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CMS Proposes More Payment Changes for 340B Hospitals in 2019

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The Medicare program is once again looking to reduce payments to 340B hospitals for Part B drugs and biologicals. As part of its proposed payment regulation for hospitals under the Outpatient Prospective Payment System (OPPS) for calendar year 2019, CMS proposes to continue the nearly 30 percent payment reduction for Part B drugs that went into effect earlier this year for certain hospitals in the 340B drug pricing program, and further proposes to extend the payment reduction to drugs provided in non-excepted off-campus hospital outpatient departments (HOPDs) that are subject to reduced "site neutral" payments. CMS also seeks to change how the payment reduction applies to certain biosimilar products, reducing the size of the payment reduction for these products, and clarifies the application of the payment cut to new drugs.

CMS included these proposals, which are discussed in more detail below, in its notice of proposed rulemaking for 2019 OPPS payment rates for hospitals. 83 Fed. Reg. 37046 (July 31, 2018). Comments are due by September 24, 2018.

Continuation of Existing 340B Payment Policy for Certain 340B Hospitals and Excepted Hospital Outpatient Departments

CMS generally proposes to continue the payment cuts implemented under this year's OPPS payment rates in the same manner for 2019. Under the 2018 Outpatient Prospective Payment System (OPPS) final rule that went into effect January 1, 2018, Medicare reduced reimbursement to certain 340B hospitals for separately payable Part B drugs without pass-through status from average sales price (ASP) plus six percent to ASP minus 22.5 percent. The payment cut applies to 340B hospitals that are disproportionate share (DSH) hospitals, rural referral centers (RRCs), and non-rural sole community hospitals (SCHs). Children's and cancer hospitals and rural SCHs are exempted from the payment cut, and the payment rules do not apply to critical access hospitals and Maryland hospitals as they are not paid under the OPPS.

The 2018 OPPS final rule also requires 340B hospitals paid under the OPPS, including those exempted from the payment reduction, to use modifiers when billing Medicare to identify 340B-acquired drugs. The "JG" modifier identifies 340B drugs subject to the payment reduction, and the "TB" modifier identifies 340B drugs not subject to the payment reduction for informational purposes.  

For 2019, CMS proposes to continue the same level of payment reduction – ASP minus 22.5 percent – and to continue exempting children's and cancer hospitals and rural SCHs from the payment cut. CMS would continue to require all 340B hospitals paid under the OPPS, including those exempted from the payment reduction, to bill Medicare for 340B drugs using modifiers.

Extension of Payment Reduction to Non-Excepted Off-Campus HOPDs

For 2019, CMS proposes that the 340B payment reduction would apply to 340B drugs administered in non-excepted off-campus HOPDs. These locations are subject to reduced site-neutral payments under Section 603 of the Bipartisan Budget Act of 2015. Under CMS's implementation of Section 603, outpatient services provided in non-excepted off-campus HOPDs are no longer paid under OPPS and are instead paid under the Medicare Physician Fee Schedule (PFS). (See companion article, "CMS Proposes Major "Site-Neutral" Changes to Payments for Off-Campus Locations.")

For 2018, CMS did not extend the 340B payment reduction to 340B drugs administered in these off-campus HOPDs, and 340B hospitals continue to be paid for 340B drugs used in these clinics at ASP plus six percent, the drug payment rate under the PFS.

CMS expresses concern in the proposed rule that this payment differential may incentivize hospitals to move drug administration services from excepted HOPDs that are subject to the 340B payment reduction to non-excepted locations in order to receive higher reimbursement. CMS proposes to address this incentive by extending the 340B payment reduction to 340B drugs administered in non-excepted off-campus HOPDs.

Based on its review of claims submitted using modifiers to identify non-excepted off-campus HOPDs that billed for 340B drugs, CMS found 115 locations that would be affected by this proposal. CMS estimates the extension of the payment reduction would reduce Medicare spending and beneficiary costs under the PFS by $48.5 million.

CMS proposes that the hospitals exempted from the existing payment reduction would also be exempt from application of the payment cut to non-excepted off-campus HOPDs.

Change in Payment Reduction Policy for Biosimilar Products

CMS proposes to change how the 340B payment reduction would apply to biosimilar products without pass-through status in a manner that would reduce the size of the payment reduction for these products. Under the 2018 payment policy, CMS pays for biosimilars without pass-through status at the biosimilar's ASP minus 22.5 percent of the biosimilar's reference product (i.e., the original biologic to which the biosimilar is a follow-on). CMS proposes to pay for biosimilars without pass-through status in 2019 at the biosimilar's ASP minus 22.5 percent of the biosimilar's ASP, instead of the reference product's ASP. CMS states that the proposal is intended to address concerns that the current policy could unfairly lower payment for biosimilars without pass-through status. Given that the reference product's ASP would generally be higher than the biosimilar's, basing payment on the reference product's ASP could result in a larger payment reduction than if payment were based on the biosimilar's lower ASP.

Clarification Regarding Payment for Drugs Without ASP Pricing

CMS responded to questions raised since finalizing the 2018 payment policy regarding the application of the payment reduction to 340B drugs that do not have ASP pricing, such as new drugs. Medicare pays for these drugs based on wholesale acquisition cost (WAC) or average wholesale price (AWP), instead of ASP. CMS clarifies that it is the agency's current policy to apply the 340B payment reduction to 340B drugs that do not have ASP pricing. In these cases, payment is WAC minus 22.5 percent or 69.46 percent of AWP (reflecting 22.5 percent less than the original 95 percent of AWP payment rate minus a six percent add-on payment). CMS says less than ten percent of all separately payable Medicare Part B drugs were affected by this policy in April 2018.

Status of Hospital Litigation

An effort by hospitals to challenge the payment cuts to 340B drugs implemented in 2018 in federal court continues after a lawsuit initially filed by hospital associations and hospital co-plaintiffs late last year was dismissed on procedural grounds. The hospital plaintiffs filed the lawsuit in the U.S. District Court for the District of Columbia on November 13, 2017, asking the court to grant a preliminary injunction to stop the cuts from going into effect, asserting that CMS does not have the authority to reduce payments in this manner. The Court dismissed the challenge on procedural grounds, finding that the hospitals failed to present a ripe claim for reimbursement, as Medicare had not yet paid the hospital plaintiffs at the reduced rates. The American Hospital Association, et. al., v. Hargan, Civ. Act. No. 17-2447 (RC) (D.D.C. 2017) (memorandum opinion).

On January 9, 2018, the plaintiffs appealed to the U.S. Court of Appeals for the D.C. Circuit, arguing that the District Court erred in dismissing the case for ripeness. The American Hospital Association, et. al., v. Hargan, Civ. Act. No. 17-2447 (RC) (D.D.C. 2017) (notice of appeal). Oral arguments were held on May 4, 2018. The D.C. Circuit dismissed the appeal on July 17, 2018, upholding the District Court's dismissal and finding that the plaintiffs did not present a claim for relief given that the payment cuts were not yet in effect when the initial lawsuit was filed. The American Hospital Association et. al., v. Azar, No. 18-5004 (D.C. Cir. 2018). The Court noted it did not consider the merits, as to whether CMS has the authority to issue the payment cuts, and the plaintiffs have indicated plans to pursue a new lawsuit now that the payment cuts are in place.

Implications for Stakeholders

Hospitals subject to the 340B payment reduction should consider evaluating the financial impact the proposed payment changes would have on their institutions, if finalized. In particular, hospitals may want to identify whether they are administering 340B drugs in non-excepted off-campus HOPDs and, if so, quantify how much payment would be reduced if CMS finalizes its proposal to extend the payment reduction to these locations. This information can be useful in comments filed with CMS.

Hospitals may also want to use this opportunity to ensure they are complying with Medicare's billing rules for 340B drugs and that they are using the proper modifier to identify 340B drugs billed under the OPPS. See our previous Payment Matters articles on the billing rules here and here.

The proposed changes to Medicare's 340B payment policy are the latest in the administration's efforts to make changes to the 340B program that could reduce provider access to savings. The initial reduction in payment to 340B hospitals included in the 2018 OPPS final rule resulted in a $1.6 billion reduction in drug payments to 340B hospitals. Although these savings were offset and redistributed to hospital payments for non-drug services, CMS estimated that 340B hospitals serving high volumes of low-income patients would nevertheless see overall payment cuts.

The administration is also considering additional changes to 340B. In its blueprint to address high drug prices and the accompanying request for information, the Department of Health and Human Services (DHHS) solicited feedback on potential changes to the definition of a 340B-eligible patient, 340B contract pharmacy rules, and rules governing which offsite hospital locations are eligible to use 340B drugs (i.e., 340B child site eligibility). Such changes could significantly reduce hospital access to 340B savings. See Baker Donelson's alert on Possible 340B Program Changes to Reduce Drug Prices.

Stakeholders will have 60 days to submit comments in response to the proposed OPPS regulation, with comments due September 24, 2018. Baker Donelson attorneys and policy advisors are available to assist clients with the drafting of comments.

Baker Donelson will continue to monitor the Administration's actions on 340B as well as litigation challenging the payment reduction.

If you have questions regarding the content of this alert, please contact Jeff Davis, Christine Morse, or Tracy Weir.

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