CMS Proposes Further OPPS Reductions to 340B Drug Reimbursement Rates - McDermott Will & Emery

CMS Proposes Further OPPS Reductions to 340B Drug Reimbursement Rates


On August 4, 2020, the Centers for Medicare & Medicaid Services (CMS) released its CY 2021 Medicare Hospital Outpatient Prospective Payment System (OPPS) proposed rule. CMS proposes to reduce OPPS payments for 340B drugs from Average Sales Price (ASP) minus 22.5% to ASP minus 28.7%. CMS will accept public comments on the proposed rule until October 5, 2020.

In Depth

On August 4, 2020, CMS released its CY 2021 Medicare Hospital OPPS proposed rule. The proposed rule includes further reductions to the Medicare OPPS payment rate for 340B drugs, which have generally been reimbursed at ASP minus 22.5% since 2018. Using the results of its recent 340B drug acquisition cost survey, CMS proposes to adopt a rate of ASP minus 34.7%, with an add-on amount for overhead and handling costs of 6% of ASP, for a net proposed rate of ASP minus 28.7% for 340B drugs.

Alternatively, CMS is considering continuing the current rate of ASP minus 22.5% for 340B drugs, in light of the recent US Court of Appeals for the District of Columbia Circuit opinion supporting CMS’s authority to set that rate.

As in past years, rural sole community hospitals, children’s hospitals and OPPS-exempt cancer hospitals would be exempt from payment cuts to 340B drugs and would continue to be paid at ASP plus 6%. Also as in past years, the 340B payment cuts would be implemented in a “budget neutral” manner, with the payment cut amounts being used to increase OPPS payments on all other services to all hospitals paid under OPPS.

CMS will accept public comments on the proposed rule until October 5, 2020.


In CY 2018, CMS reduced the Medicare payment rate for drugs purchased through the 340B program from ASP plus 6% to ASP minus 22.5%, based on a 2005 Medicare Payment Advisory Committee report that calculated hospitals’ average acquisition costs for 340B drugs to be approximately ASP minus 22.5%. CMS continued this payment policy through 2019 and 2020, despite litigation challenging the reduction as beyond CMS’s statutory authority.

A key question in the litigation turned on whether CMS had authority to make such reductions under at least one of two separate but related statutory provisions relating to reimbursement for covered outpatient drugs. The first provision provides that reimbursement for such drugs must be equal to the average acquisition cost for the drug, as determined by the US Department of Health and Human Services (HHS) based on a survey that meets certain requirements. The second provision provides that, if hospital acquisition cost data is not available, reimbursement must be equal to ASP plus 6%, as adjusted, if necessary, by HHS.

In December 2018, the US District Court for the District of Columbia sided with the hospital litigants and found that CMS had exceeded its authority in making the reductions, partly because CMS did not have the acquisition cost data necessary under the first statutory provision, and because the dramatic reduction was greater than a mere “adjustment” to the ASP under the second statutory provision.

On July 31, 2020, the DC Circuit reversed the lower court’s decision, finding that CMS had the authority to make the payment reductions for 340B drugs reimbursed under OPPS, where CMS had adjusted the reimbursement rates to more closely reflect hospitals’ acquisition costs for 340B drugs, as estimated by the Medicare Payment Advisory Committee. Our prior On the Subject, “DC Circuit Upholds OPPS Reimbursement Reductions for 340B Drugs,” provides an overview and analysis of the DC Circuit’s decision.

Prior to the DC Circuit’s decision, CMS launched a drug acquisition cost survey to collect information regarding 340B hospitals’ net acquisition costs for 340B-purchased drugs, as described in our previous On the Subject, “CMS Releases 340B Drug Acquisition Cost Survey, Responses Due May 15, 2020.” The survey appeared to be an administrative fallback process intended to provide CMS with a pathway to continue its reduced reimbursement rates under the first statutory provision in the event that the DC Circuit sided with the hospitals and the district court to decide that the reduction was far greater than a mere “adjustment” under the second statutory provision.

Analysis and Key Considerations

CMS is required to calculate the reimbursement rate for specified covered outpatient drugs (SCODs) in one of two ways. First, under Section 1833(t)(14)(A)(iii)(I) of the Social Security Act (SSA), which we will refer to as “Subclause (I),” CMS may use the “average acquisition cost for the drug,” which may vary by hospital group, taking into account certain hospital acquisition cost survey data. Alternatively, under Section 1833(t)(14)(A)(iii)(I) of the SSA, which we will refer to as “Subclause (II),” if average acquisition cost data are not available, CMS must use “the average price for the drug,” which may be adjusted as necessary “for purposes of this paragraph.” CMS presents two potential reimbursement rates in the proposed rule, one based on Subclause (I) and the other based on Subclause (II).

The ASP Minus 28.7% Rate

Subclause (I) states that CMS may conduct a hospital acquisition cost survey and set payment to equal the average acquisition cost for each SCOD. Although the DC Circuit upheld the ASP minus 22.5% payment cut based on Subclause (II), the proposed 2021 rate of ASP minus 28.7% is justified by CMS under Subclause (I) based on the data available from the 340B drug acquisition cost survey conducted earlier this year. Taking the results of that survey, CMS made several adjustments to arrive at its proposed net rate of ASP minus 28.7% for 340B drugs. Notably, CMS mentions in its proposed rule that some hospitals provided drug acquisition cost data that exceeded 340B ceiling prices. CMS states that it kept that data in its calculations, excluding outliers, because hospitals may have been overcharged for their drug acquisition costs and could have accurately reported acquisition costs greater than the Health Resources and Services Administration ceiling price.

However, the survey instructions had stated that hospitals were to report the “sub-ceiling price after all applicable discounts,” suggesting that any prices reported were to be at or below the 340B ceiling prices and that any hospitals that reported pricing in excess of the 340B ceiling price would not be completing the survey as instructed. The language in the survey instructions indicating that only 340B ceiling or sub-ceiling prices could be reported, coupled with the burden of completing the full survey (particularly during the COVID-19 public health emergency), may have caused some hospitals to opt for the “quick survey,” which indicated that the hospital had acquired all 340B drugs at the 340B ceiling price. Thus, hospitals may have been deterred from submitting the more detailed survey that could have reflected the above-ceiling costs for certain drugs. In the end, only 7% of hospitals submitted a detailed survey response.

The proposed rule indicates that CMS analyzed the survey results and applied various statistical methodologies to determine an “approximate average” or “typical” amount by which to reduce ASP that would approximate hospital acquisition costs for 340B drugs. The agency stated that it “generally” chose methodologies that yielded the most conservative reduction to ASP, which involved analyses of multiple measures of central tendencies (arithmetic mean, median, geometric mean), the effect of including penny priced drugs, mapping of multi-source NDCs to a single HCPCS code, weighing values by volume/utilization, and applying trimming methodologies to remove anomalous or outlier data. Commenters likely will scrutinize CMS’s calculations, assumptions and overall methodology, although it will not be possible for stakeholders to access the data necessary to validate CMS’s methodology, because of the statutory requirement that 340B ceiling prices be kept confidential.

The ASP Minus 22.5% Rate

Section 1847A of the SSA generally sets a default rate of ASP plus 6% for SCODs. However, under Subclause (II), CMS is permitted to adjust that rate “as necessary for purposes of this paragraph.” The recent DC Circuit opinion interpreted the “purposes of this paragraph” to mean for the purpose of “approximating hospital acquisition cost.” Thus, the DC Circuit concluded that CMS was permitted to set the rate at ASP minus 22.5% because it was an approximation of the hospitals’ acquisition costs of the drugs.

The language of Subclause (II) states that it applies “if hospital acquisition cost data are not available.” Given that CMS has conducted a survey to obtain hospital acquisition cost data, the statute indicates that CMS may use that data to set payment rates as long as the survey met the statute’s survey requirements. However, certain stakeholders have indicated in comments submitted to CMS that the acquisition cost survey may not have been properly conducted, which may lead to litigation if CMS adopts a rate based on the survey results. CMS may be including the ASP minus 22.5% reimbursement option as a fallback option in the event commenters raise strong arguments that the ASP minus 28.7% rate is likely to be successfully challenged in litigation.

Implications Outside of 340B

While the proposed rule would only reduce payment rates for 340B drugs, CMS might attempt to apply the payment-adjusting techniques set forth in the proposed rule to non-340B hospital outpatient drugs in the future. For example, CMS may seek to deploy an acquisition cost survey nationwide (or to a particular group of hospitals) and establish hospital outpatient drug reimbursement rates across the board (or for a particular group of hospitals) based on reported acquisition costs. Alternatively, if CMS identifies a relatively reliable estimate of comparatively low acquisition costs for a particular group of hospitals, it may seek to “adjust” these hospitals’ outpatient drug reimbursement rates downward to reflect more closely the hospitals’ acquisition costs.

Such maneuvers may be tempting as another strategy to further the Trump Administration’s overarching goal of reducing drug costs to both the government and beneficiaries. While CMS may choose to limit these reductions to 340B drugs because the structure of the 340B program inherently reduces covered entity hospitals’ acquisition costs, CMS may also choose to take a more bullish approach to expanding these reductions beyond the 340B program, as the agency’s authority waxes in the wake of the DC Circuit opinion.