Knowledge Base Article

As a child I loved watching and playing along with game shows.  A lot of television viewers must also enjoy game shows as they continue to be popular with the ongoing creation of new shows and now even an entire channel dedicated to game shows. There are game shows where the contestants must answer difficult questions, game shows where people gamble on random choices, and game shows where the contestants try to guess answers given by others.  Though it is not an official “game show,” every year it is fun to guess which proposals from CMS’s proposed rules for inpatient and outpatient prospective payment systems will make the cut to become final Medicare requirements.  “Fun” may not be the word everyone would choose to describe this guessing game – some might consider it nerve racking.  There are some clues you can use to help with your guess: the tone of the discussion in the proposed rule and the resulting public conversations from interested parties. 

Based on public arguments concerning the 2018 Outpatient Prospective Payment System (OPPS) proposed payment reduction for drugs purchased through the 340B program, I truly thought CMS would back off, either altogether with no payment reduction or at least a lesser payment reduction.  There were numerous objections to the proposal from some influential entities – hospital associations, previous different and less severe proposals by the Medicare Payment Advisory Commission (MedPAC) and the Office of Inspector General (OIG), Hospital Outpatient Payment (HOP) Advisory Panel, and even members of Congress.  BUT – sound the buzzer – I was wrong.  CMS has indeed finalized their proposal to reduce payment for separately payable drugs purchased under the 340B program to ASP -22.5% as opposed to ASP +6% for drugs not purchased through the 340B program.

Background on the 340B Program

• The program allows participating hospitals and other health care providers to purchase certain “covered outpatient drugs” at discounted prices from drug manufacturers.
• It was established by section 340B of the Public Health Service Act by the Veterans Health Care Act of 1992 and is administered by the Health Resources and Services Administration (HRSA) within the Department of Health and Human Services (HHS).
• Health care providers eligible to participate in the 340B program if they meet certain criteria are:
• Federal health care grant recipients,
• Hospitals with a Medicare disproportionate share hospital (DSH) percentage > 11.75%,
• Critical Access Hospitals (CAHs),
• Children’s Hospitals with a DSH adjustment > 11.75%,
• Sole Community Hospitals (SCHs) with a DSH adjustment ≥0%
• Rural Referral Centers (RRCs) with a DSH adjustment ≥0%, and
• Freestanding Cancer Hospitals with a DSH adjustment > 11.75%.
• HRSA calculates the maximum (ceiling) price a participating drug manufacturer can charge a covered entity for each covered outpatient drug based on average manufacturer price (AMP) and a unit rebate amount (URA) that considers innovator vs. non-innovator drugs and the availability of generics.
• Deeper discounts (known as “subceiling prices”) are available on some covered outpatient drugs through HRSA’s Prime Vendor Program (PVP).
• The statutory intent of the 340B Program is to maximize scarce Federal resources as much as possible, reaching more eligible patients, and providing care that is more comprehensive.

CMS’s Reasons for the Payment Reductions

Payment Not Aligned with Costs

CMS’s goal is to make Medicare payment for separately payable drugs more aligned with the resources expended by hospitals to acquire such drugs. Various reports by government agencies estimated 340B hospitals receive a significant minimum discount for drugs paid under the OPPS with even deeper discounts if participating in the PVP program.

• MedPAC – discount of 22.5% of the ASP
• OIG – discount of 33.6% of the ASP
• GAO – discount of 20-50% of the ASP

Another MedPAC report estimated savings of $3.8 billion on outpatient drugs purchased through the 340B Program in 2013.  Also, participation in the program has grown steadily, from 583 participating hospitals in 2005, to 1,365 hospitals in 2010, and 2,140 hospitals in 2014.

There are limitations in estimating 340B drug costs due to the inability to identify which drugs were purchased through the 340B Program within Medicare claims data.  This is another concern CMS addresses in the final rule.

Drug Utilization/Spending

A MedPAC study also found that “Medicare spending grew faster among hospitals that participated in the 340B Program … than among hospitals that did not participate in the 340B Program …”.  The GAO found per beneficiary Medicare Part B drug spending, including oncology drug spending, was substantially higher at 340B DSH hospitals than at non-340B hospitals.  According to the GAO report, this indicates that, on average, beneficiaries at 340B DSH hospitals were either prescribed more drugs or more expensive drugs than beneficiaries at the other non-340B hospitals in GAO’s analysis.

Beneficiary Costs

CMS is also concerned about the cost of co-pays for Medicare beneficiaries.  Medicare beneficiaries are liable for a 20% copayment of the OPPS payment rate, which is currently ASP+6% (regardless of the 340B purchase price for the drug).  In another unfavorable report, the OIG found 35 drugs where the “difference between the Part B [payment] amount and the 340B ceiling price was so large that, in at least one quarter of 2013, the beneficiary’s coinsurance alone… was greater than the amount a covered entity spent to acquire the drug.”

Public Comments

A number of commenters agreed with CMS’s proposal and reasons and also put forth a few other reasons for going forward with the payment reduction. Here are some of reasons given by commenters.

• Reverse the “perverse incentives” that have driven the closure and consolidation of the nation’s community cancer care system
• Only a small minority of 340B participating hospitals are using the program to benefit patients in need
• The increasing scope and magnitude of required 340B discounts are increasing drug prices to record-breaking levels as manufacturers factor these discounts into pricing decisions
• Future decreases in prices for supplemental insurance due to coinsurance savings from the 340B payment reduction if it is implemented
• Encourage site-neutral care as patients may receive the same services at a physician office setting without a significant difference in their financial liability between settings
• Address the incentive for hospitals to utilize these drugs solely for financial reasons

The major opposition to the payment reduction expressed by commenters was the lack of CMS’s statutory authority to impose such a large reduction in the payment rate for 340B drugs, and that payment cuts of this magnitude would greatly “undermine 340B hospitals’ ability to continue programs designed to improve access to services—the very goal of the 340B Program.”  If you are interested in the details of CMS’s response, you can read the display copy of the Final Rule beginning on page 562.  In summary, CMS stood their ground on most of the proposals although they did concede some additional exceptions and a change in the required modifier reporting. 

The Final Decision

For CY 2018, separately payable Part B drugs assigned status indicator (SI) “K” that are acquired through the 340B Program (including 340B PVP) will be paid at the ASP minus 22.5 percent when billed by a hospital paid under the OPPS that is not excepted from the payment adjustment.  Since separately payable Part B drugs with an SI of “K” were paid at ASP + 6% in 2017, the 340B drug payment reduction actually represents a total reduction of 28.5% from 2017 to 2018.  Also, since separately payable drugs not purchased through the 340B program will continue to be paid at ASP + 6% in 2018 the payment rate for these drugs posted in Addendum B of the 2018 OPPS Final Rule is ASP + 6%. Therefore, to calculate the reduced payment, you must first determine ASP by subtracting 6% and then the final reduced payment by subtracting the 22.5% to arrive at ASP – 22.5%, which is a reduction of 28.5% from the posted payment rate.

CMS believes an average discount to set payment rates for 340B-acquired separately payable drugs achieves the goals of (1) adjusting payments to better reflect resources expended to acquire such drugs, and (2) protecting the confidential nature of discounts applied to a specific drug. According to CMS, the estimated average minimum discount of 22.5% of the ASP calculated by MedPAC adequately represents the average minimum discount a 340B participating hospital receives for separately payable drugs.  In fact, they think it is likely the average discount is higher, potentially significantly higher, than the average minimum of 22.5%.  CMS wants to ensure that Medicare beneficiaries are not liable for a copayment rate that is tied to the current methodology of ASP+6% when the actual cost to the hospital to purchase the drug under the 340B Program is much lower than the ASP for the drug.

Exclusions and Exceptions

Exclusions from the 340B payment reduction are (1) drugs on pass-through payment status, which are required to be paid based on the ASP methodology (status indicator “G” – paid at ASP + 6%), and (2) vaccines, which are excluded from the 340B Program (status indicator L, paid at reasonable cost).  The following types of facilities are also excepted from the 340B payment discount:

• Critical Access Hospitals (CAHs),
• Rural Sole Community Hospitals (SCHs),
• Children’s Hospitals, and
• PPS-exempt Cancer Hospitals.

CMS decided not to make exceptions for the following:

• Biosimilar biological products will be paid the same as other separately payable drugs. Pass-through biosimilars will be paid ASP+6% and non-pass-through biosimilars will be paid at ASP-22.5%.  Currently there are only two biosimilars on the market, both with pass-through status for all of CY2018.  This means there are no biosimilars at this time that will be affected by the reduced payment for 340B drugs.
• Drugs provided in nonexcepted off-campus provider-based departments will be paid in accordance with section 1847A of the Act (generally, ASP+6 percent), consistent with Part B drug payment policy in the physician office although CMS may consider payment adjustments for these PBDs in 2019.
• Rural referral centers (RRCs) will be subject to the reduced payment if they participate in the 340B program.
• Blood clotting factors and radiopharmaceuticals that are not pass-through drugs will be paid ASP-22.5% if purchased through the 340B program.

Modifier Requirements

In response to comments, CMS is requiring a modifier for drugs acquired under the 340B Program instead of requiring its use on drugs that were not acquired under the 340B Program. In addition, they are establishing an informational modifier for use by certain providers who will be excepted from the 340B payment reduction.

• Effective January 1, 2018, Medicare will require hospitals subject to the 340B payment policy to report modifier “JG” on the same claim line as the drug HCPCS code to identify a 340B-acquired drug. These drugs will be paid at ASP-22.5%.
• Rural SCHs, children’s hospitals and PPS-exempt cancer hospitals excepted from the 340B payment adjustment will be required to report informational modifier “TB” for 340B-acquired drugs, and will continue to be paid ASP+6 percent.

These modifiers will facilitate the collection and tracking of 340B claims data whether they affect payment or not.

Budget Neutrality

CMS plans to implement the payment reduction for 340B drugs in a budget neutral manner.  “To maintain budget neutrality within the OPPS, the estimated $1.6 billion in reduced drug payments from adoption of this final alternative 340B drug payment methodology will be redistributed in an equal offsetting amount to all hospitals paid under the OPPS through increased payment rates for non-drug items and services furnished by all hospitals paid under the OPPS for CY 2018. Specifically, the redistributed dollars will increase the conversion factor across non-drug rates by 3.2% for CY 2018.”

Comment Solicitation

It is clear this is not the final word on this issue.  CMS states they may revisit the alternative 340B drug payment methodology in CY 2019 rulemaking and I am going to make another guess and say they definitely will. They are still seeking public comments on ways to more closely align the actual acquisition costs that hospitals incur rather than using an average minimum discounted rate while still keeping the ceiling price confidential as required by law.

I guessed wrong concerning the reduction in payment proposal for drugs acquired under the 340B program, but at least I didn’t have any money riding on it.  Unfortunately, hospitals do have money riding on it, maybe even a lot of money.

If you are interested in determining the potential impact the 340B payment reduction will have on your hospital, please contact Medical Management Plus, Inc. at 205-941-1105.  Utilizing the Medicare claims data from our sister company, RealTime Medicare Data (RTMD), we can compare your actual Medicare payments for drugs with an SI of “K” from a recent 12-month timeframe to the proposed 22.5% reduction from ASP.  As explained above this involves first subtracting 6% from the Addendum B payment rate of ASP + 6%, and then reducing the ASP by 22.5%, for a total of 28.5% below the posted payment rate.