CMS’ 340B remedy favors hospitals that provide less charity care


Hospitals that would get between $1 and $500,000 in remedy payments dedicated an estimated median of 3.56% of their operating expenses to uncompensated care. That percentage drops as proposed remedy payments rise.

Hospitals that would receive at least $50 million in remedy payments dedicated an estimated median of 1.39% of their operating costs to uncompensated care. The median uncompensated care cost as a percentage of operating expenses for all hospitals receiving remedy payments was an estimated 3.04%.

“The analysis shows that the 340B program has moved away from Congress’ original intent,” said Sayeh Nikpay, associate professor of health policy and management at the University of Minnesota, who studies the 340B program and reviewed Modern Healthcare’s analysis. “The program rewards providers that do less of what we consider safety-net care.”

Hospital associations and lawyers who represent hospitals argue that uncompensated care costs as a proportion of operating expenses is not a valid measure of a hospital’s overall impact to the underserved community. Excluding hospitals’ Medicaid shortfall from the analysis also shortchanges hospitals’ public benefit, they said.

“Expenses are higher at 340B hospitals, and they would be even higher if those hospitals didn’t get the 340B discount,” said James Junger, a healthcare attorney at law firm Hall Render who represents hospitals. “Generally, charity care spending by 340B hospitals dwarfs charity care spending by non-340B hospitals.”

Alicia Mitchell, senior vice president of communications for the American Hospital Association, said in a statement that Modern Healthcare’s analysis is “deeply flawed and misleading, using a highly questionable and arbitrary apples-to-oranges approach that fails to recognize that 340B hospitals provide a range of services beyond uncompensated care to America’s poorest patients.”

It’s hard to quantify a hospital’s societal benefit, and some hospitals—especially ones in rural communities—need a different reimbursement model to remain solvent, said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation. But even those who support the 340B program and rebuff any reforms say it is not targeted perfectly well, she said.

“The analysis shows that the remedy payments are not correlated with hospitals’ share of operations that go to uncompensated care. It doesn’t seem like the way the program operates right now follows the original intent,” said Hempstead, who reviewed Modern Healthcare’s analysis. “There is a growing consensus that there ought to be a way to restructure the program so the incentives are aligned.”

Calls to restructure the drug discount program have in part been driven by its significant growth. The 340B program grew from 8,100 eligible hospitals, clinics and pharmacies in 2000 to 50,000 in 2020. Discounted drug purchases under the 340B program reached $43.9 billion in 2021, a roughly 16% increase from 2020, according to Health Resources and Services Administration data. Hospitals qualify for 340B drug discounts by meeting certain criteria, such as having a minimum Medicare disproportionate-share hospital adjustment percentage.

As for the proposed remedy payment calculations, CMS said in the proposed rule that the agency “reasonably approximates the results that would occur if we simply re-ran the claims after eliminating the 340B adjustment.” Hospitals with greater Medicare volumes experienced bigger reimbursement cuts from 2018 to 2022, and as a result, would receive higher remedy payments.

Of the 50 hospitals that would receive the highest proposed 340B remedy payments, 10 spent an estimated median of 1% or less of their operating expenses on uncompensated care.

“The magnitude of hospitals’ financial gain from the 340B program is disconnected from the extent of their service to low-income patients,” said Ge Bai, an accounting and health policy professor at Johns Hopkins University who studies nonprofit hospitals’ charity care spending and reviewed Modern Healthcare’s analysis. “The law’s intention and consequences are far apart.”

Meanwhile, more than 200 of the 1,571 hospitals analyzed spent at least an estimated 8% of their operating costs on uncompensated care from 2018 to 2022. One of those hospitals was John H Stroger, Jr. Hospital in Chicago, which recorded an estimated median uncompensated care cost as a percentage of operating expenses of 29.71%. It would receive $5.9 million in remedy payments under the proposed rule. The University of Mississippi Medical Center in Jackson, which would receive $23.9 million in remedy payments under the proposed rule, dedicated an estimated median of 8.8% of its operating costs to uncompensated care. Spokespeople from each hospital said the 340B program was an essential component of increasing access to care.

Some states have pushed for greater transparency of how hospitals use 340B payments, but federal policymakers have proposed few changes to the program. Minnesota, for instance, enacted a law in May that requires 340B-eligible facilities to report their total 340B drug acquisition costs and payments.

“Lawmakers created this program for safety-net providers, but we really don’t have a great way of defining who is a safety-net provider and who is not,” the University of Minnesota’s Nikpay said.


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