The WasteWatcher: The Staff Blog of Citizens Against Government Waste

New CMS Rule Will Help Reduce Drug Costs

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


On Wednesday, November 1, 2017, the Centers for Medicare and Medicaid Services (CMS) issued a new rule that will lower costs to taxpayers and Medicare beneficiaries for certain outpatient pharmaceuticals purchased under the 340B drug discount program.

According to CMS Administrator Seema Verma, “As part of the President’s priority to lower the cost of prescription drugs, Medicare is taking steps to lower the costs Medicare patients pay for certain drugs in the hospital outpatient setting.  Medicare beneficiaries would benefit from the discounts hospitals receive under the 340B Program by saving an estimated $320 million on copayments for these drugs in 2018 alone.”  CMS stated that the change “would better, and more appropriately, reflect the resources and acquisition costs that these hospitals incur.  Such changes would allow the Medicare program and Medicare beneficiaries to pay less for drugs …”

Citizens Against Government Waste has been critical of how the 340B program has been functioning for several years.  Just recently, we weighed in on the issue with a September 25, 2017 OpEd in The Hill, a Washington, D.C.-based newspaper that focuses on politics and policy.

First, a bit of background.  The 340B drug discount program was created in 1992 to provide heavily discounted outpatient drugs to certain healthcare providers, such as disproportionate share hospitals (DSH) and federally qualified health centers, which serve uninsured, low-income people that do not qualify for Medicaid or Medicare.  Pharmaceutical manufacturers that wish to participate in Medicaid must also participate in the 340B program.  The Health Resources and Services Administration (HRSA), the agency that oversees the program, establishes a ceiling or maximum price a manufacturer can charge a healthcare provider for each outpatient drug purchased under the 340B program.

The savings on drugs can be significant.  CMS stated that according to the U.S. Government Accountability Office (GAO) “the 340B discount ranges from an estimated 20 to 50 percent discount, compared to what the entity would have otherwise paid.”  The Medicare Payment Advisory Commission (MedPac), which advises Congress on the Medicare program, estimated in a May 2015 report that hospitals in the 340B drug discount program receive a minimum 22.5 percent discount of the average sales price for drugs paid under the Medicare outpatient prospective payment system (OPPS).

The savings obtained via the 340B discount drug program are supposed to be used to “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”  But like many government-run programs that are created with good intentions, it has grown massively, especially under Obamacare, and strayed from its original mission.  Due to a lack of clarity in the law on what exactly is a 340B eligible patient, the program has been exploited by many hospitals to obtain millions of dollars in profit.  Ultimately, it is taxpayers and patients that pay.  You can read more about the program here.

The new CMS rule changes the Medicare hospital OPPS for Medicare Part B drugs, which are administered by infusion or injection in physician offices or hospital outpatient departments.  According MedPac, Medicare Part B payments amounted to $26 billion in 2015.

Currently, most Medicare Part B payments to a provider are the average sales price (ASP) of a drug plus 6 percent that covers handling costs.  But, for drugs acquired by hospitals under the 340B program, instead of the ASP plus six percent, the payment will be changed to ASP minus 22.5 percent.  (Rural sole community hospitals, children’s hospitals, and Prospective Payment System-exempt cancer hospitals will be excluded from this new payment methodology in 2018.)

Why is the change necessary?  CMS noted that a MedPac May 2015 report to Congress (page 14) examined chemotherapy drugs and drug administration services administered between 2008 to 2012 and found that ‘‘Medicare spending grew faster among hospitals that participated in the 340B program for all five years than among hospitals that did not participate in the 340B program at any time during [the study] period.’’  In addition, CMS stated that a March 2016 MedPac report (page 76) notified Congress that, “discounts across all 340B providers (hospitals and certain clinics) average 34 percent of ASP, allowing these providers to generate significant profits when they administer Part B drugs.”

CMS also pointed out that the GAO had found that, “… in both 2008 and 2012, per beneficiary Medicare Part B drug spending, including oncology drug spending, was substantially higher at 340B DSH hospitals than at non-340B hospitals.”

Thomas Barker at the law firm of Foley and Hoag provided an example of how the new Medicare payment to a 340B hospital would work.

Under current law, suppose an ASP for a cancer drug is $2,000.  A hospital would be reimbursed $2,000 plus 0.06 percent or $120, for a total of $2,120.  (The beneficiary pays 20 percent copayment, or $424, and Medicare pays the remaining amount of $1,696.)

However, if it is a 340B hospital, it is likely the facility received the drug for a much lower cost.  Since MedPac has stated the minimum discount for a 340B drug is 22.5 percent from the ASP, the estimated minimum discounted price the hospital was able to purchase the drug for is $1,550.  But, the 340B participating hospital would receive the ASP plus six percent payment of $2,120.  It is this $570 spread, or “profit,” that CMS is going after.

CMS will require hospitals to notify them if their drug was purchased under the 340B program.  Under the rule change, a 340B hospital will not receive the ASP plus 6 percent for most of their outpatient drugs.  Instead, the 340B hospital will be paid the ASP minus 22.5%.  Hospitals that do not purchase a drug under the 340B program will continue to receive the ASP plus six percent reimbursement.

According to the Nov. 1, 2017, edition of Modern Healthcare, within one hour of CMS releasing the rule, the Association of American Medical Colleges, America’s Essential Hospitals, and the American Hospital Association (AHA) announced they would sue CMS, believing the agency has overstepped its authority in cutting 340B payments.  AHA Executive Vice President Tom Nickels said, “CMS' decision in today's rule to cut Medicare payments to hospitals for drugs covered under the 340B program will dramatically threaten access to healthcare for many patients, including uninsured and other vulnerable populations.”

But, a November 1, Inside Health Policy article reported that, “CMS says hospitals will likely still profit off of 340B drugs.  Hospitals didn't propose an alternative formula for the cuts, which CMS said ‘gives us confidence that our suggested payment of ASP minus 22.5 percent is, in fact, the low bound of the estimate and keeps Medicare payment within the range where hospitals will not be underpaid for their acquisition costs of such drugs.’”

What hospitals are really upset about is their profitable ATM has been shut down.

Meanwhile, the Community Oncology Alliance (COA) applauded the final rule.  The COA said the rule will, “reduce drug costs for seniors by an estimated $320 million on copayments for drugs in 2018 alone; help to curb outrageous abuses of the 340B program by some large hospitals; and, hopefully, start to reverse the profit incentives that have dismantled our nation's community cancer care system.”  In June 2016, CAGW wrote about a CAO study that showed how the 340B program was driving up costs in cancer care.

While this rule change is a great start to reforming the 340B drug discount program, much more needs to be done and that will take congressional intervention.  What is needed is a clear definition of a 340B eligible patient, a well-defined description of charity care, which makes a hospital eligible for the 340B program, and more transparency on how hospitals utilize the 340B savings.

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