On July 7, the Centers for Medicare & Medicaid Services (CMS) published a proposal to cut Medicare Part B payment rates to certain hospitals in the 340B drug pricing program for separately payable drugs purchased at discounted prices. Under the proposal, which CMS included in the 2027 Outpatient Prospective Payment System (OPPS) Proposed Rule (Proposed Rule), Medicare would pay for drugs purchased at 340B prices at average sales price (ASP) –33.4%, down from the current rate of ASP +6%. The roughly 37% payment reduction would be a deeper cut than the ASP –22.5% rate in place from 2018 to 2022.
CMS based the new proposal on hospital drug acquisition cost survey data, addressing a legal flaw under CMS’s prior 340B payment policy that led the U.S. Supreme Court to overturn it in 2022. If finalized, the payment policy would be effective January 1, 2027.
CMS Proposes to Cut Payment for 340B Drugs from ASP +6% to ASP –33.4%
The Medicare statute requires CMS to pay hospitals for separately payable drugs (i.e., high-cost drugs administered in the hospital setting) at the average acquisition cost, as determined by CMS, taking into account hospital acquisition cost survey data or, if the survey data is not available, at the drug’s average price based on statutory rates. CMS currently pays for 340B drugs at the statutory rate of ASP +6%, the same rate as for non-340B drugs.
CMS conducted an OPPS Drug Acquisition Cost Survey (ODACS) from January 1, 2026, through April 7, 2026 (after an extension of the original March 31, 2026, deadline). The data collection followed an April 2025 White House Executive Order calling for CMS to conduct the survey and to consider and propose any adjustments that would align Medicare payment with acquisition costs.
The survey indicated 340B drug acquisition costs were 33.4% below ASP. CMS concluded the results show that the statutory reimbursement rate of ASP +6% “is not an appropriate payment proxy for hospitals that acquire drugs through the 340B Program” and proposed to adjust payment to “better align payment with the acquisition costs demonstrated by the survey.”
The payment cuts would not apply to children’s hospitals, PPS-exempt cancer hospitals, or rural sole community hospitals (SCHs), as was the case under the prior 340B payment policy. The payment cuts also would not apply to certain drug categories, including vaccines, drugs with transitional pass-through payment status, and non-opioid pain management drugs, or to entities that are not paid under the OPPS, including critical access hospitals (CAHs), rural emergency hospitals (REHs), and Maryland waiver hospitals.
CMS would require hospitals to use several modifiers to effectuate the payment policy. As was the case previously, 340B hospitals subject to the payment cut would bill using the “JG” modifier to trigger the reduced payment rate and would use the “TB” modifier to identify 340B drugs not subject to the cuts. 340B hospitals exempt from the payment policy would again use the “TB” modifier to identify all 340B drugs for informational purposes. New this time, CMS proposed that all OPPS hospitals use a modifier to identify non-340B drugs, currently referred to as the placeholder “XX” modifier, which CMS would update in the final rule, if the proposal is finalized.
Rather than setting different reimbursement rates by drug, CMS proposed to use a single discount off ASP for all 340B drugs. CMS noted it would not be practical to set drug-specific discounts because acquisition costs will change over time, and a uniform percentage applied to quarterly ASP updates will “better align payment with the average cost of the drug.”
CMS also acknowledged that the Medicare statute authorizes CMS to pay additional amounts to cover overhead and handling expenses. However, the agency said the statute does not require an add-on payment and that, in this case, CMS did not believe an add-on payment was warranted because CMS took a “prudent approach” that resulted in a conservative estimate of 340B acquisition costs.
CMS Solicits Feedback on an Alternative Payment Policy Based on 340B Prices
To validate the survey responses, CMS compared the survey data to 340B ceiling price data from the Health Resources and Services Administration (HRSA), which showed that 340B ceiling prices were roughly 28% below ASP in the aggregate. CMS suggested that the difference between the survey data and the ceiling prices made sense, given that the ceiling price is the minimum discount manufacturers must provide but hospitals can negotiate additional discounts, resulting in sub-ceiling prices. CMS requested feedback on an alternative payment rate of ASP –28%, which would be the estimated average 340B drug acquisition cost based on the 340B ceiling prices. CMS noted that relying on 340B prices to set reimbursement rates could be a “reasonable alternative” given that it would be “based on objective data from HRSA” and could be updated regularly.
CMS Believes the Survey Data is Sufficient, But Only 23% of Eligible 340B Hospitals Responded
Under the ODACS, CMS requested that all OPPS hospitals submit 340B and non-340B drug acquisition cost data for drugs purchased between July 1, 2024, and June 30, 2025. The survey collected data for nearly 2,000 national drug codes (NDCs), corresponding to roughly 500 HCPCS codes. Of the nearly 4,500 eligible hospitals, 43.6% responded to the survey. CMS noted that some responding hospitals declined to provide acquisition cost data. Ultimately, only 453 of 1,957 eligible 340B hospitals (23.1%) and 885 of 2,537 eligible non-340B hospitals (34.9%) shared drug cost data.
The Proposed Rule did not include any indications that CMS would penalize 340B hospitals that did not respond to the survey by paying them at different rates. When CMS first indicated plans to conduct the ODACS during the 2026 OPPS rulemaking process, CMS suggested the possibility that the agency would take into account a hospital’s non-response to the survey when calculating reimbursement rates. However, under the Proposed Rule, Medicare would pay all 340B hospitals for 340B drugs at ASP –33.4%, regardless of whether they responded to the survey.
CMS acknowledged that the statute requires the survey to “have a large sample of hospitals that is sufficient to generate a statistically significant estimate of the average hospital acquisition cost for each specified covered outpatient drug.” CMS evaluated whether the survey respondents comprised a large sample sufficient to generate statistically significant and representative estimates of hospital acquisition costs. CMS ran several analyses and concluded it had confidence in the statistical validity of the respondents and responses and that the survey results met the standard required by the statute. CMS said it would provide an additional summary of its analysis of the survey results and solicit comments on the process used to evaluate the survey data.
The New 340B Proposal Follows Previous 340B Payment Cuts and Litigation
Prior to 2018, Medicare paid 340B hospitals at ASP +6%, the same rate used for non-340B hospitals. In 2018, Medicare began paying for 340B drugs at ASP –22.5%, which CMS estimated at the time was the average minimum 340B discount. Hospital associations challenged the payment policy in federal court, arguing the Medicare statute did not authorize the payment reduction. In June 2022, the U.S. Supreme Court ruled in their favor, finding that the payment policy exceeded CMS’s authority.
The Supreme Court found that the Medicare statute authorizes CMS to vary payment rates by hospital group only if CMS conducts a survey of drug acquisition costs and bases the variable payment rates on the survey data. The Court ruled that the previous 340B payment policy was unlawful because CMS had not conducted a survey and did not base the payment cuts on survey data. In proposing the new 340B payment policy, CMS has addressed this deficiency by conducting the survey and basing the proposed policy on the survey data.
CMS Proposes That Most of the Payment Cuts Be Budget Neutral, With Some Savings to Medicare and Beneficiaries
CMS proposed to apply the payment reduction in a budget-neutral manner, as required by the statute. CMS estimated that the policy would reduce 340B drug payments by $4.85 billion in 2027, and CMS would redistribute the savings in an equal offsetting amount to all hospitals paid under the OPPS through increased payment for non-drug services. As a result, the proposal would increase payments to non-340B hospitals. The net impact on 340B hospitals would vary depending on a hospital’s mix of drug versus non-drug services. Medicare estimated that the proposal would reduce Medicare beneficiary copays for 340B drugs by $1.15 billion in 2027, given that drug copays are based on a percentage of the OPPS payment rate, which would decrease. CMS estimated that the alternative payment reduction to ASP –28% would reduce Medicare spending on 340B drugs by $4.68 billion in 2027.
The proposed payment reduction would apply to 340B drugs furnished in all hospital departments, including both excepted and nonexcepted off-campus provider-based departments (PBDs). However, while the reduction for drugs paid under the OPPS would, as described above, be implemented in a budget-neutral manner, CMS took the position that the budget-neutrality requirements do not apply to drugs furnished by nonexcepted off-campus PBDs—i.e., departments subject to reduced Medicare site-neutral payments—because items and services furnished by these departments are not “covered outpatient department services” payable under the OPPS. Rather, such drugs are paid under the Physician Fee Schedule through a relativity adjuster set at 40% of the OPPS rate. As a result, savings from the 340B payment reduction for nonexcepted off-campus PBDs would not be redistributed through the OPPS conversion factor. CMS estimated that application of the 340B payment proposal to nonexcepted off-campus PBDs would result in $735 million in Medicare savings and $185 million in beneficiary savings in 2027.
CMS Also Proposes to Accelerate Recoupment Under the 340B Remedy
In addition to the 340B drug payment proposal, CMS proposed changes to the remedy it finalized to reverse the prior 340B payment policy found unlawful by the Supreme Court. In November 2023, CMS issued a final rule outlining a remedy to repay 340B hospitals for the difference between the rate under the unlawful policy and the rate hospitals would have received if not for the policy. CMS took the position that the Medicare statute required CMS to implement the remedy in a budget-neutral manner, meaning CMS was required to offset the 340B repayments by reducing payment to all OPPS hospitals for non-drug services. When CMS first implemented the 340B payment reduction in 2018, CMS offset the reduction by increasing payment to all OPPS hospitals for non-drug services. In 2023, CMS finalized a policy to recoup the increased payments for non-drug services by adjusting the OPPS conversion factor by -0.5% starting in 2026, continuing until the $7.8 billion is offset, which CMS projected would take roughly 16 years and would end in 2041.
In last year’s rulemaking cycle, CMS proposed to revise the annual reduction from 0.5% to 2% and shorten the recoupment timeframe, but CMS ultimately kept the 0.5% reduction in place in 2026. In the Proposed Rule, CMS proposed to shorten the timeframe again, this time by increasing the annual reduction from 0.5% to 3%, effective January 1, 2027. The reduction would continue until the full amount is offset, which CMS expected would occur by the end of 2029. CMS noted that the proposed change would result in recoupment being complete roughly six years after CMS made the remedy repayments, which would align with the five years during which the 340B payment policy was in place. CMS also highlighted that the 3% reduction would be close to the 3.19% payment increase hospitals received for non-drug services while the 340B payment policy was in place. CMS also sought comments on increasing the reduction to 2% instead of 3%.
The Financial Impact of the Proposal Will Vary by Hospital, and 340B Hospitals Are Likely to Raise Concerns About the Use of Survey Data
Hospitals evaluating the potential impact of the proposed payment cuts should consider several factors. On one hand, the nearly 37% payment reduction for 340B drugs could result in a significant reduction in Medicare reimbursement for 340B hospitals that bill for a high volume of separately payable drugs administered to Medicare beneficiaries, such as hospitals that operate infusion centers. On the other hand, the corresponding increase in reimbursement for non-drug services would increase reimbursement, including 340B hospitals. Ultimately, though, CMS estimated that for most 340B hospitals, the impact of the proposed 340B payment policy would be a net negative.
The payment proposal would have a net positive impact on non-340B hospitals, given that they would benefit from the increased payment rate for non-drug services. CMS did not propose to change payment for non-340B drugs based on the survey data. The survey showed that non-340B drug acquisition costs were roughly 2.7% above ASP, on average, less than the ASP +6% statutory reimbursement rate, but there was more variation among non-340B drug acquisition costs as compared to 340B drug acquisition costs. CMS indicated that further analysis and stakeholder feedback were needed before determining whether to base non-340B drug reimbursement rates on survey data and that it would evaluate the data for future rulemaking.
Hospitals subject to the 340B remedy offset would face payment reductions based on the proposed change to the 340B remedy and the increased recoupment timeline. Among hospitals subject to the offset, non-340B hospitals would be disproportionately impacted by faster recoupment, but 340B hospitals with larger volumes of non-drug services would also feel the impact more acutely.
CMS is accepting comments on the proposal until August 31, 2026, before issuing a final rule later this year. 340B hospitals have historically raised concerns about setting payment rates based on survey data, particularly when a survey has a low response rate, as was the case with the ODACS conducted earlier this year. Hospitals are likely to point to the statutory language requiring CMS to ensure that surveys used to set payment rates have a large sample of hospitals that is sufficient to generate a statistically significant estimate of the average hospital acquisition cost for each outpatient drug.
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