New OPPS Rule: Medicare Payment Cuts and Modifier Requirements for 340B Hospitals

On November 1, 2017, HHS announced that it would move forward with substantial cuts in Medicare Part B payments to certain 340B hospitals.  In addition to cutting payments, CMS is requiring hospitals that participate in the 340B program to submit modifiers on claims that involve 340B drugs, which will pose a substantial administrative burden for many hospitals.  Failure to use the modifiers properly could put hospitals at risk of significant Medicare overpayments and penalties.  The payment cuts and modifier requirements go into effect on January 1, 2018. 

Key Provisions of Hospital Outpatient Prospective Payment System Final Rule (CMS-1678-FC)


340B Hospitals Subject to Payment Cut

The following hospitals are subject to the payment cut if they participate in the 340B program:

  • disproportionate share hospitals (DSH)
  • rural referral centers (RRC)

340B Hospitals Not Subject to Payment Cut

The following hospitals are not subject to the payment cut even if they participate in the 340B program:

  • children’s hospitals
  • free-standing cancer hospitals
  • rural sole community hospitals (SCH)
  • critical access hospitals (CAH)

Amount of Payment Cut for 340B Drugs 

Medicare Part B payments for 340B drugs will be substantially reduced from Average Sales Price (ASP) + 6% to ASP – 22.5%

Drugs Affected by Payment Cut

The payment cut affects: separately payable drugs under Medicare Part B (status indicator K)

Drugs Not Affected by Payment Cut

The payment cut does not affect:

  • vaccines (status indicator “L” or “M”)
  • packaged drugs (status indicator “N”)
  • drugs on pass-through status (status indicator “G”)
  • drugs that are not paid under Medicare Part B (e.g., retail drugs sold to the public by hospital pharmacies, drugs used in new off-campus hospital clinics (Section 603 clinics))

New Modifier Requirements for 340B Hospitals

New modifier requirements apply for all 340B hospitals except CAHs and Maryland Waiver Hospitals. Though not clear in the preamble to the new regulation, subsequent FAQs released by CMS indicate that DSH and RRC hospitals will need to use both the "JG" modifier and "TB" modifier for certain drugs.  Other 340B hospitals will need to use just the "TB" modifier.  See the CMS chart explaining which modifier to use for which drugs (item #8).

Current Considerations for 340B Hospitals

In addition to the significant cut in payment, compliance with the new modifier requirements will be a key concern among hospitals.  Failure to use the "JG" 340B modifier for a 340B drug could result in an overpayment by Medicare, for which the hospital would be legally required to repay, and potentially subject the hospital to additional penalties. (For more information, see this brief article on Medicare overpayments.) At the same time, it is important to remember that DSH hospitals may not purchase outpatient drugs eligible for 340B through their group purchasing organization, as that is a violation of 340B rules.  Thus, if a hospital is not using 340B for an outpatient drug that would otherwise qualify for 340B, the drug must be purchased at a non-340B and non-GPO price, such as Wholesale Acquisition Cost.  Enforcement regarding failure to use the "TB" modifier is less clear, as such action does not result in direct financial harm to Medicare.

Future 340B Changes?

The commentary to this rule predicts additional 340B changes for 340B hospitals, noting that the Department of Health and Human Services intends to work with Congress so that HHS can have the flexibility to develop “tools” around “safety net hospitals.”  HHS, rather than CMS, is referred to here, indicating a plan to make changes directly to the 340B program, and not just indirectly impact 340B by making additional changes to Medicare.  Given the focus on tying 340B to uncompensated care and calls for more information on how hospitals use 340B savings, it is very possible that the “tools” referred to could relate to changes to 340B eligibility criteria (possibly linking 340B eligibility to the provision of a certain level of uncompensated care) and the creation of reporting requirements around use of 340B savings.

Flanagan & Testoni will continue to keep our clients abreast of changes and recommendations. We welcome you to read more about our 340B program counseling and compliance work. Contact us to discuss your questions or concerns.

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