As our expertise is wide-ranging, our attorneys also specialize in a number of related areas.
We help clients to assess and mitigate the near- and long-term impact of the IRA’s Medicare drug pricing negotiations on their business, and to strategically engage CMS on issues relating to its implementation. Key areas of focus include:
Drug Selection for Negotiation
The IRA amends the Part D noninterference clause that prohibits the Secretary of Health and Human Services (HHS) from negotiating prescription drug prices, and instead requires the Secretary to negotiate with manufacturers for “selected drugs ”to establish a “maximum fair price” (MFP). The first drug-selection process will begin in 2023, more than two years in advance of initial price applicability year 2026, when negotiated payment rates will first take effect. The scope of negotiation will be phased in starting with 10 drugs from the Part D program in 2026, 15 drugs from the Part D program in 2027, 15 drugs from the Parts B and D programs collectively for 2028, and 20 drugs from the Parts B and D programs collectively for 2029 and each subsequent year. It is important to note that drugs selected for negotiation will no longer be listed among the top 50 for subsequent years. As a result, this means that by 2031, up to approximately 100 drugs could be subject to price negotiations.
Negotiation Methodology
The legislation directs the Secretary to establish a consistent methodology and process for drug negotiation. The statute includes a methodology for calculating a ceiling price for the MFP. However, subject to this statutory minimum discount, the legislation provides the Secretary with broad discretionary authority for conducting the negotiations. In particular, the Secretary is required to assess a variety of factors submitted by the manufacturer, including research and development costs, the unit cost of production, federal financial support for drug discovery, patent and revenue, and sales volume. Additionally, the Secretary must consider whether the drug represents a therapeutic advance and the effects of the product on specific populations (such as individuals with disabilities and whether the product addresses unmet medical needs).
Manufacturer Obligation to Offer the MFP
The IRA requires manufacturers of selected drugs to enter into a Negotiation Agreement with CMS, and to make selected drugs available at the MFP to “MFP-eligible individuals” (i.e., Medicare beneficiaries) and to certain entities that furnish services to such beneficiaries. Part D plans must also cover selected drugs on their formularies, subject to limited exceptions.
Price negotiation is enforced by an excise tax that applies when a manufacturer delays entering into a Negotiation Agreement, fails to agree upon an MFP with the Secretary beyond statutorily-defined periods, or fails to provide an MFP once it is determined. However, the excise tax may be suspended if the manufacturer terminates its agreements to participate in Medicare and Medicaid. The Secretary may also levy civil monetary penalties (CMPs) against a manufacturer for failure to offer the MFP to MFP-eligible individuals or MFP-eligible entities, failure to comply with the terms of the Negotiation Agreement, or the submission of false information required to inform negotiation proceedings.
Notably, because the obligation to offer the MFP is limited to Medicare beneficiaries (and providers on behalf of Medicare beneficiaries), a key issue for manufacturers will be ensuring that the MFP does not spill over into other markets, including through efforts by states .
Program Implementation
Per statute, the negotiation provisions will be implemented through a combination of the Negotiation Agreement and, for initial price applicability years 2026-2028, program instruction and other forms of program guidance. This means that, at least for the initial years, the negotiation program will not be implemented through notice-and-comment rulemaking. In January, 2023, CMS issued guidance outlining the Agency’s timeline for issuing most of the key guidance regarding the IRA’s drug negotiation provisions during 2023 for initial price applicability year 2026, which indicates that the agency will be issuing “initial guidance” for comment. In addition, because CMS will be soliciting information from manufacturers (and others) as part of the negotiation process, the Agency will be issuing a series of Information Collection Requests (ICRs) in accordance with the Paperwork Reduction Act. These will create opportunities for manufacturers and others to shape program implementation.
Here is some of the CMS guidance and ICRs issued regarding the drug price negotiation program to date:
CMS has also issued rulemaking on a Part D regulation related to the total expenditures used to identify high-cost Part D drugs for negotiation:
For additional information regarding the Medicare price negotiation program, please contact:
Pharmaceutical manufacturers are increasingly finding that there are mounting ways they could be liable to the government for mandatory rebates for their drugs—the IRA adds inflationary rebates under both Medicare Part B and Part D to that list. Key areas of focus include:
Part B Inflationary Rebates
Beginning January 1, 2023, the IRA imposes mandatory rebates for price increases on “Part B rebatable drugs ”that exceed the rate of inflation relative to a payment amount benchmark.
Calculating the Part B Inflationary Rebate: The Part B inflationary rebate is calculated based on the product of the total number of billing units for the drug’s billing and payment code paid for under Part B (excluding 340B discounted drugs, drugs paid by Medicaid, and packaged drugs), and the amount by which the ASP exceeds the inflation-adjusted payment amount (which is essentially the payment amount from July 1, 2021, adjusted for inflation). It is important to note that based on changes made to the legislation prior to Senate passage, the Part B inflationary rebate applies only to units paid under Part B. As a result, units sold in the commercial market are excluded, and presumably, units paid by a Medicare Advantage plan will be excluded because that individual’s drugs are paid under Part C, rather than Part B.
Manufacturer Payment of the Rebate: Manufacturers of each Part B rebatable drug will receive a quarterly report from CMS that identifies the amount of rebate owed (if any), as well as several of the components used to calculate that amount. The report must be provided no later than 6 months after each quarter; however, CMS may delay sending reports for 2023 and 2024 until September 30, 2025. A delay in receiving the report does not affect the obligation of a manufacturer to pay a rebate for a previous rebate period, but merely affects the timing of when the rebate must be paid. Once manufacturers receive the report (whether CMS delays or not), they are required to pay a Part B inflationary rebate to CMS within 30 days of receipt of the report.
Manufacturer Penalty: A manufacturer that does not pay a rebate within 30 days is also subject to a civil monetary penalty in an amount equal to 125 percent of the rebate amount owed.
Implementation: While the IRA did not specifically provide for implementation of the Part B inflationary rebate via guidance, this policy was added to section 1847A of the Social Security Act (SSA), which already included a provision authoring implementation by program instruction or otherwise. That said, CMS has gone through rulemaking to implement other provisions of section 1847A, including the newly added discarded drug refund under section 1847A(h) of the SSA, and CMS expressly stated that it would be addressing overlap between that provision and the Part B inflationary rebates “in future rulemaking.”
The Part B inflationary rebate also has an indirect impact on beneficiary coinsurance. Specifically, if a rebate payment is required for a Part B rebatable drug furnished on or after April 1, 2023, the coinsurance for the beneficiary receiving the drug must be 20 percent of the inflation-adjusted payment amount. In the CY2023 Outpatient Prospective Payment System (OPPS) final rule CMS noted that “[a]dditional details on the implementation [of this provision] are forthcoming and will be communicated through a vehicle other than the CY 2023 OPPS/ASC regulation.” CMS has since issued some guidance to Medicare Advantage plans indicating that CMS will publish these adjusted cost-sharing amounts via the quarterly ASP files. However, CMS may still go through rulemaking to implement this provision of the IRA, as it lacks express authority for implementation via guidance, as does the provision of the SSA where the policy is codified (section 1833 of the SSA).
Part D Inflationary Rebates
Beginning October 1, 2022, the IRA imposes mandatory rebates for price increases on “Part D rebatable drugs” that exceed the rate of inflation relative to a payment amount benchmark.
Calculating the Part D Inflationary Rebate: The Part D inflationary rebate is calculated by taking the product of the total number of units paid under Part D, and the amount by which the “annual manufacturer price” for a Part D rebatable drug exceeds the inflation-adjusted payment amount of the drug. Beginning in 2026, the rebate excludes units for which the manufacturer provides a discount under the 340B Drug Pricing Program.
To calculate the annual manufacturer price, CMS will identify the AMP of the dosage form and strength, as calculated for a unit of the Part D rebatable drug with respect to each of the calendar quarters of the applicable period, which will take into account rebates negotiated into payment amounts made to pharmacies. Then, CMS will multiply that amount by the ratio of (1) the total number of units of such dosage form and strength reported under the Medicaid drug rebate program, with respect to each calendar quarter of a year, and (2) the total number of units of such dosage form and strength reported with respect to the year.
To calculate the inflation-adjusted payment amount, CMS will identify the benchmark period manufacturer price for such dosage form and strength, and increase that amount by the percentage by which the applicable period CPI-U (which is the CPI-U for the first month of the applicable period (i.e., October)) exceeds the January 2021 CPI-U. The benchmark period manufacturer price is calculated similarly to the annual manufacturer price, except the calculation uses the period of January 1, 2021 to September 30, 2021 instead of the applicable period.
Manufacturer Payment of the Rebate: Manufacturers will receive a report that identifies the amount of rebate owed (if any), as well as several of the components used to calculate that amount. Unlike the Part B report, the Part D report is sent to manufacturers on an annual basis, not later than 9 months after the end of the applicable period; however, the Secretary may delay sending reports for 2023 and 2024 until December 31, 2025. Once manufacturers receive this report (whether CMS delays or not), manufacturers are required to pay a Part D inflationary rebate to CMS within 30 days of receipt of the report.
Manufacturer Penalty: A manufacturer that does not pay a rebate within 30 days is also subject to a civil monetary penalty in an amount equal to 125 percent of the rebate amount owed.
For additional information regarding Medicare Part B and Part D inflation rebates, please contact:
The IRA transforms the existing Medicare Part D benefit to shift more liability to manufacturers and Part D plans, which has wide-ranging implications for manufacturers' and payers’ approach to the Part D program. Key areas of focus include:
Overview
The IRA makes many changes to the Part D benefit to reduce patient out-of-pocket costs and to change manufacturer and plan responsibility, which take effect beginning in either 2024 or 2025.
Patient Out-of-Pocket Costs Capped at $2,000: Beginning January 1, 2025, the IRA establishes for the first time an annual out-of-pocket threshold equal to $2,000, increased annually by the percentage increase in average per capita aggregate expenditures for covered Part D drugs.
Elimination of Cost-Sharing in Catastrophic Phase: Beginning January 1, 2024, the IRA eliminates beneficiary cost-sharing in the catastrophic phase of coverage under Part D. However, this takes effect prior to the $2,000 out-of-pocket maximum is in effect on January 1, 2025.
Limiting Increases to Base Beneficiary Premiums: The IRA limits the extent to which the base beneficiary premium can be annually increased under Part D plans beginning with 2024 through 2030. The base beneficiary premium for a year must be the lesser of the amount that is the base beneficiary premium of the preceding year + 6%, or the amount that would have been the base beneficiary premium for the current year as traditionally calculated. But in 2030, the Secretary is also authorized to make a one-time adjustment to the beneficiary premium percentage, so it may not be less than 20%.
Smoothing of Out-of-Pocket Costs: Beginning January 1, 2025, the IRA introduces “smoothing” into the Part D program, requiring Part D plans to provide enrollees the option to elect to pay cost- sharing up to the out-of-pocket maximum pursuant to capped monthly amounts. However, Part D plans may preclude an enrollee from electing the “smoothing” option for out-of-pocket costs for the subsequent year if, in the current year, the enrollee fails to make one such monthly payment.
Expansion of Discounted Prices in the Coverage Gap: Beginning January 1, 2025, the IRA expands the required discounted price under a new Manufacturer Discount Program, which will replace the existing Coverage Gap Discount Program. The discounted price will be made available with respect to applicable beneficiaries irrespective of whether they have reached the annual out-of- pocket threshold. The discount will be equal to 80% and 90% of the negotiated price of an applicable drug with respect to individuals who have and have not yet exceeded the annual out-of-pocket threshold, respectively.
Reduction of Reinsurance Subsidies: Beginning January 1, 2025, the amount of reinsurance subsidies paid by the Secretary to Part D plans for allowable costs incurred above an enrollee’s out-of- pocket maximum threshold will be the sum of 20% of allowable reinsurance costs incurred with respect to applicable drugs and 40% of allowable reinsurance costs incurred with respect to any other covered Part D drug.
Implementation
While none of these benefit design changes take effect in 2023, it generally takes plans 18 months prior to the start of a contract year to establish their benefit designs, and CMS begins preparing for a given plan year during the previous calendar year. Accordingly, we expect to see implementation of the plan year 2024 policies, and perhaps even some plan year 2025 policies, during calendar year 2023. We also expect that most of the plan year 2024 IRA changes will be implemented via program instruction or other guidance.
For additional information regarding Part D Redesign, please contact:
Our healthcare and life sciences regulatory team regularly interfaces with state and local government agencies on a wide variety of legislative and regulatory matters affecting the life sciences.
The core IRA initiatives like limiting drug prices through negotiation and inflationary rebates, along with curtailing patient out-of-pocket responsibility through benefit redesign, align with recent efforts by states to control drug pricing and patient cost sharing through mechanisms such as upper payment limits (UPLs), excise taxes, and cost-sharing caps. We may see state legislators attempt to leverage the policies included in the IRA to inform state drug pricing policy in the coming years through actions such as:
We strive to gain an understanding of our pharmaceutical and medical device clients’ business including their particular strengths and vulnerabilities to state regulation, and in the process are able to effectively manage local lobbying and regulatory initiatives on our clients’ behalf. We also work with clients to bring impactful litigation at the state level, and note that initiatives targeting drug pricing may face legal pushback in a variety of areas, in particular the dormant commerce clause, patent clause preemption, and, in some cases, preemption by the IRA itself. Initiatives targeting plans will also likely be preempted by ERISA to the extent they seek to regulate self-insured plans.
