CMS 2019 Final Rule and the Scope of the 340B Program

In its final rule for 2018, the Centers for Medicare and Medicaid Services (CMS) reduced Medicare Part B reimbursement for 340B-acquired drugs from Average Sales Price (ASP) plus 6% to ASP minus 22.5%. This policy change affects payments for separately-payable, non-pass-through drugs and biologicals (other than vaccines) billed through the Outpatient Prospective Payment System (OPPS).[1]

On November 1, 2018, CMS issued the final rule for 2019, which expanded the reimbursement cut to 340B-acquired drugs prescribed in non-excepted, off-campus provider-based departments (PBDs). These locations were exempt from the previous ruling, as services provided at these locations are paid under the Medicare Physician Fee Schedule (PFS), established under Section 603 of the Bipartisan Budget Act (BBA) of 2015. Rural, sole community hospitals, children’s hospitals, and PPS-exempt cancer hospitals remain exempt from this decreased reimbursement amount.


From CMS’ perspective, this ruling is the logical result of the BBA of 2015 and the 2018 final rule.

Section 603 of the BBA is a response to a growing trend by hospitals to acquire previously independent physician offices, transforming freestanding treatment sites into hospital outpatient facilities.[2] By establishing these locations at hospital outpatient departments (HOPDs), services provided could be billed through OPPS at hospital rates. This profit incentive motivated the trend of acquisitions, causing a shift in site of care towards HOPDs for services previously provided at freestanding facilities and effectively increasing the cost of treatment (as hospital prices can increase to twice the cost of the same service provided in a physician’s office).[3] Section 603 of the BBA reduced Medicare reimbursement to any HOPDs established on or after November 2, 2015, by requiring them to bill under PFS or the Ambulatory Surgical Center (ASC) payment system, both of which pay at lower rates than OPPS. This was a clear attempt to slow the trend toward HOPDs in place of physician offices, as the higher cost of treatment at HOPDs was putting financial strain on Medicaid and Medicare programs.

CMS’ implementation of Section 603, however, allowed HOPD sites the continued benefit from the parent hospital’s 340B eligibility.[4] Furthermore, with the implementation of the 2018 final rule, while parent hospitals saw a 27% reimbursement decrease for 340B-acquired drugs for Medicare Part B patients, non-excepted, off-campus PBDs (i.e., locations established before the November 2, 2015, cutoff) continued reimbursements at the original rate of ASP plus 6% since they were not billing through OPPS. The final 2018 rule effectively countered the intent of the implementation of Section 603, because the payment reduction introduced did not apply to HOPDs. The payment differential created an incentive for hospitals to move drug administration services to sites that Section 603 attempted to disincentivize. The final 2019 rule effectively closes this loophole, providing the same rate of reimbursement to hospitals and their off-campus locations. In this way, the 2019 final rule is understood as a reconciliation of the 2015 BBA with the 2018 final rule.


A Berkeley Research Group analysis hypothesizes that CMS efforts won’t be enough to disincentivize participation in the 340B program, as these rulings do not affect the majority of the profit margin that hospitals gain as a result of participation in the program.

A 2017 study estimated that the 2018 ruling, if implemented as a site-neutral payment, would reduce an enrolled hospital’s profit margin by 13%, leaving intact 87% of the profit. (Since this analysis assumed site-neutrality and grouped HOPDs with their associated parent hospitals, the results of the analysis show a fair approximation of the current market, after the introduction of the 2019 add-on to reimbursement cuts.)[5] With drug spending per patient increasing  faster for 340B covered entities as compared to non-enrolled counterparts,[6] the 87% profit margin will continue to grow at these sites, and the overall trends of site of care consolidation and increase in 340B-participating sites will likely continue.

Recently, regulatory bodies as well as the executive branch have taken the manufacturer’s perspective, suggesting further legislation to help curb the program’s growth. On February 9, 2018, the White House  issued the “Reforming Biopharmaceutical Pricing at Home and Abroad” report, which identified the 340B program as needing reform. It underscored the 2018 final rule as being a step in the right direction and recommended further changes to eligibility criteria in order to curb growing participation.[7] Other proposals by the White House to further regulate the program include redistribution of the federal savings from lower Part B payments based on a hospital’s share of uncompensated care; as well as increased regulatory authority by the Health Resources and Services Administration (HRSA) to oversee the program, funded in part, by a new user fee on purchases by covered entities.


With 340B sales hitting a record $19.3 billion in 2017,[8] some (including President Trump) have hypothesized that the increasing volume of discounts will lead manufacturers to seek profit elsewhere, namely by increasing the list price. The American Patients First blueprint released in May 2018, by the  Department of Health and Human Services pointed to the Affordable Care Act expansion of 340B as the source of “additional billions of dollars in sales and…additional pressure on manufacturers to increase the list price.”[9] This logic allows the president to place a heavy burden for rising drug costs on the 340B program.

With discounts, rebates, and other price concessions reducing invoice spending by an estimated $324.4 billion in 2017, this seems an unfair burden to put on the small percentage of those discounts which are a result of the 340B program.[10] In 2015, HRSA reported that covered entities spent $12 billion on 340B-discounted drugs, saving an estimated $6 billion.[11] Assuming the same percentage of savings, hospitals likely saved approximately $9.65 billion on the $19.3 billion of drugs purchased at 340B pricing in 2017. That $9.65 billion represents only 3% of total discounts, rebates, and other price concessions offered (often voluntarily) in 2017. Further, the approximate 33% savings rate is only slightly higher than the average 28% price reduction on other sales.[12]

Taken together — the impact of the 2018 and 2019 final rules as reducing 340B profit margins by only 13% and the 340B program represents just 3% of total discounts provided by manufacturers — the ongoing lawsuit between hospitals and CMS over the regulations seems an overreaction to the scope of its affect. Still, the American Hospital Association and America’s Essential Hospitals spent most of 2018 engaged in a lawsuit against CMS, claiming that the agency did not have statutory authority to implement the 2018 final rule. After the hospitals’ associations lost an appeal in July and refiled in September, the U.S. District Court for the District of Columbia held on December 27, 2018, that CMS had exceeded its authority in implementing the payment reduction.[13]


Because of its budget-neutral nature (Avalere analysis of the budget-neutral implementation found that 340B hospitals would see less than a two percent reduction in overall payment[14]), it’s still not clear how the court ruling will affect payments, as any reimbursement of retroactive payments requires CMS to also retroactively reduce other reimbursements. The court also confirmed that the December 27 opinion did not address the 2019 expansion of the reimbursement cuts as the hospital associations had not submitted a claim for those reimbursements.

At this point, it is not clear whether these recent CMS rulings will become long-term mainstays in healthcare policy; but it is clear that the federal government is actively exploring other policies to support the manufacturer position that the 340B program has outgrown its original intentions.