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“Unexpected Uncertainty For The 340B Drug Pricing Program”

Law 360 By Alyce C. Katayama and Elizabeth R. Gebarski

Just when we have all heard more than enough about the threats facing the 340B Drug Pricing Program, along comes the Bipartisan Budget Act of 2015 (BBA 2015). BBA 2015 does not even mention the 340B Program. However, it changes the way in which new off-campus hospital outpatient departments (HOPDs) will be paid on or after Jan. 1, 2017, and this change could have a substantial impact on 340B Program child site eligibility for the child sites of certain 340B covered entities (CEs).


First, a little history. Before Nov. 2, 2015, Medicare generally paid more for diagnostic and therapeutic services furnished in off-campus HOPDs than for the same services performed in freestanding facilities. An off-campus facility seeking to be reimbursed as an HOPD had to meet Medicare's requirements for "provider-based" facilities. Since provider-based facilities can claim both a facility fee and a professional fee there has been a trend, for some years now, for hospitals to acquire freestanding facilities and convert them into provider-based entities.

The requirements for achieving provider-based status included shared licensure (if permitted by state law), financial integration and clinical integration, as evidenced, in part, by the fact that the main hospital maintains the same monitoring and oversight of the off-campus facility as for any other department of the provider. Once a facility is provider-based, its costs and charges appear on the hospital's Medicare cost report in a manner which demonstrates that the facility is reimbursable under Medicare.

Bipartisan Budget Act of 2015

Freestanding facilities criticized this unequal payment, urging Medicare to pay the same amount for the same services, regardless of where the services are furnished. The Medicare Payment Advisory Commission (MedPAC) also endorsed the concept of site neutral payment. These efforts came to fruition in Section 603 of BBA 2015, which mandates that Medicare payments for most items and services furnished at an off-campus HOPD which was not billing as such prior to Nov. 2, 2015, be paid, effective Jan. 1, 2017, under the applicable Medicare fee schedule. There are several exceptions, including emergency departments, departments that are "on-campus" to a "remote location" of the hospital, rural health clinics (RHCs) and certain federally qualified health centers (FQHCs) or FQHC lookalikes.

Affect on 340B Drug Pricing Program

So, where's the rub for 340B CEs? The CEs that may be impacted by this are children's hospitals, freestanding cancer hospitals, sole community hospitals, rural referral centers and disproportionate share (DSH) hospitals. The why will take a little explaining.

All off-campus outpatient facilities not located at the same physical address as the “parent” CE must be registered in the 340B Program, if the off-campus facilities intend to purchase and use 340B drugs for their eligible patients. Hospital CEs demonstrate the eligibility of their child sites by showing that each off-campus outpatient facility is listed on a line of the parent hospital's Medicare cost report, which is reimbursable under Medicare, and that the services provided at each of the facilities have associated outpatient costs and charges on the Medicare cost report. Children's hospitals, which do not file Medicare cost reports, must demonstrate that the requested outpatient facility "(1) is an integral part of the hospital and (2) would be correctly included on a reimbursable line with associated Medicare costs and charges on a Medicare cost report, if filed."

The Centers for Medicare & Medicaid Services (CMS) has not yet disclosed how it intends to implement Section 603 of BBA 2015. There are at least five possibilities:

  • CEs will be held accountable for the accuracy and currency of the practice location information they report at enrollment, revalidation, change of ownership or change of information, using the Medicare Enrollment Application (CMS-855A), or perhaps some similar process yet to be devised;

  • CMS could continue to rely on the cost report approach currently used, requiring all off-campus HOPDs to be reflected on the Medicare cost report, whether their reimbursement is grandfathered;

  • CMS could require the use of modifiers in the billing process, such as a PO modifier, which indicates services, procedures and/or surgeries performed at off-campus HOPDs. This would sync with the requirements in the proposed 340B Drug Pricing Program Omnibus Guidance for 340B drug use determinations to be made “on a prescription-by-prescription or order-by-order basis.”;

  • CMS could cease to make any determinations of provider based-status; or

  • CMS could devise some approach unlike any of the above.

CMS does not run the 340B Program; the Health Resources and Services Administration(HRSA) does that. Nevertheless, how CMS chooses to implement site neutral payment could unfavorably impact the ability of 340B CE hospitals to establish new child sites. Two of the more disastrous options for 340B child sites would be if CMS were to cease making provider-based determinations, or if CMS were to require entities created after Nov. 2, 2015, to report their charges in a manner different than grandfathered provider-based entities. In either case, the burden would then shift to HRSA to develop a novel method by which to determine child site eligibility, or, even worse, HRSA would decide not to allow new child sites.

Don't throw in the towel yet. It is possible that a new child site could be viewed by HRSA as provider-based for 340B purposes, even though not eligible, due to BBA 2015 Section 603, for provider-based reimbursement. This is because BBA 2015 does not repeal the concept of provider-based status. Rather, it simply changes the way in which new off-campus provider-based entities will be reimbursed. In which case, HRSA may decide to require new off-campus HOPDs to prove eligibility in the manner currently used by children's hospitals that do not file a Medicare cost report, namely, by demonstrating that the requested outpatient facility is integral and would be correctly included on a reimbursable line with associated Medicare costs and charges on a Medicare cost report, if filed according to the provider-based rules. But it is not clear how such a new child site could ever obtain a reliable determination that it was provider-based, so as to know that it would not violate the 340B Program prohibition on drug diversion.

We should also recall that HRSA requested comments, in its proposed 340B Drug Pricing Program Omnibus Guidance, regarding how to determine child site eligibility. Thus it is clear that this topic was already under HRSA's microscope. This is not surprising since recent significant growth in the number of child sites is one of the items that 340B Program critics cite to evidence that the program is out of control. There is no indication that BBA 2015 Section 603 was meant to impact 340B eligibility. But, CEs should watch how this plays out. It is our guess that HRSA will end up following CMS' lead in ways that limit the growth of child sites.