments to hospitals. In 1990, CMS began auditing “base periods” used to compute reimbursement amounts for teaching hospitals in accordance with regulations published in 1989. 

Medicare auditors, under the direction of CMS, began re-auditing data in closed-cost reports going back as far as 1982. Many of the audit adjustments from these “re-audits” related to an alleged “lack of documentation.” 

More vexing, some of the data requested could not be ever be produced, because hospitals had no reason to gather it prior to the regulations published in 1989.

Hospitals filed appeals that eventually reached the U.S. Supreme Court. The Regions case raised the question of whether Medicare could retroactively audit hospital expenses closed by statute.

In a 6-3 opinion authored by Supreme Court Justice Ruth Bader Ginsburg, the Court upheld the re-audit rule. “The Secretary’s re-audit rule brings the base-year calculation in line with Congress’ pervasive instruction for reasonable cost reimbursement,” wrote Justice Ginsburg. Justice Scalia wrote a dissenting opinion, in which Justices Sandra Day O’Connor and Clarence Thomas joined.

So why was this such a big deal? It changed the standard that CMS had to meet in publishing regulations to “a reasonable interpretation of the law.” This means that in cases after Regions, providers had to prove that regulations are not a reasonable interpretation of the law to prevail. This is a huge hurdle.

As a side note, the ability of providers to win appeals almost disappeared overnight. Even if providers won cases at the Provider Reimbursement Review Board, the CMS administrator could overturn almost all decisions of the Board, knowing they would almost certainly win in federal court.

The current proposal would have an impact on hospitals that acquire their drugs through the 340B drug discount program, but will have larger impacts on certain areas of the country and specific types of hospitals.

The biggest impact of the new regulations stems from how CMS pays for separately payable drugs. The current rate is the standard average sales price (ASP) plus 6 percent. For 2018, the agency slashes payments for separately payable drugs, excluding those with pass-through status and vaccines, at ASP minus 22.5 percent.

CMS is soliciting input on multiple facets of its 340B proposal, including the amount of the payment reduction, how to collect data, over what time frame to implement the policy, and whether certain types of hospitals should be excluded.

Based on the map below of all eligible hospitals, we can see that the impact disproportionately impacts California, Texas, Illinois, Florida, and New York.

340B Drug Program

We also looked at just Critical Access Hospitals (CAH) in the 340B Drug program. We can see that the Midwest corridor from Texas through Minnesota will take the major brunt of the cuts to these types of hospitals. These already struggling facilities will receive no benefit to the potential offsetting increases in OPPS rates.  

340B Drug Program 2

Unlike other payment programs, 340B is a discount program, and it is very hard to determine the impact of the regulations. The benefit is based on the savings on drug prices. It will disproportinaltely impact smaller rural hospitlas that lack the barganing power of larger urban hospitals. 

Additional cuts to the 340B program could come if the Patient Protection and Affordable Care Act (PPACA) and the expenasion of Medicaid is reversed. Since the qualification for the 340B program is dependent on a ratio of  Medicaid patient days to total days, many hospitals that now qualify for the 340B drug program will fail to qualify if the number of Medicaid days falls with the reversal of Medicaid expansion.  It all spells trouble for struggling poor and rural hospitals.

Stay safe out there. 


Timothy Powell, CPA

Timothy Powell is a nationally recognized expert on regulatory matters, including the False Claims Act, Zone Program Integrity Contractor (ZPIC) audits, and U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) compliance. He is a member of the RACmonitor editorial board and a national correspondent for Monitor Mondays.

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