On August 16, 2022, President Biden signed into federal law the Inflation Reduction Act (IRA), which, among other priorities for the Biden administration, addresses prescription drug costs and drug prices in the Medicare program.[1]
Specifically, the provisions provide new federal authority for the federal government to negotiate pricing for certain Medicare Part D and Medicare Part B drugs. Other notable provisions create new caps on out-of-pocket spending for drugs in Part D, including for insulin and adult vaccines; provide penalties for prices of Part B or D drugs that increase faster than inflation; increase Part B reimbursement rates for biosimilars; and extend the moratorium on the U.S. Department of Health & Human Services (HHS) Office of Inspector General’s rebate rule to 2032.
The IRA is a strategic political move ahead of the November elections because many of its drug pricing provisions are popular with voters across party lines. For instance, there appears to be widespread support for a key provision that permits the Medicare program for the first time to negotiate with drug companies to get a lower price on certain medications: a recent poll showed that 95 percent of Democrats, 82 percent of Independents, and 71 percent of Republicans are in favor of the measure.[2] Other drug pricing and health care provisions in the IRA likewise appeal to the general public.[3]
In addition, the IRA presents new challenges for a pharmaceutical distribution and payment chain currently undergoing major scrutiny from federal and state entities. For instance, the Federal Trade Commission (FTC) currently is studying how pharmacy benefit managers (PBMs) may impact the price and costs of drugs, particularly outpatient drugs. Despite this study’s focus on PBMs, actors throughout the supply chain should be alert for future FTC actions along the drug distribution and payment chain continuum.[4]
The IRA does not directly focus on PBMs, but it does provide changes to drug pricing and costs in the Medicare Part D program that impact pharmaceutical manufacturers, Part D plans, pharmacies, and the entities that provide administrative services on behalf of these entities (e.g., PBMs, pharmacy services administrative organizations (PSAOs), and a host of other downstream middlemen). This Insight analyzes key pharmaceutical drug cost and drug pricing provisions in the IRA and highlights what actors in the pharmaceutical chain continuum should pay attention to as the law is implemented.
I. Government Drug Negotiations for Medicare Part D Plan Drugs
Summary: Beginning in 2026, the HHS Secretary, through its Centers for Medicare & Medicaid Services (CMS), will negotiate pricing for the 10 top-spend outpatient drugs in Part D and then will increase the number of drugs negotiated yearly. Medicare Part B drugs will be included in CMS negotiations by 2028. There are exceptions on which drugs can be negotiated. For example, single source drugs without competitors will be eligible, but orphan drugs (approved for rare disease states or conditions as the only Food and Drug Administration-approved indication) will not be eligible for negotiations.
CMS “negotiations” means that CMS will set a “maximum fair price” (MFP) for these drugs. The MFP is set following negotiations in which drug manufacturers submit information to CMS to establish the upper limit for the negotiated price of a drug that is equal to the lower of:
- the drug’s enrollment-weighted negotiated price (net of all price concessions) for a Part D drug,
- the average sales price (ASP) for a Part B drug, or
- a specified percentage of the drug’s non-federal average manufacturer price (AMP), which is the average price paid by wholesalers and distributors as reported by manufacturers in connection with their sales to government agencies under the Federal Supply Schedule Program.[5]
Drug manufacturers that do not provide information on pricing to the government could face onerous civil monetary penalties equal to 10 times the amount of the drug product dispensed during the year. Drug manufacturers that do not negotiate with CMS may be assessed an excise tax.
At the pharmacy counter, it is unlikely that the patient experience will change in any material way other than possibly seeing lower prices for the select drugs. The pharmacy, however, may experience some new challenges because the IRA requires a “true up” between the price that the pharmacy negotiates with the Part D plan (or its PBM) for the drug and the fair maximum price. The timing of the “true up” could vary, presenting the pharmacy with potential cash flow issues. However, CMS could prescribe timing parameters for the “true up” during its regulatory implementation of the IRA. In addition to the “true up,” the IRA permits pharmacies to collect a dispensing fee.
The change in authority for the federal government to negotiate drug pricing is no small feat for Congress or the Biden administration because historically, the non-interference clause in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which created the Part D program, expressly precludes the federal government from inserting itself into the negotiations between drug manufacturers and Part D plans. This non-interference clause, included at the time of the initial enactment of the new Part D program, was intentional due to the Part D program construct under which coverage is provided through private health plan sponsors that offer a drug benefit through Part D or Medicare Advantage plans. While the government subsidizes these plans via Part D bids, the Part D program largely operates as a market-oriented program that competes for Medicare beneficiaries, more akin to the Federal Employee Health Benefits Program than to the other parts of the Medicare program.
For years, Congress and HHS have avoided making any changes that would appear to involve government negotiations in drug pricing under the Part D program. For example, CMS was careful to state that a recent Part D final rule that requires plans to report pharmacy price concessions (sometimes referred to as “pharmacy direct and indirect remuneration” or “pharmacy DIR”) at the point of sale is a change that is limited to Part D plan reporting, not to negotiating with the Part D plan on the amount of such price concessions.[6] In the previous year, Congress has tried to modify the non-interference clause to address rising costs and prices for a select number of drugs.[7] This time, that effort was successful.
Key Takeaway: In terms of implementation, pharmaceutical manufacturers should watch for CMS rulemaking that dictates how the negotiated drugs are selected and how CMS promulgates its methodology and standards for such a formulary. Assuming the determination of the highest-priced drugs is based on gross prescription drug costs without factoring in manufacturer rebates (which are required to be reported in the Part D plan’s DIR), high list price (rather than net price) could dictate whether the drug is selected.
Drugs selected for negotiation will be published by September 1, 2023. While Part D plans and their PBMs will be excluded from the negotiations of these drug prices, drug manufacturers should consider assessing how the publication of MFP may impact commercial rebate negotiations and whether additional changes to their pricing and contracting strategies may be advisable.
On the pharmacy side, pharmacies will need to update their claims systems to include indicators for drugs that are subject to the fair maximum price. The National Council for Prescription Drug Pricing (NCPDP) billing standards may be updated to effectuate such change. Further, the pharmacies will want to ensure that the “true ups” from Part D plans are paid timely. Specifically, pharmacies will want to review their agreements with relevant entities, including Part D plans, which may address the timing of such “true ups” and the applicability of any administrative fees assessed by administrative processors (e.g., PBMs or PSAOs) for effectuating the “true up.” Again, CMS could prescribe some parameters around the timing and process for such “true up” via regulation.
II. Cap on Insulin Copayments
Summary: Monthly copayment spend on insulin is capped at $35 for plan years 2023, 2024, and 2025 in Part D plans and for insulin via durable medical equipment under Part B. For plan year 2026 and subsequent years, the cap will be the lesser of $35, or an amount equal to 25 percent of the MFP established for the covered insulin product, or an amount equal to 25 percent of the negotiated price of the covered insulin product.
Key Takeaway: This change is tied to the government’s establishment of the MFP under government negotiations. For plan year 2026 and forward, drug manufacturers (and patients) will want to keep an eye on whether their insulin product is selected for negotiations that could lower the price below the cap.
III. Cap on Annual Out-of-Pocket Spending and an Option to Smooth Out Patient Cost Sharing
Summary: Beginning in 2025, out-of-pocket costs for Part D beneficiaries will be capped at $2,000. In subsequent years, the $2,000 threshold will be increased at the rate of growth for the Part D program. This provision will effectively eliminate the coverage gap, sending patients straight to the catastrophic phase after meeting the $2,000 threshold. Likewise, beginning in 2025, Part D patients can elect to have their cost sharing be distributed over the course of the benefit year. The growth in Part D premiums is capped at 6 percent per year from 2024 to 2030.
The provisions also redesign benefit stages in Part D. Currently, Part D beneficiaries who run through all benefit phases and into what is called the “catastrophic phase” pay 5 percent of the costs for their drugs, with the government responsible for 80 percent of the costs, and plans for 15 percent. In addition to closing the coverage gap, the IRA eliminates beneficiary cost sharing in the catastrophic phase and instead places greater responsibility for costs in the phase on plans and manufacturers. Specifically, beginning in 2025, the government’s responsibility will drop to 20 percent while the plan’s responsibility will increase to 60 percent, and manufacturers will take on 20 percent.
Key Takeaway: Drug manufacturers will note their new cost-share responsibility in the catastrophic phase and might consider how the significant increase in costs for plans may change negotiation strategies that focus on mitigating plan responsibility in the phase (e.g., slowing patients’ progression into the phase). One such strategy change could include reassessing the role of manufacturer rebates in Part D benefit designs.
On the latter point, it is worth noting that coinciding with the benefit redesign is the implementation of CMS’s pharmacy DIR rule for contract year 2024, which also serves to slow the progression of the patient into the catastrophic phase by requiring pharmacy price concessions (from pharmacies to PBMs) to be assessed at the point of sale. Yet, under the pharmacy DIR rule, Part D sponsors remain permitted to choose whether to reflect manufacturer rebates in the negotiated price, which accounts for the majority of post-point-of-sale DIR. The IRA’s new Part D benefit redesign may create new incentives to revisit post-point-of-sale strategies. Such changes also could impact pharmacy negotiations with Part D plans, possibly through efforts to recoup losses from the phase reforms through more aggressive up-front price concessions.
Finally, elimination of the coverage gap also means drug manufacturers may not benefit as much from the pharmacy DIR rule as projected earlier this year. In this rule, manufacturers appear to benefit from lower patient cost share that would slow the beneficiary’s progress through their benefit, including the coverage gap, wherein manufacturers must pay a coverage gap discount. In eliminating the coverage gap, manufacturer savings contemplated under that rule also may disappear.
IV. Elimination of Cost Sharing for Adult Vaccines Under Part D
Summary: Beginning January 2023, cost sharing for adult vaccines covered under Part D is eliminated.
Key Takeaway: This change alters the playing field for vaccines covered under Part D vis-a-vis those covered under Part B. For years, CMS has strongly encouraged Part D plans to eliminate any cost sharing related to adult vaccines but has never required such a change. CMS will need to implement the requirement in updated regulations before the 2023 open enrollment period starting this fall. Pharmacies should pay close attention to amendments to their contracts with Part D plans, as the plans might attempt to shift these costs to cover any potential increased cost from this change in coverage.
V. Increased Part B Reimbursement Rates for Biosimilars
Summary: From October 1, 2022, through 2027, qualifying biosimilars will be reimbursed under Medicare Part B at ASP plus 8 percent of the reference product’s ASP. For new biosimilars furnished on or after July 1, 2024, the payment rate will be the lesser of the biosimilar’s Wholesale Acquisition Cost (WAC) plus 3 percent or 106 percent of the reference product’s ASP.
Key Takeaway: The significant number of manufacturers aiming to bring new biosimilars to market in the next few years may benefit from this tailwind, which is intended to incentivize their adoption. Realigning Part B provider reimbursement such that the relative reimbursement is higher for the lower-cost biosimilar than for the more expensive reference drug may level the playing field somewhat to encourage the use of the biosimilars, increase competition, and reduce costs.
VI. Extended Moratorium on Implementation of the Drug Rebate Rule Until 2032
Summary: The HHS Office of Inspector General’s rebate rule from 2019 would eliminate safe harbor protection for retrospective rebates and create a new discount safe harbor under the Anti-Kickback Statute that would have the effect of requiring pharmaceutical rebates to be applied while the patient is at the pharmacy counter. This change could lead to lower out-of-pocket costs for Medicare patients.[8] Last fall, President Biden signed a law that would stave off implementation of the rule until 2026.[9] Under the IRA, the rule’s effectivity would be delayed to 2032.
Key Takeaway: While the OIG’s rebate rule has been stalled for more than a decade, drug manufacturers and PBMs may be interested to note that CMS recently reaffirmed its own statutory authority (independent of the rebate rule) to regulate the application of non-pharmacy price concessions in the negotiated price, despite noting that given the existing moratorium on implementation of the rebate rule, CMS is now following an “incremental approach.” This leaves open the possibility that CMS could, in future rulemaking, consider changes to the application of manufacturer rebates.[10]
VII. Drug Manufacturers Penalized for Medicare Prices That Increase More Than Inflation
Summary: Drug manufacturers will be required to offer rebates for certain Part B and D drugs, the prices of which increase more than the rate of inflation for the applicable quarter. The rebate penalty would be calculated by determining the difference between a “benchmark price” (in Part B, the ASP, and, in Part D, the AMP, a metric applicable to and defined by the Medicaid Drug Rebate Program) from a base period to the current period and the current payment for the drug under Part B or D, respectively. A manufacturer would owe a rebate in each quarter that the current period amount exceeded the inflation-adjusted base period amount. Manufacturers that do not pay the rebate may have to pay a penalty of at least 125 percent of the original rebate amount. The requirement applies beginning in 2023 (with agency discretion to defer its implementation for the next two years).
Key Takeaway: In terms of implementation, many drug manufacturers are already familiar with inflation penalty rebates as a condition for participation in the Medicaid program.[11] Nonetheless, it will be important to note the incremental impact on revenue of the application of an inflation penalty in the Medicare market and to watch for cross-over impact from these Medicare requirements to drug prices in the commercial market.
Conclusion
The IRA will be a popular talking point during the upcoming election cycle; undoubtedly, it will also have a lasting impact on the Medicare program. As HHS and CMS implement the changes in the IRA through proposed rulemaking and otherwise, Epstein Becker Green will continue to advise all players in the drug distribution and payment chain continuum in order to help them address the operational, compliance, and legal issues that are expected to emerge.
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This Insight was authored by Alan J. Arville, Kala K. Shankle, and Constance A. Wilkinson. For additional information about the issues discussed in this Insight, please contact one of the authors or the Epstein Becker Green Health Care and Life Sciences attorney who regularly handles your legal matters.
ENDNOTES
[1] Pub. Law No. 117-169 (signed August 16, 2022). In addition to these provisions, the IRA also includes various tax provisions and climate- and energy-related funding. On the health care front, the IRA extends enhanced premium subsidies for people buying their health insurance on the Affordable Care Act’s marketplace to 2025. Previously, the American Rescue Plan Act, signed into law in March 2021, had extended those subsidies through 2022.
[2] Kaiser Family Foundation, The Public Weighs In On Medicare Drug Negotiations (Oct. 12, 2021), available at https://www.kff.org/health-costs/poll-finding/public-weighs-in-on-medicare-drug-negotiations/.
[3] Kaiser Family Foundation, KFF Health Tracking Poll – May 2021: Prescription Drug Prices Top Public’s Health Care Priorities (June 3, 2021), available at https://www.kff.org/health-costs/poll-finding/kff-health-tracking-poll-may-2021/.
[4] Epstein Becker Green, FTC’s PBM Study Signals Broader Federal Scrutiny of the Prescription Drug Section (July 12, 2022), available at insights/ftcs-pbm-study-signals-broader-federal-scrutiny-of-the-prescription-drug-sector/.
[5] See 38 U.S.C. § 8126(h)(5).
[6] Epstein Becker Green, CMS Finalizes Changes to Pharmacy DIR in Part D Starting with Contract Year 2024 (May 13, 2022), available at insights/cms-finalizes-changes-to-pharmacy-dir-in-part-d-starting-with-contract-year-2024/.
[7] H.R. 3, Elijah E. Cummings Lower Drug Costs Now Act, 117th Congress.
[8] 85 Fed. Reg 76666 (finalized Nov. 30, 2020), available at https://www.federalregister.gov/documents/2020/11/30/2020-25841/fraud-and-abuse-removal-of-safe-harbor-protection-for-rebates-involving-prescription-pharmaceuticals; see also Epstein Becker Green, Finalized HHS Drug Formulary Rebate Rule Faces Uncertain Future Under Biden Administration and Current Legal Challenge (Jan. 15, 2021), available at insights/finalized-hhs-drug-formulary-rebate-rule-faces-uncertain-future-under-biden-administration-and-current-legal-challenge/.
[9] Pub. Law No. 117-58 (signed into law Nov. 15, 2021).
[10] Epstein Becker Green, CMS Finalizes Changes to Pharmacy DIR in Part D Starting with Contract Year 2024 (May 13, 2022), available at insights/cms-finalizes-changes-to-pharmacy-dir-in-part-d-starting-with-contract-year-2024/.
[11] 42 U.S.C. § 1396r-8 (c)(2).
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