The Last Time Washington Went After Hospital Drug Markups, the Supreme Court Blocked It. This Time CMS Brought Receipts.

A man with prostate cancer walks into a 340B hospital, gets a Lupron injection the hospital bought for about $700, and walks out owing roughly $1,000 in coinsurance. His copay alone runs larger than the drug cost the hospital. That is not a billing error. It is how a corner of Medicare has worked for years, a hidden tax on sick seniors buried inside a drug bill, and the last time the government tried to end it, the hospitals won on a technicality.

This is the second time Washington has come at essentially this problem, so to understand why it might stick now you have to start with what the Supreme Court told CMS in 2022: you skipped a step. Back in 2018, the first Trump administration looked at a quiet feature of the Medicare drug-payment system and decided it was a scam worth ending. Hospitals in the federal 340B program were buying outpatient drugs at steep, congressionally mandated discounts, billing Medicare as if they had paid full freight, and pocketing the spread. CMS cut their reimbursement from the standard average sales price plus 6 percent down to average sales price minus 22.5 percent, swinging roughly $1.6 billion a year away from those hospitals. The hospital lobby sued, and in June 2022 the Court ruled against the government, unanimously, in an opinion by Justice Brett Kavanaugh. The problem was not the idea. The statute lets CMS vary rates for a group of hospitals only after it surveys what those hospitals actually pay for the drugs, and CMS had never run the survey.

So this year, before proposing anything, the agency ran it. From January 1 through April 7 of 2026, CMS collected acquisition-cost data from hospitals paid under the outpatient system. What it found is worse than the 2018 fight suggested. In some cases, the survey concluded, a Medicare patient’s cost-sharing, normally 20 percent of the billed amount, exceeded the entire price the hospital had paid for the drug. The copay was bigger than the cost.

How a discount for the poor became a markup on patients

To see how that happens, look at what 340B was built to do. Congress created it in 1992 so that safety-net hospitals and clinics serving low-income patients could buy outpatient drugs cheap and stretch scarce federal dollars further. The discount was the reason they did it. Nothing in the law, though, changed how Medicare pays those same hospitals when they administer the drug. Medicare still reimburses at the drug’s list-based average sales price, and the patient’s coinsurance is still figured off that list price, not off the discounted price the hospital actually paid. The gap between the two is the margin, and over three decades the program grew from a narrow safety-net tool into one of the largest drug-purchasing channels in American health care.

CMS put a face on the margin. Take Lupron Depot, a common prostate-cancer therapy. A 340B hospital can acquire a course for roughly $700, then collect about $4,000 in Medicare reimbursement, with the patient owing around $1,000 of that in coinsurance. More than 130 hospitals bought that one drug through the program. The senior’s share alone is more than the whole thing cost the hospital that dispensed it.

What the new rule actually does

The CY2027 outpatient proposed rule, announced July 2 by CMS Administrator Mehmet Oz, would pay for 340B-acquired drugs at average sales price minus 33.4 percent, a deeper cut than the one the Court blocked. CMS projects the change would reduce total Medicare drug spending by about $5.7 billion in 2027: $1.15 billion of that in lower out-of-pocket costs for people on Original Medicare, and $4.55 billion in reduced government outlays. The agency estimates the average Part B beneficiary who gets one of these drugs would save about $800 a year. Oz framed the rule as one that “focuses squarely on patient affordability” by “aligning drug payments with actual acquisition costs.”

The $1.15 billion in patient relief is the clean number, because it lands directly on seniors’ bills. The $4.55 billion in taxpayer savings deserves a harder look. The same statute that tripped up the 2018 cut requires the outpatient payment system to stay budget-neutral, so the money CMS stops paying hospitals for 340B drugs has to come back as higher payments for other, non-drug hospital services. The dollars do not leave the system. They move. The copay relief is direct; the government “savings” is closer to a reallocation.

The pushback, and what it is really defending

The hospital lobby came out fast. The American Hospital Association’s Ashley Thompson called the package a “continued assault on the 340B drug pricing program,” built on “another insufficient reimbursement update” and “an excessive productivity adjustment.” Jennifer DeCubellis of America’s Essential Hospitals said the rule “takes an axe to critical funding” for the hospitals that serve the most vulnerable patients.

That argument deserves to be taken seriously on its own terms, because part of it is true: many genuine safety-net hospitals do lean on 340B margins to keep clinics open in places the market walked away from. But notice what the defense concedes. It does not dispute that patients are being charged coinsurance on a price the hospital never paid. It argues that the overcharge funds good works. That is a case for funding safety-net hospitals directly and honestly, not for keeping a hidden tax on sick seniors stitched into a cancer drug bill. When the establishment’s best answer to “why does a prostate-cancer patient’s copay beat the drug’s cost” is “because we spend the difference well,” the burden has landed exactly where it belongs.

The rule is a proposal, not law, and a comment period runs before anything is final. The hospitals will almost certainly sue again, and Wall Street already assumes it: analysts at TD Cowen said CMS is “likely in better standing now” because it finally ran the acquisition survey, while adding that the policy “will probably still be challenged.” That is what to watch. The number that decides this fight is not the $5.7 billion or the $800. It is whether the survey CMS ran from January to April reads as the “reasonable” evidence the statute demands when a federal judge weighs it against the January 2027 effective date. In 2022 the Court struck the cut down for a missing step. Whether the agency has now taken that step, or merely gestured at it, is the question the next round of litigation will answer.

Sources

1. CMS – CY2027 Hospital Outpatient Prospective Payment System (OPPS) Proposed Rule fact sheet (CMS-1850-P)
2. Supreme Court of the United States – American Hospital Assn. v. Becerra, No. 20-1114 (opinion)
3. Foley Hoag – American Hospital Association v. Becerra: Supreme Court Rejects CMS 340B Payment Cut (2022)
4. The Epoch Times – Trump Administration Proposes Rule That Could Save Medicare Patients More Than $1 Billion
5. Healthcare Dive – Medicare slashes 340B payments, broadens site-neutral policies in proposed 2027 payment rule
6. AHA News – CMS proposes increases to outpatient payment rates, site-neutral and 340B changes (Ashley Thompson statement)