Continued 340B eligibility is at risk for hundreds of hospitals thanks to pandemic-related factors

Hospitals that rely on savings from the 340B Drug Pricing Program should examine the possibility that they’ll soon be rendered ineligible.

Several factors are having an industrywide impact on the disproportionate share hospital (DSH) adjustment percentage, and if that tally drops below a certain threshold on a hospital’s Medicare cost report, the hospital cannot receive 340B discounts.

The tricky part is that hospitals may be unaware of the issues triggering the drop in their percentage until they produce their cost report. Roughly 425 hospitals across 49 states are in jeopardy of losing eligibility upon filing their next cost report, according to data provided by the National Rural Health Association (NRHA). Others could see reductions in their allocated 340B savings.

“Particularly for smaller rural hospitals that don’t have a really large administrative staff, it’s just something that would fly under the radar,” said Alexa McKinley, JD, regulatory affairs manager with NRHA.

Carl Lindquist, associate vice president of government and community affairs at Tidelands Health, a four-hospital system based in South Carolina, said his organization identified the possibility of a looming widespread issue in late 2022. In 2023, a partnership emerged that included NRHA, Tidelands Health, various other hospitals and health systems, and seven state hospital associations. The group in September authored a letter to Congress asking for an extension of a waiver that has allowed hospitals to remain eligible for 340B over the last two years.

Federal appropriations legislation at the close of 2021 made the waiver available, but that accommodation ended after the FY22 cost-reporting period. The reprieve may have led hospitals to overlook the need to track their eligibility going into the current reporting period, McKinley noted.

Why eligibility is at risk

DSH formula inputs that have been affected amid the pandemic include the share of a hospital’s patients who are in Medicaid. That number is plummeting across the country during the ongoing Medicaid eligibility redetermination process, with the Kaiser Family Foundation reporting 16.4 million disenrollments as of Feb. 1.

Another input is a hospital’s share of Medicare patients who receive Supplemental Security Income (SSI). The Social Security Administration is experiencing a massive backlog that has stymied the processing of SSI claims, causing delays of at least seven months as of December, according to an AARP report. Thus, many hospitals have fewer SSI patients to report than they normally would.

Given that in most states, SSI eligibility confers presumptive Medicaid eligibility, the accumulation of unprocessed disability claims also causes hospitals to lose out on additional Medicaid patients.

Hospitals in South Carolina and the nine other states that have not expanded Medicaid as authorized by the Affordable Care Act face an even greater risk because they generally have a smaller Medicaid population and a higher number of uninsured patients, Lindquist noted.

Another factor is the lingering systemwide logjam in moving patients from hospitals to post-acute care. That issue raises a hospital’s total number of patient days and its number of Medicare Part A days, both of which are denominators in the formula and thus reduce the DSH percentage if they increase. A 2023 survey by the American Health Care Association found that 52% of nursing homes have had to limit admissions because of staffing shortages.

Longer lengths of stay also may stem from the care deferrals that took place early in the pandemic. That pool of patients also tends to have commercial insurance rather than Medicaid, McKinley noted.

Unappealing options

If a hospital’s DSH percentage drops below 11.75, it is ineligible for 340B. Smaller facilities may be able to stay eligible by reclassifying as a sole community hospital (SCH) or rural referral center (RRC). Hospitals in those categories can remain in 340B if their percentage is 8 or above.

“But that assumes they meet the other qualifications for being a sole community hospital or rural referral center, which is another whole set of issues,” McKinley said.

One drawback to reclassifying as an SCH or RRC, she noted, is that those hospitals don’t get to apply 340B savings to orphan drugs (except at the discretion of the manufacturer).

“They would still be in 340B, but then that would get rid of some of the 340B savings that they [previously] saw,” McKinley said.

A loss of 340B savings won’t necessarily lead to closures, but service lines would be at risk.

“Hospitals across the country that are in this position are going to face some very difficult decisions,” Lindquist said.

He noted that Tidelands Health uses 340B savings to fund the distribution of medications to patients for free or at a reduced cost and to support outreach programs that connect community members with preventive care.

The buzz on Capitol Hill

Because 340B represents a vital boost for hospital finances — especially at smaller and rural facilities — Congress should provide an eligibility waiver just as it did two years ago, advocates say.

McKinley and Lindquist are realistic about the prospects at a time when 340B has become something of a political lightning rod. For example, one pending piece of legislation would impose new transparency requirements on 340B hospitals.

“I’ve had lots of meetings in the House and Senate on this, and no one is saying it’s not a problem,” McKinley said, referring to the eligibility issue. “But they’re [saying], ‘I don’t want to lead this charge. I would join on if someone else did.’”

She’s also received feedback that Congress is trying to curtail its practice of offering pandemic-related waivers that need to be extended every couple of years.

However, said McKinley, “That’s not what we’re looking for. We truly think hospitals need [only] two more years to make sure that the Medicaid shares balance out and everything kind of gets back to normal.”

Absent congressional intervention, the number of affected hospitals could well grow, although that’s hard to project because of the lag in the publication of cost-report data.

“I don’t think the trends are in a positive direction, let’s put it that way,” Lindquist said. “I think if anything, these dynamics are going to continue to worsen.”

He added, “Democrat or Republican, we think everybody [in Congress] should have an interest in this. Ultimately, it comes down to supporting safety-net healthcare providers like us who are out there trying to advance health in the communities we serve.”