On August 16, 2022, President Biden signed H.R. 5376 – Inflation Reduction Act of 2022.1 This new law establishes the ability for the Secretary of Health and Human Services to establish a Drug Price Negotiation Program that allows for negotiations for certain high-priced drugs that are dispensed under Medicare Part D in 2026 and begin to include Medicare Part B drugs in 2028. This marks one of the most significant changes to Medicare as price negotiations were prohibited under the Medicare Modernization Act of 2003.2
Beginning in 2026 the Secretary will publish a list of drugs that will have pricing established through negotiations facilitated by the Secretary with select drug manufacturers.3 In 2026, ten Medicare Part D drugs will be selected by the Secretary. In 2027, there will be fifteen drugs added. In 2028 there will be an additional 15 drugs identified, however, the list can be a combination of Medicare Part D and Medicare Part B drugs. In 2029, or a subsequent year, a list of an additional 20 drugs of Medicare Part D and/or Medicare Part B drugs can be produced.
Drugs Eligible for Negotiation
Drugs need to meet the definition of a Medicare Part D drug or are eligible for payment under Medicare Part B. These drugs need to be single-source drugs that are approved under the Food Drug and Cosmetic Act4 (i.e., Brand Name Drugs) or through a Biologics License.5 For drugs approved under Food, Drug, and Cosmetic Act, the drug “is marketed pursuant to such approval; for which, as of the selected drug publication date with respect to such initial price applicability year, at least 7 years will have elapsed since the date of such approval” and is not approved and marketed under an Abbreviated New Drug Application (ANDA).6 Meanwhile, for drugs approved under a Biologics License, “for which, as of the selected drug publication date with respect to such initial price applicability year, at least 11 years will have elapsed since the date of such licensure” and is not marketed as a biosimilar.7 Therefore, drugs eligible for negotiation will not be drugs that are new to market.
There are some specific drugs excluded from the program which include:1) Certain Orphan Drugs; 2) Low Spend Medicare drugs; 3) Plasma-derived products.
There are also exceptions for “Small Biotech Drugs” in 2026, 2027, and 2028. Drugs that will not be eligible for negotiation for Part D are drugs that are ≤1% of total expenditures under Part D and are equal to at least 80% of the total expenditures for all covered applicable8Part D drugs which the manufacturer has an agreement with CMS. For Part B drugs, similar provisions apply. Drugs that are ≤1% of total expenditures under Part B and are equal to at least 80% of the total expenditures under Part B for all qualifying single source drugs of the manufacturer for which payments are made under Part B.”
For 2026, data will be used by the Secretary to evaluate and rank eligible drugs based on the highest total expenditures based on data between June 1, 2022, and May 31, 2023. To establish the initial list of drugs in 2026, negotiations with manufacturers will begin on the sooner of the date the manufacturer and the Secretary enter into an agreement; or between October 1, 2023, and August 1, 2024. Subsequent negotiation periods will begin on the sooner of the date the manufacturer and the Secretary enter into an agreement or between February 28 and November 1 of the year that begins two years prior to the initial price applicability year.
When a drug has been selected and an agreement has been established between the manufacturer and the Secretary, the agreement will be effective largely until the drug is marketed under ANDA or Biosimilar status.
The “maximum fair price” will be established by evaluating the lessor of 1) A weighted amount based on enrollment and each Prescription Drug Plan or Medicare Advantage Plan and the negotiated price for the drug net of all price concessions for Part D drugs or for Part B drugs it will be the lessor of Average Sales Price or Wholesale Acquisition Cost;9 or 2) The average non-Federal average manufacturer price in 2021 (with increases based on the consumer price index for all urban consumers) and an “applicable percent” applied to the price based on the length of time the drug has been approved by the Food and Drug Administration (FDA). Terms used to describe the length of time are Short-Monopoly Drugs which are less than 12 years, Extended-Monopoly Drugs which have been approved for at least 12 years but less than 16 years, and Long-Monopoly drugs which have been approved for at least 16 years. The "applicable percentages" used for the pricing calculation are Short-Monopoly – 75%, Extended-Monopoly – 65%, and Long-Monopoly – 40%.
Prices are required to be published by November 30th of the year which is two years prior to the applicable year.
Inclusion of Selected Drugs for Coverage
Prescription Drug Plan sponsors should expect to cover each drug that is selected under the Drug Price Negotiation Program for each year. Removal will be permitted when replacing the brand name formulary item with a therapeutically equivalent generic.
- Drugs approved under the Food, Drug and Cosmetic Act (i.e.,
Brand Name drugs) “with respect to such initial price
applicability year, at least seven years will have elapsed since
the date of such approval” and for drugs approved under
Biologics License “at least 11 years will have elapsed since
the date for such licensure” means that time must lapse
before a drug is eligible for consideration. Therefore,
beneficiaries will not save on drug costs when a drug is new to
- Depending upon each drug's patent expiration date and the competitive landscape for generic equivalents, the 7/11 year waiting period may provide a limited duration of lower price as a single source drug.
- Some drugs may have a generic equivalent before it meets this provision.
- Most Part D plans have been negotiating rebates directly with
manufacturers for single source drugs. There will likely be overlap
across drugs eligible for selection by the Secretary for
negotiation and drugs for which a plan sponsor received rebates. If
the current rebate model is reduced, what are the ramifications?
Typically rebate dollars are used to lower premiums and without
rebate dollars, Part D plans historically anticipate premiums will
increase. As the negotiated drug lists from 2026 and subsequent
years expand, this will likely decrease the number of drugs
available for plan sponsors to negotiate rebates with
- Alternatively, drugs that are negotiated by the Secretary may be drugs where plan sponsors have not had the ability to obtain rebates from the manufacturer and will not impact the rebate/premium calculations and the Drug Price Negotiation Program provides a lower drug cost for beneficiaries.
- Other levers sponsors may use to conserve cost could be more restrictive formularies with less drugs and greater utilization management. These strategies may increase operational costs as plans will need to anticipate higher formulary exception requests and redeterminations.
- The Inflation Reduction Act also limits premium increases for Medicare prescription drug benefits to 6% annual increases from 2024 to 2030 10 which is another confounding factor plans will need to consider as this will make it more difficult to defray costs through premiums.
- Medicare Advantage plans will need to be cognizant of the
pricing of negotiated prices of Medicare Part B drugs and
contractual obligations based on site of service between the plan
sponsor and the provider. For selected drugs, plan sponsors will
need to ensure they are not overpaying for drugs based on contract
versus the Secretary's negotiated price.
- Claims systems will need to be reviewed to ensure that payments align with the Part B negotiated pricing and that adjudication of provider claims considers contracts and the negotiated drug lists.
- Pharmacy claims systems will also need to account for Medicare Part B negotiated pricing for Medicare Part B vs D drugs and Part B drugs that are allowed to adjudicate at pharmacy point-of-sale.
4. 21 USC 355: New drugs
5. 42 USC 262(a): Biologics License
6. 21 USC 355(j): Abbreviated New Drug Applications
7. 42 USC 262(k): Licensure of Biological Products as Biosimilar or Interchangeable
10. Section 1860D-13 of the Social Security Act amended.
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.