Health systems are rightly concerned about Republican plans to cut Medicaid spending, end ACA subsidies and enact site neutral payments, says consultant Michael Abrams, managing partner of Numerof, a consulting firm.
“Health systems have reason to worry,” Abrams said shortly after President Donald Trump was inaugurated on Monday.
While Trump mentioned little about healthcare in his inauguration speech, the GOP trifecta means spending cuts outlined in a one-page document released by Politico and another 50-pager could get a majority vote for passage.
Of the insurers, pharmaceutical manufacturers and health systems that Abrams consults with, healthcare systems are the ones that are most concerned, Abrams said.
At the top of the Republican list targeting $4 trillion in healthcare spending is eliminating an estimated $2.5 billion from Medicaid.
“There’s no question Republicans will find savings in Medicaid,” Abrams said.
Medicaid has doubled its enrollment in the last couple of years due to extended benefits made possible by the Affordable Care Act, despite disenrolling 25 million people during the redetermination process at the end of the public health emergency, according to Abrams.
Upward of 44 million people, or 16.4% of the non-elderly U.S. population are covered by an Affordable Care Act initiative, including a record high of 24 million people in ACA health plans and another 21.3 million in Medicaid expansion enrollment, according to a KFF report.Medicaid expansion enrollment is 41% higher than in 2020.
The enhanced subsidies that expanded eligibility for Medicaid and doubled the number of enrollees are set to expire at the end of 2025 and Republicans are likely to let that happen, Abrams said. Eliminating enhanced federal payments to states that expanded Medicaid under the ACA are estimated to cut the program by $561 billion.
If enhanced subsidies end, the Congressional Budget Office has estimated that the number of people who will become uninsured will increase by 3.8 million each year between 2026 and 2034.
The enhanced tax subsidies for the ACA are set to expire at the end of 2025. This could result in another 2.2 million people losing coverage in 2026, and 3.7 million in 2027, according to the CBO.
WHY THIS MATTERS
For hospitals, loss of health insurance coverage means an increase in sicker, uninsured patients visiting the emergency department and more uncompensated care.
“Health systems are nervous about people coming to them who are uninsured,” Abrams said. “There will be people disenrolled.”
The federal government allowed more people to be added to the Medicaid rolls during the public health emergency to help those who lost their jobs during the COVID-19 pandemic, Numerof said. Medicaid became an open-ended liability which the government wants to end now that the unemployment rate is around 4.2% and jobs are available.
An idea floating around Congress is the idea of converting Medicaid to a per capita cap and providing these funds to the states as a block grant, Abrams said. The cost of those programs would be borne 70% by the federal government and 30% by states.
This fixed amount based on a per person amount would save money over the current system of letting states report what they spent.
Another potential change under the new administration includes site neutral Medicare payments to hospitals for outpatient services.
The HFMA reported the site neutral policy as a concern in a list it published Monday of preliminary federal program cuts totaling more than $5 trillion over 10 years. The 50-page federal list is essentially a menu of options, the HFMA said, not an indication that programs will actually be targeted leading up to the March 14 deadline to pass legislation before federal funding expires.
Other financial concerns for hospitals based on that list include: the elimination of the tax exemption for nonprofit hospitals, bringing in up to $260 billion in estimated 10-year savings; and phasing out Medicare payments for bad debt, resulting in savings of up to $42 billion over a decade.
Healthcare systems are the ones most concerned over GOP spending cuts, according to Abrams. Pharmacy benefit managers and pharmaceutical manufacturers also remain on edge as to what might be coming at them next.
THE LARGER TREND
President Donald Trump mentioned little about healthcare during his inauguration speech on Monday.
Trump said the public health system does not deliver in times of disaster, referring to the hurricanes in North Carolina and other areas and to the fires in Los Angeles.
Trump also mentioned giving back pay to service members who objected to getting the COVID-19 vaccine.
He also talked about ending the chronic disease epidemic, without giving specifics.
“He didn’t really talk about healthcare even in the campaign,” Abrams said.
However, in his consulting work, Abrams said, “The common thread is the environment is changing quickly,” and that healthcare organizations need to do the same “in order to survive.”
On Tuesday, health system leaders testified before the House Energy and Commerce Subcommittee onOversight and Investigations about potential changes to the 340B Drug Pricing Program.
The committee was receptive to witnesses’ claims that the program is essential to the financial survival of many systems, but representatives stated that “the status quo is not acceptable” and that they had a responsibility to “step in and provide oversight.”
There was little interest expressed in broad overhauls to the program, but both witnesses and representatives focused on how it could benefit from greater transparency, for example requiring hospitals to disclose 340B revenue, how savings are used, and which patient populations are served through the program.
Meanwhile, Republicans and Democrats in both houses have introduced multiple bills this session that focus on various aspects of the 340B program, including transparency.
The Gist: It’s encouraging to see members of congress recognize how essential the 340B program is to health system finances, and of the potential reforms on the table, increased transparency is a relatively palatable option.
Congress is exploring statutory tweaks to the program in response to the myriad legal challenges concerning it, many of which involve the Department of Health and Human Services. Several of these lawsuits stem from more than 20 major drugmakers restricting 340B discounts at contract pharmacies, which has led multiple states to enact legislation protecting these discounts, in turn prompting further lawsuits.
The mess of conflicting rulings these cases have produced so far is a clear sign that the 340B statute will be amended, and health system advocates should continue working with Congress to find solutions that preserve the integrity of the program.
Late last week, the Department of Health and Human Services (HHS) published a final rule establishing a new administrative dispute resolution process for the 340B drug discount program.
A panel, composed of government experts from the Office of Pharmacy Affairs, will resolve claims raised by covered entity providers about drugmakers overcharging them for 340B drugs, as well as claims from pharmaceutical companies that covered entities are diverting or duplicating discounts improperly. The new process, which will go into effect in mid-June, allows the panel to review claims on issues related to those pending in federal court. It’s intended to be “more accessible, administratively feasible, and timely” than a prior process established by HHS in 2020 that was paused after legal challenges.
The Gist:
This new 340B dispute resolution process is likely to see extensive use, as battles between providers and drugmakers over the drug discount program have heated up significantly in recent years. There are more than 50 ongoing court cases related to the program, many of which concern actions taken by at least 20 major drugmakers to restrict 340B sales to contract pharmacies. Although this new process may provide more effective dispute resolution, none of its decisions can be considered final until courts have settled the myriad cases before them.
On Tuesday, the 8th US Circuit Court of Appeals ruled against the pharmaceutical industry after its PhRMA (The Pharmaceutical Research and Manufacturers of America) trade group sued to prevent Arkansas from requiring drug manufacturers to distribute discounted drugs to 340B contract pharmacies. The judge’s decision, seen as a win for hospitals, affirmed state authority to establish regulations on top of the federal 340B law, which does not actually reference contract pharmacies. A Louisiana law similar to Arkansas’ is currently being challenged.
The Gist:This rulingcould encourage other states to pass laws protecting 340B contract pharmacy discounts. Contract pharmacy sales have swelled in recent years, prompting at least 20 major drug manufacturers to refuse to provide 340B discounts for drugs dispensed through contract pharmacies.
This issue is currently the subject of myriad lawsuits as courts have issued conflicting rulings.
Baptist Health said reimbursements for the medications were determined by a payment model that was later invalidated, and the insurer continues to benefit from a “windfall” of underpayments due to the health system, according to the lawsuit.
The suit comes months after the CMS finalized a rule that aimed to fix years of illegal payment cuts in the 340B program. Hospitals had previously argued the solution didn’t consider how MA insurers would benefit financially from the remedy.
Dive Insight:
The 340B program requires pharmaceutical companies to give discounts — which can range from 25% to 50% of the medication’s cost — to providers who serve low-income communities.
The program aims to help safety-net providers better serve vulnerable groups, and it has grown significantly since 340B was created in 1992.
But in 2018, the CMS cut Medicare payments for certain drugs acquired under the 340B program, setting off a legal challenge that hospitals eventually won in front of the Supreme Court four years later.
To fix the underpayments, regulators decided to pay each hospital in 340B a lump sum that would total $9 billion overall. But the fix needed to be budget neutral, so the CMS would cut payments to all hospitals for non-drug items and services over 16 years.
In comments on the proposal, the American Hospital Association argued there was a “significant problem” with the plan, noting many MA insurers pay hospitals according to traditional Medicare rates.
Payers would benefit from reducing the non-drug payments to hospitals, and wouldn’t be required to repay 340B providers for the lower payments between 2018 and 2022, commenters argued on the rule, which was finalized in November.
In response, regulators said they appreciated the concerns, but that they were outside the scope of the rule and “CMS cannot interfere in the payment rates that MAOs [Medicare Advantage organizations] set in contracts with providers and facilities.”
In the Baptist lawsuit, the health system reported it contacted Humana multiple times about retroactive adjustments and remedy payments, but the insurer’s counsel disputed any obligation to make those payments.
“Humana’s refusal to act has worked a substantial windfall to Humana as it continues to hold funds provided by CMS for Humana’s Medicare Advantage plans without reimbursing Baptist Health for the amounts owed to it under the Agreement,” the system said in the lawsuit.
Humana said it does not comment on ongoing litigation.
A new perspective on how technology, transformation efforts, and other changes have affected payers, health systems, healthcare services and technology, and pharmacy services.
The acute strain from labor shortages, inflation, and endemic COVID-19 on the healthcare industry’s financial health in 2022 is easing. Much of the improvement is the result of transformation efforts undertaken over the last year or two by healthcare delivery players, with healthcare payers acting more recently. Even so, health-system margins are lagging behind their financial performance relative to prepandemic levels. Skilled nursing and long-term-care profit pools continue to weaken. Eligibility redeterminations in a strong employment economy have hurt payers’ financial performance in the Medicaid segment. But Medicare Advantage and individual segment economics have held up well for payers.
As we look to 2027, the growth of the managed care duals population (individuals who qualify for both Medicaid and Medicare) presents one of the most substantial opportunities for payers. On the healthcare delivery side, financial performance will continue to rebound as transformation efforts, M&A, and revenue diversification bear fruit. Powered by adoption of technology, healthcare services and technology (HST) businesses, particularly those that offer measurable near-term improvements for their customers, will continue to grow, as will pharmacy services players, especially those with a focus on specialty pharmacy.
Below, we provide a perspective on how these changes have affected payers, health systems, healthcare services and technology, and pharmacy services, and what to expect in 2024 and beyond.
The fastest growth in healthcare may occur in several segments
We estimate that healthcare profit pools will grow at a 7 percent CAGR, from $583 billion in 2022 to $819 billion in 2027. Profit pools continued under pressure in 2023 due to high inflation rates and labor shortages; however, we expect a recovery beginning in 2024, spurred by margin and cost optimization and reimbursement-rate increases.
Several segments can expect higher growth in profit pools:
Within payer, Medicare Advantage, spurred by the rapid increase in the duals population; the group business, due to recovery of margins post-COVID-19 pandemic; and individual
Within health systems, outpatient care settings such as physician offices and ambulatory surgery centers, driven by site-of-care shifts
Within HST, the software and platforms businesses (for example, patient engagement and clinical decision support)
Within pharmacy services, with specialty pharmacy continuing to experience rapid growth
On the other hand, some segments will continue to see slow growth, including general acute care and post-acute care within health systems, and Medicaid within payers (Exhibit 1).
Several factors will likely influence shifts in profit pools. Two of these are:
Change in payer mix. Enrollment in Medicare Advantage, and particularly the duals population, will continue to grow. Medicare Advantage enrollment has grown historically by 9 percent annually from 2019 to 2022; however, we estimate the growth rate will reduce to 5 percent annually from 2022 to 2027, in line with the latest Centers for Medicare & Medicaid Services (CMS) enrollment data.1 Finally, the duals population enrolled in managed care is estimated to grow at more than a 9 percent CAGR from 2022 through 2027.
We also estimate commercial segment profit pools to rebound as EBITDA margins likely return to historical averages by 2027. Growth is likely to be partially offset by enrollment changes in the segment, prompted by a shift from fully insured to self-insured businesses that could accelerate as employers seek to cut costs if the economy slows. Individual segment profit pools are estimated to expand at a 27 percent CAGR from 2022 to 2027 as enrollment rises, propelled by enhanced subsidies, Medicaid redeterminations, and other potential favorable factors (for example, employer conversions through the Individual Coverage Health Reimbursement Arrangement offered by the Affordable Care Act); EBITDA margins are estimated to improve from 2 percent in 2022 to 5 to 7 percent in 2027. On the other hand, Medicaid enrollment could decline by about ten million lives over the next five years based on our estimates, given recent legislation allowing states to begin eligibility redeterminations (which were paused during the federal public health emergency declared at the start of the COVID-19 pandemic2).
Accelerating value-based care (VBC). Based on our estimates, 90 million lives will be in VBC models by 2027, from 43 million in 2022. This expansion will be fueled by an increase in commercial VBC adoption, greater penetration of Medicare Advantage, and the Medicare Shared Savings Program (MSSP) model in Medicare fee-for-service. Also, substantial growth is expected in the specialty VBC model, where penetration in areas like orthopedics and nephrology could more than double in the next five years.
VBC models are undergoing changes as CMS updates its risk adjustment methodology and as models continue to expand beyond primary care to other specialties (for example, nephrology, oncology, and orthopedics). We expect established models that offer improvements in cost and quality to continue to thrive. The transformation of VBC business models in response to pressures from the current changes could likely deliver outsized improvement in cost and quality outcomes. The penetration of VBC business models is likely to lead to shifts in health delivery profit pools, from acute-care settings to other sites of care such as ambulatory surgical centers, physician offices, and home settings.
Payers: Government segments are expected to be 65 percent larger than commercial segments by 2027
In 2022, overall payer profit pools were $60 billion. Looking ahead, we estimate EBITDA to grow to $78 billion by 2027, a 5 percent CAGR, as the market recovers and approaches historical trends. Drivers are likely to be margin recovery of the commercial segment, inflation-driven incremental premium rate rises, and increased participation in managed care by the duals population. This is likely to be partially offset by margin compression in Medicare Advantage due to regulatory pressures (for example, risk adjustment, decline in the Stars bonus, and technical updates) and membership decline in Medicaid resulting from the expiration of the public health emergency.
We estimate increased labor costs and administrative expenses to reduce payer EBITDA by about 60 basis points in 2023. In addition, health systems are likely to push for reimbursement rate increases (up to about 350 to 400 basis-point incremental rate increases from 2023 to 2027 for the commercial segment and about 200 to 250 basis points for the government segment), according to McKinsey analysis and interviews with external experts.3
Our estimates also suggest that the mix of payer profit pools is likely to shift further toward the government segment (Exhibit 2). Overall, the profit pools for this segment are estimated to be about 65 percent greater than the commercial segment by 2027 ($36 billion compared with $21 billion). This shift would be a result of increasing Medicare Advantage penetration, estimated to reach 52 percent in 2027, and likely continued growth in the duals segment, expanding EBITDA from $7 billion in 2022 to $12 billion in 2027.
Profit pools for the commercial segment declined from $18 billion in 2019 to $15 billion in 2022. We now estimate the commercial segment’s EBITDA margins to regain historical levels by 2027, and profit pools to reach $21 billion, growing at a 7 percent CAGR from 2022 to 2027. Within this segment, a shift from fully insured to self-insured businesses could accelerate in the event of an economic slowdown, which prompts employers to pay greater attention to costs. The fully insured group enrollment could drop from 50 million in 2022 to 46 million in 2027, while the self-insured segment could increase from 108 million to 113 million during the same period.
Health systems: Transformation efforts help accelerate EBITDA recovery
In 2023, health-system profit pools continued to face substantial pressure due to inflation and labor shortages. Estimated growth was less than 5 percent from 2022 to 2023, remaining below prepandemic levels. Health systems have undertaken major transformation and cost containment efforts, particularly within the labor force, helping EBITDA margins recover by up to 100 basis points; some of this recovery was also volume-driven.
Looking ahead, we estimate an 11 percent CAGR from 2023 to 2027, or total EBITDA of $366 billion by 2027 (Exhibit 3). This reflects a rebound from below the long-term historical average in 2023, spurred by transformation efforts and potentially higher reimbursement rates. We anticipate that health systems will likely seek reimbursement increases in the high single digits or higher upon contract renewals (or more than 300 basis points above previous levels) in response to cost inflation in recent years.
Measures to tackle rising costs include improving labor productivity and the application of technological innovation across both administration and care delivery workflows (for example, further process standardization and outsourcing, increased use of digital care, and early adoption of AI within administrative workflows such as revenue cycle management). Despite these measures, 2027 industry EBITDA margins are estimated to be 50 to 100 basis points lower than in 2019, unless there is material acceleration in performance transformation efforts.
There are some meaningful exceptions to this overall outlook for health systems. Although post-acute-care profit pools could be severely affected by labor shortages (particularly nurses), other sites of care might grow (for example, non-acute and outpatient sites such as physician offices and ambulatory surgery centers). We expect accelerated adoption of VBC to drive growth.
HST profit pools will grow in technology-based segments
HST is estimated to be the fastest-growing sector in healthcare. In 2021, we estimated HST profit pools to be $51 billion. In 2022, according to our estimates, the HST profit pool shrank to $49 billion, reflecting a contracting market, wage inflation pressure, and the drag of fixed-technology investment that had not yet fulfilled its potential. Looking ahead, we estimate a 12 percent CAGR in 2022–27 due to the long-term underlying growth trend and rebound from the pandemic-related decline (Exhibit 4). With the continuing technology adoption in healthcare, the greatest acceleration is likely to happen in software and platforms as well as data and analytics, with 15 percent and 22 percent CAGRs, respectively.
In 2023, we observed an initial recovery in the HST market, supported by lower HST wage pressure and continued adoption of technology by payers and health systems searching for ways to become more efficient (for example, through automation and outsourcing).
Three factors account for the anticipated recovery and growth in HST.First, we expect continued demand from payers and health systems searching to improve efficiency, address labor challenges, and implement new technologies (for example, generative AI). Second, payers and health systems are likely to accept vendor price increases for solutions delivering measurable improvements. Third, we expect HST companies to make operational changes that will improve HST efficiency through better technology deployment and automation across services.
Pharmacy services will continue to grow
The pharmacy market has undergone major changes in recent years, including the impact of the COVID-19 pandemic, the establishment of partnerships across the value chain, and an evolving regulatory environment. Total pharmacy dispensing revenue continues to increase, growing by 9 percent to $550 billion in 2022,4 with projections of a 5 percent CAGR, reaching $700 billion in 2027.5Specialty pharmacy is one of the fastest growing subsegments within pharmacy services and accounts for 40 percent of prescription revenue6; this subsegment is expected to reach nearly 50 percent of prescription revenue in 2027 (Exhibit 5). We attribute its 8 percent CAGR in revenue growth to increases in utilization and pricing as well as the continued expansion of pipeline therapies (for example, cell and gene therapies and oncology and rare disease therapies) and expect that the revenue growth will be partially offset by reimbursement pressures, specialty generics, and increased adoption of biosimilars. Specialty pharmacy dispensers are also facing an evolving landscape with increased manufacturer contract pharmacy pressures related to the 340B Drug Pricing Program. With restrictions related to size and location of contract pharmacies that covered entities can use, the specialty pharmacy subsegment has seen accelerated investment in hospital-owned pharmacies.
Retail and mail pharmacies continue to face margin pressure and a contraction of profit pools due to reimbursement pressure, labor shortages, inflation, and a plateauing of generic dispensing rates.7Many chains have recently announced8 efforts to rationalize store footprints while continuing to augment additional services, including the provision of healthcare services.
Over the past year, there has also been increased attention to broad-population drugs such as GLP-1s (indicated for diabetes and obesity). The number of patients meeting clinical eligibility criteria for these drugs is among the largest of any new drug class in the past 20 to 30 years. The increased focus on these drugs has amplified conversations about care and coverage decisions, including considerations around demonstrated adherence to therapy, utilization management measures, and prescriber access points (for example, digital and telehealth services). As we look ahead, patient affordability, cost containment, and predictability of spending will likely remain key themes in the sector.The Inflation Reduction Act is poised to change the Medicare prescription Part D benefit, with a focus on reducing beneficiary out-of-pocket spending, negotiating prices for select drugs, and incentivizing better management of high-cost drugs. These changes, coupled with increased attention to broad-population drugs and the potential of high-cost therapies (such as cell and gene therapies), have set the stage for a shift in care and financing models.
The US healthcare industry faced demanding conditions in 2023, including continuing high inflation rates, labor shortages, and endemic COVID-19. However, the industry has adapted. We expect accelerated improvement efforts to help the industry address its challenges in 2024 and beyond, leading to an eventual return to historical-average profit margins.
A federal drug discount program for safety-net providers that’s been a perennial source of fierce disputes among health care industry powerhouses is back in the spotlight, with billions of dollars at stake.
The big picture:
Separate but coinciding issues are generating renewed focus on the decades-old 340B program, which requires that drugmakers give large discounts on outpatient drugs to health care providers serving low-income patients.
A Biden administration proposal to issue hefty back payments due to 340B providers, drugmakers’ efforts to limit discounts, and rebooted congressional interest in broader reforms are again igniting debate about the program’s scope.
Context:
The Supreme Court last year unanimously sided with hospitals who challenged a nearly 30% reduction to their 340B payments by the Centers for Medicare and Medicaid Services that began under the Trump administration.
In response to the court decision, CMS last month announced a $9 billion plan to repay 340B providers that’s generated some controversy. While 340Bhospitals are happy they’re getting paid back, industry groups are upset that the payments are funded by clawing back money to other hospitals.
Meanwhile, the Biden administration is battling drugmakers in court over restrictions they’ve placed on where hospitals can use their 340B discounts.
A bipartisan group of senators this summer also released a request for information on how to improve stability and oversight within the program.
Hospitals could face further cutbacks if Congress or the courts place new limits on 340B.
Flashback:
The 340B program began in 1992 to help providers serving patient populations who struggled to afford their prescription drugs. It allowshospitals and other safety-net providers like community health clinics to save an average of 25% to 50% on drug purchases, according to the federal government.
When hospitals partner with off-site pharmacies to dispense drugs, the pharmacies also benefit financially from 340B savings.
The program has grown significantly since its inception, increasing from 8,100 participating safety-net providers in 2000 to 50,000 in 2020.
Between the lines:
The expansive program growth has drawn lawmakers’ scrutiny and complaints from pharmaceutical companies, who accuse providers of using the program to pad their profits rather than help vulnerable patients. Providers dispute those accusationsand say the program helps them stretch limited federal resources.
More than 20 drug companies have placed restrictions on when providers can use 340B discounts at off-site pharmacies. Drug companies say the limits help prevent them from having to give duplicate discounts, which occurswhen both the provider and state Medicaid agency receive a discount on the same drug.
The Biden administration asked several drugmakers to lift their 340B restrictions and threatened fines if they don’t comply.
Several drugmakers have sued the administration, arguing federal officials didn’t have the right to stop them from limiting discounts. One appellate judge ruled in favor of drugmakers earlier this year, and two other cases are pending in federal appellate courts.Experts say the cases could go all the way to the Supreme Court.
As the legal fight plays out, 340B providers are urging Congress to approve new measures to prevent drugmakers from restricting access to discounts.
The other side: Drugmakers, meanwhile, want lawmakers to tightenhospital eligibility standards and place stronger limits on how 340B pharmacies can profit from the program.
Of note: Rural hospitals, some of which were spared from the 340B cuts made years ago, are especially concerned about the hit they would takefrom CMS’ proposed funding clawbacks.
Rural facilities today rely heavilyon 340B to offset other financial losses, Brock Slabach, chief operations officer at the National Rural Health Association, told Axios.
“You can’t get out of this problem without harming those who were helped,” Slabach said.
What we’re watching: Expect to keep hearing about 340B in the coming months.
CMS still needs to finalize the 340B repayment planafter the public comment ends Sept. 5.
The D.C. Circuit Court of Appeals and the 7th Circuit Court of Appeals will issue rulings on whether the Biden administration can reverse drugmakers’340B restrictions.
Congress could take up a serious reform effort following the Senate’s information request, though that would take time.
Earlier this week, the Centers for Medicare and Medicaid Services (CMS) issued a proposal to remedy its four years of payment cuts to the more than 1,600 hospitals participating in the 340B Drug Pricing Program through one-time, lump-sum payments that will total roughly $9B.
In 2018, CMS reduced drug reimbursement to 340B covered-entity hospitals by nearly 30 percent, in an attempt to align reimbursement with hospitals’ actual drug acquisition costs. The Supreme Court overturned those cuts in 2022, ruling that the Department of Health and Human Services (HHS) had violated rulemaking procedure. As CMS rulemaking on Medicare payment must be budget-neutral, the agency will offset the remedy payments with a 0.5 percent cut to all hospitals for non-drug items and services covered under the Hospital Outpatient Prospective Payment System (OPPS) over the next 16 years. Stakeholders have until September 5th to comment on the proposed rule. Once the final rule is published later this year, CMS plans to repay 340B participant hospitals within 60 days of their application for remedy.
The Gist: After worries about how last year’s Supreme Court ruling would be implemented, 340B participant hospitals will be relieved to receive their payment corrections up front instead of over time, especially given current margin challenges.
But while this issue is now set to be resolved, other critical decisions about the 340B program’s fate are pending before courts. Earlier this year, Bayer and EMD Serono became the 20th and 21st drugmakers to restrict discounts to contract pharmacies, following an appellate court decision in January that sided with the pharmaceutical manufacturers.
Meanwhile, appellate courts in other jurisdictions are set to hear at least two more cases on the issue, amid conflicting rulings about whether HHS can enforce contract pharmacy discounts.
The court ruling comes after the Supreme Court struck down a nearly 30 percent cut to 340B hospital payments from 2018.
October 04, 2022 – A federal judge has ordered HHS to immediately end the almost 30 percent cut in Medicare drug reimbursement to 340B hospitals.
The decision published last week by judge Rudolph Contreras with the US District Court for the District of Columbia rejected HHS’ plan to restore full payment to hospitals participating in the 340B Drug Pricing Program in 2023.
“HHS should not be allowed to continue its unlawful 340B reimbursements for the remainder of the year just because it promises to fix the problem later,” wrote Contreras.
Hospitals participating in the 340B Drug Pricing Program receive outpatient prescription drugs at a discounted price of up to 50 percent since they treat a disproportionate amount of low-income and vulnerable patients. The 340B Program is designed to enable the safety-net providers to stretch their financial resources. Medicare must also reimburse hospitals for administering covered outpatient drugs.
HHS reduced the Medicare drug reimbursement rates for 340B hospitals though in 2018, cutting payments by 28.5 percent in an effort to generate about $1.6 billion in savings. Federal officials reasoned that reimbursing 340B hospitals at the same rate as other hospitals creates an incentive for the hospitals to overprescribe the drugs or prescribe more expensive drugs since they receive covered outpatient drugs at a discounted price.
HHS also argued that 340B hospital reimbursement cuts would lower co-payments for Medicare beneficiaries since the amounts are tied to hospital reimbursement rates.
Hospitals and hospital groups, including the American Hospital Association (AHA) Association of American Medical Colleges (AAMC), and American’s Essential Hospitals, sued the federal government over the reduced reimbursement rates.
The case made it all the way to the Supreme Court where, in a major win for hospitals, judges unanimously ruled that HHS should not have reduced payments to certain hospitals in 2018 and 2019 without surveying hospitals to determine average acquisition costs for drugs. HHS had relied on the average price of the drugs to set lower rates.
However, the Supreme Court did not make judgments on 340B hospital reimbursement cuts for 2020 and later years. Following the Supreme Court’s ruling, HHS announced it would reimburse hospitals for administering 340B-covered drugs the same as non-340B drugs starting Jan. 1, 2023.
Hospital groups again challenged HHS policy, asking the courts to immediately halt the unlawful cuts in 2022.
“The AHA appreciates Judge Contreras’ ruling that the Department of Health and Human Services must immediately stop unlawful reimbursement cuts for 2022 for hospitals participating in the 340B drug pricing program. Halting these cuts will help 340B hospitals provide comprehensive health services to their patients and communities,” said Melinda Hatton, AHA’s general counsel and secretary, regarding the most recent court ruling.
“We continue to urge the Administration to promptly reimburse all the hospitals that were affected by these unlawful cuts in previous years and to ensure the remainder of the hospital field is not penalized for their prior unlawful policy, especially as hospitals and health systems continue to deal with rising costs for supplies, equipment, drugs and labor,” Hatton continued in the public statement.
340B Health’s president and CEO Maureen Testoni also called the court ruling “an important victory for 340B hospitals that have been fighting these unlawful cuts for nearly six years.” 340B health advocates safety-net hospitals participating in the drug pricing program.
“The Centers for Medicare & Medicaid Services (CMS) has the clear responsibility to restore the appropriate payments for 340B drugs immediately, and now a federal court has ordered it to do so without delay,” Testoni said.
HHS has not announced a repayment plan for 340B hospitals. Notably, the court ruling also did not cover the AHA’s motion to include reimbursement cuts from 2020 through 2022 in the case, nor AHA’s motion to repay hospitals for the cuts since 2018 without penalizing other hospitals.
More than 180 members of the House of Representatives are urging the Biden administration to crack down on drugmakers restricting drug discounts in the 340B program.
Enforcement actions should include fines, the letter from a bipartisan group of House members to HHS Secretary Xavier Becerra and other administration officials said.
Currently, 18 drug manufacturers are limiting 340B discounts dispensed through pharmacies that contract with 340B providers, according to the letter.
Dive Insight:
The 340B program requires drugmakers to charge hospitals only the statutory ceiling prices for eligible outpatient drugs. The goal of the three-decade-old program is to have savings flow into care for low-income patients and underserved communities. But critics — notably, drugmakers and some lawmakers — argue the program doesn’t have enough oversight, as hospitals don’t need to account for what they do with any savings.
Drug manufacturers began imposing restrictions on 340B discounts as early as summer 2020, sparking legal challenges from regulators. The HHS sent nine warning letters to pharmaceutical companies, referring seven of them to the Office of the Inspector General for investigation and potential enforcement.
However, eight months later, the OIG has yet to take enforcement action, the new letter from 181 House members reads.
The letter asks the OIG to finish its ongoing review of seven drug manufacturers for potential noncompliance with federal law on 340B discounts “as soon as possible.”
The law allows the OIG to impose fines up to $6,000 per drug claim on companies that intentionally overcharge 340B providers, according to the Health Resources and Services Administration, which oversees the program.
Regulators should begin imposing civil monetary penalties against pharmaceutical companies found in violation, the congresspeople said.
The letter also argues that the Biden administration should pursue enforcement action against 11 drug companies restricting 340B pricing, which either haven’t received notice from the HHS that they’re in violation of law yet, or have received a notice but haven’t been referred to OIG for enforcement.
“Every day that drug manufacturers violate their obligation to provide these discounted drugs, vulnerable communities, federal grantees, and safety net health care providers are deprived of resources Congress intended to provide,” the letter reads.
A number of hospital associations came out in support of the letter, including the National Rural Health Association, the American Hospital Association, America’s Essential Hospitals and the National Association of Community Health Centers.
340B Health, which lobbies on behalf of hospitals in the 340B program, thanked the House members for the letter in a statement Monday, and reiterated calls for fines.
“HHS should impose steep financial penalties on all the companies that are ignoring their legal commitments to the health care safety net,” said Maureen Testoni, CEO of 340B Health, in a statement.
A survey of more than 500 hospitals by 340B Health released in May estimated that the annual financial impact from drug company restrictions has doubled since the end of 2021, costing hospitals millions of dollars per year.
Drugmakers that have imposed or announced restrictions on 340B discounts for drugs dispensed at community and specialty pharmacies include AbbVie, AstraZeneca, Johnson & Johnson, Merck and Pfizer.
HENRY KOTULA 