Inpatient drug costs will continue to rise for nonprofit and public U.S. hospitals, but the pace of drug price increases will likely slow down amid growing scrutiny of drug manufacturers’ pricing practices.
But even with the slowing rate of price increases, the rising drug costs and potential changes to Medicare 340B payments for outpatient drugs would further reduce hospital margins, according to a new report from Moody’s Investors Service.
Pharmaceutical costs have outpaced hospital revenue growth in recent years, contributing to weaker operating margins, Moody’s finds. “Price increases in recent years were extraordinarily high for certain branded hospital inpatient drugs, but drug manufacturers are pulling back on these increases,” said Diana Lee, a Moody’s vice president. “On the generic drug side, we expect that some of the pressure will ease as the U.S. Food and Drug Administration approves more generic drugs for the first time.”
However, the government’s proposed reduction of Medicare Part B outpatient drug reimbursement to 340B hospitals by roughly 30% would hurt hospital margins.
“Hospitals and health systems of varying size and across the rating spectrum have noted anecdotally that they have benefited from cost savings from this discount drug program,” Lee says. “In some instances, the savings and income gained from this program can be meaningful relative to total operating cash flow. While about half of hospitals in the nation are 340B providers, those that have limited financial flexibility would be most exposed to possible changes to the 340B program.”
Hospitals and industry trade groups have urged the Centers for Medicare & Medicaid Services to withdraw its proposal to cut the drug payments to hospitals in the federal drug discount program. Hospitals use the savings to waive copays and provide drugs and other services for free or reduced costs to low-income patients.
Last week a bipartisan group of more than 220 members of the House of Representatives also told CMS in a letter (PDF) they oppose the proposal.
“This program is a lifeline for the hospitals that serve our most vulnerable patients. These arbitrary cuts will do nothing to improve patient care, or address rising costs in the Medicare program. Instead they simply jeopardize access to the treatments and services that 340B hospitals provide,” said Rep. Mike Thompson (D-Calif.) in an announcement. “There is robust bipartisan agreement that CMS should go back to the drawing board to prevent harm to patients across the country.”
Rep. David P. McKinley (R-W.Va.) said CMS’ proposal was “misguided.” “Our letter shows strong bipartisan opposition to this proposed rule, and hopefully will convince CMS to change course. We must address the high costs of drugs, but this is not the way to do it,” he said.
Meanwhile, the Health Resources and Services Administration has once again delayed (PDF) the effective date of a different 340B final rule that would set drug price ceilings and penalties for drug manufacturers that knowingly overcharge hospitals for drugs purchased under the program. The Department of Health and Human Services said it has delayed the effective date to July 1, 2018, to give more time to make changes to facilitate compliance. “After reviewing the comments received from stakeholders regarding objections on the timing of the effective date and challenges associated with the complying with the final rule, HHS has determined that delaying the effective date to July 1, 2018, is necessary to consider some of the issues raised.”