Much-Criticized Medicare Rule Helps Many Hospitals: Analysis

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By Mike Stankiewicz and Bronwyn Mixter

Most hospitals will benefit from payment changes in a Medicare rule that has been criticized for cutting drug reimbursements to some facilities, according to a consulting firm’s analysis.

Research released Jan. 29 by Avalere Health, a health-care consulting firm, found that 85 percent of outpatient hospitals will see an increase in their overall Medicare Part B (outpatient services) reimbursement under the rule that took effect Jan. 1. This is despite the rule’s 30 percent reduction in Part B payments for drugs that hospitals obtained under the 340B pricing program. The 340B program, which is not part of Medicare, allows hospitals serving low-income populations to obtain discounted medications from drug companies for outpatient care.

The report comes as the 340B hospitals are being criticized by pharmaceutical companies and some congressional Republicans for misusing the discounts they get on drugs. GOP bills in Congress could restrict hospitals’ eligibility for discounts or impose new reporting burdens on the hospitals getting the 340B discounts. Drug companies participating in the program include Pfizer, Merck, Johnson & Johnson, and Mylan.

Meanwhile, a hospital group says Avalere misses the point and the study is an attempt to justify the pharmaceutical industry’s agenda.

Increases and Decreases in Net OPPS Payments Across All Hospitals in 2018

The 340B program, created under a 1992 law, has been growing. In 2013, there were 7,806 hospital sites participating in the 340B program, and in 2017 that number grew to 21,554 hospital sites in the program, according to the Government Accountability Office.

Study ‘Misses the Point’

Avalere’s study focuses only on selective measures to conclude that the Centers for Medicare & Medicaid Services policy reduces patient costs, when it actually has increased copayments for 97 percent of Medicare patients who are being treated at 340B hospitals, Tom Nickels, executive vice president of the American Hospital Association, said in a Jan. 29 statement.

“Avalere also fails to mention that one of the main drivers of increases in patients’ costs are the skyrocketing cost of pharmaceuticals,” Nickels said. “In addition, in determining the number of hospitals that will see net payment increases, the study absurdly conflates the hospital inflation adjustment required by law with the 340B payment changes.”

The study is an “attempt to again justify the [pharmaceutical] industry’s agenda to misdirect and mislead,” Nickels said.

Nickels said Avalere “completely misses the point,” which is that the nearly 30 percent payment reduction for 340B drugs is “unlawful.” He said the reduction to 340B drug payments isn’t permitted by the Medicare statute and the agency can’t “concoct its own reimbursement rules that effectively eviscerate the benefits and intent of the 340B program.”

“That’s why we continue to pursue our legislative and legal strategies, and expect to prevail in holding the agency accountable for its overstepping,” Nickels said.

By demonstrating how the cuts simply redirect Part B funds from safety-net hospitals to the non-340B provider community and how, on an aggregate basis, they do nothing to reduce patient cost-sharing, the study “supports the hospital view that the real purpose of the cuts is to advance the agenda of the pharmaceutical industry of undermining the value of the 340B program by allowing payers to usurp the benefit of 340B discounted pricing,” attorney William von Oehsen with Powers Pyles Sutter & Verville PC told Bloomberg Law in an email. Von Oehsen focuses on the 340B program and has worked with hospitals, clinics, and other covered entities.

340B Health, a group that represents hospitals and health systems that participate in the program, said in a statement it continues “to be concerned that CMS’s policy takes funds away from hospitals that serve high volumes of low-income patients.”

“CMS’s own analysis shows that, even with the payment redistribution, government hospitals, major teaching hospitals, and hospitals that treat the largest shares of low-income patients will see overall payment reductions,” 340B Health said.

“The regulation does nothing to lower drug prices, it does not save Medicare or the taxpayers a dime, and it won’t lower costs for most seniors,” the industry group said.

America’s Essential Hospitals also criticized the study in a statement saying it skews “the conclusions in a way that masks the real harm of the” 340B reimbursement cuts. The group said “the 340B payment cuts subvert the very intent of the 340B program by taking savings away from the safety net. For hospitals that operate on narrow margins—those that fill a safety-net role and depend most on 340B support—the payment cuts are unsustainable.”

Medicare Money Redistributed

The cuts that went into effect Jan. 1 under the Medicare rule for 340B hospitals were in part offset by a 1.34 percent increase in total outpatient prospective payment system (OPPS) Medicare pay for 2018, the consulting firm said. The payment change redistributes $1.6 billion in Medicare payments for the drugs to all outpatient hospitals, the consultant’s analysis added.

Matt Brow, executive vice president and general manager at Avalere, said the findings weren’t very surprising.

“The hospitals that are going to be hit the hardest are those that much rely on the 340B program,” he told Bloomberg Law. “One of the more interesting things is that it has a generally positive impact on rural hospitals.”

Rural hospitals benefit the most from the payment changes with a 2.7 percent net increase in Part B payments, Avalere said. The average hospital will see an average 1.5% increase in their total Part B payments. Urban hospitals will see a 1.4% net increase.

Those Left Behind

Among the 15 percent of hospitals that will experience a net payment reduction, 76 percent will see cuts of less than 5 percent of their overall outpatient reimbursement. Also, about half of total disproportionate share hospitals will see payment increases more than offsetting the 340B drug reimbursement cuts. DSH providers serve largely low-income populations.

Brow added the findings will not come as a relief to hospitals that have expressed concern about the cuts.

The findings also come in the wake of a New England Journal of Medicine study finding that hospitals have grown their volume of 340B drugs by buying up physician practices.

340B Health pushed back against the NEJM study, saying its finding is inconsistent with existing research “that demonstrates 340B hospitals treat high volumes of low-income patients and provide high levels of uncompensated care and specialized services to care for low-income patients.”

To contact the reporters on this story: Mike Stankiewicz in Washington at; Bronwyn Mixter in Washington at

To contact the editor responsible for this story: Brian Broderick at

For More Information

The Avalere analysis is at

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