Today, President Biden signed into law the Inflation Reduction Act (IRA).

The IRA includes three primary drug pricing provisions that establish:

  • a drug price negotiation program for certain high spend Medicare drugs that have been on the market for a certain length of time and lack generic or biosimilar competition, with Medicare prices capped by a "maximum fair price" (MFP) (as described below);
  • manufacturer rebates on drugs paid under Medicare Part B or D whose prices increase faster than inflation over a baseline period; and
  • redesign of the Part D benefit, including capping patients' annual out-of-pocket costs on Part D drugs, lowering the beneficiary out-of-pocket threshold, streamlining the Part D benefit to eliminate the "coverage gap" phase, and replacing the manufacturer coverage gap discount program with a new manufacturer discount program that provides discounts throughout the post-deductible benefit phases.

The IRA also:

  • further delays implementation of the HHS Office of Inspector General "Rebate Rule" until January 1, 2032 (most recently, the Bipartisan Safer Communities Act delayed implementation until January 1, 2027);
  • establishes a payment rate for biosimilars under Part B during the initial period at the lesser of the biosimilar's WAC plus 3% or 106% of the reference product's ASP;
  • increases the Part B add-on payment for qualifying biosimilars from 6% to 8% of the reference product's ASP for a five year period (i.e., reimbursement would equal 100% of biosimilar's ASP + 8% of reference product's ASP);
  • eliminates cost-sharing for Advisory Committee on Immunization Practices (ACIP)-recommended vaccines covered under Part D or Medicaid;
  • caps Medicare beneficiaries' cost-sharing for certain insulin products reimbursed under Part D or Part B; and
  • expands full subsidies to all Part D low-income subsidy (LIS)-eligible beneficiaries.

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I. Medicare Negotiation

A. Overview

  • The IRA establishes a Drug Price Negotiation Program for certain Part B and Part D "selected drugs":
    • The "negotiated" maximum fair price (MFP) first effective in 2026 (negotiation begins in Sep. 2023).
    • Part B drugs are not subject to MFP until 2028 (negotiation begins in 2026).
  • The IRA prohibits administrative or judicial review of a number of Secretary's determinations under negotiation program, including the selection of drugs for negotiation

B. Drugs Selected for Negotiation

  • There is a three part process for identifying "selected drugs":
    • The product must be a "qualifying single source drug":
      • A Part B or Part D drug with no marketed generic at least 7 years after approval before the selection date (generally, at least 9 years from the first year the MFP is applied).
      • A Part B or D biologic with no marketed biosimilar at least 11 years after licensure before the selection date (generally, at least 13 years from the first year the MFP is applied).
      • There is an exclusion of certain orphan drugs, low-spend Medicare drugs, and plasma products.
    • Qualifying single source drugs are "negotiation-eligible drugs" if they are among the - Top 50 qualifying single source drugs with the highest total expenditures under Part B; or
      • Top 50 qualifying single source drugs with the highest total expenditures in Part D.
      • There is an exclusion for "small biotech drugs"1 for the first three years of the Drug Price Negotiation Program (i.e., 2026 to 2028).
    • The Secretary identifies selected drugs by ranking negotiation-eligible drugs according to total Medicare expenditures and then selecting the highest ranked drugs (except Part B drugs are omitted for 2026-2027):
      • 10 negotiation-eligible drugs in 2026 (Part D only);
      • 15 negotiation-eligible drugs in 2027 (Part D only) & 2028 (Part B and Part D); and
      • 20 negotiation-eligible drugs in 2029 & each subsequent year (Part B and Part D).
    • There is a process for biosimilar sponsors to submit requests to delay selection and negotiation of would-be reference product in certain circumstances:
      • The process is limited to biologics that would be extended monopoly drugs (12-16 years after licensure).
      • Requests must be submitted before the biologic's selected drug publication date (September 1, 2023 for the first initial price applicability year (2026) and February 1 of the year that begins 2 years prior to the initial price applicability year in future years).
      • The delay period cannot exceed 2 years:
        • For initial 1-year delay, there must be a "high likelihood" of biosimilar market entry before the biologic's MFP would be effective.
        • The delay may extend for a second year, if there remains a "high likelihood" of biosimilar market entry and a "significant amount of progress" toward licensure.
      • Manufacturer of would-be reference product would have to pay a rebate to Medicare if the biosimilar is no longer highly likely to come to the market after initial one-year delay period or the biosimilar does not launch by the end of a two-year delay period.
    • A selected drug remains a selected drug until the first calendar year at least 9 months after the date the Secretary determines a generic or biosimilar version is approved/licensed and marketed

C. Negotiation Process

  • Generally, "negotiation" begins two years before an MFP is effective.
    • There is a special timeline for the first year. The Secretary will select drugs on September 1, 2023 with an MFP effective January 1, 2026.
    • The "negotiation" process involves the following:
  • Manufacturers submit information to the Secretary to inform the negotiation (e.g., R&D costs, market data, prior federal support, data on patents and exclusivity, national sales data, information on unmet need and alternative treatments). Proprietary information disclosed by manufacturers to the Secretary can only be used by the Secretary or disclosed and used by the Comptroller General to carry out negotiation program. Manufacturer information may be further protected from disclosure under Trade Secrets Act and Freedom of Information Act, as applicable.
  • The Secretary makes an offer (considering manufacturer-provided data and evidence about alternative treatments).
  • The manufacturer responds by accepting or making a counter offer.
  • The Secretary then publishes the MFP (and, later, publishing explanation for MFP).
    • The IRA establishes escalating excise tax during "noncompliance periods;" civil monetary penalties in certain circumstances.

D. Maximum Fair Price

  • For most drugs, there is an MFP "ceiling," but no "floor."
  • The ceiling is the lower of:
    • (1) the percentage of annualized non-FAMP from 2021 (adjusted for inflation, starting in 2027)2, based on the number of years following FDA approval/licensure:
  • Short-monopoly drugs and vaccines (less than 12 years): 75%
  • Extended-monopoly drugs (12-16 years): 65%
  • Long-monopoly drugs (16+ years): 40%
    • or (2) the Part B payment amount (SSA 1847A(b)(4)), or the Part D weighted negotiated net price (as applicable).
  • There is a temporary "floor" for "small biotech drugs" of 66% of non-FAMP in 2029 and 2030.
  • Renegotiation in certain circumstances, generally subject to the Secretary's discretion.
  • With respect to government price reporting, MFPs are included in Best Price and excluded from AMP.
  • Medicare patients must have access to the MFP (i.e., patient cost-sharing generally based on MFP).
  • Manufacturers must make the MFP available to pharmacies and providers when they dispense/administer the selected drug to Medicare patients. 340B covered entities shall access the lower of the 340B ceiling price or the MFP with respect to units dispensed to eligible Medicare patients.
  • Medicare Part B and Part D plans must reimburse providers and pharmacies based on MFP (i.e., MFP +6% in Part B and "negotiated price" = no more than MFP +dispensing fee in Part D).

II. Inflation Rebates

A. Part B Inflation Rebates

  • Starting in Q1 2023, a manufacturer would owe a quarterly rebate based on the number of Medicare units of a manufacturer's product multiplied by the amount by which the Part B payment rate (usually ASP + 6%) in the applicable quarter exceeds the "inflation-adjusted payment amount."
    • "Part B rebatable drugs" includes single source drugs and biologicals including some biosimilars, but excludes certain low cost drugs, vaccines, and certain other "qualifying biosimilars" eligible for the temporary payment increase.
    • "Units" excludes units sold at the 340B ceiling price, subject to Medicaid rebate, or not separately payable (i.e., packaged with other items and services).
    • The "inflation-adjusted payment amount" is calculated by increasing the Part B payment rate for the drug in Q3 2021 by the rate of change in the CPI-U between January 2021 and the first month of the quarter that is two quarters before the rebate quarter. If the calendar quarter payment rate exceeds the inflation-adjusted payment amount, then manufacturer has a rebate obligation.
  • The IRA establishes timing for when subsequently approved drugs (defined as drugs approved after December 1, 2020) could be subject to rebates (and establishes the payment amount benchmark quarter and benchmark period CPI-U for such drugs).
  • After April 1, 2023, beneficiary coinsurance is reduced by 20% of the amount of the rebate.
  • With respect to government price reporting, inflation rebates are excluded from the calculations of ASP, Best Price and AMP.

B. Part D Inflation Rebates

  • For each one-year period, starting with the one-year period beginning October 1, 2022, manufacturers may owe Part D inflation rebates based on the number of Medicare Part D units multiplied by the amount by which the weighted AMP during the applicable period exceeds the "inflation-adjusted payment amount."
    • "Part D rebatable drugs" generally means a covered Part D drug, except certain low-cost drugs and certain generics.
    • "Unit" includes Medicare Part D units; excludes units sold at 340B prices starting in 2026.
    • "Inflation Adjusted Payment Amount" is calculated by increasing the volume-weighted average AMP from January 1, 2021 to September 30, 2021 by the rate of change in the CPI-U between January 2021 and the first month of the applicable year. If the volume-weighted average AMP during the applicable period exceeds the inflation-adjusted payment amount, a manufacturer would have a rebate obligation.
  • The IRA establishes timing for when subsequently approved drugs (defined as drugs approved after October 1, 2021) could be subject to rebates (and establishes the payment amount benchmark year and benchmark period CPI-U for such drugs).
  • There are provisions establishing special treatment for certain drugs:
    • A line extension of an oral solid dosage form Part D rebatable drug (as line extension is defined in the Medicaid rebate statute). The Secretary must establish a formula for determining the "inflation-adjusted payment amount" and the total rebate amount for such a drug, which must be consistent with the formula in the Medicaid rebate statute at SSA 1927(c)(2)(C).
    • Selected Drugs. For each applicable period after a formerly selected drug is no longer considered a selected drug (under subsection 1192(c)), the inflation rebate shall be calculated as if: (i) the benchmark period is the last year in which the drug was a selected drug; and (ii) the benchmark period CPI-U is the CPI-U from January of the last year in which the drug was a selected drug.
  • With respect to government price reporting, inflation rebates are excluded from the calculations of ASP, Best Price and AMP.

C. Enforcement and Review

  • Manufacturers that do not pay Part D inflation rebates timely would be subject to CMPs equal to 125% of the rebate amount; manufacturers that do not pay Part B inflation rebates timely would be subject to CMPs equal to at least 125% of the rebate amount.
  • The IRA provides that there is no administrative or judicial review of whether a drug qualifies as a Part B or Part D rebatable drug, determination of units, or the rebate or beneficiary coinsurance calculations.

III. Part D Redesign

  • Most elements of the redesign effective 2025.
  • The IRA eliminates the coverage gap and the Coverage Gap Discount Program.
  • The IRA establishes a new Manufacturer Discount Program:
    • A 10% discount in initial phase (after the deductible and before catastrophic phase) and 20% catastrophic phase discount.
    • Phase-ins for "specified manufacturers" (applicable only to LIS beneficiaries' utilization) and "specified small manufacturers" (applicable to all Part D applicable beneficiaries' utilization):
  • "Specified manufacturer" is a manufacturer that, in 2021:
  • had a coverage gap discount agreement
  • had total expenditures for all the manufacturer's drugs covered by the coverage gap discount agreement were less than 1.0% of the total expenditures for all Part D drugs; and
  • had total expenditures for all the manufacturer's Part B single source drugs and biologicals were less than 1.0% percent of the total expenditures for all Part B drugs.
  • "Specified Small Manufacturer" is a manufacturer that, in 2021:
  • meets the criteria of a "specified manufacturer" and
  • total expenditures for any one of the specified small manufacturer's Part D drugs that are covered under a coverage gap discount agreement are 80+% of the total expenditures under Part D for all of the manufacturer's drugs that are covered under a coverage gap discount agreement.
    • Discounts not required for selected drugs.
  • The IRA provides caps in beneficiary cost-sharing at the out-of-pocket (OOP) phase starting in 2024 (in 2022 the OOP threshold is $7,050).
  • Beginning in 2025, the IRA lowers the OOP maximum to $2,000.
  • Finally, the IRA also provides beneficiaries with the option to make cost-sharing payments in monthly installments ("patient smoothing").

Footnotes

1 A "small biotech drug is a qualifying single-source drug that meets either of the following:

  • (1) Part D: The total expenditures for the drug under Part D during 2021 are: (a) equal to or less than 1% of the total expenditures under Part D for all covered Part D drugs during 2021; and (b) equal to at least 80% of the total expenditures under Part D for all covered Part D drugs that such manufacturer has a manufacturer discount agreement in effect during 2021.
  • (2) Part B: The total expenditures for the drug under Part B during 2021 are: (a) equal to or less than 1% of the total expenditures under Part B for all qualifying single source drugs during 2021; and (b) equal to at least 80% of the total expenditures under Part B for all of such manufacturer's qualifying single source drugs that are covered under Part B.

2 Starting in 2027, if the annualized non-FAMP from the year prior to the selected drug publication date is lower than the non-FAMP from 2021, it would be used as the basis for the ceiling calculation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.