Update: Federal Court Allows The Centers for Medicare & Medicaid Services to Cut $1.6 billion from Federal 340B Drug Pricing Program

Health care policies are implemented through expenditure decisions made by government officials. Today, a federal court  deemed a lawsuit brought by three hospital associations — among other entities — invalid, allowing the CMS to implement the provisions of a final rule the agency published in November. 


In November, the CMS published a controversial final rule  which, among other things, cut Medicare hospital reimbursement payments for hospitals that participate in the Health Resources and Services Administration’s (HRSA’s) 340B Drug Pricing Program by $1.6 billon, effective January 1, 2018. Rural, children’s and cancer hospitals are not subject to reimbursement decreases.


The language in the final rule reads: “We [CMS] believe that reducing payments on 340B purchased drugs to better align with hospital acquisition costs directly lowers drug costs for those beneficiaries who receive a covered outpatient drug from a 340B participating hospital. Further, to the extent that studies have found that 340B participating hospitals tend to use more high cost drugs, we believe that this 340B payment policy helps address drug pricing in the hospital outpatient setting by lessening the incentive for unnecessary utilization of costly drugs.”


The Omnibus Reconciliation Act created the CMS’ Medicaid Rebate Program in 1990. In order to be reimbursed by the federal government, and as a prerequisite for entry into the Medicaid and Medicare Part B markets, the Act requires drug manufacturers to offer formula based rebates on certain outpatient drugs.

To mitigate the unintended consequences of the rebate program — a rise in prescription drug costs for safety net hospitals and other entities that provide health care services to low income patients — Congress passed the Veterans Health Care Act of 1992 which created Section 340B of the Public Health Service Act. The Act requires pharmaceutical manufacturers to provide point of sale discounts to 340B-covered entities.


The HRSA’s Office of Pharmacy Affairs administers the 340B Drug Pricing Program.

Qualifying hospitals and other 340B-covered entities receive discounts from pharmaceutical manufacturers participating in government-sponsored health care programs that have entered into a pharmaceutical pricing agreement with the Department of Health and Human Services Secretary.

Manufacturers participating in Medicaid agree to provide outpatient drugs to covered entities at significantly reduced prices. All covered entities must register and annually re-certify their eligibility as 340B providers, agree to adhere to all program requirements, and accurately report how they bill Medicaid fee-for-service drugs on the Medicaid Exclusion File (MEF).

The MEF is a coding mechanism employed by 340B-covered entities and states to prevent duplicate discounts for drugs subject to Medicaid rebates. By law, drug manufacturers are not allowed to provide a discounted 340B price and a Medicaid drug rebate for the same product.


By authorizing the CMS to continue with its plan to cut the 340B Drug Pricing Program by $1.6 billion, Medicare hospital reimbursement payments for 340B hospitals will decrease exponentially. According to the hospital associations involved in the lawsuit, this decision will profoundly undermine patient access to affordable prescription drugs. Proponents of 340B program cuts disagree… Only time will tell.