The drug industry has cited the 340B program as one of the drivers of drug price growth and has made changes to the program a priority. Early last year, HHS proposed “mega-guidance” that would rein in the program only to withdraw it upon the arrival of the new administration.
The pressure did not abate and late yesterday CMS responded. In the CY 2018 Outpatient Prospective Payment Rule published yesterday, CMS proposed that Medicare reimbursement for drugs purchased through a 340B hospital be reduced from ASP + 6 percent (the standard Part B drug reimbursement) to ASP – 22.5 percent.
Their proposal is so dramatic we doubt it sticks completely under what will be the withering criticism of non-profit hospitals, especially large research medical centers. The reimbursement reduction will no doubt please the pharmaceutical industry which will finally see some limits on the growth of the program. Patient advocates will also be pleased because cost-sharing for Medicare beneficiaries will be reduced along with the reimbursement rate.
If you are not familiar with the 340B program, we have a handy explainer here.
The specifics of the CY 2018 OPPS 340B proposal are as follows:
- Creates a billing modifier, effective Jan. 1, 2018 for hospitals to report separately payable drugs that were not acquired under the 340B program.
- The 22.5 percent discount to 340B drugs is derived from estimates in a 2015 MedPAC report and is consistent with CMS’s analysis of ceiling prices established by law but not disclosed.
- Medicare beneficiaries will be responsible for co-payment rates at the new ASP-22.5 percent for a drug, thus reducing their liability
- Savings derived from the decreased reimbursement may be subject to budget neutrality and applied to increase payments to providers subject to OPPS or under Part B generally. CMS is asking for suggestions on how that might be accomplished
- CMS would consider a phased-in approach using two to three years of implementation
As we will discuss in our Black Book presentation on Drug Pricing and Approval Policy July 20th at 11:00am (check with for more information), the 340B program and its explosive growth has created some pretty interesting market dynamics in health care.
For hospitals, the spread between the price at which they purchase 340B drugs and the Medicare reimbursement is roughly 25 to 50 percent There is little hard data on how much money gets diverted from the drug industry to the hospital business. For 2013, MedPAC estimated the total value of the diversion at $3.2B. Dr. Allen Fein of Pembroke Consulting (www.drugchannels.com) has estimated the 2016 amount at about $16B
The high margin business of 340B drugs has provided much of the incentive for hospitals to acquire physicians practices especially in the areas of oncology and opthamology. If CMS's proposal sticks we should see fewer acquisitions.
For many non-profit hospitals, the 340B program has been propping up income statements especially for weaker operators. One large hospital told us that pharmacy is about 70 percent of gross margin! A reduction in the 340B spread is surely going to have an impact on financial performance.
The contract pharmacies, especially WBA that dominates the space, get a little cut in the action - no one knows how much. With less spread between the 340B discount and Medicare reimbursement, those contract pharmacy relationships may be less valuable. The billing modifier in the proposed rule will also complicate things for contract pharmacies who often have no idea if a patient perscription is 340B eligible or not.
While the proposal does not help lower drug prices it definitely should have the effect of limiting the growth of the program and constraining the upward pressure on prices.
More broadly, it would appear that when it comes to picking winners and losers in the health care system, the Trump administration is going to come down firmly on the side of Medicare beneficaries. The 20 percent co-payments required under Part B have been assessed on the ASP + 6 percent price even if a hospital purchased the drug at the steep 340B discount. With this proposal, CMS is calling that what it is - grossly unfair.
Call with questions. The 340B program is pretty complicated.
Emily Evans
Managing Director
Health Policy
@HedgeyeEEvans
