The Centers for Medicare and Medicaid Services’ recent proposal to overhaul Medicare’s reimbursement rates for 340B drugs will be a drag on many large hospitals and those treating a disproportionate share of low-income patients, but a gift to for-profits, according to federal estimates highlighted in a Wednesday KFF analysis.
Earlier this month, the administration shared its annual proposed rule on outpatient hospital payments, which included plans to cut 340B reimbursements from the current bar of average sales price plus 6% down to 33.4% below the average sales price.
At the same time, because CMS is required by law to keep its overall outpatient spending at similar levels despite specific reimbursement changes (referred to as a budget neutrality requirement), it proposed offsetting the cut with an 8.44% increase in how much it plans to pay for other non-drug outpatient services.
CMS, in the proposed payment rule, said that in the 2027 calendar year it expects the changes to reduce drug payments by $4.85 billion and save $1.15 billion for Medicare beneficiaries who use discounted drugs and are subject to cost sharing.
CMS, when addressing the offsetting non-drug service pay increase, wrote that it expects “for most 340B providers, the decreased 340B drug payments will outweigh the increased payments for non-drug services.” The proposal triggered outcry from hospital industry groups, particularly those representing hospitals that participate in the program like 340B Health.
Aggregate estimates from the agency, cited by KFF, include a 5.8% net reduction of outpatient prospective payment system (OPPS) revenue for disproportionate share hospitals (those with a DSH patient percentage of 0.35 or higher) due to the policy. Urban hospitals with 500 beds or more are expected to see a 5.2% net reduction, major teaching hospitals a 4.3%, government hospitals a 3% net reduction and nonprofit hospitals on the whole a 0.5% net reduction. KFF noted that “some hospitals that would see the largest decrease in revenue likely fall into more than one of these categories (e.g., major teaching hospitals tend to be large urban hospitals).”
KFF also noted that the changes would lead to some higher cost burdens for beneficiaries, whose cost sharing for non-drug outpatient hospital services would effectively increase with the higher payments.
On the other hand, for-profit hospitals that by definition can’t participate in the 340B program would benefit substantially from the budget neutrality adjustment for non-drug outpatient services, with a 7.4% net increase in OPPS revenues estimated by CMS.
Rural sole community hospitals, which were exempted from the reduction under the proposal, should also expect a 5.7% net increase, as should urban hospitals with fewer than 100 beds (4.8% net increase) and non-teaching hospitals (3.5% net increase).
KFF analysts also highlighted the exclusion of children’s hospitals and prospective payment system-exempt cancer hospitals from the proposed reimbursement reduction. Additionally, the designation comprising the majority of rural hospitals, critical access hospitals, are not reimbursed under CMS’ outpatient payment system and therefore would dodge the pay cut, they wrote.
In short: “Reductions in 340B payments could add to the financial challenges facing safety-net hospitals while increasing the margins of for-profit hospitals,” the analysts wrote.
Safety-net hospitals whose operating margins are already struggling “could have an especially difficult time” weathering the reduced 340B revenue and impending Medicaid spending cuts, they warned while noting that benefitting for-profits “have much higher operating margins than the average hospital.”
CMS attempted such a policy shift in 2017, but the Supreme Court eventually overturned it because the agency failed to gather information from program participants before enacting the changes (a requirement it said it has met this time around with a recent survey of a subset of 340B hospitals). The agency was forced to make 340B hospitals whole but, again due to budget neutrality requirements, begin a years-long recoupment of $7.8 billion by reducing pay to a broader swath of providers.
Not included in the KFF analysis is a concurrent proposal from CMS to accelerate that recoupment, which in 2027 would bring more than $2.3 billion of reduced payments in 2027. That policy drew the ire of the for-profit hospital lobby, which often describes the accelerated recoupment as a clawback against non-340B hospitals unfairly caused by the agency’s own mistake.
Still, major for-profit hospital chains have told analysts and investors that the accelerated payback is a small bump amid the broader rate changes.
Kevin Hammons, CEO of Community Health Systems, said during the company’s quarterly earnings call last week that the payback “will offset a pretty significant portion of that [proposed] pay bump, at least for a few years.
“All that said, we think the net increase in outpatient rate for 2027 should be around 5%. It’s still a much better improvement in Medicare outpatient rates than we have been getting over the past several years, if not the best ever. … Once the full 340B amount is paid back, then that base rate on the outpatient side has been elevated—we view this as very positive.”
Mike Marks, executive vice president and chief financial officer of HCA Healthcare, said his company is “very pleased” with CMS’ inpatient and outpatient pay rule proposals in aggregate, and “especially” happy with the outpatient proposal.
“We think they’re positive. Obviously we’ve got to get them from proposed to final, so that’s what we’re waiting on,” he said.
The 340B drug discount program has become a consistent source of policy dispute, especially as it has grown into a $100 billion program in 2025 and policymakers seek ways to tackle rising healthcare costs.
Drugmakers have said health systems have relied on loopholes and statutory ambiguities to improperly draw more revenue, and over the years have sought to impose requirements and restrictions they argue will increase accountability. One such move by Eli Lilly has recently escalated into discount pricing rescindments for some hospitals and health systems that wouldn’t comply with its data reporting policy, opening up a new legal front for affected providers.
Hospitals participating in the program have contended that the discounts and net revenues they allow are necessary to subsidize care for low-income and uninsured patients—a rising issue amid sweeping policy-driven coverage disenrollments—and to stabilize their finances.