In November 2015, the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) published a report (the Report) on the subject of Medicare Part B (Part B) payments made for covered outpatient drugs purchased through the 340B Drug Pricing Program (340B Program). The Report is the result of an OIG review, through which OIG sought to determine the extent to which Part B payments to hospitals and other entities participating in the 340B Program (Covered Entities) for covered outpatient drugs exceeded the cost to such Covered Entities in acquiring those drugs. In sum, OIG found that in 2013, Part B payments exceeded drug costs to Covered Entities by approximately $1.3 billion. OIG notes that the Report, which also sets forth three potential mechanisms whereby Part B could share in that excess payment amount, is intended to be used by stakeholders in future discussions on the distribution of 340B Program savings and the reduction in overall Medicare spending.   

The 340B Program allows Covered Entities to purchase covered outpatient drugs from manufacturers at discounted prices. The Health Resources and Services Administration (HRSA) sets the maximum price that a manufacturer can charge for a 340B-eligible drug, which is calculated each quarter (also known as the Ceiling Price). Covered Entities dispense 340B drugs to eligible patients, and are reimbursed for the dispensed drugs by applicable third party payors. 

Covered Entities may provide 340B drugs to Part B patients. Part B pays for most covered outpatient drugs on the basis of volume-weighted average sales prices (ASPs). According to the Report, in 2013, Medicare Part B paid for most covered outpatient drugs at 106 percent of ASP.  Part B beneficiaries are responsible for 20 percent of all Part B payments, including payments for drugs. 

In producing the Report, OIG reviewed claims submitted by Covered Entities to Part B for 340B-eligible drugs in 2013. OIG used this data to determine the differential between the 2013 Ceiling Prices for 340B-eligible drugs and the amounts actually paid by Part B (including Part B beneficiaries) to Covered Entities for such drugs. As noted briefly above, the Report states that the total payments by Part B and Part B beneficiaries to Covered Entities for 340B-eligible drugs in 2013 exceeded the Ceiling Prices for such drugs by $1.3 billion.

Currently, where a Covered Entity dispenses a 340B drug to a Part B beneficiary, the Covered Entity retains the entire differential between the cost of acquiring the 340B drug (often, the Ceiling Price) and the total payment received from Part B for such drug. The 340B Program does not mandate how a Covered Entity uses the savings generated by dispensing 340B drugs, including any savings generated by dispensing 340B drugs to Part B beneficiaries.

In the Report, OIG sets out three potential alternative payment methodologies whereby Part B and Part B beneficiaries could share in the savings accrued to Covered Entities through the 340B Program. The chart below sets forth the proposals as outlined in the Report, and illustrates the distribution of the savings generated which would have been generated by the 340B Program for 2013 for Covered Entities and for Part B under each methodology. 

In each scenario, Part B would reduce reimbursement to Covered Entities for 340B-eligible drugs dispensed to Part B beneficiaries. As illustrated above, the three alternative payment methodologies vary in how the savings would be shared between Part B and the Covered Entities. Relatedly, the total savings to the Part B Program varies among the three options: the first alternative methodology (100 percent of ASP) represents a 5 percent reduction in total Part B expenditures on 340B drugs, the second methodology represents an 18 percent reduction and the third represents a 31 percent reduction in Part B spending on 340B drugs.

The Report is careful to note that the financial analysis contained therein does not take into account the potential effects on those communities served by Covered Entities. From the Covered Entity perspective, the proposed shared-savings mechanisms may make the 340B Program less viable, and Covered Entities may be discouraged from participation. The proposals contained in the Report may also cause additional administrative burdens on Covered Entities, because such proposals would require a Covered Entity to specifically identify 340B drugs on Medicare Part B claims (e.g., through the use of a modifier).

As noted by OIG, the Report is intended to serve as a tool for future discussions pertaining to the 340B Program, the use of savings by Covered Entities and the reduction in overall Part B payments. It appears that the Centers for Medicare & Medicaid Services (CMS) would be unable to implement any change to the payment methodology, including adoption of any of the proposed methods mentioned in the Report, absent regulatory (or potentially, statutory) action.  In light of this Report, it is possible that public and private stakeholders alike will engage in discussions about redistributing at least some of the savings which are generated by the 340B Program.