Hospitals will continue to pay more for inpatient drugs, though Moody's predicts the pace will moderate due to pharmaceutical scrutiny.
Pharmaceutical costs have outpaced hospital revenue, contributing to weaker operating margins, according to the Moody's Investors Service report released Tuesday.
Not-for-profit hospitals will feel the continued impact of pharmaceutical costs on their margins, the report said.
Even at a slower rate of growth, Moody's said it expects rising drug costs will continue to challenge hospitals' financial flexibility.
Adding to the drug price pressure is a proposed 30 percent reduction in Medicare Part B outpatient drug reimbursement, which includes the 340B program.
The Centers for Medicare and Medicaid Services is expected to release the final rule on rate changes for hospital outpatient, ambulatory surgical center payments, including for 340B, around Nov. 1.
The rate change has the potential to reduce drug costs for seniors by about $180 million per year, according to the Department of Health and Human Services.
Providers oppose the cut, while the Community Oncology Alliance supports getting rid of 340B discounts it said are being abused by hospitals.
The 340B drug pricing program allows hospitals and other healthcare providers to purchase drugs and biologicals, other than vaccines, from drug manufacturers at a discounted price for use in a hospital outpatient department.
Hospitals sell the drugs to Medicare patients at full price. The federal profit allows them to treat low-income patients, providers have said. Hospitals in the 340B program provide about 60 percent of uncompensated care.
The Community Oncology Alliance has said hospitals make a tremendous profit from the program and have taken over cancer care, at a cost to Medicare of $2 billion in 2014.
Moody's said, if finalized, federal proposals to lower Medicare 340B payments for outpatient drugs, such as for cancer treatment, would further reduce hospitals' margins.
The median growth rate for supply costs, which include pharmaceuticals, did moderate between 2015 and 2016, the report said. But the gap between how fast supply costs grew versus revenues has widened.
"Price increases in recent years were extraordinarily high for certain branded hospital inpatient drugs, but drug manufacturers are pulling back on these increases," said Diana Lee, a Moody's vice president. "On the generic drug side, we expect that some of the pressure will ease as the US Food and Drug Administration approves more generic drugs for the first time."
340B has allowed hospitals of varying size to realize meaningful operating cash flow, Lee said.
"While about half of hospitals in the nation are 340B providers, those that have limited financial flexibility would be most exposed to possible changes to the 340B program," Lee said.
If changes were implemented to 340B, the largest impact would be on pharmaceutical companies with a product mix weighted towards biotech drugs, Moody's said. However, the overall impact is relatively modest based on the relatively small proportion of Medicare Part B spending as a portion of each company's revenue.
HHS also proposes to delay enforcement of a 340B rule that would determine 340B ceiling prices and impose civil monetary penalties on drug manufacturers that overcharge providers. The rule was scheduled to go into effect on October 1, and has been pushed out to July 1, 2018.
340B Health has said it objects to the delay as drug manufacturers often charge providers in the 340B program above what the law permits.
"We are also troubled that HHS says it intends to engage in additional rulemaking on these issues," 340B Health President and CEO Ted Slafsky. Said. "The 340B program gives safety-net providers relief from high drug prices. They rely on the savings to fund critical programs for low-income and rural patients."