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A $1.6B cut to 340B payments, plus outpatient TKA: Our key takeaways on the 2018 Outpatient Final Rule

November 2, 2017

    Late yesterday, CMS released its Final Rule regulating outpatient payment in CY 2018. The biggest news includes two major changes that could significantly affect many hospitals' margins:

    • CMS will reduce the reimbursement for drugs acquired with discounts under the 340B program to average sale price (ASP) minus 22.5%
    • CMS will remove total knee arthroplasty (TKA) from the inpatient-only list, a change that will likely trigger a shift of cases to outpatient settings starting next year

    Read on for more information about these changes, or hear a full analysis of the details in our webconference recording on the Outpatient Final Rule.

    The first big change: a $1.6B cut in 340B payments

    Savings will be redistributed across all HOPPS-reimbursed facilities

    CMS finalized a dramatic reduction in reimbursement for separately payable drugs under the 340B program. The program allows enrolled providers ("covered entities")—which serve large populations of low-income or vulnerable patients—to purchase separately payable Part B drugs from manufacturers at discounted rates.

    Effective January 1, 2018, CMS will reimburse 340B-covered entities for drugs purchased at discounted rates under the 340B program at average sales price (ASP) minus 22.5%, a huge reduction from the current reimbursement rate of ASP plus 6%.

    CMS estimates that this alternative 340B drug payment methodology—which was finalized as proposed despite opposition from hospital advocacy groups, the HOP Panel, and even MedPAC—will save Medicare $1.6 billion in CY 2018.

    Several commenters on the HOPPS Proposed Rule recommended that, if CMS finalized the alternative 340B methodology, it should redistribute the savings among safety net hospitals, ensuring that the funds go to services for the most vulnerable populations. However, CMS has chosen to redistribute the $1.6 billion in savings as a slightly higher rate for all non-drug services furnished by all HOPPS-reimbursed facilities. In effect, this shifts HOPPS payments from drug to non-drug services and bumps up HOPPS payment rates for non-drug items and services by 3.2% in CY 2018.

    340B drug savings redistributed across all HOPPS-reimbursed entities

    Notably, the alternative 340B drug payment methodology does not apply to critical access hospitals (CAHs), rural sole community hospitals (SCHs), children's hospitals, PPS-exempt cancer hospitals, or non-excepted hospital outpatient departments that are reimbursed at the "site-neutral" MPFS rate. Covered entities of these types will continue to receive 340B reimbursement at current rates (AS plus 6% for all except CAHs, which are reimbursed under 340B at 101% of reasonable costs).

    CMS will begin to track 340B use with new modifiers

    Further, as part of an effort to better understand use of the 340B program, CMS has finalized two new modifiers that 340B covered entities must report on claims alongside drugs purchased with 340B discounts.

    Covered entities that are impacted by the alternative 340B drug payment methodology must use a "JG" modifier on the same claim line as a drug purchased with a 340B discount, while organizations that are not impacted by the rate cut must use a "TB" modifier.

    Providers must begin using these modifiers for claims on and after January 1, 2018. CMS will likely use data collected through these modifiers to inform its methodology for 340B reimbursement in CY 2019.

    340B rate changes are sparking provider pushback

    With the 340B rate reduction slated to take effect in just two months, three hospital groups are already discussing a lawsuit to stop the 340B provision, Politico reports. Regardless of whether this lawsuit moves forward, we'll likely see more changes to Medicare 340B reimbursement in the future, because CMS's alternative 340B drug payment methodology applies only for CY 2018.

    CMS has made clear that it intends to revisit this methodology for CY 2019, including the ASP minus 22.5% reimbursement rate and the redistribution of 340B savings across HOPPS-reimbursed entities. CMS notes, "We continue to be interested in exploring ways that funds from a subsequent proposal could be targeted in future years to hospitals that serve a high share of low-income or uninsured patients."

    See the Pharmacy Executive Forum's "Action Items for Hospitals," a response to CMS's initial 340B proposal

    The second big change: Total knee arthroplasty is no longer "inpatient only"

    Per the outpatient Final Rule, CMS will begin reimbursing TKA in the outpatient setting starting on January 1, 2018.

    Hospital outpatient TKA (HCPCS 27447) will be assigned to APC 5115—Level V Musculoskeletal Procedures, J1 status indicator—with a payment rate of $10,122.22. This outpatient reimbursement rate is about 18% lower than the $12,384 FY 2018 inpatient rate for TKA without complications and comorbidities (MS-DRG 470).

    How many TKA cases will shift to the outpatient setting, and how quickly will the shift occur? It's tough to say, but an Advisory Board analysis of approximately 410,500 inpatient Medicare FFS TKA cases from CMS's MEDPAR dataset found that up to 48% of cases could be eligible to be performed in the outpatient setting, after accounting for a variety of exclusion criteria. (Read more about our analysis, conducted for the CY 2018 HOPPS Proposed Rule.)

    In addition to the reimbursement implications, the outpatient shift of TKA raises several other considerations for providers:

    Provider considerations in anticipation of TKA OP shift

    Some providers had expressed concern that removal of TKA from the inpatient only list would make TKA a prime target for post-payment audits for inpatient medical necessity, and that providers would be at increased risk of denial under the two-midnight admission standard. To ease the transition to outpatient TKA, CMS is suspending Recovery Audit Contractors (RAC) patient status review of inpatient TKA procedures for CY 2018 and CY 2019. However, RAC reviews of TKA procedures described by CPT code 27447 will continue to be permitted for issues other than patient status as an inpatient or outpatient (e.g., underlying medical necessity).

    Learn more about the 2018 Outpatient Final Rule

    To learn more about the Final Rule, including upcoming changes to hospital outpatient department and ambulatory surgical center reimbursement in CY 2018, watch our webconference recording.

    Watch Now

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