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October 3, 2017

Report: Not-for-profit hospital margins would suffer under proposed cuts to 340B program

Daily Briefing

Moody's Investor Services has released a new report that found proposed changes to hospital payments under the 340B drug discount program would hurt the margins of not-for-profit hospitals.

A proposed $900M cut to 340B payments—and other early impressions from the 2018 OPPS rule

CMS in July proposed  reducing payment rates under the program down from the current average sales price (ASP) plus 6 percent to ASP minus 22.5 percent—a nearly 30 percent total cut, according to Moody's. CMS estimated that under the proposed rule hospital outpatient payments for those drugs could decrease by $900 million in CY 2018. CMS said it would redistribute those savings by raising Medicare payments to hospitals by 1.4 percent in CY 2018.

However, health care industry stakeholders during a House subcommittee hearing in July expressed concerns about the proposal to reduce 340B payments.

Report findings

The report projected that inpatient drug costs will rise at a slower pace for not-for-profit hospitals amid growing scrutiny over the pricing practices of drugmakers, particularly as FDA approves more generic drugs. But the report concluded that the proposal to cut hospital payments by almost 30 percent in the aggregate would "represent another headwind for hospitals already facing pressure."

Diana Lee, a vice president at Moody's, said, "Hospitals and health systems of varying size and across the rating spectrum have noted anecdotally that they have benefited from cost savings from this discount drug program."

Lee continued, "In some instances, the savings and income gained from this program can be meaningful relative to total operating cash flow. While about half of hospitals in the nation are 340B providers, those that have limited financial flexibility would be most exposed to possible changes to the 340B program" (Paavola, Becker's Hospital CFO Report, 9/27; Commins, HealthLeaders Media, 9/27; AHA News, 9/28; Siddons, "TrumpTracker," CQ HealthBeat, 9/28 [subscription required]).

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