CMS and MedPAC Guidelines and Trends

CMS Proposal: A Path to an Uncertain Future for 340B

October 2, 2017 11:15 am

The Trump administration has run the Centers for Medicare & Medicaid Services (CMS) since January 2017, so now is a reasonable time to consider what changes it has brought to the Medicare program. What have the policy choices been, and what clues do they offer as to what to expect from the new administration in the next four years?

The short answer is that, when it comes to Medicare, the Trump administration has talked a good game about reducing regulatory and contractor burdens for providers. That is to be expected from an administration that ran on an antiregulation platform, but we have not yet seen much in the way of details and precise proposals.

But in the places where the Trump administration has shown its hand with detailed proposals —particularly those issued by CMS Administrator Seema Verma—it has become clear that the administration intends to be aggressive in proposing major, sometimes controversial, Medicare payment changes. Some of these proposals raise questions about the agency’s legal authority. To illustrate, consider just one major proposal advanced by CMS: reduction of rates for 340B-covered entities for separately payable outpatient drugs.

CMS’s Policy Proposal

The Medicare program pays hospital providers for outpatient department services under the Outpatient Prospective Payment System (OPPS), which groups clinically comparable services with respect to their use of resources into ambulatory payment classifications (APCs), each with its own payment weight and rate. Using its authority under the Social Security Act to define APCs and establish payment rates—set forth in Sections 1833(t)(2) and 1833(t)(14) of the act—CMS has created distinct APCs for “separately payable drugs” and set the payment rates for these drug APCs. Section 1833(t)(14) instructs CMS to price separately payable drugs using one of two methodologies. CMS must establish a payment rate that is “equal . . . to the average acquisition costs for the drug for that year” based upon the results of an acquisition cost survey, which the agency is required by statute to conduct.

As an alternative, if hospital acquisition cost data are “unavailable,” the agency is directed to set the payment rate at a level equal to the average price for the drug in the years established under Section 1847A of the Social Security Act, which sets forth the average sales price (ASP) payment methodology for Part B drugs.

For several years, CMS has declared that it does not have accurate acquisition cost survey data for separately payable drugs, and it therefore has invoked its authority under this second option to set the payment rate for separately payable drugs at ASP plus 6 percent.

In the FY18 OPPS proposed rule, CMS proposes using its authority under Section 1833(t)(14) to set the payment rate for separately payable drug APCs furnished by 340B covered entities at ASP minus22.5 percent. a  This proposed rate—specifically, the 22.5 percent downward adjustment to ASP—is based on MedPAC’s 2015 estimate of the average discount that 340B hospitals receive “for drugs paid under the [OPPS].”

In the proposed rule, CMS states that its goal is “to make Medicare payment for separately payable drugs more aligned with the resources expended by hospitals to acquire such drugs…. ” But CMS also has cited other reasons for proposing this policy, such as protecting the finances of beneficiaries who may pay more in copayments for certain outpatient drugs than what it costs a 340B hospital to acquire those drugs. CMS estimates that the proposal would reduce Medicare payments for separately payable drugs by $900 million annually, which CMS proposes to use this year to increase FY 2018 non-drug APC payment rates by 1.4 percent.

CMS also requested comments as to whether the agency should divert this $900 million in annual savings from the OPPS payment system and use it in other ways. CMS notes, in particular, that is seeking comments “on whether and how the offsetting increase could be targeted to hospitals that treat a large share of indigent patients, especially those patients who are uninsured.”

Implications of CMS’s Proposal

CMS’s proposal would strike a significant financial blow to 340B hospitals, many of which are safety-net providers that rely upon the 340B drug pricing program to fund their operations. Under the 340B program, drug manufacturers agree to limit their charges to 340B ceiling prices for sales of certain drugs to covered entities(i.e., entities covered by the 340B program). Those entities can purchase drugs at ceiling prices for all eligible outpatients, including patients with Medicare or private insurance, and retain the difference if payment for the drugs exceeds their costs—i.e., their ceiling price. This is a known feature of the 340B program, and one that Congress intended for funding services of covered entities that serve indigent and uninsured populations by allowing the entities to retain the difference between payment rates (including Medicare) and their acquisition costs. In the words of Congress, the 340B program is designed to “enable these entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” b

The ASP minus 22.5 percent proposal shows that the new administration is willing to float radical proposals that arguably stretch its legal authority beyond the breaking point. What CMS identifies as a flaw in the program—that it currently pays hospitals in excess of 340B ceiling prices for outpatient drugs—is a well-known and intended feature. Far from acting to fix this “flaw,” Congress has expanded the 340B program, allowing more institutions to participate in it, including children’s hospitals, rural referral centers, and critical access hospitals.

So CMS’s 2018 OPPS proposal threatens to rewrite this statutory scheme in that it diverts 340B savings away from 340B covered entities, which are the intended beneficiaries, and directs those funds to other uses. CMS contends that the authority that requires it to use the ASP methodology to price drug APCs when survey data are “unavailable” also permits it to adjust those payment rates as necessary for the purposes of Section 1833(t)(14).

But the agency’s “adjustment” of the statutorily prescribed rate to ASP minus 22.5 percent has a different purpose altogether: to redirect 340B savings to other uses such as payment outside the OPPS altogether. Courts have been skeptical of such maneuvers, and have ruled that where “Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions,” agencies have no authority to rewrite the congressional scheme (here, the 340B program) by using some vague and generalized authority found in another statute. c

Time Will Tell

As the Supreme Court has said, “Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.” We will see on or about Nov. 1, 2017 when CMS issues its final rule whether it elects to adopt this aggressive proposal, and if so, we will see shortly thereafter if anyone decides to challenge this exercise of authority.


a. CMS, “Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs,” Federal Register, July 20, 2017.

b. See H.R. Rep. No. 102-384(II), at 12.

c. See, for example, RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2071 (2012)>


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