On November 1, 2017, CMS announced that it is in fact cutting Medicare Part B reimbursement for 340B drugs to the tune of $1.6 billion.  To be accurate, what CMS announced is its intent to finalize proposed rule changes to the Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems Quality Reporting Program.  As part of the rule changes, CMS will be implementing, with minor tweaks, the proposal it first announced last summer to significantly reduce Medicare Part B reimbursement for 340B drugs paid to hospitals and ambulatory surgical centers.  The full text of the final rule with commentary is available now and will be published in the Federal Register on November 13^th.   The reimbursement reduction, and other changes relative to 340B, are scheduled to go into effect on January 1, 2018.

The rule only impacts Medicare Part B reimbursement for 340B, and no other government or private payor reimbursement.  Still, the change will have major repercussions in the 340B world.  When the proposed rule was first announced, I posted answers to a myriad of questions about the proposal and its potential impact on 340B covered entities.  With the “rule” now in final form, I can revisit some of those questions and answers.

1. What is the change to Medicare Part B Reimbursement for 340B drugs? Effective January 1, 2018, CMS will reduce Part B reimbursement for 340B drugs from Average Sales Price (ASP) plus 6% to ASP minus 22.5%.

2. Does the change apply to all 340B covered entities? The mechanism for the change is a revision to the Outpatient Prospective (OPPS) and Ambulatory Surgical Center (ASC) Payment Systems, so the change only applies to entities that utilize those systems: generally hospitals, Community Mental Health Centers, and ASCs.  However, there are three types of hospitals that receive OPPS payment adjustments: rural sole community hospitals, children’s hospitals, and OPPS-exempt cancer hospitals These three types of hospitals are exempted from the reduction in Medicare Part B reimbursement and will still receive the ASP plus 6% reimbursement rate for Medicare Part B drugs.

3. Does the change apply to all 340B drugs? The change applies to most, but not all, 340B drugs.  While CMS considered multiple exceptions, only vaccines and drugs that are on transitional pass-through payment status (assigned status indicator “G”) will be excluded from the Medicare Part B payment reduction.  CMS did say that it is open to reconsidering additional exemptions in future years based on further data or information.

4. How much will CMS save and what will CMS do with the savings? CMS believes that the reduction in Medicare Part B reimbursement will save it approximately $1.6 billion for calendar year 2018.  But because the mechanism for the change is the OPPS and ASC adjustments, the change must be budget neutral.  CMS states that it will “redistribute” the savings to the covered entities by increasing the conversion factor for non-drug items paid through the OPPS and ASC Payment Systems by 3.2%.

5. Did CMS add requirements related to the use of modifiers in billing 340B drugs?  In order to effectuate the payment adjustment as well as to collect data for future use, CMS is requiring impacted hospitals and facilities subject to the reduced reimbursement to add the modifier “JG” on the same claim line as the HCPCS code to identify any drug purchased through the 340B program.  For rural sole community hospitals, children’s hospitals, OPPS-exempt cancer hospitals, or any other hospital exempt from the payment reduction, they must also use a modifier “TB” on the claim line to identify any drugs purchased through the 340B program.  This change is also effective January 1, 2018.

6. Does CMS have legal authority to unilaterally implement these changes? This remains the key question.  CMS asserts it has statutory authority under 42 U.S.C. 1395I(t)(14)(A)(iii)(II) to “adjust” hospital payments for outpatient drugs based on hospital acquisition cost data or, if the data is not available, by the average price for the drug “as calculated and adjusted by the Secretary.”  CMS asserts that multiple studies support the conclusion that ASP plus 6% far exceeds hospital acquisition cost for 340B drugs; moreover, given the confidentiality of 340B ceiling and subceiling prices, it lacks the data to determine an average price.  Based on cited studies and the statutory authorities, CMS asserts it is authorized to make an “adjustment” and reduce payments for these drugs to more closely approximate what the entities paid to purchase the drugs.  However, while CMS asserts it is appropriate to make this change through rulemaking, there continues to be no actual “rule” proposed by CMS as part of 42 CFR to effectuate the change.

So what happens next?  While there might be some appeals to HRSA, HRSA is powerless to act on the proposed change.

As we know, Congress is considering changes to the 340B Program, and lobbying of Congress to halt the implementation of the rule is likely already underway.  But as part of its commentary to the final rule, CMS focused on the benefit to Medicare beneficiaries in the form of reduced co-pays for 340B drugs – otherwise beneficiaries are paying 20% of a charge that far exceeds what the entity paid to purchase the product.  Congress may not have the appetite to prevent those reduced co-pays from going into effect.  That leaves the courts.

Several groups, including American Hospital Association, Association of American Medical Colleges, and America’s Essential Hospitals, have already vowed to pursue litigation to prevent the rule from taking effect.   Arguments will likely include whether CMS can meets its statutory obligation to “calculate” acquisition cost by citing others’ studies, and whether CMS can legally make the change through “rule-making” without actually proposing a “rule.”

So for 340B stakeholders, you may want to buckle your seatbelts folks – it is definitely going to be a bumpy ride.