A new Trump executive order sets the stage for lower 340B payments

Hospitals can anticipate a regulatory effort to lower the Medicare payments they receive for purchases of Part B drugs through the 340B Drug Pricing Program.

President Donald Trump on April 15 signed a wide-ranging executive order on drug costs, and one of the provisions directs HHS to conduct a survey of hospital acquisition costs for covered outpatient drugs.

Such a step would allow HHS to claim legal authority to lower the 340B drug reimbursement rate, which since late 2022 has been the same as for all Part B drugs: average sales price (ASP) plus 6%.

340B implications

From 2018 through late 2022, beginning in Trump’s first administration, CMS lowered the Medicare payment rate for 340B drugs to ASP minus 22.5%. Hospitals sued, saying the agency had lowered the rate unlawfully.

The case reached the Supreme Court in the summer of 2022, and in a unanimous ruling, the high court agreed with the hospitals. CMS was required to raise the rate by 28.5 percentage points, restoring it the pre-2018 rate, and disburse a $9 billion remedy payment to hospitals as compensation for the nearly five years of underpayments.

But the court also indicated that the lower rate would have been legal if it had been based on an official survey of hospitals’ drug acquisition costs. Thus, the forthcoming survey could be the first step in an effort to bring down the payment rate while remaining on more solid ground legally. The executive order requires a survey plan to be in place and published within six months.

In the spring of 2020, CMS undertook a survey of drug acquisition costs at hospitals and used the results to tentatively lower the payment rate from ASP minus 22.5% to ASP minus 28.7% for 2021. The agency eventually backtracked, citing the turmoil hospitals were experiencing during the COVID-19 pandemic.

Trump wrote in the new executive order: “Following the conclusion of this survey, the [HHS] Secretary shall consider and propose any appropriate adjustments that would align Medicare payment with the cost of [drug] acquisition, consistent with the budget neutrality requirement in [the Medicare statute] and other legal requirements.”

The budget neutrality aspect also might mean an increase in the general payment rate for hospital outpatient care. That happened in 2018, when the 340B payment rate was lowered. But when the remedy payment went out to 340B hospitals, the Biden administration ruled that the previous increase should be recouped in the form of a 0.5% decrease in the annual outpatient update from 2026 through 2041.

The Federation of American Hospitals, whose for-profit hospital membership is more likely to be affected by a general outpatient payment increase than by a 340B-related decrease, commended the provision as part of a statement from Chip Kahn, president and CEO: “Beneficiaries will see lower drug-cost sharing while fairness of drug payment will increase.”

Site-neutral payment

Trump’s executive order also sets the stage for a limited expansion of site-neutral payment. Within six months, HHS is supposed to evaluate and potentially propose regulations “to ensure that payment within the Medicare program is not encouraging a shift to drug administration volume away from less costly physician offices to more expensive hospital outpatient departments.”

In Congress, the House passed transparency-focused legislation in late 2023 that included a similar provision. The bill languished in the Senate, but a more expanded version of site-neutral payment is being discussed in both chambers as part of the ongoing budget reconciliation process.

Inflation Reduction Act

The executive order proposes relatively minor changes to implementation of Medicare’s price negotiation authority under the Inflation Reduction Act (IRA).

Guidance to be developed by HHS “shall improve the transparency of the Medicare Drug Price Negotiation Program, prioritize the selection of prescription drugs with high costs to the Medicare program, and minimize any negative impacts of the maximum fair price on pharmaceutical innovation within the United States,” Trump wrote.

The order also looks to tackle Part D premiums, which rose in 2024 following a benefit redesign authorized by the IRA. For example, annual out-of-pocket costs were capped at $2,000 for 2025, leading some Part D plans to consider raising premiums. The Biden administration implemented stabilization measures that limited monthly premium increases to $35, at an estimated federal cost of up to $5 billion.

The order also seeks to close a disparity (i.e., the “pill penalty”) that makes small-molecule prescription drugs eligible for negotiation nine years after FDA approval, compared with 13 years for large-molecule biological products. It was not immediately clear whether the nine-year window would be delayed, or the 13-year time frame would be pushed up.

“This discrepancy threatens to distort innovation by pushing investment toward expensive biological products, which are often indicated to treat rarer disease, and away from small-molecule prescription drugs, which are generally cheaper and treat larger populations,” the executive order states.

Miscellaneous

One provision in the order calls for launching a payment model to allow Medicare to obtain better value for high-cost prescription drugs and biologicals that are not subject to price negotiations. In Trump’s first term, efforts to moderate prices stalled, including models that would have linked drug charges to international prices.

Under the IRA, Medicare negotiated the prices of 10 Part D drugs in 2024, with prices taking effect in 2026. Another 15 drugs are set to be negotiated this year, followed by 15 more next year and 20 annually in subsequent years. For prices taking effect in 2028 and beyond, Part B drugs will be eligible for negotiation.

Pharmacy benefit managers (PBMs) also would be affected by the executive order, with the Department of Labor required to ensure employer-based health plans have transparency into both direct and indirect PBM compensation.