2027 OPPS and ASC Proposed Rule: CMS Proposes Deep 340B Payment Cuts

CMS published the proposed rule in the Federal Register on July 7. See 91 Fed. Reg. 128 (July 7, 2026). Among the most consequential proposals in the rule is a dramatic reduction in Medicare Part B payment for drugs acquired through the 340B Drug Pricing Program.

The 340B Program, established under Section 340B of the Public Health Service Act, requires drug manufacturers participating in Medicaid to sell covered outpatient drugs at discounted prices to eligible covered entities. These entities include disproportionate share hospitals (DSHs), children’s hospitals, sole community hospitals (SCHs), critical access hospitals (CAHs), and certain other safety net providers. Since the program’s inception, covered entities have used 340B savings to stretch scarce federal resources, fund patient services, and expand access to care for vulnerable populations.

The CY 2027 proposal must be understood against a fraught legal and policy backdrop. From January 2018 through September 2022, CMS paid 340B-acquired drugs at the Average Sales Price (ASP) minus 22.5%. The US Supreme Court unanimously struck down this policy in American Hospital Association v. Becerra (AHA v. Becerra), 596 U.S. 724 (2022), because the US Department of Health and Human Services (HHS) had never conducted the acquisition-cost survey that Congress required as a precondition to varying payment by hospital group. Following remand, CMS restored payments to ASP plus 6% (the statutory default) and finalized a lump-sum remedy for affected hospitals totaling approximately $10.6 billion in November 2023.

CMS’ Medicare OPPS Drug Acquisition Cost Survey (ODACS) was conducted between January 1 and April 7, pursuant to Executive Order 14273, “Lowering Drug Prices by Once Again Putting Americans First.” The survey found that 340B acquisition costs run approximately 33.4% below mean ASP. Relying on the results of the survey, CMS now proposes to reduce 340B payment rates again, this time to ASP minus 33.4%, effective January 1, 2027. Comments are due August 31.

Key 340B Program Proposals

Payment Rate Reduction: ASP Minus 33.4%

CMS proposes to pay for 340B-acquired separately payable drugs, biologicals, biosimilars, and radiopharmaceuticals at the ASP minus 33.4%. This rate reflects a reduction of approximately 37% from the current ASP plus 6% rate. Notably, the proposed rate includes no add-on for drug overhead and handling costs - such as pharmacy labor, storage, compliance infrastructure, and split-billing systems - that covered entities necessarily incur in acquiring and administering 340B drugs. The omission of these costs from a rate purportedly based on “acquisition cost” raises questions about whether CMS has accurately captured the full cost of drug acquisition as contemplated by the statute.

Notably, CMS’ own sensitivity analyses produced a range of results, from approximately 29.9% to 33.4% below ASP, depending on methodology and weighting. CMS selected the most aggressive end of that range. CMS also disclosed that the 340B ceiling price (Average Manufacturer Price minus the unit rebate amount) is, in aggregate, only 28% below mean ASP. Because the proposed 33.4% reduction exceeds this figure, certain hospitals could receive Medicare payment below their actual statutory ceiling acquisition cost - a result that undercuts CMS’ stated goal of paying at acquisition cost and would force covered entities to absorb losses on affected drug claims. CMS has solicited comments on an alternative rate of ASP minus 28%.

For non-340B drugs, the same survey found acquisition costs approximately 2.7% above mean ASP. CMS nonetheless proposes to maintain non-340B payment at ASP plus 6%. This approach does not apply the survey findings symmetrically across drug categories.

Budget Neutrality and Conversion Factor Offset

Because OPPS drug payment is subject to statutory budget-neutrality requirements, CMS would redistribute the estimated $4.85 billion reduction in 340B drug payments through an 8.44% increase in the non-drug OPPS conversion factor. This increase would benefit all OPPS hospitals - including non-340B hospitals that bear none of the drug payment reduction - while only partially offsetting the 340B revenue loss for affected covered entities. The net effect is a transfer of resources from 340B safety-net hospitals to non-340B providers. Hospitals should model the net impact by comparing their 340B drug payment reduction against the incremental non-drug revenue gained through the higher conversion factor.

340B Final Remedy Offset Acceleration

Separately, CMS proposes to accelerate recoupment of the $7.8 billion in excess non-drug payments that CMS made to all OPPS hospitals during the unlawful 2018–2022 period. The CY 2023 Final Remedy rule established a 0.5% annual reduction to the OPPS conversion factor beginning in CY 2026. CMS projected that this reduction would recoup the offset over approximately 16 years. CMS now proposes to increase the annual reduction to 3%, applicable only to hospitals enrolled in Medicare before January 1, 2018. Under the proposal, CMS projects full recoupment by approximately CY 2029. CMS estimates that the accelerated offset will reduce overall OPPS payments by approximately $2.3 billion in CY 2027.

Exemptions

The following provider categories are exempt from the 340B payment reduction and continue to receive ASP plus 6%.

• Sole community hospitals.
• PPS-exempt cancer hospitals.
• Children’s hospitals.

CAHs and Rural Emergency Hospitals are unaffected because they are not paid under OPPS. CMS states it “may revisit” these exemptions in future rulemaking.

Billing Modifiers

CMS proposes new billing modifiers effective January 1, 2027: “JG” for 340B-acquired drugs subject to the payment reduction, “TB” (informational) for exempt 340B drugs continuing at ASP plus 6%, and “XX” for all non-340B drugs.

Non-340B Drug Payment

Non-340B drugs remain at ASP plus 6%. CMS does not propose to adjust non-340B payment despite its survey finding that acquisition costs for non-340B drugs run approximately 2.7% above mean ASP, which is materially below the current payment level. This asymmetric application of the survey results - applying the data aggressively against 340B hospitals while ignoring it for non-340B drugs - presents a significant vulnerability in CMS’ rulemaking rationale.

Off-Campus Provider-Based Department Treatment

CMS would also pay 340B drugs furnished at nonexcepted off-campus provider-based departments (PBDs) at ASP minus 33.4%, but it would not budget-neutralize this reduction, consistent with historical off-campus PBD payment treatment. CMS estimates $735 million in Part B Trust Fund savings and $185 million in beneficiary copay savings from this component.

Comparison: Current vs. Proposed 340B Payment Parameters

The following chart summarizes the principal changes between current policy and the CY 2027 proposal.

Analysis and Implications

CMS Has Cured the AHA v. Becerra Defect: New Vulnerabilities Emerge

The central holding of AHA v. Becerra was that HHS could not vary payment by hospital group without first conducting the acquisition cost survey required by statute. The ODACS fulfilled that requirement. This cures the specific statutory defect the Court identified and forecloses a facial “no survey at all” challenge. Any future litigation will necessarily proceed on different grounds.

Arbitrary and Capricious Risk Under the APA

The methodology and application of the survey remain highly vulnerable to challenge under 5 U.S.C. § 706(2)(A) and the reasoned decision-making framework of Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983). We identify four principal lines of attack.

1. Representativeness and Response Rate

Only approximately 23.1% of 340B hospitals provided usable acquisition cost data, and approximately 29.8% of all respondents submitted usable data out of an overall response rate of approximately 43.6%. Multiple hospitals submitted coordinated form letters declining to participate. A court might find that a rate derived from less than a quarter of the affected population fails to constitute the kind of “adequate” data Congress contemplated and that rational decision making requires. This risk is heightened because the responding population may be skewed by self-selection.

2. Selection of the Most Aggressive Sensitivity Estimate

CMS’ own sensitivity analyses yielded results ranging from 29.9% to 33.4% below ASP. CMS selected the ceiling of that range without providing a fully developed explanation for why the most aggressive estimate, rather than the midpoint or a more conservative figure, should govern. This is the type of unexplained methodological choice that courts have found arbitrary under State Farm.

3. Asymmetric Application of Survey Results

CMS proposes to reduce 340B payment by the full amount the survey indicates below ASP (33.4%), while declining to reduce non-340B payment below ASP plus 6% even though the same survey shows non-340B acquisition costs are only ASP plus 2.7%. This asymmetry is stark: CMS applies the survey aggressively where doing so produces savings but disregards it where application would reduce payment to non-340B hospitals. The inconsistency arguably undermines CMS’ stated rationale that payment should reflect actual acquisition cost, and it may be difficult to defend as reasoned decision making.

4. Extension to Non-SCOD Drugs

CMS proposes to apply the reduced rate to all separately payable drugs acquired under 340B, including non-specified covered outpatient drugs (non-SCODs) that CMS has treated as SCODs only as a matter of policy since 2006, not by statutory command. The specific survey-based authority under § 1833(t)(14)(A)(iii)(I), as construed in AHA v. Becerra, does not clearly extend to drugs outside the statutory SCOD definition. Applying the survey-derived cut to non-SCODs therefore raises substantial questions about whether CMS has exceeded its delegated authority a particularly potent argument under post-Loper Bright de novo review.

Remedy Offset Acceleration: Change-of-Position Risk

The proposal to increase the annual remedy offset from 0.5% to 3% targets a defined subset of legacy hospitals with a much steeper, front-loaded reduction than the approach CMS itself defended less than three years ago in the Final Remedy rule. This shift raises substantial concerns under Supreme Court precedent. See FCC v. Fox Television Stations, 556 U.S. 502 (2009), and Encino Motorcars, LLC v. Navarro, 579 U.S. 211 (2016). An agency that changes position must acknowledge the change and provide a reasoned explanation, particularly where serious reliance interests are at stake. Hospitals that structured their finances around a 16-year glide path - including capital budgets, bond covenants, workforce planning, and long-term service-line investments - have a strong argument that CMS’ abrupt shift requires more robust justification than the rule currently provides, and that the resulting financial disruption constitutes the type of serious reliance interest that demands heightened explanation under Fox and Encino Motorcars.

Likelihood of Legal Challenge

The AHA has demonstrated a willingness to litigate 340B payment issues, having previously prevailed at the Supreme Court. A legal challenge to a finalized CY 2027 rule is therefore highly probable if CMS finalizes the ASP minus 33.4% rate substantially as proposed. Industry commentary from multiple law firms and advocacy organizations already frames the adequacy of the ODACS survey as the central battleground. However, the current judicial environment introduces genuine uncertainty about the outcome. A Supreme Court majority appears generally sympathetic to executive branch cost-containment authority, and the Court’s recent curtailment of Chevron deference in Loper Bright Enterprises v. Raimondo, 603 U.S. 871 (2024), cuts both ways under the Loper Bright framework: courts will review CMS’ statutory interpretation de novo rather than deferring to the agency. This standard may embolden challenges to CMS’ reading of its survey authority, and it removes the deference shield CMS previously enjoyed. On balance, the shift to de novo review favors challengers, including hospitals, because CMS bears the burden of demonstrating that its statutory interpretation is correct rather than merely reasonable.

What This Means for Providers

Covered Entity Hospitals and Health Systems

Non-exempt 340B hospitals, including DSH hospitals, free-standing cancer centers that are not PPS-exempt, and other covered entities outside the exempt categories, face the most significant financial impact. A reduction from ASP plus 6% to ASP minus 33.4% represents a loss of approximately 37% of current per-drug Medicare revenue for 340B-acquired drugs. For large 340B programs, this translates to tens or hundreds of millions of dollars annually per system. These losses compound already-declining 340B margins caused by manufacturer contract pharmacy restrictions; more than a dozen manufacturers have limited 340B pricing through contract pharmacies since 2020–2021.

Safety-net and rural providers benefit from the proposed exemptions for SCHs, children’s hospitals, and PPS-exempt cancer hospitals. The exemptions are narrow, however. Many rural hospitals that are not SCHs, and urban safety-net DSH hospitals that serve disproportionately low-income populations, receive no exemption. The failure to exempt DSH hospitals - the original and largest category of 340B covered entities - despite their statutory mission to serve low-income patients, may itself be vulnerable to challenge as arbitrary and inconsistent with the program’s purposes. CMS’ statement that it “may revisit” the exemptions in future rulemaking provides cold comfort for the immediate CY 2027 impact.

The accelerated remedy offset (3% annually for pre-2018 enrollees) compounds the pressure: legacy hospitals face both a per-drug payment reduction of approximately 37% and a steeper conversion-factor offset simultaneously, creating a dual revenue reduction that could threaten financial viability for heavily 340B-dependent systems. Hospitals should model these combined effects as part of their financial scenario planning.

Contract Pharmacies

The proposed rule does not directly alter 340B contract pharmacy arrangements, but the financial impact is indirect and significant. To the extent Medicare Part B billing under OPPS covers 340B-acquired drugs dispensed through contract pharmacies, the reduced payment rate diminishes the economic return from those arrangements. This reduced return may lessen covered entities’ incentive to maintain contract-pharmacy networks, particularly given ongoing manufacturer restrictions, and it may accelerate the shift toward in-house pharmacy dispensing for Medicare claims.

Drug Manufacturers

Manufacturers are not directly affected by the OPPS payment rate, but the proposal has significant adverse implications for covered entities. A lower Medicare payment rate for 340B drugs reduces the financial margin that covered entities rely on to fund patient services and safety-net operations. This reduction could weaken covered entities’ negotiating leverage with manufacturers and erode the political coalition that supports robust 340B program access. Combined with ongoing manufacturer contract-pharmacy restrictions - which more than a dozen manufacturers have imposed since 2020-2021 - the proposed payment cut threatens to compound the erosion of 340B program value from both the payer and manufacturer sides simultaneously. Hospitals should also monitor the Health Resources and Services Administration’s (HRSA) parallel 340B rebate-model rulemaking, which could restructure program mechanics more fundamentally.

Medicare Advantage Organizations

Medicare Advantage plans that reimburse 340B hospitals based on OPPS fee-schedule rates (or percentages thereof) may attempt to pass the proposed rate change through to their provider contracts. Hospitals should immediately review MA plan agreements for automatic OPPS-linked rate adjustment provisions that could reduce reimbursement without requiring a contract amendment, as well as for contractual carve-outs, rate floors, or alternative payment arrangements that insulate 340B reimbursement from OPPS changes. Hospitals should resist contract amendments or renewals that incorporate the reduced rate and should negotiate rate floors, 340B carve-outs, or offsetting concessions in advance of any final rule.

Next Steps and Comment Deadline

Comments are due August 31. CMS has specifically requested comment on numerous aspects of the proposal, including the alternative ASP minus 28.0% rate, the survey methodology, the extension to non-SCOD drugs, and the remedy-offset acceleration. Interested parties should consider taking the following steps.

• Submit substantive comments. Covered entities, industry associations, and other stakeholders should submit detailed comments challenging the survey methodology (response rates, weighting, and representativeness), the asymmetric treatment of 340B vs. non-340B survey results, the selection of the 33.4% figure over the disclosed alternatives, and the failure to include any add-on for drug overhead and handling costs. Comments supporting the ASP minus 28% alternative or proposing intermediate approaches should be supported with facility-specific data where possible.
• Conduct financial scenario planning. Model the impact under both the proposed ASP minus 33.4% rate and the alternative ASP minus 28% rate. Assess the combined effect of the drug payment cut and the accelerated remedy offset on your system’s OPPS revenue. Identify which service lines and patient populations are most affected.
• Evaluate litigation posture. Organizations that may join or support a legal challenge should begin coordinating with industry associations (particularly AHA) and outside counsel now. Begin assembling evidence of irreparable harm - including system-specific financial projections, patient-access impact data, and service-line vulnerability analyses - to support a preliminary injunction or stay motion immediately upon finalization. Given the January 1, 2027, effective date, pre-finalization preparation is critical. Preserve administrative remedies by filing timely comments addressing the legal deficiencies identified above.
• Monitor parallel developments. Track HRSA’s 340B rebate-model rulemaking, ongoing contract-pharmacy litigation across multiple circuits, and state-law developments. The convergence of OPPS payment cuts, manufacturer restrictions, and potential program restructuring creates compounding risks that require integrated strategic planning.
• Assess contract-pharmacy economics. For covered entities operating contract-pharmacy networks, model whether the reduced Medicare reimbursement rate alters the financial viability of those arrangements and whether program restructuring, including expanded in-house dispensing, is warranted.

For additional information on this alert, please contact the author or the ArentFox Schiff attorney with whom you regularly work.