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MedPAC is on track to make a recommendation to Congress that could prompt debate or even action on the 340B program’s use of the Medicare disproportionate share (DSH) patient percentage to determine hospital eligibility.

MedPAC Is Expected to Make a Policy Recommendation That Could Prompt a Look at 340B Hospital Program Eligibility Criteria

Congressional Medicare advisers are moving toward recommending what they say is a better way to give extra Medicare funding to safety-net hospitals that disproportionately serve low-income and/or uninsured beneficiaries.

If Congress and the executive branch adopt the proposal, however, it could in turn lead to debate or even action on the 340B program’s use of the Medicare disproportionate share (DSH) patient percentage to determine which DSH hospitals, rural referral centers, sole community hospitals, children’s hospitals, and free-standing cancer hospitals are eligible for drug discounts.

The Medicare Payment Advisory Commission (MedPAC) acknowledges that the 340B program uses the DSH patient percentage. But it says that, in offering the recommendation, it is keeping its hands off of 340B. The drug discount program, it says, could keep using the DSH calculation even if Medicare discards it in favor of some other measure.

The commission during its meeting on Friday heard a staff report about ongoing work to develop the Medicare safety-net funding recommendation. MedPAC also described the work in its June report to Congress. A majority of commissioners indicated during the meeting that they support the work and want the staff to continue.

A MedPAC staff senior executive said emphatically during an interview Monday with 340B Report that the commission is not advocating changes to the 340B program.

“We believe there is a better way to target Medicare dollars to the hospitals that are used as primary sources of care for large sources of low-income Medicare beneficiaries,” MedPAC Executive Director James Mathews said.

“We are not in any way, shape, or form suggesting changes to the 340B program,” Mathews said. “To the extent 340B by statute relies on a disproportionate care measure to determine eligibility, we are not saying anything about that…We are not touching it.”

While that is accurate, MedPAC nevertheless is on track to recommend as soon as March that Congress should replace Medicare DSH adjustment payments. If Congress and the president agree, Medicare DSH adjustment payments would end and Medicare would stop using the Medicare DSH patient percentage calculation. 

And if Medicare stops using the calculation, a case could be made for stopping its use in 340B too, no matter what MedPAC says about not advocating changes to 340B.

The 340B program’s use of the DSH percentage has been under fire for years. Critics point out that it is an inpatient statistic. They say it is improper for 340B, an outpatient drug program, to base hospital eligibility on inpatient data. MedPAC struck a similar note in its June report. “The DSH metric is an inpatient-only metric,” it said. “As the practice of medicine shifts toward outpatient settings, the mix of inpatients may be less reflective of the hospitals’ overall patient mix.”

Meanwhile, the drug industry, some drug pricing analysts, and some congressional Republicans say provision of charity care is a better measure of whether hospitals deserve 340B pricing. Hospital groups respond that providing free care is just one way that they use 340B revenue in accordance with congressional intent. They also say 340B DSH hospitals serve substantially more Medicaid and low-income Medicare patients and are more likely to provide unreimbursed or under-reimbursed services. (The American Hospital Association declined to comment on the Medicare safety-net funding recommendation that MedPAC is leaning toward making.)

In January 2022, a House Republican task force developing proposals the party could advance if the GOP took the majority in Tuesday’s mid-term elections invited public input “on making healthcare more affordable.” Its first question about 340B was, “Are there other recommended measures for program eligibility, other than Disproportionate Share Hospital?”

Medicare currently gives extra financial help in two ways to hospitals that serve high shares of low-income and/or uninsured patients: (1) a DSH adjustment payment to the base payment per inpatient discharge, and (2) additional payments for uncompensated care. Amounts for both rely on a hospital’s DSH patient percentage—the sum of the percentage of Medicare inpatient days attributable to patients eligible for both Medicare Part A and Supplemental Security Income (SSI), and the percentage of total inpatient days attributable to patients eligible for Medicaid but not Medicare Part A.

MedPAC in its June report to Congress and during its meeting last Friday discussed whether to recommend replacing DSH adjustment payments and uncompensated care payments with a new safety-net index (SNI) payment. SNI would be computed as:

  • a hospital’s share of Medicare beneficiaries eligible for the Part D low-income subsidy, plus
  • uncompensated care costs as a share of revenue, plus
  • one-half of a hospital’s Medicare share of total inpatient days.

SNI payments would be applied to Medicare inpatient and outpatient payments for services to Medicare fee for service and Medicare Advantage patients, according to a slide presentation during MedPAC’s Nov. 4 meeting. Commission staff said, and most commissioners appeared to agree, that redistributing current Medicare DSH and uncompensated care dollars to hospitals using the new SNI metric would focus Medicare funding more tightly on hospitals serving high shares of low-income Medicare patients.

When Congress created 340B, it borrowed Medicare’s DSH patient percentage for use in the drug pricing program. To be eligible to participate in 340B, DSH hospitals, children’s hospitals, and free-standing cancer hospitals must have a DSH adjustment percentage greater than 11.75% for the most-recently filed Medicare cost report. They must also either be a public hospital or private non-profit hospital with a contract with state or local government to be serving the indigent. Rural referral centers and sole community hospitals must have a DSH adjustment percentage greater than or equal to 8%.

MedPAC addressed the 340B program’s use of Medicare’s DSH patient percentage in an endnote in its June report to Congress.

“The 340B drug pricing program allows certain hospitals to obtain discounted prices from drug manufacturers,” the note said. “The 340B program could continue in its current form, using existing DSH thresholds, even if the Medicare DSH program was reformed and DSH was no longer used as the basis for distributing Medicare payments to hospitals.”

Congress and the executive branch do not have to implement MedPAC’s recommendations verbatim. A notable example was the Trump administration’s adaptation of the commission’s March 2016 recommendation that Congress should direct the Department of Health and Human Services to:

  • reduce Medicare Part B payment for hospitals 340b-purchased drugs from average sales price plus 6% to ASP minus 10%
  • direct the program savings from reducing Part B drug payment rates to the Medicare-funded uncompensated care pool
  • distribute all uncompensated care payments using data from the Medicare cost reports’ Worksheet S–10, phased in over three years.

HHS under Trump decided instead, starting in 2018, to cut Part B reimbursement for hospitals’ 340B-acquired drugs to ASP minus 22.5% and redistribute the savings among all hospitals in the outpatient prospective payment system as an increase in payments for non-drug services.

That decision led to a lawsuit that reached the U.S. Supreme Court, which ruled that the cut was illegal. HHS, 340B hospital plaintiffs, and a federal district judge are still ironing out a solution.

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