On December 31, the Internal Revenue Service (IRS) issued a proposed rule for the calculation of the excise tax under the Medicare Drug Price Negotiation Program, as enacted under the Inflation Reduction Act (IRA). Under the IRA, a manufacturer, producer, or importer is subject to an excise tax for sales of a designated drug if that entity fails to reach agreement with CMS on a maximum fair price for the drug and the entity does not exit from the Medicare and Medicaid programs. The excise tax can be significant. Under the IRA, the "applicable percentage" ranges from 65 to 95 percent, but the statutory formula does not directly apply the percentage to sales revenue. The Congressional Research Service calculated the tax could be as high as 1,900 percent of sales revenue.
The proposed rule appears intended to minimize the amount of the excise tax in two significant ways. First, the IRS proposes in the definition of "applicable sales" that the tax will only apply to sales of designated drugs to "maximum fair price-eligible individuals," that is, Medicare beneficiaries. Second, the "price" which is used to calculate the tax excludes the amount charged allocable to the tax.
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