Regulation
Medicare's 2027 Drug Payment Cut Shifts Money From Safety-Net to For-Profit Hospitals
By Insurance Wire Staff, . Insurance Wire.
A newly finalized Medicare payment rule will cut what hospitals receive for drugs bought through the 340B discount program by roughly a third, beginning January 1, 2027, and the financial consequences will fall unevenly across the hospital sector, according to an analysis by KFF.
What the rule does
The 340B Drug Pricing Program, created to help hospitals and clinics that serve low-income patients, requires drug manufacturers to sell outpatient drugs to qualifying providers at steep discounts. Because Medicare has historically reimbursed those drugs at rates set for the general market, participating hospitals have been able to pocket the spread between what they paid and what Medicare paid them back.
The Centers for Medicare and Medicaid Services is now closing much of that gap. Under the 2027 Hospital Outpatient Prospective Payment System rule, reimbursement for 340B drugs will drop from average sales price plus 6 percent to average sales price minus 28 percent. That is a 32-percentage-point swing. CMS had originally proposed a steeper cut to minus 33.4 percent, based on a cost acquisition survey of hospitals conducted in early 2026, but set the final rate using maximum allowed acquisition costs instead, partly to simplify future updates.
The agency estimates the change will reduce Medicare spending on 340B drugs by $4.65 billion in 2027.
Why the money doesn't disappear
Federal law requires CMS to keep total Medicare outpatient spending roughly constant when it adjusts reimbursement rates, a requirement known as budget neutrality. To comply, the agency finalized a 7.5 percent across-the-board increase in payments for non-drug outpatient hospital services, which it estimates will offset the 340B drug cuts in aggregate.
The practical effect is a transfer: money that previously flowed to hospitals through 340B drug margins gets spread across all hospitals, 340B-participating and non-participating alike, through higher payments for everything else. Safety-net hospitals, which tend to rely heavily on 340B revenue to fund care for uninsured and underinsured patients, lose more than they gain. For-profit hospitals, which are less likely to be 340B participants but still collect the higher non-drug payments, come out ahead.
Medicare beneficiaries who use 340B drugs would see lower cost-sharing, since their 20 percent coinsurance applies to a smaller reimbursement base. The analysis puts those savings at $1.1 billion in total for 2027. Beneficiaries who use other outpatient hospital services would face higher cost-sharing, because the 7.5 percent payment increase flows through to what patients owe.
The legal backstory
This is not the first time CMS has tried to reduce 340B payments. The agency implemented a similar cut in 2018 under the first Trump administration, but the Supreme Court struck it down in 2022 on procedural grounds: the agency had not first conducted a cost acquisition survey as required. The 2026 survey, and the final rule's reliance on maximum allowed acquisition costs, are CMS's answer to that ruling. Whether the revised legal foundation will survive a court challenge is an open question; the 340B program has attracted litigation from both hospital groups and drug manufacturers for years.
What to watch
The rule is finalized, but the redistribution it creates will put pressure on safety-net hospitals that depend on 340B margins to cross-subsidize uncompensated care. Carriers and plans that contract with those hospitals may face renegotiation pressure as the revenue picture shifts. The KFF analysis notes that the piece it reviewed was updated to reflect changes in the final rule, and the full analysis, including hospital-by-hospital breakdowns, extends beyond what was available for this summary. Brokers and plan administrators working with hospital systems should review how their contracted facilities are classified under 340B and what the January 2027 effective date means for existing payment arrangements.
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