Billions of dollars in lump-sum payments are coming to hospitals as a remedy for 340B-related underpayments

Hospitals that participate in the 340B Drug Pricing Program stand to receive $9 billion in aggregate lump-sum payments as compensation for underpayments from Medicare during a nearly five-year period.

In a proposed rule issued July 7, CMS described how it would provide remedies following a 2022 Supreme Court ruling that the U.S. Department of Health and Human Services (HHS) did not follow proper procedure when it lowered the Medicare reimbursement rate for drugs purchased through 340B by 28.5 percentage points starting in 2018.

About 1,650 340B-participating hospitals would receive portions of the $9 billion. A hospital’s payment would be calculated based on its claims filed for drugs acquired through the program between Jan. 1, 2018, and Sept. 27, 2022, CMS wrote in the rule.

The Medicare payment rate for those drugs during that time frame was average sales price (ASP) minus 22.5%. The lump-sum payment would be intended to increase the compensation to hospitals for those purchases to ASP plus 6%, the rate that was in place through 2017 and then restored last Sept. 28 in the aftermath of the Supreme Court decision.

Medicare administrative contractors would be directed to remit the payments within 60 days of receiving instructions from CMS after publication of the final rule.

“We believe this approach comes as close to providing 340B-covered entities with make-whole relief as CMS can reasonably accomplish, without the massive burden that would be associated with manually reprocessing all claims,” CMS wrote.

Hospitals can view their estimated payment in a data file available through the CMS webpage for hospital outpatient payment policies once the proposed rule is published in the Federal Register (note: the information is available as of July 11 in a ZIP file labeled “Addendum AAA” at the above link). Comments on the rule are due by Sept. 5 at regulations.gov (refer to file code CMS-1793-P).

How the need for a lump-sum payment arose

The American Hospital Association (AHA), Association of American Medical Colleges and America’s Essential Hospitals (AEH) challenged the lower reimbursement rate that was implemented for 2018, with the case then winding its way through the court system.

In June 2022, the Supreme Court unanimously ruled that HHS did not have statutory authority to change the reimbursement rate without first conducting a survey of hospitals’ drug acquisition costs in the 340B program. 

The prior rate of ASP plus 6% was restored as of Sept. 28 and remained in effect for 2023. After crunching the numbers, CMS determined that 340B providers received $10.5 billion less in drug payments during the nearly five-year span that began in 2018, compared with what they would have received absent the unlawful change in the reimbursement rate.

Of that sum, the agency gauged that $1.5 billion already was distributed to providers through claims processing and reprocessing following reestablishment of the higher rate in late September.

The resulting $9 billion aggregate payment would include $1.8 billion as an estimate of the additional beneficiary copayment amounts that hospitals would have collected if the higher rate for 340B-acquired drugs had been in place. Future cost-sharing would not be affected, meaning hospitals could not bill for coinsurance on remedy payments.

CMS said it considered whether it could tack on interest to the lump-sum payments but concluded it does not have the statutory authority.

Why general outpatient payments would be reduced

CMS said its reading of the Medicare statute indicates the remedy payments are subject to budget neutrality requirements.

Due to those requirements, the higher 340B-related payment rate for 2023 necessitated a reduction of 3.09% in the conversion factor for Medicare outpatient payments to hospitals. The reduction was implemented in the final rule for 2023 outpatient payments after the proposed rule was issued too late to incorporate the consequences of the Supreme Court ruling.

There would be subsequent reductions in ensuing years under the newly proposed rule. CMS noted that when the 340B-related reimbursement rate was reduced starting in 2018, budget neutrality allowed for an increase in the payment rate for nondrug items and services. The agency calculated that hospitals were paid $7.8 billion more for such items and services than they would have been without the unlawful change in the rate for drugs acquired through 340B.

Starting in 2025, according to the proposed rule, CMS would reduce the conversion factor for hospital outpatient payments by 0.5% annually until the full $7.8 billion is offset. That looks to be a 16-year period. Providers would not be subject to the rate reduction if they enrolled in Medicare in 2018 or later.

The extended time frame would ensure the decrease is not “overly financially burdensome on impacted entities, especially those in rural communities,” CMS wrote.

However, the budget neutrality adjustment could act as a double whammy if it’s in place during a future year when HHS invokes its authority to lower 340B-related payment rates. The Supreme Court indicated such a move would be permissible if HHS bases the adjustment on a survey of hospitals’ drug acquisition costs, which it did not do heading into 2018.

Benefits and drawbacks

Hospital advocacy groups view the proposal as a mixed bag, saying the payments would be a needed boost but the budget neutrality provisions would take an unnecessary toll in future years.

In a statement attributed to President and CEO Rick Pollack, the AHA said it was “especially gratified that HHS agreed with the AHA’s position that these hospitals must be promptly repaid in full, with a single lump-sum. At the same time, the AHA is disappointed that HHS has chosen to recoup funds from other hospitals that cannot afford additional Medicare payment cuts.”

AEH said, “The administration’s plan to cut nondrug payments to hospitals to achieve budget neutrality unnecessarily blunts the impact of the remedy by ensuring years of future underpayments,” according to a statement by President and CEO Bruce Siegel, MD, MPH.

Soumi Saha, senior vice president for government affairs with Premier Inc., said the company is intent on “fleshing out ambiguity that exists in statutory language regarding whether retrospective remedies pursuant to a Supreme Court case are required to be implemented in a budget-neutral manner.”