CMS Draft Guidance Creates Regulatory Vacuum in 340B Drug Pricing

The Centers for Medicare and Medicaid Services (CMS) released its draft guidance for the Medicare Drug Price Negotiation Program in May 2025, offering operational improvements like using Wholesale Acquisition Cost (WAC) for standardized refund calculations. Yet beneath these technical refinements lies a critical policy failure: CMS's refusal to mandate federal claims modifiers for affected transactions and contradictory programs. This decision creates a regulatory vacuum that enables systematic duplicate discounts worth billions annually while sidelining patient experiences.

By abdicating responsibility for duplicate discount prevention and suggesting retrospective payment models that could strain smaller entities, CMS has created an environment where unscrupulous actors can exploit loopholes as state laws increasingly block the transparency mechanisms needed for program integrity. The contrast is stark—CMS requires mandatory "TB" modifiers for Part B inflation rebates but makes them voluntary for Maximum Fair Price (MFP) effectuation, creating an inconsistent regulatory framework that undermines program integrity.

"CMS had an easy answer right in front of them," says Jen Laws, CEO of the Community Access National Network (CANN). "Claims modifiers are an already existing tool within the scope of Medicare claims and instead agency officials opted to offer more than 220 pages worth of justifying why they won't mandate the information and not one page was dedicated to appreciating how such a fragmented approach might harm patients. The only mention we got was off handed references about maybe listening to patient advocacy organizations - which didn't go so well for us during the initial listening sessions of drug selection. Honestly, it's all entirely baffling."

The Mechanics of Duplicate Discounts and Why Modifiers Matter

Without clear claims identification, the same drug unit may receive multiple discounts—340B pricing plus Medicare rebates or Medicaid rebates—creating billions in inappropriate financial flows. Federal law (42 USC 256b(a)(5)(A)(i)) explicitly prohibits duplicate discounts between 340B and Medicaid rebates on the same drug unit, yet enforcement remains weak. While this might seem fine, no specified benefit is required to flow to patients and these factors incentivize ever increasing, uncontrolled costs within the healthcare ecosystem.

The scope of this problem is staggering. IQVIA estimates $20-25 billion in duplicate discounts annually across the industry. A Government Accountability Office (GAO) audit found that 25% of audited 340B programs had duplicate discount errors, with 264 of 429 cases caused by inaccuracies in the Medicaid Exclusion File system (MEF) itself. For context, some states seeking to prohibit claims modifier requirements cite use of the MEF—these inaccuracies and resulting duplicate discounts highlight the flaws of this approach.

The exploitation extends beyond duplicate discounts. Contract pharmacy fees extract over $1 billion annually from the 340B ecosystem, with CVS's third-party administrator (TPA) operation alone collecting over $350 million in fees over a few years according to Senate HELP Committee inquiry.

"Statutorily prohibited duplicate discounts are one of the many ways the 340B program is exploited as a profit-making tool by large hospital systems and for-profit contract pharmacies," explains Kalvin Pugh, State 340B Policy Director at CANN. "A simple claims modifier would ensure that this guidance prevented continued abuse and taken a step forward in much-needed accountability."

Despite misleading statements to the contrary, claims modifiers do not risk patient privacy. Claims modifiers function as digital markers using de-identified information to tag individual claims as 340B, similar to Medicare claims, enabling automated systems to exclude them from other rebate calculations. Without this technical infrastructure, PBMs can attempt "illicit rebate grabs" on 340B drugs, and covered entities can divert Medicaid rebates that should be reinvested in state programs directly to their own entities. These exploitations drive up the overall cost of medication and care for patients, either directly by profiteering off of patients and not passing on those discounts or by way of increased private insurance premiums as justified by increased billing across the healthcare ecosystem.

State Medicaid Programs Bear the Cost of Federal Inaction

The absence of mandatory claims modifiers enables duplicate discounts that drain state Medicaid rebate programs of billions annually, forcing difficult choices between expanding access and protecting limited state resources. While the pending Reconciliation Bill making its way through the Senate includes provisions to prohibit 340B spread pricing in Medicaid programs—as was seen in the December 2024 Continuing Resolution prior to it being gutted—efficient and effective compliance requires a claims modifier.

A Health Management Associates study found that 9 states position that manufacturers should seek recoupment from providers rather than reducing state rebate payments. The Texas experience illustrates the real-world consequences—when the Texas Legislature considered legislation that would have expanded 340B contract pharmacy use without oversight or revenue-sharing requirements, the fiscal note projected the state's HIV Medication Program would become 'insolvent by 2027' with an estimated $72 million shortfall over a multiyear period. This demonstrates how policy changes affecting 340B identification can directly threaten state programs serving vulnerable populations, while some states implemented comprehensive carve-out policies removing all 340B drugs from managed care to avoid such complications entirely.

"State programs will lose out on numerous rebates by offering the option to use the often lower 340B discount instead of the Medicaid price," Pugh explains. "This will strain state resources and put vulnerable impoverished communities at risk of losing access to lifesaving healthcare and medications."

In non-fee-for-service states, choosing the 340B rate over the Medicaid rate diverts rebate value away from Medicaid program reinvestment, effectively divesting from state programs that serve vulnerable populations. This interaction between 340B and Medicaid creates perverse incentives that undermine both programs' effectiveness.

CMS's Abdication of Responsibility Creates a Regulatory Vacuum

By declaring it "will not, at this time, assume responsibility for deduplicating discounts", CMS has created a regulatory vacuum that enables bad actors while burdening manufacturers and providers with piecemeal solutions.

The consequences of this abdication are far-reaching. At least 12 states have enacted laws restricting 340B claims modifier requirements or data sharing. CMS provides limited oversight of state Medicaid duplicate discount prevention efforts, leaving this responsibility to states, which are not always sufficiently funded or staffed to meet this responsibility. The Indiana situation exemplifies this chaos—former state officials filed a "whistleblower" lawsuit alleging "tens, likely hundreds" of millions of dollars of Medicaid fraud by hospital systems and managed care entities (PBMs by any other name), partly due to inadequate state oversight.

According to insights from interviews with former and current Medicaid directors and pharmaceutical policy experts in 14 states, the Health Resources and Services Administration (HRSA) has been faulted with inconsistent and weak enforcement of 340B duplicate discounts due to lack of data transparency. The GAO review found that only 4 of 13 covered entities had accurate descriptions of state Medicaid policies.

"While CMS might be about to assume some of HRSA's responsibilities with regard to 340B, it seems the agency is prepared to repeat HRSA's abdication of responsibility," Laws notes. "The IRA's interaction with 340B under this draft guidance systematizes the absolute headache covered entities, manufacturers, and patients already have with one program and just...duplicates it."

Retrospective Payment Models Threaten Safety-Net Provider Viability

The shift from prospective 340B discounts to retrospective payment models could create existential cash flow threats for smaller safety-net providers who lack working capital to absorb payment delays. While the draft guidance offers a rubric for manufacturers to assess entity financial sustainability and requires manufacturers to enact individualized action plans, this approach is clumsy and not foolproof, nor does the guidance suggest how smaller entities might efficiently comply with a patchwork of manufacturer assessment tools.

The financial reality for true safety-net providers is bleak. Nearly 45% of rural hospitals operate with negative margins, making 340B savings vital for maintaining operations. 93% of rural hospitals report relying on 340B savings to help keep their doors open. However, rural hospitals average only $2.2 million in annual 340B savings, compared to $11.8 million for all hospitals. Compliance costs range from $100,000 to $200,000 annually, regardless of hospital size, posing a significant burden on these facilities.

The timing requirements compound these challenges. The 14-day MFP payment window plus manufacturer 45-day lookback requirements create complex compliance deadlines that smaller entities may struggle to meet.

CMS also fails to contemplate the natural and expected outcome of confusing and potentially conflicting billing for patients. People already face challenges determining actual payments due when engaging in critical care for chronic and complex health conditions. Bills may come slow or arrive with differing amounts due based upon claims adjudication. A complex retrospective payment process as suggested by CMS will only further exacerbate this issue.

Technical Infrastructure: Why Modifiers Are the Solution

Claims modifiers represent proven, existing technical infrastructure that could solve the identification problem with minimal additional burden on providers already using similar systems. Think of claims modifiers as digital tags—simple two-digit codes that healthcare providers already add to insurance claims to provide additional information about services without changing the fundamental billing process. The "TB" modifier became the universal 340B identifier for all covered entities when billing Medicare Part B starting January 1, 2025.

The key point is that this infrastructure already exists for Medicare—extending similar requirements to the Medicare Drug Price Negotiation Program would simply apply proven technology consistently across federal programs rather than creating new systems. Furthermore, False Claims Act liability creates potential fines up to $10,000 per incorrect Medicare entry, ensuring accuracy and proper use of these digital markers.

The Path Forward Requires Federal Leadership

The public comment period for CMS's draft guidance closes on June 26, 2025, representing a critical opportunity for stakeholders to advocate for mandatory modifiers.

"We had some high hopes for a more thoughtful and, frankly, direct approach to our already fractured healthcare system with this guidance," Laws reflects. "The draft, as it is, is a mess. Mandating a claims modifier is a direct and elegant answer that would require far less wasted ink. Despite this Administration's claims to the contrary, here we are watching draft guidance unfold that will perpetuate a system prone to fraud and abuse. And patients? Our experiences in the middle of all of this? We're an afterthought. It's just completely unacceptable. The only way systems meet patient needs is by starting with us. This is not that and CANN is prepared to be loud and clear about that fact."

A mandatory federal claims modifier can provide the systematic solution needed to protect safety-net providers and ensure program integrity. Technical fixes aren't enough—comprehensive policy reform is needed. The stakes are too high, and the patients we serve deserve better than regulatory half-measures that enable exploitation while threatening the safety net they depend on for survival.