Background

The 340B program requires drug manufacturers to provide significant discounts on certain medications sold to safety-net providers. Hospitals that serve a high number of low-income patients, those designated as critical access facilities, children's and cancer hospitals, and federally qualified health centers are among those eligible to participate in the 340B program.

In 2018, HHS reduced the reimbursement rates for hospitals participating in the 340B program by 28.5%, which ultimately led the American Hospital Association (AHA) and other provider groups to file a lawsuit, claiming the cuts were illegal because CMS didn't survey hospitals to determine their average drug acquisition costs. Instead, the agency used the "average price" for each drug — an option that is allowed under Medicare law to determine reimbursement amounts for drugs purchased by hospitals.

In June 2022, the Supreme Court unanimously ruled the reimbursement rate cuts were unlawful. According to the opinion, authored by Justice Brett Kavanaugh, the policy was illegal because HHS did not survey hospitals' drug acquisition costs before making the cuts, effectively violating protections set against varying payment rates for certain hospitals.

"Absent a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates only for 340B hospitals; HHS's 2018 and 2019 reimbursement rates for 340B hospitals were therefore unlawful," Kavanaugh wrote. "Under the text and structure of the statute, this case is therefore straightforward."

"In short, the statute allows HHS to set reimbursement rates based on average price and affords the agency discretion to 'adjust' the price up or down. But unless HHS conducts a survey of hospitals' acquisition costs, HHS may not vary the reimbursement rates by hospital group," Kavanaugh continued.

In addition, Kavanaugh noted that "340B hospitals perform valuable services for low-income and rural communities but have to rely on limited federal funding for support."

CMS to pay $9B in lump sum payments to 340B hospitals

On Friday, CMS released a rule saying it will send $9 billion in lump-sum payments to more than 1,600 hospital that participated in the 340B program. In order to pay for the restitution, CMS said it will cut all hospitals' payments from other items and services by 0.5% spread out over 16 years beginning in 2026.

CMS argued that the program needs to be budget-neutral and that it intends to offset $7.8 billion with the payment cuts. The agency also argued that it is within the government's power to offset these payments over time.

"Even if a budget neutrality adjustment is not statutorily required, it is an appropriate exercise of the agency's statutory and common-law or inherent recoupment authorities," officials wrote in the rule.

Reaction

AHA president and CEO Rick Pollack in a statement said the organization "is very pleased that 340B hospitals finally will be reimbursed in full" but added that AHA rejects the cuts CMS is using to finance the payments and suggested further litigation may be possible.

"The AHA will continue to review this rule and consider all available options going forward," he said.

340B Health, which represents 340B-eligible providers, also expressed concerns about CMS' rule, saying it "fails to address hospital concerns that Medicare private plans, that followed CMS in imposing their own 340B cuts, will not be required to repay hospitals for those reductions."

Similarly, Federation of American Hospitals president and CEO Chip Kahn said the rule "sets a dangerous precedent by breaking a promise to seniors and their providers that care will be covered. The law does not allow Medicare to go backwards, and this statutory predictability and stability of payment is mission critical to sustain patient access to care." (Cohrs, STAT+ [subscription required], 11/2; Kacik, Modern Healthcare, 11/6; Kacik/Bennett, Modern Healthcare, 11/2)

Learn how the 340B drug pricing program helps reduce costs for providers serving low-income populations.