By John McManus, president and founder, The McManus Group
The Trump administration surprised the healthcare community when it stuck to its guns and finalized a proposal to substantially cut Medicare reimbursement of Part B drugs provided to 340B hospitals.
The Hospital Outpatient Prospective Payment System (HOPPS) final rule, issued November 1, will slash Medicare payment to most 340B hospitals from 106 percent of average sales price (ASP) to 77.5 percent of ASP — a 28.5 percent reduction. While the final rule exempts rural hospitals (read: hospitals in Republican districts), children’s hospitals, and prospective payment-exempt cancer hospitals, it locks in the reduced payment amount CMS proposed this past summer to the urban and suburban hospitals that drive volume in the program.
Policymakers recently have focused on the 340B program as its size ballooned from $6 billion in 2010 to $16 billion in 2016 and the number of covered entities doubled in that same time period. Whole cottage industries have been created that instruct how hospitals and contract pharmacies can profit from the loose regulations, to the point that the drug industry can no longer overlook the market inefficiencies (Genentech alone has reported billions in discounts to 340B, revenue which must be made up elsewhere). Yet despite several oversight hearings by the House Energy & Commerce Committee, which raised concerns about whether patients were actually benefitting from the discount program, Congress could not come to a consensus on how to reform it.
The American Hospital Association, the powerful teaching and public hospital lobby — with well-connected members and jobs in every district — has grown reliant on this revenue and strenuously opposed program reforms. And many health policy hands were skeptical that the administration would withstand the considerable pressure the hospital industry could exert. They rallied 57 Senators and 228 Members of the House to oppose the Medicare cut proposed by CMS.
But legislative gridlock spurred executive action. Starting in January when the rule goes into effect, Medicare payments to 340B hospitals for outpatient drugs will fall by almost $1.6 billion annually, and Medicare beneficiaries will save about $320 million annually in lower copays, which will be based off the discounted price, not the inflated prices.
However, this payment cut does not result in a net savings to Medicare. The hospital outpatient prospective payment system is budget neutral — meaning these cuts to 340B hospitals for their outpatient drugs are redistributed as higher payments to all hospitals for all other items and services.
The Medicare Payment Advisory Commission (MedPAC) had suggested targeting that redistribution to hospitals that provide uncompensated care. CMS ignored that recommendation and rather increased reimbursement to all items and services by 3.4 percent. This policy will split the hospital community because non-340B hospitals, such as private hospital chains that are not eligible for 340B, will receive a windfall.
Only Congress can remove resources from the payment system through a change in the statute — a very good reason there may be an end-of-year provision trying to capture some of these savings while simultaneously providing some relief to hospitals.
MedPAC had been examining 340B for the past several years and estimated the 340B discounts to be 34 percent below ASP, meaning 340B hospitals are still profiting on drugs reimbursed at 77.5 percent of ASP. Other government agencies estimated even greater discounts from the program. The Office of Inspector General had found that participating providers were paid 58 percent more than the discounted prices. 340B discounts on some products may be 70 percent or greater, based on price increases since date of launch.
In explaining its rationale for the policy change, CMS says it believes, “based on numerous studies and reports, that 340B participation is not well correlated to the provision of uncompensated care and is associated with differences in prescribing patterns and drug costs.”
Anticipating litigation on the matter, CMS included an unusually detailed discussion of its statutory authority, knocking down each argument by hospitals that it lacked the legal ability to execute the policy.
CMS then struck at policy weakness in the hospitals’ argument: “The fact that hospitals did not submit comments suggesting an alternative minimum discount that would be a better, more accurate reflection of the discount at issue is instructive for two reasons. One, it gives us confidence that our suggested payment of ASP minus 22.5 percent is, in fact, the low bound of the estimate. … Two, it gives us confidence that the affected hospital community does not believe there is some other number, such as ASP minus 24 percent or ASP minus 17 percent, that would be a better, more accurate measure.”
Where do things go from here? That’s unclear. The major hospital industry trade associations have filed lawsuits to block the policy from going into effect but that has an iffy probability of success.
This rule establishes unit-level tracking for drugs acquired under the 340B program. All providers, exempt and nonexempt, will have to report when Medicare beneficiaries are receiving 340B discounted drugs. This data haul should provide real data for additional reforms, which CMS hints at in its verbiage.
The pharmaceutical industry remains stifled by the loose statute and limiting regulatory oversight of the program — currently all patients, regardless of insurance or economic status, qualify for the program if they show up at the 340B hospital pharmacy or its contract pharmacies. The pharmaceutical industry would like the definition of the “patient” substantially circumscribed and targeted at low-income and the uninsured. But even a freeze to the program’s ever-expanding nature would be welcome. Both of those policies require legislative action by Congress.
Free-standing physician practices welcomed the payment cut to competing 340B hospitals that often use those resources to buy still more practices. The Community Oncology Alliance said it strongly supports this policy that will “help curb outrageous abuses of the 340B program by some large hospitals, and hopefully, start to reverse the profit incentives that have dismantled our nation’s community cancer system.”
Yet physician practices are now realizing that the rule contains a loophole, which allows hospital-acquired off-campus practices to continue to receive full ASP+6 percent reimbursement if they are paid for their healthcare services at the physician office rate. This could permit substantial diversion.
Alex Azar Nomination For HHS Secretary
President Trump announced a rather surprising nominee for Health and Human Services (HHS) Secretary: former Eli Lilly executive Alex Azar. Surprising because during the campaign, and at intermittent times since then, Trump has characterized the pharmaceutical industry as price gougers who are “getting away with murder.”
Yet the choice seems shrewd. Azar served as the HHS General Counsel under the Bush Administration and knows the bureaucracy and policies as well as anyone. He is well-liked and highly regarded. More importantly, he understands the practical policy implications on the private sector for decisions made in Washington. He helped Lilly navigate several challenging years when key products were going off patent and several promising products for Alzheimer’s failed to pay off.
Former HHS Secretary Mike Leavitt said, “We worked side by side on the implementation of Medicare Part D, pandemic preparedness, and Hurricane Katrina recovery. He is an expert on health policy and HHS operations, as well as a skilled manager. Because he knows the department so well, there may never be a HHS secretary better able to hit the ground running than Alex Azar.”
But look for a bruising confirmation fight, with Democrats focusing in on Lilly’s price increases of insulin and other products during his tenure. Republicans may argue that no HHS Secretary knows the pharmaceutical industry better than Azar and he has a unique skillset to tackle to complex problems in this sector.
John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.