$1.6B in Medicare payment cuts likely to cripple struggling hospitals, S&P says

Medicare payment cuts under the 340B Drug Pricing Program pose a potential financial threat to nonprofit hospitals serving vulnerable patients, according to a report from S&P Global Ratings.

The $1.6 billion reduction in Medicare payments, put in motion Jan. 1, was part of CMS' 2018 Medicare Outpatient Prospective Payment System Rule. The reduction is reached by paying hospitals 22.5 percent less than the average sales price for drugs purchased through the 340B program.

While many larger 340B hospitals and systems won't see direct effects from the cuts due to their size and scope, smaller participating providers and rural hospitals could see a greater financial effect, according to S&P.

"The impacts of the cuts to the 340B Drug Pricing Program on nonprofit hospitals that rely on 340B drug savings will likely weaken their operating performance at a time of already tightening margins," the agency wrote. "This could lead to negative rating actions if hospital-specific funding reductions were material and not offset by other management actions."

If the Medicare cuts result in insufficient cash flow for some hospitals, they likely will serve fewer patients, prompting more patients to seek treatment in other hospital emergency rooms or clinics, S&P stated.

The American Hospital Association, Association of American Medical Colleges, America's Essential Hospitals and various health systems have challenged the cuts in court. Judge Rudolph Contreras in the U.S. District Court for the District of Columbia dismissed the lawsuit in December, saying it was brought prematurely.

But S&P said it expects the case to continue, as a federal appellate court was considering reviving it.  

S&P also noted calls for 340B reform at the federal level. This includes a proposal by federal lawmakers requiring 340B hospitals to report their low-income utilization rates for outpatient and inpatient services, as well as further 340B reform proposed as part of the Trump administration's proposed major drug pricing changes.

Even if a legal challenge to the cuts is revived, "additional proposed program reforms at the federal level could further negatively affect these providers' finances," S&P concluded.


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