Medicare’s $7.8B outpatient payments clawback plan, explained

Modern Healthcare – Monday, July 28, 2025
By Bridget Early

Hospitals may get hit with an across-the-board Medicare reimbursement cut for outpatient services as the Centers for Medicare and Medicaid Services rushes to recoup $7.8 billion it doled out years ago.

The industry knew this was coming after a lengthy legal battle that went all the way to the Supreme Court. But it’s now on the verge of happening faster and on a larger scale than CMS originally indicated, which has provoked unease in the hospital sector.

Two years ago, CMS announced a plan to trim the hospital outpatient reimbursement conversion factor by 0.5% over a 16-year period to recoup inappropriate payments. In a proposed rule the agency issued this month, CMS details how it now intends a 2% cut over six years.

The recent draft regulation is the latest development in a process that has dragged on for years as CMS and the hospital sector tussle over money.

“The proposed recoupment is both illegal and unwise, and it should not be finalized,” Ashley Thompson, senior vice president of public policy analysis and development for the American Hospital Association, said in a news release. The AHA declined to comment further.

Here’s what to know about the CMS plan to claw back $7.8 billion in Medicare payments:

The backstory

CMS needs to fix a problem that dates back to 2017, when the agency finalized a regulation that included a nearly 30% rate cut for 340B drugs that began the following year.

Federal budget laws dictate that Medicare reimbursement regulations may not increase or decrease net spending, so the agency redistributed $7.8 billion in savings to all hospitals via higher outpatient reimbursements.

That got complicated when the hospital industry sued over the 340B cuts. The Supreme Court eventually ruled that CMS should not have reduced 340B drug payments without surveying providers about costs. A lower court later ordered the agency to unwind the policy.

The agency already made 340B providers whole via $9 billion in lump-sum payments in 2023 but must reclaim the money it redistributed from 2018-2022.

The new plan

CMS now proposes the deeper cut to the conversion factor, which translates service costs into dollar amounts, over a shorter period of time, which it estimates as 2026-2031. Hospitals that started participating in Medicare after Jan. 1, 2018, would be exempt.

The agency also plans to survey hospitals about their pharmaceutical acquisition costs, which may portend future 340B drug reimbursement cuts.

“This prospective offset aimed to balance the goal of restoring hospitals to their financial position had the original 340B policy never existed, while avoiding burdening them with an immediate single-year recovery,” CMS said in a news release.

The impact

The agency threw the hospital industry a curveball at an inopportune time, said Greg Fliszar, a shareholder at the law and lobbying firm Baker Donelson, which represents hospitals.

Health systems were preparing for the 0.5%, 16-year conversion factor cut and would have to scramble if CMS finalizes its new plan, Fliszar said.

“To try and recoup that back over 16 years is one thing. But to try and do it over six years and really reduce the payments that hospitals rely on — that just doesn’t seem fair,” Fliszar said.

“If [CMS] had done this the right way in the first place — done a survey, adjusted the rates based on the survey — we wouldn’t be in this mess,” Fliszar said. “It seems like they’re getting rid of their own mistake as fast as they can on the backs of hospitals.”

This also comes at a moment when the hospital sector is under considerable strain with more trouble on the horizon.

President Donald Trump’s “One Big Beautiful Bill” cut Medicaid and the health insurance exchanges by more than $1 trillion over 10 years, which is projected to make 10 million people uninsured and increase the uncompensated care burden on providers. Trump and the majority-Republican Congress also are poised to allow enhanced exchange subsidies to expire at the end of the year, leading millions more to lose health coverage.

The Trump administration is pursuing other policies hospitals oppose, such as a site-neutral Medicare payment for some outpatient services that would result in lower reimbursements to hospitals.

“Hospitals may be left to make some difficult decisions in terms of the types of care and services that they’ll be able to provide as a result of reduced reimbursement,” said Jeff Wurzburg, a partner at the law and lobbying firm Norton Rose Fulbright, which represents hospitals.

The implications for the 340B Drug Pricing Program

The overpayment recoupment proposal intensifies worries that the administration or Congress may again seek to scale back the 340B program.

Republicans have expressed concern about the growth of 340B over the years. Meanwhile, the Health and Human Services Department is considering allowing drugmakers to effectively convert 340B from a discount program to a rebate system. HHS also aims to shift 340B management from the Health Resources and Services Administration, which it intends to eliminate, to CMS.

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