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Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs

Health care policies are implemented through expenditure decisions made by government officials. On Wednesday, the Centers for Medicaid & Medicare Services (CMS) published a 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 justification for cutting  hospital reimbursement payments? 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 costs 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 to entry into the Medicaid and Medicare Part B markets, the Act requires drug manufacturers to offer formula based rebates on 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.

Click here for information on how to become a 340B hospital/covered-entity and/or how to become a 340B pharmaceutical manufacturer.
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