Medicare Payment and Reimbursement

Outpatient payment proposed rule: 340B drug payments to rise significantly in 2023 but will cut into the overall rate increase

July 19, 2022 4:48 am

Even before factoring in the impact of the 340B payment changes, hospital groups aren’t happy with the proposed payment update.

For hospitals, these were three of the key takeaways from Friday afternoon’s release of the 2023 proposed rule for Medicare outpatient payments:

  1. CMS hasn’t yet implemented a required increase to Medicare payments for 340B drugs but will do so when the final rule is released later this year.
  2. The proposed 2023 update to outpatient payments — 2.7% — is displeasing to hospital advocates.
  3. The pending 340B update will have an adverse impact on general outpatient payments, likely making the finalized increase even more concerning for the hospital industry.

1. The 340B payment rate will be updated

Technically, the proposed rule calls for the Medicare payment rate for drugs acquired through the 340B Drug Pricing Program to remain at average sales price (ASP) minus 22.5%, the same rate that has been in place since 2018. However, that will change when the final rule is published in November.

The Supreme Court ruled unanimously in June that the approach used to establish the current payment rate was not permissible under the Medicare statute. But the timing of the ruling didn’t leave enough time to incorporate a new rate in the proposed rule, CMS said.

Nonetheless, “We fully anticipate applying a rate of ASP + 6% to such drugs and biologicals in the final rule,” the agency stated.

Hospitals seemingly are entitled to financial remedies covering 340B payments that have been made since 2018, given that the current rate was established impermissibly. But no announcement is imminent regarding how those remedies would be determined and paid, and the timeline for such restitution remains to be seen.

“We are interested in public comments on the best way to craft any potential remedies affecting cost years 2018-2022 given that the Court did not resolve that issue,” CMS said.

Based on statements in the proposed rule, it sounds like CMS isn’t inclined to pay out remedies as if the higher payment rate had been in place the entire time. The agency indicated that the survey data it collected from 340B hospitals in 2020 could be used to establish an appropriate lower rate for remedies.

Referring to an earlier ruling in the case that was recently decided at the Supreme Court, the proposed rule states: “The district court itself acknowledged that CMS may base the Medicare payment amount on average acquisition cost when survey data are available. No 340B hospital disputed in the rulemakings for 2018 and 2019 that the ASP minus 22.5% formula was a conservative adjustment that represented the minimum discount that hospitals receive for drugs acquired through the 340B program, which is significant because 340B hospitals have internal data regarding their own drug acquisition costs.”

In future years, survey data also could be used to establish a 340B payment rate that’s lawfully lower than the rate (ASP plus 6%) for other Part B drugs. The Medicare statute allows CMS to apply a different rate to a subset of hospitals — such as those receiving 340B discounts — if it first conducts a valid survey of those hospitals.

2. Overall payment update falls short of hopes

Payments for hospital outpatient services would increase by 2.7% in 2023 for hospitals that meet quality-reporting requirements, according to the proposed rule. That would equate to a cumulative $6.2 billion increase. The update would be reduced to 0.7% for hospitals that don’t comply with the reporting requirements.

The proposed raise was met with disappointment by hospital advocates, who said it would do little to ease the ongoing cost burden. Through May, for example, hospital costs had increased by 10.4% year-to-date, according to Kaufman Hall’s latest report.

“We are deeply concerned about CMS’ proposed payment update of only 2.7%, given the extraordinary inflationary environment and continued labor and supply cost pressures hospitals and health systems face,” Stacey Hughes, executive vice president of the American Hospital Association, said in a written statement.

“A much higher update is warranted, and we will be closely analyzing CMS’s proposed market basket, as well as its proposed productivity offset,” she added.

CMS noted that the proposed market-basket update was derived from 2021 claims data and from cost-reporting periods that covered 2019, since more recent cost-reporting data was skewed by the COVID-19 public health emergency.

The payment increase for ambulatory surgical centers also would be 2.7% in keeping with a policy of applying the hospital market-basket update to ASCs from 2019 through 2023.

3. The 340B update would bring down the general rate

In the proposed rule, CMS advised that reverting to paying for 340B-acquired drugs at the same rate as for all separately payable drugs and biologicals in 2023 “will have an effect on the payment rates for other items and services due to the budget-neutral nature” of the payment system for hospital outpatient care.

CMS’s preliminary calculations suggest the increase in 340B payments will result in a differential of $1.96 billion in Part B drug payments. This amount would have to be taken out of general outpatient payments, the agency said.

CMS released files (available to download at this link) projecting the budget neutrality impact. As a group, rural hospitals would feel the brunt of the adjustment, experiencing a reduction of 1.7% in the conversion factor that determines general outpatient payments. That would negate a large portion of the 2.7% market-basket update. The 2023 update for urban hospitals would increase by 0.3% as a result of the budget neutrality adjustment, although those with fewer than 300 beds would see a decrease.

Among the nine designated U.S. regions, the budget neutrality adjustment looks to be:

  • Most favorable for hospitals in the East South Central (Alabama, Kentucky, Mississippi, Tennessee): 1.4% for urban hospitals, -0.4% for rural hospitals
  • Least favorable for hospitals in the West South Central (Arkansas, Louisiana, Oklahoma, Texas): -0.9% for urban hospitals, -2.8% for rural hospitals

Major teaching hospitals would benefit to the tune of a 2.4% increase, while minor teaching hospitals would experience a 0.2% decrease and nonteaching hospitals would face a 1.6% decrease.

“Public comments on the budget neutrality adjustment are welcome and will be carefully considered,” CMS said.

Stakeholders can submit comments on the proposed rule through Sept. 13 at


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