On Nov. 4, the Centers for Medicare and Medicaid Services (CMS) finalized another cut to what Medicare pays hospitals for certain discounted drugs. Patients could pay less, while affected hospitals lose revenue. The agency tried a similar policy before and lost at the Supreme Court. Its new approach rests on the hospital-cost survey missing from that earlier attempt.

The 340B program, run by the Health Resources and Services Administration, an agency within the Department of Health and Human Services, requires participating manufacturers to sell outpatient drugs at reduced prices to eligible hospitals and clinics. The agency describes the purpose as helping providers stretch their resources and reach more patients.

The purchase price and the Medicare payment are separate transactions. Federal law sets a ceiling on what manufacturers can charge eligible providers. Medicare then uses its own payment rules when a hospital gives a covered drug to a patient. Changing that reimbursement does not repeal the manufacturer's discount obligation.

In 2018, CMS began paying affected hospitals average sales price minus 22.5 percent for 340B drugs. Average sales price is a benchmark based on manufacturers' sales, rather than the individual hospital's invoice.

In American Hospital Association v. Becerra, the Supreme Court unanimously rejected that policy on June 15, 2022. Justice Brett Kavanaugh's opinion explained that the Medicare statute offers two routes. With hospital acquisition-cost survey data, the government can base payment on those costs and vary rates among hospital groups. Without those data, it must use the alternative statutory method and cannot single out 340B hospitals for lower rates.

The Court rejected the agency's method, leaving the survey-based route available. Completing a survey does not automatically make every rate lawful.

CMS says its hospital-cost survey found large differences in what hospitals paid for drugs bought through 340B and through other channels. In some cases, patients' coinsurance exceeded what the hospital paid for the drug.

Beginning Jan. 1, 2027, the rate for affected drugs falls from average sales price plus 6 percent to minus 28 percent. CMS estimates patients' drug payments will fall by $1.1 billion in the first year, averaging about $900 for a beneficiary receiving a qualifying drug. Individual savings will vary.

For illustration, a drug with an average sales price of $100 moves from a $106 reimbursement to $72. That is a reduction of about 32 percent in the payment, rather than 28 percent of the old payment.

The final rule exempts designated rural Sole Community Hospitals, children's hospitals and cancer hospitals exempt from Medicare's standard hospital payment system.

CMS estimates a $4.35 billion reduction in Original Medicare drug payments. It says the policy is budget neutral because payments for other outpatient services rise by an equivalent amount.

A hospital's mix of drug treatments and other services determines whether it gains or loses from that redistribution.

A separate adjustment also reduces non-drug payments. CMS is raising an existing offset from 0.5 percent to 2 percent to recover earlier increases tied to the old 340B policy. It expects recovery of roughly $7.8 billion to finish in 2031.

The redistribution funds future services; the offset recovers past payments. Both affect hospital budgets.

CMS argues that using the statute's cost-based payment method lets patients share the benefit of hospitals' discounts through lower coinsurance. Higher reimbursement preserves more revenue for providers.

Hospitals argue that the gap supports care beyond the drug itself. The American Hospital Association's Ashley Thompson says the new rate inadequately accounts for hospitals' financial challenges, especially in rural and underserved communities. She argues that both lower reimbursement and faster recovery of earlier payments will strain hospitals' ability to serve patients.

America's Essential Hospitals makes the safety-net argument more forcefully. Beth Feldpush says the cuts threaten hospitals and patients, particularly as people risk losing Medicaid coverage. The group wants Congress to protect the program.

The disagreement is over what the payment should finance: the drug's purchase cost or a broader contribution to hospital care.

The final rule softened the proposed drug rate from average sales price minus 33.4 percent to minus 28 percent. It also reduced the proposed historical recovery offset from 3 percent to 2 percent, citing hospitals' concerns about burden.

CMS retained its approach while reducing the cuts. That is a concrete concession on size and pace, although hospital groups still oppose the policy.

The companion physician rule cuts the standard dollar multiplier used to calculate doctors' fees by 2.31 percent as a temporary increase expires. Qualifying participants in payment arrangements tied to care quality and cost receive a different update.

MedPAC, Congress's Medicare advisory commission, found access to physician services generally strong. That finding concerns a separate payment stream and does not establish how hospital drug cuts will affect care.

The hospital rule takes effect Jan. 1, 2027. Its comment process does not suspend implementation.

Patients will judge the policy by their bills and access to treatment. Hospitals must prepare for both the new reimbursement rate and the faster recovery of earlier payments.

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