CMS Final Rule for CY 2018

Brief overview of 340B reimbursement

In 1992, the 340B drug discount program was passed as Section 340B of the Public Health Service Act. This program allows “covered entities”, hospitals and clinics which have enrolled in the program and demonstrated a minimum disproportionate share adjustment percentage, to receive discounted pricing when purchasing drugs from the manufacturer. 

Once enrolled in the program, 340B-eligible hospitals and clinics can purchase drugs at this discounted rate for all eligible patients – including patients with private insurance or Medicare – and generate additional revenue from these sales. In this way, additional revenue, gathered by treating privately-insured patients, incentivizes the treatment of low-income and uninsured patients which allows the hospital to receive this discounted pricing.

Historically, drugs purchased by covered entities at 340B pricing have been reimbursed by Medicare Part B coverage at a rate of Average Sales Price (ASP) plus 6.0%, allowing some of the 340B savings to be passed on to the Medicare program and Medicare beneficiaries. Due to the budget sequestration in 2013, this reimbursement fell to ASP plus 4.3%.

CMS Final Rule

On November 1, 2017, the Centers for Medicare & Medicaid Services (CMS) published a final rule changing the Medicare Part B reimbursement amount for 340B-purchased drugs from ASP plus 6.0% to ASP minus 22.5%. Taking into account budget sequestration impacting the federally-funded portion of this payment, total reimbursement to hospitals fell from ASP plus 4.3% to ASP minus 23.7%. This policy impacts payments for separately-payable, non-pass-through drugs and biologicals (other than vaccines) made through the Outpatient Prospective Payment System (OPPS). Rural sole community hospitals (SCHs), children’s hospitals, and PPS-exempt cancer hospitals are not subject to this decrease in reimbursement amount.


In recent years, there has been a debate between drug manufacturers and 340B covered entities about the scope of the program, as the rate of expansion of the 340B program has vastly outpaced the increase in overall drug spending. According to a study by the Medicare Payment Advisory Commission (MedPAC) published in 2015, spending on 340B-discounted drugs by covered entities tripled from 2005 to 2013. Over the course of the same eight years, total drug spending in the United States increased by only 33%. Medicare Part B spending, specifically, increased by 543%, from $0.5 billion in 2004 to $3.5 billion in 2013 (in nominal dollars). While some of this increased spending was due to the expansion of the definition of 340B eligibility under PPACA, most of it came from increased spending at previously-eligible entities.

Drug manufacturers, seeing the volume of discounted sales triple, argue that the program should focus on providing access to outpatient drugs for poor and uninsured patients, not allowing hospitals to turn a profit off of privately-insured patients. In response, hospitals point to language in the congressional report on the program from 1992, which established the purpose of the program: “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”[1] To the hospitals, it is the revenue generated from this program which allows them to provide a broad range of services to low income and uninsured patients in their communities.

In fact, less than two weeks after CMS released the ruling, three hospital groups and several individual hospitals had already sued the Department of Health and Human Services. The lawsuit argued that payment cuts would threaten hospitals’ ability to participate in the 340B program, alleging that “the life-saving services provided to patients as a result of 340B savings have been put in jeopardy.” To me, this line of debate plays unfairly on human emotion, threatening the loss of lives to divert attention from consistently increasing profit margins that hospitals have enjoyed by participating in the program.

While the new ruling does not directly address this debate, it seemingly removes federally-funded payments from the discussion. Drug manufacturers must continue to provide the same volume of 340B-discounted drugs to covered entities. However, hospitals may not continue to profit (at least, at such a high rate) by selling these discounted drugs specifically to federally-insured patients. The new reimbursement rate of ASP minus 22.5% matches MedPAC reporting from 2015, which identified this rate as an approximate minimum discount received by hospitals when purchasing under the 340B program. Thus, as explained by CMS in the final rule, the new reimbursement payment methodology “better, and more appropriately, reflect[s] the resources and acquisition costs that these hospitals incur.”

By decreasing the reimbursement amount paid to covered entities by Medicare Part B, CMS effectively argues that revenue generated by the 340B program should not be subsidized by federal spending. The cost of the program remains the responsibility of the drug manufacturers; the savings, in the case of Medicare Part B reimbursed purchases, has been passed from the hospital to the Medicare Part B program.

Reporting impacts

Since non-340B drugs continue to be reimbursed at the original payment rate of ASP plus 6.0%, CMS introduced two new modifiers to identify 340B-acquired drugs being reimbursed through OPPS. These modifiers must be included by hospitals when billing through the OPPS (for claims with the Type of Bill 13X) and included on the same claim line as the drug HCPCS code:

  • “JG” modifier must be applied to all drugs or biologicals (not vaccines or packaged drugs) acquired at a 340B discounted price and will trigger the ASP minus 22.5% reimbursement rate. This modifier is only required for hospitals and clinics who are subject to the payment adjustment.
  • “TB” modifier must be applied to all drugs or biologicals (again, excluding vaccines or packaged drugs) acquired at a 340B discounted price for reporting purposes, regardless of whether the hospital or clinic is impacted by the CY 2018 payment adjustment.

Financial impacts

Effective January 1, 2018, this rule marks approximately a 27% decrease in the reimbursement amount being received by hospitals and clinics dispensing 340B drugs to Medicare Part B insured patients. In nominal terms, it is estimated that Medicare Part B reimbursements to covered entities will fall by $1.6 billion in 2018. This reduction will be reflected in savings for the Medicare Part B program as well as Medicare beneficiaries, who stand to see their out-of-pocket expense fall from 21.2% of ASP to 15.5% of ASP.

It is worth noting that as this ruling affects OPPS payments, it must be budget neutral. To that end, federal government savings due to the reduction in reimbursement amounts have been reallocated to increase reimbursements for other non-drug items and services paid through the OPPS. In a future post, we will explore the overall impact of these reimbursement changes to hospitals. (Sneak peek: rural sole community hospitals, children’s hospitals, and PPS-exempt cancer hospitals are the clear winners of this policy change, as they are poised to benefit from the increased reimbursements for non-drug items and services without being subject to 340B reimbursement cuts.)

[1] U.S. House of Representatives. 1992. The Medicaid drug rebate amendments of 1992. Report 102–384, part 2. 102nd Cong., 2nd sess.