Drug Pricing Reform Finally Becomes Law: What the Inflation Reduction Act Means for Pharma

After many years of policy debate and attempts at proposed legislation, some of the most meaningful changes to the ways in which Medicare pays for prescription drugs – and the obligations of manufacturers selling drugs to Medicare beneficiaries - have finally come to pass. Many of the provisions which have become law appeared in previous bills including the Build Back Better Act.

The Inflation Reduction Act of 2022 (IRA), was signed into law by President Biden on August 16, 2022. A full copy of the law can be found here. This article summarizes the main provisions of Subtitle B of the IRA at a high level. It should also be noted that many of the technical details regarding the provisions will be subject to rulemaking and the issuance of guidance documents by the US Department of Health and Human Services (HHS) and the Centers for Medicare & Medicaid Services (CMS). Please contact the authors of this article should you have more detailed questions about the IRA and its provisions impacting drug pricing and Medicare reimbursement and coverage. 

Medicare Prescription Drug Direct Price Negotiation

One of the most significant provisions of the IRA gives HHS the ability to negotiate directly with manufacturers over the price that Medicare will pay for certain high-cost drugs via establishment of the Drug Price Negotiation Program (or the Program). The Program will apply to drugs administered or dispensed under both Medicare Parts B and D, although for the first two years of the Program, only Medicare Part D qualifying drugs will be impacted. The Program will officially begin in 2023 with CMS selecting 10 drugs for direct price negotiation from a list of drugs representing the highest Medicare Part D spend. The newly negotiated prices for the first tranche of Part D drugs will not be applicable until 2026 (referred to as “the initial price applicability year”). 
The general process will be as follows: HHS will determine which qualifying single-source drugs and biologicals under Medicare Part B and D have the highest expenditures for a given plan year. Then the Secretary of HHS will select a specified number of drugs that will be subject to price negotiation. The Secretary of HHS will negotiate a maximum fair price (MFP) with the manufacturer of each drug selected for negotiation. There will continue to be a MFP for a drug until there is an approved generic or biosmilar introduced to the market.
The Program will consist of several components, the details of which are to be designed by HHS and communicated at a later time. The Program will comprise the following:

  • The annual identification and publication of a list of drugs subject to MFP negotiation;
  • The establishment of written agreements between HHS and the impacted drug manufacturers that set out the terms for negotiating MFPs;
  • Negotiation between HHS and the manufacturers to reach MFPs for the selected drugs;
  • Establishment of certain administrative rules and functions to enable the negotiation process; and
  • Establishment of mechanisms to promote compliance and participation in the Program.

For the initial price applicability year of 2026, the Program will follow this procedural timeline:

  • HHS will publish a list of drugs selected for negotiation by September 1, 2023;
  • HHS and the impacted drug manufacturers must enter into agreements to negotiate prices no later than October 1, 2023;
  • The MFP negotiation period will begin on October 1, 2023, and end on August 1, 2024;
  • The negotiation period will be subject to certain timelines. For example, manufacturers of the selected drugs must submit information on the non-Federal Average Manufacturer Price (non-FAMP) as well as other information requested by HHS no later than October 2, 2023. HHS’s initial written offer of the MFP must be provided to manufacturers no later than February 1, 2024. Within 30 days of receipt of the offer, the manufacturer must either accept the offer or make a counteroffer to HHS; and
  • Finally, HHS will publish the final negotiated MFPs no later than September 1, 2024.

HHS will follow a slightly modified timeline for the second price applicability year of 2027 and for future years.
The IRA sets forth specific criteria for the drugs that can be selected for price negotiation. Only single-source drugs or biologics can be selected for negotiation and only if such drugs have been on the market for at least seven years for branded drugs or 11 years for biologics. In addition, certain single source drugs or biologics are exempt from the Program:

  • Drugs with low Medicare spend; meaning less than or equal to 1 percent of the total Part D expenditures;
  • New formulations (such as extended release) of a qualifying drug;
  • Drugs for a single rare disease or condition; and
  • Biological products derived from human whole blood or plasma.

Lastly, the IRA empowers HHS to delay a MFP for a single-source biologic for up to two years if there is a “high likelihood that a biosimilar biologic product of the reference biologic product will come to market within two years.” In order for the delay to apply, a biosimilar manufacturer must submit “clear and convincing evidence” that the biosimilar will come to market. The IRA does not provide any detail as to the types of information that might provide such “clear and convincing evidence.”
The MFP will replace the “negotiated price” as the reimbursement metric for the select Part D drugs subject to negotiation. Medicare Part D plans are required to cover drugs with a negotiated MFP but can remove such drugs from their formularies during a plan year following the proscribed negative formulary change rules. For Part B drugs, the MFP will replace Average Sales Price (ASP) for the purposes of provider reimbursement.
Manufacturers that do not agree to a MFP with HHS will be subject to a tax of 65 to 95 percent of Medicare utilization based on the prior year. Manufacturers that agree on an MFP, but do not honor it, will be subject to civil monetary penalties equal to 10 times the amount of the product dispensed or administered that year, as well as the difference between the reimbursed price and the MFP. 

Drug Inflation Rebates for Medicare Part B and D Drugs

Beginning in 2023, manufacturers of certain “Part B rebatable drugs” will be required to pay HHS a rebate each calendar quarter to the extent that the ASP-based reimbursement of such Part B drug in the current quarter exceeds the ASP-based reimbursement of the drug in a benchmark quarter adjusted for inflation. The inflation adjustment is measured as a change in the Consumer Price Index-Urban (CPI-U) between the benchmark and comparison periods.
Under the IRA, the term “Part B rebatable drug” means a single-source drug or biological, including a biosimilar biological product, with some limited exceptions. Certain vaccines and drugs that have an annual average total Part B allowed charge per individual of less than $100 will not be considered “Part B rebatable drugs.” The IRA’s rebate provision also clarifies that a Medicare beneficiary’s coinsurance for Part B rebatable drugs will be calculated as 20 percent of the inflation-adjusted Part B payment amount. The inflation rebates will be paid on Medicare beneficiary utilization of such Part B rebatable drugs in the applicable quarter, unless the utilized drug was sold at the 340B price or subject to a Medicaid Drug Rebate Program rebate. In addition, the Part B rebate is not due or payable on Part B drugs that are not separately reimbursable, but rather reimbursed in a bundled procedural payment.
Similarly, the Act establishes an inflation rebate program for certain Part D drugs that is triggered when the drug’s Average Manufacturer Price (AMP), as reported under the Medicaid Drug Rebate Program, increases faster than inflation. The manufacturer of a Part D rebatable drug shall pay a rebate to HHS to the extent that the drug’s AMP for a given year has increased more than the AMP from a baseline period adjusted for inflation. The inflation adjustment is measured by the change in CPI-U between the benchmark and comparison periods. The Part D inflation-based rebate program will first apply to the applicable 12-month period beginning on October 1, 2022 and continue for each subsequent 12-month period. Implementation of the new Part D inflation rebate may be delayed by HHS until no later than December 31, 2025. The rebate is due from manufacturers on Medicare Part D beneficiary utilization of Part D rebateable drugs unless the drugs dispensed are purchased under the 340B program. The Part D rebate requirement applies to drugs approved under a New Drug Application as well as biologics and to drugs approved under Abbreviated New Drug Applications but only if there is no brand equivalent being sold. The Part D rebate does not apply to drugs if the annual average cost per individual is $100 or less per year.

Manufacturers will be subject to civil monetary penalties of 125 percent of the rebate amounts for untimely payments.

Medicare Part D Benefit Design Changes

The IRA also alters the current structure of the Medicare Part D standard benefit. 
The Coverage Gap or infamous “donut hole” will be eliminated under the new design. The IRA caps beneficiary out-of-pocket costs beginning in 2024 to an amount equal to the catastrophic threshold and then reduces the out-of-pocket maximum to $2,000 beginning in 2025. The cap can be increased in future years consistent with the per capita expenditure spending for covered Part D drugs. The existing Coverage Gap Discount Program for pharmaceutical manufacturers will be replaced by a new manufacturer discount program effective in 2025. Under the new program, manufacturers will provide a 10 percent discount off the negotiated price for applicable drugs (branded drugs and biologics manufactured by companies that have Part D discount agreements) after the deductible is satisfied through the catastrophic phase of the benefit. In the catastrophic phase, manufacturers will provide a 20 percent discount off negotiated price.
The IRA will allow any Part D beneficiary to elect to make prescription cost-sharing payments in monthly installments (up to the annual out-of-pocket threshold) starting with plan year 2025. 
Beginning in 2025, the government’s share of reinsurance that it is required to provide to Part D plan sponsors in the form of a subsidy is reduced to between 20-40 percent, down from 80 percent. 
Part D plans’ premium increases will essentially be capped at 6 percent annually. Additionally, eligibility for the full low-income cost-sharing subsidy is expanded to individuals at or below 150 percent of the Federal Poverty Level (FPL). The partial low-income cost-sharing subsidy has been eliminated under the Act. 

Drug Rebate Safe Harbor Final Rule

The Act prohibits HHS from implementing or enforcing certain changes to the Federal Anti-Kickback Statute Discount Safe Harbor related to rebates paid from pharmaceutical manufacturers to Part D plans and their pharmacy benefit manager agents that were finalized back in 2020. ArentFox Schiff provided an analysis of the 2020 Final Rule here. The Act clarifies that the changes adopted in the Final Rule cannot be enforced prior to 2032. 

Part D Vaccine Coverage

The IRA requires coverage of vaccines under Medicare Part D with no cost-sharing or deductible beginning January 1, 2023. In addition, it requires HHS to provide additional subsidies to Medicare Advantage Prescription Drug Plan (MA-PD) and Prescription Drug Plan (PDP) sponsors for plan year 2023 in an amount equal to the aggregate reduction in cost sharing that the plans would have received if the no cost-sharing requirement had not been implemented under the IRA.

Limiting Medicare Part D Beneficiary Costs for Insulin

The IRA contains provisions that will limit the cost-sharing amounts that Medicare Part D beneficiaries will be required to pay for qualifying insulin products. In 2023, Part D beneficiaries will not be subjected to deductible requirements for certain insulin products. In addition, Part D plans will be required to offer insulin products at a co-payment of no more than $35; this co-payment cap will apply for plan years 2023-2025. Starting with plan year 2026, the co-payment amount for applicable insulin products will be the lesser of (i) $35; (ii) an amount equal to 25 percent of the MFP for the covered insulin product under the Program; or (iii) an amount equal to 25 percent of the negotiated price of the insulin product for that beneficiary’s PDP or MA-PD plan.

Incentivizing Biosimilar Development

Medicare Part B reimbursement for biosimilars will be temporarily increased to ASP + 8 percent (8 percent being calculated on the ASP of the reference product) for a five year period. For biosimilars currently on the market, the increase will be effective through December 31, 2027. New biosimilars launched prior to December 31, 2027, will experience the temporary increase in reimbursement from their date of launch to the end of the five years. Biosimilars launched after December 31, 2027, will be reimbursed as ASP + 6 percent (6 percent being calculated on the ASP of the reference product).

Extending Exchange Plan Subsidies

The American Rescue Plan had extended premium subsidies for individuals and families enrolling into exchange plans with incomes above 400 percent of the FPL if a minimum threshold was met. Extension of the subsidies to individuals and families with incomes above 400 percent of the FPL was set to expire at the end of 2022. The IRA extends the subsidies for individuals and families with income greater than 400 percent of the FPL through 2025.
The IRA is full of new requirements applicable to drug manufacturers with respect to Medicare coverage and reimbursement, and HHS and CMS will be issuing numerous proposed rules and guidance documents in the months and years to come. ArentFox Schiff is tracking all such developments and stands ready to assist clients with understanding how these new requirements will impact their operations and legal liabilities. 


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