FAH Hospital Policy Blog

Perspectives on health policy affecting America's hospitals and the patients we serve.

340B | FAH Policy Blog Team

Current Medicare Outpatient 340B Drug Payment Policy Works

One of the largest issues facing hospitals and the patients they treat is rapidly rising drug costs, and our industry is united in the effort to bring those costs down.

FAH has joined other health care groups in releasing studies showing the real-world impact that persistent drug price increases are having on patients and hospitals.

One important program that has helped eligible public and nonprofit hospitals in the face of rising drug costs is the 340B Drug Pricing Program. Overseen by the Health Resources & Services Administration (HRSA), 340B allows qualified hospitals to buy drugs administered in outpatient settings at substantial discounts — with an average discount of approximately 34%, according to the Medicare Payment Advisory Commission. According to congressional report language for the 340B authorizing legislation, the savings make it possible for “covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” However, 340B hospitals are not required to pass on these savings to patients in the form of lower copayments.

Medicare OPPS Payment for Drugs Purchased Through the 340B Program

The Centers for Medicare and Medicaid Services (CMS) pays for drugs administered in outpatient hospital settings to Medicare beneficiaries through the Medicare Hospital Outpatient Prospective Payment System (OPPS); this includes drugs that are both purchased and not purchased through the 340B Program.

In 2018, CMS took an important step to directly benefit seniors and improve the accuracy of Medicare’s payment for outpatient hospital services across all hospitals treating Medicare beneficiaries. The agency said it was implementing this change to “better, and more appropriately, reflect the resources and acquisition costs that [340B] hospitals incur” and “allow the Medicare Program and Medicare beneficiaries … to share in the savings.” 

Specifically, CMS reduced the Medicare OPPS payment to 340B hospitals for the separately payable drugs they acquire with the 340B discount and reinvested the savings, estimated by CMS at $1.6 billion, into higher OPPS payments to all hospitals for non-drug services. That action, to better align Medicare payment with 340B hospital acquisition costs, had two immediate benefits. First, seniors who get their drugs at a 340B hospital pay less because the lower Medicare OPPS payment to the hospital means a lower copayment for the Medicare beneficiary. This is due to the Medicare copayment structure, which requires seniors to pay 20% of the amount Medicare reimburses the hospital, not 20% of what it costs the hospital to buy the drugs. Second, all hospitals, including 340B hospitals, get a much-needed bump in Medicare payment for primary and emergency care, as well as outpatient procedures and other non-drug services – a welcome increase in a chronically underfunded system.

CMS’s actions level the playing field across all OPPS hospitals, reinforcing the purpose of the Medicare OPPS to incentivize efficient and equitable behavior. CMS’s Medicare OPPS payment change does not affect the 340B Program nor hospitals’ ability to participate in it. 340B hospitals continue to benefit from the significant discounts they get when they purchase drugs through that Program. 

It is also worth noting that CMS’s action has no effect on geographically isolated Critical Access Hospitals (CAHs) that participate in the 340B Program; they are paid 101 percent of their cost.  In addition, CMS applied a special policy for 340B Sole Community Hospitals (SCH), recognizing the critical role they play in rural communities. CMS did not reduce their drug payment. That means the hospital not only retains the full savings it obtained under the 340B program, but also benefits from the higher payment for all other non-drug OPPS services. 

Implications of Rolling Back the Current Medicare Payment Policy

If this regulation is rolled back, as some are trying to do through legal action, a study released today from the consulting firm Avalere Health outlines the net impact for beneficiaries and hospitals across the country. “Insight” narrative from Avalere Health summarizing key finds of study is available here.

A change to current policy would lead to a 37% increase (approximately $472.8 million annually) in Medicare Part B drug copayments for seniors seeking care in 340B hospitals.

The study also found that 82% of all OPPS hospitals would see net total outpatient payment decreases, which breaks down to 89% of rural hospitals and 80% of urban facilities. Even half of 340B hospitals would experience net payment decreases. And every SCH would grapple with lower OPPS payments.

FAH strongly supports the current CMS policy, which strengthens the OPPS. We also believe in the benefits of the 340B Drug Payment Program, which is not impacted by the CMS payment policy. As noted in our Amicus Brief filed today with the Supreme Court:

“FAH does not question the importance of the 340B Program in serving the needs of hospitals, especially those in financial distress, many of which have been devastated by the COVID-19 pandemic; in serving the needs of the community, including uninsured patients and immigrants of all legal statuses; or in maintaining critical hospital services, such as dialysis and chemotherapy.”

Yet all hospitals, 340B and non-340B alike, provide these needed clinical services. Equally important are the similar levels of community benefit non-340B hospitals contribute. As Avalere’s report shows, non-340B hospitals have uncompensated care cost rates comparable to, if not higher than, 340B hospitals.   

The current CMS policy works for Medicare and America’s seniors. Reversing it would not only substantially increase Medicare patients’ cost burden for drugs acquired under the 340B program, but also would lower net total payments to most OPPS hospitals, restoring the inefficiencies that the current policy corrects.