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November 2018
Spotlight: Evaluating the Impact of 340B Drug Program Payment Changes in 2019
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The new CMS rule on 340B drugs is a sign of things to come, and healthcare leaders should be alert to such changes. The federal government is likely to challenge any lines of business in which hospitals and health systems make significant margins.
Commercial health insurers pose additional risks, as they tend to follow CMS’ example. Whenever CMS creates a cost-cutting initiative, health systems can expect that commercial payers will make similar cuts in the coming years. If and when commercial payers push a similar reduction on 340B drugs, it could be another $1+ billion payment reduction for health systems, except this time it wouldn’t be revenue neutral.

Especially given the industry’s increasing dependence on government payment brought on by the aging population, healthcare leaders who can predict and prepare for potential CMS policy changes will be in a much better position moving forward.
Conclusion
Hospitals and health systems nationwide were hit with significant cuts to Medicare and Medicaid drug payments this year—and now those reductions are expanding in 2019. Such policy changes illustrate the federal government’s continued focus on making hospitals and health systems a key target in its attempts to reduce overall U.S. healthcare costs.
For more than 25 years, the 340B Drug Program has enabled eligible organizations to receive deeply discounted outpatient pharmaceuticals from participating drug manufacturers, with a goal of expanding access to needed medications for low-income patients.
In 2018, however, the Centers for Medicare and Medicaid Services (CMS) implemented changes for the program that resulted in a 28.5 percent drop in drug payments to 340B-eligible hospitals. CMS estimates the changes will reduce federal spending on 340B drugs by $1.65 billion this calendar year.
In 2019, CMS is extending the cuts to cover Offsite Provider-Based Departments (PBDs), in addition to hospital-based locations. The change will mean even greater losses for the nation’s hospitals and health systems. To prepare, organizational leaders should re-evaluate their exposure to 340B drug distribution via PBDs.
Overview
Outlining the Changes
Payment Mechanisms
Overview
Conclusion
Financial Implications
A Look at the Payment Mechanisms
Hospital and health system leaders are amending their budgeted 340B revenues, and reevaluating drug administration and purchasing policies across all facilities in anticipation of the expanded reductions. Figures 1 and 2 provide sample assumptions and process maps associated with the 340B payment changes.
Figure 1: Assumptions
Source: Kaufman, Hall & Associates, LLC
Figure 2: Process
Source: Kaufman, Hall & Associates, LLC
Outlining the Changes
The 340B Drug Program has come under fire in recent years due to accusations that—rather than providing support to organizations for serving low-income patients—hospitals were able to profit through the provision of lower-cost pharmaceuticals.
The steps taken this year to control costs reduced hospital payments on 340B drugs from +6 percent of Average Sales Price (ASP) to -22.5 percent. CMS projects the $1.65 billion in savings in 2018 will be “budget neutral,” as that money will be redistributed to all Medicare/Medicaid providers.
To help offset losses, many hospital and health system providers were incentivized to prescribe and administer 340B drugs at offsite, (non-hospital) provider-based facilities to avoid the lower payment rate. As a result, CMS will expand the 2018 cuts to include PBDs effective Jan. 1, 2019. In the spirit of the original rule passed under the Bush Administration in 1992, Prospective Payment System-exempt Cancer Hospitals, Rural Sole Community Hospitals, and Children’s Hospitals are exempt from the 340B payment reductions.
Financial Implications
The federal government has not yet released financial projections for the overall impact of the expanded 340B payment reductions in 2019, but it is expected to be less than the $1.65 billion in 2018. To estimate organizational impact, hospital and health system finance leaders first must assess which of their PBDs are administering and prescribing 340B-eligible drugs. Non-exempt, provider-based cancer treatment locations will see the biggest impact, due to the outsized cost of oncology drugs.
Figure 3 shows the significant decrease in Medicare payment rates year over year.
Some of the changes are a result of health systems raising their charges faster than Medicare rate growth increases (Kaufman Hall estimates Medicare payment growth rates on average of 1 percent per year). The drop from 26.8 percent in 2017 to 22.6 percent in 2018, however, is due in part to the 340B drug payment changes. Expansion of the cuts to provider-based locations will contribute to continued declines in the years to come.
Figure 3: 340B Payment Rate Trends
Source: Kaufman, Hall & Associates, LLC
Outlining the Changes
Payment Mechanisms
Overview
Conclusion
Financial Implications
©2018 Kaufman, Hall & Associates, LLC
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