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New Year’s Changes to the 340B Discount Drug Program Raise Compliance Concerns as New Billing Modifiers and Payment Reductions Take Effect

By Justin C. Linder, Dughi Hewit & Domalewski PC

Judge Rudolph Contreras of the U.S. District Court for the District of Columbia on December 29,
2017 dismissed a lawsuit filed by the American Hospital Association (AHA) and various hospitals
and industry groups seeking declaratory judgment and a preliminary injunction blocking
implementation of a dramatic cut in Medicare Part B reimbursement to certain hospitals participating
in the 340B discount drug program (340B Program).[1] The dismissal of the action on jurisdictional
grounds—none of the plaintiffs had yet presented a claim reimbursed at the reduced payment rate—
is the latest setback for adversely impacted hospitals attempting to halt the reduced payment regime
and ensured that the reductions would go into effect January 1, 2018.
The Centers for Medicare & Medicaid Services (CMS) on November 1, 2017 released the 2018
Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center Payment
System Final Rule (Final Rule), which finalized a controversial proposal to significantly reduce
reimbursement for most drugs purchased through the 340B Program by disproportionate share
hospitals (DSHs) and rural referral center hospitals (RRCs).[2]
In the Final Rule, CMS cut the applicable payment rate for separately payable, non-pass-through
drugs (excluding vaccines) purchased by DSHs and RRFs through the 340B Program, including the
Prime Vendor Program, by approximately 27%, from the average sales price (ASP) plus 6% to ASP
minus 22.5% (collectively, the Payment Reduction).[3] For hospitals affected by the Payment
Reduction, a drug with an ASP of $1,000 would be reimbursed at $775 starting January 1, 2018,
down from the calendar year 2017 reimbursement rate of $1,060.
The Payment Reduction does not apply to 340B eligible entities classified as rural sole community
hospitals, children’s hospitals, or PPS-exempt cancer hospitals, nor does it affect critical access
hospitals, which are reimbursed outside of the OPPS.
Articulating the rationale for the $1.6 billion payment cut in a press release accompanying the Final
Rule, CMS Administrator Seema Verma explained that “Medicare beneficiaries would benefit from
the discounts hospitals receive under the 340B Program by saving an estimated $320 million on
copayments for these drugs in 2018 alone.”[4] This account is disputed by affected hospitals and
340B advocacy groups, including 340B Health, which, in a release following Judge Contreras’ ruling,
shot back: “If these cuts remain in place, many safety net hospitals will be forced to cut back on
services, close service sites, and let go clinicians and other caregivers. These payment cuts do
nothing to lower drug prices, do not save Medicare a dollar, and won’t reduce costs for seniors and
other patients.”[5]
To distinguish 340B hospitals that are subject to the Payment Reduction from those that are exempt,
the Final Rule establishes two new modifiers to identify whether a drug billed under the OPPS was
purchased under the 340B Program—”TB” for use by hospitals that are not subject to the Payment
Reduction and “JG” for those impacted by the Payment Reduction.[6]
The Final Rule itself left many details regarding operationalization of the new modifiers unaddressed,
hindering efforts by hospitals to implement billing system modifications prior to the Final Rule’s
effective date of January 1, 2018. However, on December 13, 2017, CMS released a Frequently
Asked Questions (FAQs) memorandum, at AHA’s request, to clarify the agency’s new modifier policy
for billing 340B-acquired drugs under the OPPS.[7]
The FAQ publication addresses a wide range of implementation issues, such as identifying drugs
that must be billed with modifier “JG,” the use of modifiers by non-excepted off-campus providerbased
departments, the billing of waste for 340B-acquired drugs and the definition of rural sole
community hospitals. Notably, the guidance clarifies that hospital-owned retail pharmacies that bill
340B-eligible claims under Part B are exempt from the Payment Reduction because they are not
reimbursed under OPPS.
The FAQs confirm that all hospitals that bill for separately payable, non-pass-through drugs (i.e.,
drugs assigned status indicator “K”) acquired with a 340B discount must use either the “JG” or “TB”
modifier, depending on whether they are subject to the Payment Reduction. Each drug should be
billed on a separate claim line with the appropriate 340B modifier, and for claims with multiple drug
lines, the appropriate 340B modifier is required on each line of a 340B-acquired drug. The only
hospitals excepted from these requirements are critical access hospitals and Maryland Waiver
The implementation of the Payment Reduction and modifiers less than six months after first
proposed, two months after release of the Final Rule, and just weeks after CMS’ release of subregulatory
guidance delineating the proper use of the new claim modifiers,[8] has left hospitals
scrambling to perform billing system upgrades necessary to comply with the Final Rule.
One of the most daunting obstacles confronting hospitals subject to the new modifier requirements is
the timely identification of which drugs were acquired at a 340B discount to determine whether a
modifier applies. Due to complex rules imposed on 340B Program participants by the Health
Resources and Services Administration (HRSA), which administers the 340B Program, not all drugs
purchased by a 340B eligible provider can be purchased at the 340B discounted price. Rather, drugs
not eligible for a 340B discount must be acquired by 340B Program participants at Wholesale
Acquisition Cost or at other price points exceeding the 340B ceiling price.[9]
Determining whether a drug prescribed at a 340B-participating hospital is considered a “Covered
Outpatient Drug” eligible for 340B discount pricing requires a fact-specific inquiry into multitudinous
interplaying elements, including service location, the outpatient status of the patient at the time of
prescription or administration, the relationship between the hospital and the prescriber, whether the
hospital maintains the patient’s medical records, whether the patient is Medicaid eligible and the
particular hospital’s policy for defining “Covered Outpatient Drug,” among other factors.
On account of these complexities, many hospitals utilize virtual inventory accumulation and/or split
billing software to aid in determining whether a particular prescription is eligible for a 340B discount.
These drug inventory and purchasing systems are distinct from hospitals’ patient billing systems and
there often exists a lag time of a few days or more before a hospital is aware of whether a particular
prescription qualifies for a 340B discount. The latency inherent in 340B inventory accumulation
software, coupled with the lack of integration between such software and hospital patient billing
systems, presents a multifaceted challenge to operationalization of the new modifier system.
Though it is unclear whether CMS took these factors into account when devising the modifier
provisions in the Final Rule, the FAQs released December 13 strongly suggest that CMS intends to
enforce the modifier requirements with minimal flexibility. For example, with respect to the
inadvertent reporting of a “JG” modifier (resulting in reduced reimbursement) rather than a “TB”
modifier (resulting in reimbursement at the normal OPPS rate) due to provider error, CMS exhorts
that “It is a provider’s responsibility to submit correctly coded claims,” explaining that such a mistake
would result in a lower reimbursement.[10] Accordingly, inadvertent coding of a drug with modifier
“JG” (indicating it was acquired at a 340B discounted price) may result in an underpayment.
Of greater concern, failure by a provider to properly code a drug purchased at a 340B discount with
the “JG” modifier could result in an overpayment, which must be returned to Medicare. In the event a
provider receives “credible information” of an overpayment, overpayment disclosure obligations are
triggered under the Affordable Care Act and its implementing regulations.[11] Subsequent failure to
disclose and repay an overpayment within 60 days of its “identification” could subject a provider to
crippling False Claims Act penalties. To this end, the FAQs affirm that: “Federal law permits
Medicare to recover its erroneous payments. Medicare requires the return of any payment it
erroneously paid as the primary payer. Providers are required to submit accurate claims . . . .”[12]
The FAQs offer little comfort to hospitals concerned about their inability to upgrade billing software
by January 1, 2018 to integrate the new modifiers, stating that: “providers have 12 months after the
date of service to timely file a claim for payment. If a hospital believes that it will not be able to
properly identify and bill accurately for 340B acquired drugs, it should contact its [Medicare
Administrative Contractor] to discuss whether holding claims or rebilling claims may be an
Judge Contreras’ December 29 ruling did not reach the merits of the AHA’s complaint, which asserts
under the Administrative Procedure Act that the Final Rule exceeds the Department of Health and
Human Services’ statutory authority. AHA and other petitioners will have the opportunity to refile their
lawsuit after the Payment Reduction goes into effect. In a statement following the ruling, AHA
President and Chief Executive Officer Rick Pollack vowed to “continue our efforts in the courts and
the Congress to reverse these significant cuts to the 340B program.”[14]
On the legislative front, H.R. 4392, a bill that would reverse the Payment Reduction, was introduced
by Representatives David B. McKinley (R-WV) and Mike Thompson (D-CA) on November 14, 2017
and has generated bipartisan support and 165 co-sponsors in the House. Whether Republican
opposition to the Payment Reduction is sufficient to pass a bill overturning a policy promoted by
CMS Administrator Seema Verma as “part of the President’s priority to lower the cost of prescription
drugs”[15] remains to be seen.
Though the litigation and pending legislation potentially could reverse the Payment Reduction,
neither offers relief from the provisions of the Final Rule requiring utilization of the new modifiers.
Moreover, it does not appear from the FAQs that CMS is inclined towards leniency regarding
enforcement of the modifier requirements.
For the time being, the options available to affected providers unable to integrate the new modifiers
by January 1 appear limited to working with 340B accumulation and patient billing software vendors
to quickly implement the new modifiers and collaborating with legal counsel and Medicare
Administrative Contractors to devise acceptable mechanisms for mitigating the consequences of
delayed operationalization of the modifiers.
Continued pressure by 340B stakeholders on legislators also may incent Congress to prioritize the
340B Program in the midst of a busy legislative season.
In the wake of the Final Rule, providers subject to the Payment Reduction would be prudent to
reassess whether the benefits of continued participation in the 340B Program justify the increased
burdens and costs of compliance, a determination that may very well be contingent on whether or
not the Payment Reduction is ultimately reversed.
Justin C. Linder (, Of Counsel at Dughi, Hewit & Domalewski in Cranford,
NJ, is a seasoned Health Care and Life Sciences attorney with extensive experience representing
an array of stakeholders across the full spectrum of the health care industry. His practice is
dedicated to counseling health care entities in a range of transactional matters and negotiating
complex vendor, pharmaceutical distribution, GPO, and health technology agreements. A recipient
of an Advanced 340B Operations Certificate, Mr. Linder also provides practical regulatory and
compliance counsel, specializing in the 340B discount drug program and state and federal fraud,
abuse, and privacy laws. Prior to joining Dughi, Hewit & Domalewski, Mr. Linder served as General
Counsel for a specialty pharmacy services and technology company and Associate General Counsel
for a multi-hospital regional health system.
[1] American Hosp. Ass’n v. Hargan, No. 17-2447 (D.D.C. Dec. 29, 2017).
[2] See Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical
Center Payment Systems and Quality Reporting Programs, 82 Fed. Reg. 52356 (Nov. 13, 2017).
[3] 82 Fed. Reg. at 52362.
[4] CMS, Press Release, CMS Finalizes Policies that Lower Out-of-Pocket Drug Costs and Increase
Access to High-Quality Care, available at
2017-11-01-2.html (last visited Jan. 1, 2018).
[5] Statement by 340B Health Regarding U.S. District Court on 340B Case, available at
(last visited Jan. 2, 2018).
[6] 82 Fed. Reg. at 52495-96, 52503-09.
[7] CMS, Medicare-FFS Program, Billing 340B Modifiers under the Hospital Outpatient Prospective
Payment System (OPPS), Dec. 13, 2017, available at
OPPS.pdf [hereinafter, Billing 340B Modifiers].
[8] Id.
[9] See 42 U.S.C. § 256b; 42 C.F.R. § 10.1 et seq.
[10] Billing 340B Modifiers, supra note 7, at 5-6.
[11] 42 U.S.C. 1320a-7k(d); 81 Fed. Reg. 7654, 7654-84 (Feb. 12, 2016).
[12] Billing 340B Modifiers, supra note 7, at 6.
[13] Id. at 6.
[14] AHA, Press Release, Hospital Groups to Continue to Pursue Lawsuit to Reverse Cuts for 340B
Hospitals, available at
(last visited Jan 2, 2018).
[15] CMS Finalizes Policies that Lower Out-of-Pocket Drug Costs and Increase Access to High-
Quality Care, supra note 4.
© 2017 American Health Lawyers Association. All rights reserved.

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