On November 2, 2023, the Centers for Medicare and Medicaid Services (CMS) issued the final payment rule establishing the remedy to the payment cuts to 340B drugs under the Medicare Outpatient Prospective Payment System (OPPS). The payment cuts were in place from 2018 to 2022, but last year, the Supreme Court of the United States found that the Social Security Act’s Medicare payment provisions did not allow CMS to implement the cuts.
The new rule largely mirrors the proposed rule published on July 11, 2023. Notably, it does not remove the “budget neutrality” payment adjustments to offset lump sum payments that will be made to certain 340B hospitals, nor does it provide instructions to Medicare Advantage plans on how to implement a payment remedy.
In 2018, CMS reduced Medicare payments to most hospitals paid under the OPPS for certain separately payable drugs or biologicals acquired through the 340B Program, from the average sales price (ASP) plus 6% to the ASP minus 22.5%. The policy was in effect from January 1, 2018, through September 27, 2022, and affected 1,686 340B covered entity hospitals.
To comply with the budget neutrality requirements of the Social Security Act, CMS increased the payment rates for non-drug items and services to all hospitals paid under the OPPS by 3.19%. The redistribution led to increased payments from Medicare on most non-drug items and services to hospitals paid under OPPS.
In June 2022, the Supreme Court held that CMS could not vary its payment rates as in the 2018 policy. Accordingly, on September 28, 2022, the US District Court for the District of Columbia vacated the reimbursement rate of ASP minus 22.5% for the remainder of 2022. CMS complied with the district court’s decision by reverting the payment rate to ASP plus 6% for drugs acquired through the 340B Program from September 28, 2022, through the end of CY 2022. CMS then finalized the CY 2023 OPPS/ASC rule to extend that rate through CY 2023 and reduce the 2023 OPPS conversion factor by 3.09% to offset the previous increase of 3.19%. On January 10, 2023, the district court issued a remand without vacatur to allow CMS the opportunity to determine the appropriate remedy for the reduced payments.
The final rule made very few changes to the proposed remedy, limited to adjusting the amount to be repaid and extending the period that hospitals will be subject to a downward adjustment in their OPPS payment rates to account for the repayment to 340B hospitals of the prior payment cuts. As discussed above, funds deriving from these payment cuts were used to increase OPPS payments on most other items and services. For a summary of the provisions of the final rule, please see the article prepared by our colleagues at McDermott+Consulting, “CMS Finalizes Remedy for 340B-Acquired Drugs Purchased in CYs 2018–2022.”
Budget Neutrality Considerations
The Social Security Act provides that CMS must at least annually revise the OPPS payment information to account for certain developments, including changes in medical practice, changes in technology, the addition of new services, new cost data, and other “relevant information and factors.” When CMS makes such adjustments, the adjustments for a year must not cause the estimated amount of OPPS expenditures for the year to increase or decrease from the estimated amount of expenditures that would have been made if the adjustments had not been made. This provision is commonly referred to as the “budget neutrality” requirement.
CMS indicated in the final rule that it believes that OPPS spending resulting from the prior payment increases funded through the 340B payment cuts should be offset prospectively to maintain budget neutrality and to prevent hospitals from receiving a “windfall” from the improperly higher levels of reimbursement received in prior years.
Beginning in CY 2026 (one year after the target CY 2025 in the proposed rule), and continuing for approximately 16 years thereafter, CMS will reduce all payments for non-drug items and services to all OPPS hospitals by 0.5% each year until the total offset is reached. The delay in implementation is to allow CMS time to finalize its methodology and publish the rates in the CY 2026 OPPS/ASC proposed rule.
The final rule responds to extensive comments challenging the legality of the budget neutrality adjustments. Challenges to the adjustments claimed:
The budget neutrality provision allows adjustments for a particular “year,” not multiple years retrospectively or prospectively
The lump sum payment is not an additional payment under the OPPS that can be taken into account in subsequent years or to which the budget neutrality provisions apply
Hospitals’ payment reductions will not equate to the payment increases they received
The budget neutrality calculations are imprecise
While CMS defended its position that the budget neutrality provisions support its prospective downward adjustments, it also stated that such adjustments are an “appropriate exercise of the agency’s statutory and common-law or inherent recoupment authorities as a policy matter.” CMS then referred to its authority to make certain changes retroactively if failure to apply such changes would be contrary to the public interest. CMS also cited its authority to establish adjustments to the OPPS as necessary to ensure equitable payments in support of the prospective downward adjustments.
CMS recognized that many commenters expressed concern that Medicare Advantage organizations (MAOs) would realize a “windfall” as a result of CMS reducing outpatient payments without making corresponding repayments to hospitals. The commenters argued that MAOs would see the benefit of reduced outpatient payments to all hospitals for non-drug items and services going forward but would not be required to repay affected 340B covered entity hospitals the amounts that were withheld for 340B drugs from 2018 through 2022. CMS responded that such comments were out of the scope of the final rule and noted that CMS may not require MAOs to use particular pricing structures with contracted providers or interfere in their payment rates.
The final rule’s prospective budget neutrality adjustments will be of keen interest to hospitals impacted by the adjustments. CMS defended the adjustments at length in the final rule and cited to several statutory authorities in support, at one point recognizing that the budget neutrality adjustment may not be “statutorily required.” Elsewhere, CMS stated, “in our view,” CMS’s proposed remedy is not unreasonable or unsupported by “the statutory scheme as a whole,” in that it accomplishes “nearly the same result” as if CMS had reprocessed all the overpaid and underpaid claims. CMS has taken a similar approach in the past when it has anticipated that litigation might render one or more underlying statutory justifications of an action invalid.
In the final rule, CMS defended the lengthy timeline of the budget neutrality adjustment as a necessary balance to ensure that the offset was not “immediately, in the short-term, overly financially burdensome on some impacted entities.” CMS acknowledged that the budget neutrality adjustment was “similar to the original budget neutrality adjustment . . . that increased the payment for every non-drug item and service for CY 2018 through CY 2022.” However, the multi-year adjustment timeframe is one of several grounds raised by commenters as rendering the adjustments unauthorized under the statutory provisions that CMS cited in support of the adjustments.
The final rule only briefly addresses commenters’ concerns regarding the “windfall” that certain MAOs may receive from the prospective downward payment adjustments during the budget neutrality offset period, when many MAOs reimburse contracted providers based on a percentage of Medicare rates and will therefore benefit from the prospective downward adjustments in OPPS rates. In other words, the payment structure set forth in the final rule is likely to result in lower payments for hospital outpatient services under some MAO contracts for the duration of the budget neutrality offset, without the corresponding lump sum payment to 340B hospitals. In the final rule, CMS declined to discuss the MAO issues on the basis that they were outside of the scope of the final rule. CMS further cited the statutory provisions that prohibit the agency from dictating the rates that MAOs pay providers under negotiated Medicare Advantage contracts.
CMS will begin issuing instructions to Medicare Administrative Contractors (MACs) to make lump-sum payments to affected 340B hospitals after November 30, 2023, when the technical correction request period ends. MACs will have 60 days from receipt of these instructions to make the payment, but will not begin issuing payments until after the rule becomes effective on January 7, 2024.
Affected 340B hospitals should review Addendum AAA to determine whether there are any errors in their respective lump sum payments. Hospitals disputing the lump sum amounts will likely have their lump sum payments delayed until sometime after payments are made to non-disputing hospitals. CMS does not place a time requirement on resolving the disputes, so the delay could be lengthy. Hospitals should weigh the potential for delayed payment with the amounts in dispute before reporting an error to CMS. Hospitals choosing to dispute the lump sum amounts should email CMS at email@example.com no later than 11:59 pm EST on November 30, 2023, with the following information:
A description of the nature of the error
A designated contact person for the purposes of addressing the error
Any relevant supporting documentation such as claim numbers, total units, payment amount received and date of payment
CMS will make a 0.5% downward adjustment of payments for non-drug items and services paid under OPPS starting CY 2026 and continuing for approximately 16 years thereafter.
Based on public statements made by hospital associations both prior to and following release of the final rule, ongoing litigation should be expected. This could result in further delays to the lump sum payments and budget neutrality adjustments.