The evolving 340B payment landscape

For the last few years, we’ve been telling health system executives that Medicare drug reimbursement for 340B hospitals won't change unless CMS conducts a survey of hospital acquisition costs. On Tuesday, President Donald Trump signed an executive order instructing CMS to conduct this survey.

For context, CMS cut Medicare drug reimbursement rates for 340B hospitals by 28.5% in 2018. But a unanimous Supreme Court decision in 2022 found these cuts to be illegal. Since CMS hadn't surveyed hospitals' drug acquisition costs, they couldn't legally reimburse non-340B hospitals and 340B hospitals at different rates.

As a result, CMS was forced to pay 340B hospitals $9 billion and cut all hospitals' payments for other outpatient items and services to maintain budget neutrality. Since then, Medicare has reimbursed outpatient drugs at their average sales price +6% for both 340B and non-340B hospitals.

President Trump's new executive order could change the status quo once again. With new survey results, CMS could legally cut 340B reimbursement. Here's what this could mean for providers:

1. Potential 340B reimbursement cuts wouldn't necessarily be devastating.

CMS conducted a similar survey of drug acquisition costs in 2020 following scrutiny of its 2018 rate cuts. At the time, it only surveyed 340B hospitals, and only 7% of them provided individual drug acquisition costs. Instead, most hospitals let CMS use 340B ceiling prices as a proxy for their acquisition costs, and 38% of hospitals didn't fill out the survey at all.

Now, it's unclear if CMS has the authority to force hospitals to respond to its survey. But to support 340B reimbursement cuts, CMS is required to gather enough survey responses to generate a statistically significant estimate of drug acquisition costs.

If there are low response rates, CMS may not be able to use the survey to alter reimbursement rates.

Alternatively, the agency could take a similar approach to its previous efforts and apply 340B ceiling prices for hospitals that don't respond to the survey. In this case, the survey results would be skewed to make the average 340B drug discounts look lower — which could make any potential reimbursement cuts less drastic.

3. Non-340B hospitals and independent physician practices stand to benefit.

If CMS does cut 340B drug reimbursement, the agency will likely simultaneously boost payments for nondrug services to all hospitals, a reverse of the changes it made in 2023. This would benefit non-340B hospitals, which wouldn't be impacted by the cuts to drug reimbursement.

Independent physician groups also stand to benefit. The executive order asks HHS to make sure Medicare payments don't "[encourage] a shift in drug administration volume away from less costly physician office settings to more expensive hospital outpatient departments" — something the 340B program has been criticized for in the past.

By effectively reducing the profitability of hospital-based drug administration, cuts to 340B reimbursement would level the playing field for independent practices that have long felt underpaid for drug administration.

Parting thoughts

There's still a lot of uncertainty about how CMS will approach a drug acquisition cost survey and whether it will use the results to attempt to cut 340B drug reimbursement (and if it does, how much of the proposed cuts will be tied up in lawsuits).

CMS' potential actions are complicated further by the proposed HHS budget draft, which reshuffles oversight of the 340B program from the Health Resources and Services Administration (HRSA) to CMS under an "Office of Pharmacy Affairs."

Because this is just a proposed budget, it's unclear which changes Congress will enact — but it does signal the administration's interest in making regulatory changes to the current status quo for 340B.

Providers should continue to monitor proposed federal changes to 340B, in addition to state and manufacturer actions. Keep an eye out for updated resources from Advisory Board, including an upcoming Radio Advisory episode, 340B cheat sheet, and more.