340B -- When is Enough Going to be Enough?

It seems like CMS comes under constant fire for their efforts to serve as responsible stewards for the Medicare program. Lately it seems that CMS is taking fire for not going far enough with payment cuts. In this entry, I will look at the latest round of payment cuts to drugs purchased under the 340B Drug Discount Program. Read on for more...

In 1992, the Veteran's Health Care Act amended the Public Health Services Act by creating section 340B and its eponymous Drug Discount Program. Originally intended to provide certain hospitals that cared for underserved populations a way to "stretch scarce federal resources" and provide funding to help provide care to their patient population. The program was originally limited to so-called Disproportionate Share Hospitals, Federally Qualified Health Centers, and Ryan White HIV Clinics. It has since been expanded to allow children’s hospitals, freestanding cancer clinics, critical access hospitals and others to participate.

The program works by allowing participating facilities to purchase prescription drugs at significant discounts while still realizing full payment from Medicare. The difference between the discounted sales price and the Medicare payment was to be used to help fund services provided by the facilities that would otherwise have gone uncompensated thereby improving the health and well-being of the facility's populace.

The program has been criticized in part due to its expansion and the growth in spending by Medicare on 340B drugs. Hospitals eligible for the 340B program have also been subject to criticism for not providing enough charity care. While data both supporting and refuting these criticisms may be scarce, most agree that patients are often caught in the middle.

In 2018, CMS revised its payment policy for drugs purchased under the 340B program by reducing payments from ASP + 6% to ASP -22.5%. The revised policy resulted in  a legal challenge that was litigated for much of 2019.

Despite a previous court ruling that CMS did not have authority to make the changes, CMS continued the cuts going into 2020.

In the CY 2021 Medicare Outpatient Prospective Payment System (OPPS) proposed rule, CMS proposes to further effectively reduce its payment for 340B drugs to ASP - 28.7 percent. Citing results of its own Hospital Acquisition Cost Survey for 340B-Acquired Specified Covered Outpatient Drugs CMS determined that the ASP - 22.5% payment rate was "generous" to hospitals purchasing 340B drugs. In fact, the survey found that the average acquisition cost realized by hospitals responding to the survey was ASP minus 34.7%.

Interestingly, CMS reversed course on its previous policy of refusing to pay an add-on fee for administrative overhead such as storage and handling for drugs purchased under 340B. In the past, CMS believed that the "generous" payment rate for 340B drugs sufficiently covered any incremental overhead costs. By comparison, non-340B drugs include a 6% add on to the Average Sales Price payment because CMS believed that the ASP did not include sufficient buffer for these added costs.

For CY 2021, CMS is proposing to add six percent to the 340B payment rate resulting in a somewhat bizarre calculus whereby the payment rate for a drug purchased under 340B is actually calculated as:

(ASP - 34.7%) + (ASP + 6%)

With the effect being a reimbursement rate equal to ASP - 28.7%. Meaning that a drug with an ASP of $1000.00 would have been reimbursed at $1,060 in 2018 (ASP + 6%); $775 in 2020 (ASP - 22.5%) and finally at $713 (ASP - 28.7%) in 2021.

CMS estimates that this policy change will further reduce spending on 340B drugs by $427 million. Curiously, because the OPPS is a budget neutral system these savings won't actually materialize -- at least not at the bottom line.  Under OPPS rules, any changes to payment for one service must be offset elsewhere in the OPPS system. The result being that reduced drug spending will be used to partially fund an increase in payments made to all other OPPS services. In this case, the OPPS conversion factor will be increased by 0.85 percent. This increase contributes to -- but is not the sole reason for, the proposed increase in the OPPS conversion factor from $80.784 in 2020 to $83.697 in 2021.

CMS is not wedded to its proposal; however, suggesting that they could choose to maintain the status quo reimbursement of ASP - 22.5% going forward. Comments on the proposed rule are due to CMS October 5, 2020.

John Warren is the Owner and Principal Consultant at Gettysburg Healthcare Consulting in Hanover, Pennsylvania. He worked at CMS for 22 years and directed the Division responsible for operation of the Medicare Average Sales Price system. He has consulted with numerous pharmaceutical companies interested in navigating coverage, coding and reimbursement from Medicare. Please visit http://www.policypros.com for more insights and information about GHC's services