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A proposed $900M cut to 340B payments—and other early impressions from the 2018 Outpatient Proposed Rule

July 14, 2017

    Late Thursday, CMS released its outpatient payment proposal for CY 2018. We're busy reviewing the 664-page regulation, and we'll lay out all the key details in a webconference on August 7 (register here). 

    In the meantime, here are our initial impressions of this year's Hospital Outpatient Prospective Payment System (HOPPS) and Ambulatory Surgical Center (ASC) proposed rule—including healthy payment rate increases and big changes to the 340B program.

    CMS offers healthy payment rate update for second year running

    The proposal calls for a 1.75% increase in payment for hospital outpatient services in 2018, comprised of a 2.9% market basket update, less a 0.75% ACA adjustment and a 0.4% multifactor productivity adjustment. (That's larger than the 1.65% increase that was finalized for 2017.) CMS projects that this year's update would result in a payment increase of $5.7 billion relative to 2017, with total OPPS payments estimated at $70 billion in CY 2018.

    ASC rates would increase by 1.9% (a projected 2.3% CPI-U update less a 0.4% multifactor productivity adjustment) under the proposal.

    $900M cut for 340B drugs in 2018, with limited indication where savings would go

    After several years of pressure from a variety of agencies, CMS has proposed two significant changes to its 340B program, a federal program that allows certain hospitals to purchase separately payable drugs at discounted rates. The proposed changes would:

    1. Adjust payment rates down from average sale price (ASP) plus 6% to ASP minus 22.5%; and

    2. Establish a new claims modifier to better track drugs that are billed under OPPS and purchased under 340B.

    With these proposals, CMS seeks to more closely align reimbursement with discounted drug acquisition costs incurred by covered entities, while also more comprehensively understanding how the 340B program is being used. CMS also wants to pass along more 340B savings to Medicare beneficiaries, whose coinsurance obligations for separately payable drugs would decrease in line with lower drug payments.

    The proposals run parallel with recommendations from MedPAC and the Office of Inspector General (OIG), most recently the May 2015 MedPAC Report to Congress, which indicated that hospitals in the 340B program receive a discount of 22.5% of the ASP for separately payable drugs on average.

    Decreased payment rates would likely impact 340B covered entities' profit margins on separately payable drugs. CMS estimates that HOPPS payments for those drugs could decrease by $900 million in CY 2018. Since these savings must be incorporated into HOPPS in a budget-neutral manner, CMS would be required to figure out a methodology for redistributing the savings. In the proposal CMS has suggested a proportion of uninsured patients as one potential mechanism for redistributing savings across providers, although more details are expected to be forthcoming following public comment.

    Removal of total knee arthroplasty from "Inpatient Only" list would have wide-reaching impact

    In last year's Proposed Rule, CMS solicited public comments on the possible removal of total knee arthroplasty (TKA, HCPCS code 27447) from the Inpatient Only (IPO) list—a set of procedures deemed always to require acute care that are not reimbursable under HOPPS. It appears the agency received significant support for the shift, so CMS has proposed to reimburse outpatient TKA, effective CY 2018.

    Accordingly, HCPCS 27447 would be assigned to APC 5115 (Level V Musculoskeletal Procedures, J1 status indicator) with a proposed rate of $9,912.69 (compared to a proposed FY 2018 MS-DRG 470 rate of $17,823).

    If finalized, the removal of TKA from the IPO list would have important downstream implications. A subset of inpatient Medicare TKA cases likely would shift to the outpatient setting, resulting in lower payment for services. Medicare covered around 431,000 inpatient TKAs in 2015, although it's unclear how many of these procedures could appropriately have been performed in an outpatient setting.

    The change also could impact mandatory and voluntary bundled payments under the CJR and BPCI models. These risk-based payment models hold inpatient facilities responsible for TKA/THA episodic costs following discharge as an inpatient. Any significant shift of TKAs to the outpatient setting would effectively reduce eligible volumes in these programs, unless the current methodology is adjusted. CMS offers little detail in the proposed rule on how CJR would be modified to accommodate the removal of TKA from the IPO list.

    We've heard concerns from providers that if TKA were removed from the IPO list, it could become a target for post-payment audits for medical necessity and potentially for compliance with the two midnight rule. CMS has proposed, however, to ease any transition by prohibiting RAC review for any inpatient TKA procedures performed in CYs 2018-2019.

    In a sequel to the TKA proposal, CMS is now seeking public comment on the possible removal of total hip arthroplasty (THA, HCPCS code 27130) and partial hip arthroplasty (PHA, HCPCS code 27125) from the IPO list in future years. 

    Dramatic reduction in payments proposed for hospital outpatient departments affected by 'site-neutral' provision

    At the start of this year, CMS began implementing the controversial site-neutral payment provision that became law under the 2015 Bipartisan Budget Act. As a result, newer off-campus hospital outpatient departments (specifically, those that began furnishing services billable under the Hospital Outpatient Prospective Payment System after November 1, 2015) were unable to bill under HOPPS. Instead, they receive reimbursement at a site-specific MPFS rate, which in CY 2017 is equal to 50 percent of the HOPPS rate for each service.

    That meant a big payment cut for those affected hospital outpatient departments, and represented CMS' first big step toward equalizing payment rates across the hospital outpatient and freestanding outpatient settings.

    In the new MPFS proposed rule for 2018, CMS has put forward an even bigger cut. Specifically, to cut the payment rate for non-excepted providers in half, to 25% of the HOPPS rate in CY 2018.

    Need a 'site-neutral' refresher? See our Q&A.

    However, it appears the agency may be open to persuasion for more provider-favorable payment terms depending on public feedback. CMS indicated that it might be willing to finalize a less dramatic cut—for example, a site-specific MPFS rate at 40 percent of the HOPPS rate—dependent upon feedback received on the MPFS proposed rule.

    Quality Reporting: Proposed deletions outnumber additions

    To reduce reporting burdens for providers, CMS proposed removal of six Outpatient Quality Reporting Program (OQR) measures and three ASC Quality Reporting Program (ASCQR) measures between CY 2019 CY 2021, as well as delaying data collection for the OAS CAHPS patient experience measure from CY 2018 to a later year.

    OQR and ASCQR measures proposed for removal in CY 2018 Proposed Rule

    Three new measures were also proposed for the ASCQR, which currently has just 15 measures, beginning in CY 2021 and 2022.

    ASCQR measures proposed for addition in CY 2018 Proposed Rule

    Although we'd heard public speculation about the creation of an ASC or hospital outpatient value-based purchasing program, CMS did not mention either possibility in this year's Proposed Rule.

    Join us for our webconference to learn more

    CMS proposed many other changes in the Proposed Rule, including updates to APC reimbursement, packaging policies, and more. We'll discuss these in full detail in our upcoming webconference on August 7th. 

    Register Now

    Further, CMS has released a Request for Information (RFI) to gather ideas on promoting "transparency, flexibility, program simplification and innovation" in Medicare. We encourage you to submit your comments to

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