The Definitive Blog

New 340B Guidelines Target Program Abuses

The Centers for Medicare and Medicaid Services (CMS) announced changes to its 340B Drug Discount Program, effective January 1, 2018. The primary difference in the program is that drug payments to participating hospitals will be cut. Under the original plan, CMS reimbursed hospitals at the average drug cost plus 6 percent. Under new guidelines, hospitals will be reimbursed at 77.5 percent of the average drug price.

This year, if a medication cost an average of $20,000, a participating hospital would be reimbursed for $21,200. Beginning next year, if a medication costs an average of $20,000, a participating hospital would be reimbursed for only $15,500. The new payment plan is estimated to save CMS approximately $1.6 billion in 2018 alone.

Since announcement three organizations—America’s Essential Hospitals, the American Hospital Association, and the Association of Medical Colleagues—have filed a joint lawsuit against CMS for overstepping its statutory authority. The program was originally introduced by Congress in 1992 and has been expanded several times, most recently under the Affordable Care Act in 2010.

Top 10 Disproportionate Share Hospitals by Net Patient Revenue

Hospital Name Net Patient Revenue (M) # Medicare Certified Beds
New York Presbyterian/Weill Cornell Medical Center $4,935 2,262
Stanford Hospital $3,453 613
Florida Hospital Orlando $3,320 2,449
NYU Langone Medical Center – Tisch Hospital $3,192 1,069
UCSF Medical Center at Parnassus Heights $2,935 782
Cedars-Sinai Medical Center $2,910 848
University Hospital (University of Michigan) $2,866 800
Montefiore Medical Center – Henry and Lucy Moses $2,690 1,491
Indiana University Health Methodist $2,595 1,733
Massachusetts General Hospital $2,578 907

Fig 1 Data from Definitive Healthcare

The original aim of the 340B Drug Discount Program (340B) was to lower hospital operating costs in areas with large populations of low-income patients. Under the program, pharmaceutical companies are required to provide a 20 to 50 percent discount on drug prices to low-income patients in order to improve access, reducing the financial burden of safety-net and children’s hospitals. Other eligible facilities include free clinics, public and academic medical centers, disproportionate share hospitals (DSHs), freestanding cancer centers, and more.

According to Definitive Healthcare data, approximately 34 percent of active U.S. hospitals participate in the 340B program. Of the participants, nearly 46 percent are labelled disproportionate share hospitals. In order to be classified as a disproportionate share hospital under the Social Security Act, a facility must serve a disproportionate number of low-income patients and be reimbursed by CMS for care costs of uninsured patients.

Concerns over rising healthcare costs and budgetary restrictions could play a role in the CMS decision. The new rule includes guidelines that determine and track whether drugs are purchased under the 340B program. This is an effort to crack down on the number of incidents where hospitals purchase drugs outside the program but are still reimbursed by CMS.  The new reimbursement method is also an attempt by CMS to break even on drug costs, paying hospitals for the actual cost of required drugs without incentive to over-purchase or purchase at lower prices in order to receive larger payments.

Historically the 340B program has been a significant source of revenue for member hospitals. The original program guidelines do not restrict or specify how the 340B payments should be used. Hospitals can choose to use these funds for charity care, general operations, or other expenses. The lack of oversight made the payments vulnerable to exploitation.

Critics of the new rule claim that patient access to necessary pharmaceuticals will decrease. Member hospitals of the 340B program provide 60 percent of all uncompensated care, despite making up only 36 percent of the total number of hospitals in the U.S. However, rural hospitals, children’s hospitals, and freestanding cancer centers will not be affected by the new payment system, saving some of the most vulnerable members of the population from worry and speculation. Vaccine costs will also be exempt from the new rule.

CMS 340B Drug ProgramFig 2 Data from Definitive Healthcare and CMS

Additionally, a 2015 study from the Government Accountability Office (GAO) found evidence that 340B member hospitals had higher prescription costs than non-member hospitals. In 2012, 340B member hospitals that received DSH payments spent more than double the amount per beneficiary than non-member hospitals ($144 and $62 per beneficiary, respectively). Beneficiaries at member hospital were also prescribed a greater number of drugs, and more expensive drugs, than their counterparts at non-member hospitals. These disparities were present even after scaling for health, income, patient preference, and other factors.

As part of the 340B rule changes, CMS also announced that total knee replacement surgeries (total knee arthroscopy) will be removed from the inpatient-only (IPO) list. This could open the doors for outpatient and ambulatory surgery centers to begin offering the service in the near future, as CMS solicited feedback regarding coverage of outpatient total joint replacements at ASCs earlier this year.

Critics of the 340B program changes assert that vulnerable and uninsured patients will no longer have proper access to medically necessary pharmaceuticals. However, the history of loose program regulation has indicated that some member hospitals were likely abusing the program for financial gain. CMS expects the new, stricter regulations to drastically decrease healthcare costs without damaging patient access.

The evolution of the pharmaceutical industry — including drug pricing, policy and the role of providers in curbing drug misuse — will be one of the key topics discussed at the upcoming HLTH conference in Las Vegas. Definitive Healthcare will be exhibiting at the conference, so be sure to visit our booth!

Visit the Definitive Blog to read more about the 340B Drug Pricing Program and other CMS initiatives.

 Definitive Healthcare has the most up-to-date, comprehensive, and integrated data on the healthcare industry. Our database tracks financial and clinical metrics, as well as CMS program participation, on over 8,800 hospitals, 1.5 million physicians, and dozens of other care providers.

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