Significant Drug Pricing Reform Measures in the Inflation Reduction Act of 2022

On August 16, President Biden signed the Inflation Reduction Act of 2022 into law,^[1] which includes some of the most significant drug pricing-related changes since the passage of the Medicare Prescription Drug Improvement and Modernization Act of 2003.

The healthcare-related portions of the law introduce many important changes, most notably allowing the Medicare program to negotiate with pharmaceutical companies for reduced prescription drug prices under Medicare Part B and Medicare Part D (commonly known as the Prescription Drug Benefit for America’s senior population) for certain single-source drugs, or rather those drugs and biologicals without generic or biosimilar competitors. The law will also require drug makers to pay the government a rebate for any drug whose price increases faster than the pace of inflation. It also modifies several aspects of the Part D benefit to cap Medicare beneficiaries’ out-of-pocket costs.

A high-level summary of these provisions and other important considerations is below.

Drug Price Negotiation Program

Overview

Beginning in 2026, the government will have the authority to negotiate drug prices for certain single-source drugs under Medicare Part B and Part D. Drugs eligible for price negotiation will generally include (a) FDA-approved drugs for which at least 7 years have elapsed from approval and for which there is no generic on the market and (b) FDA-licensed biologics for which at least 11 years have elapsed since licensure and for which there is no biosimilar on the market. Small biotech drugs (until 2028), orphan drugs, low spend Medicare drugs, and plasma-derived products are excluded from price negotiation.

Under the law’s drug price negotiation provisions, the Secretary of the U.S. Department of Health and Human Services (HHS) (“the Secretary”) can specify the eligible drugs that will be subject to negotiation, targeting high-cost drugs under the Part B and Part D programs. Each year, more drugs will be added to the list of drugs subject to negotiation. Under the law, there would be 10 Part D drugs eligible in 2026, 15 Part D drugs eligible in 2027, 15 Part D and Part B drugs in 2028, and culminating in 20 Part D and Part B drugs in 2029 and each year thereafter.^[2]

The law establishes a new drug pricing concept, “Maximum Fair Price” (MFP). MFP represents the ceiling on a drug’s negotiated Part B or Part D price. It cannot exceed certain specified percentages of a drug’s non-Federal average manufacturer price (non-FAMP) or an amount reflecting an average market price and determined by the number of years since a drug’s FDA approval.^[3] For 2029 and 2030, there would be a maximum fair price floor of 66% of average non-FAMP for small biotech drugs. In conducting the negotiations, the Secretary must consider information submitted by the drug manufacturer^[4] including evidence about alternative treatments^[5] when negotiating MFP.

For Medicare Part B-reimbursed drugs, the payment amount under the law would be 106% of the MFP.  For Medicare Part D drugs, the negotiated price would be no greater than the MFP, and Part D plans would be under an obligation to have negotiated drugs listed on their formularies.

Enforcement

Manufacturers will be subject to significant civil monetary penalties (CMPs) for failing to offer the MFP with respect to a Medicare beneficiary, violating the terms of an agreement, or knowingly providing false information. Further, manufacturers can be subject to a significant excise tax for failing to (1) timely enter into the negotiation, (2) timely agreeing to a MFP, or (3) timely submitting the requisite information to the Secretary.

Impact on Medicaid Drug Rebate Program Calculations

Under the Medicaid Drug Rebate Program, Best Price calculations for negotiated drugs would include the MFP, whereas AMP calculations for negotiated drugs would not include MFP.

Part B and Part D Inflation Rebates

In addition to the drug price negotiation provisions, the law requires manufacturers to pay the government a rebate on a unit of a drug paid under Part B or D if the price of the drug increases faster than inflation.

Part B

Drugs subject to the Part B inflation rebate are single-source drugs or biologicals, paid under Part B, excluding vaccines, drugs with low Medicare expenditures, and certain biosimilars. The rebate would be calculated as: the total number of Medicare Part B units of the drug in the relevant quarter, excluding 340B units and packaged units; multiplied by the amount (if any) by which the rebate quarter Part B payment rate exceeds the inflation-adjusted benchmark quarter Part B payment rate. For any Part B drug for which a rebate is triggered, Part B beneficiary cost sharing would be reduced to 20% of the inflation-adjusted benchmark quarter Part B payment amount. The Part B inflation rebate goes into effect Q1 2023.

These rebate amounts would be excluded from average sales price (ASP), Best Price, and AMP calculations. A manufacturer that does not timely pay a rebate would be subject to a CMP in an amount at least equal to 125 percent of the rebate amount. Importantly, there is no administrative or judicial review of determinations of rebate units, whether a drug qualifies as a Part B rebatable drug, rebate calculations, or beneficiary coinsurance calculations.

Part D

Drugs subject to the Part D inflation rebate would be drugs or biologicals paid under Part D, excluding low Medicare spend drugs. The rebate would be calculated as: the total number of Medicare Part D units of the drug in the rebate year (excluding 340B units beginning in 2026); multiplied by the amount (if any) by which the volume-weighted average annualized AMP for the rebate year exceeds the inflation-adjusted volume-weighted average annualized AMP for the benchmark year. The Secretary would establish the rebate calculation for line extensions of oral solid dosage form Part D rebatable drugs, consistent with the treatment of line extensions under the MDRP. The Part D inflation rebate goes into effect annually, starting with the one-year period beginning on October, 1, 2022.

The Part D rebates would be excluded from ASP, Best Price, and AMP calculations. A manufacturer that does not timely pay a rebate would be subject to a CMP in an amount equal to 125 percent of the rebate amount. Just like with the Part B inflation rebate, there is no administrative or judicial review of determinations of rebate units, whether a drug qualifies as a Part D rebatable drug, rebate calculations, or beneficiary coinsurance calculations.

Part D Benefit Changes

Overview of Manufacturer Discount Program (effective January 1, 2025)

The law adopts a new Manufacturer Discount Program under which the Secretary enters agreements with manufacturers to provide discounted prices for applicable drugs dispensed to applicable Medicare beneficiaries, beyond those drugs subject to Part B and Part D negotiation addressed above. Under the program, a manufacturer must offer the government: (1) a 10% discount off the negotiated price for an applicable drug where an applicable beneficiary has incurred costs equal to or above the deductible and below the out-of-pocket threshold; and (2) a 20% discount off the negotiated price for an applicable drug where an applicable beneficiary has incurred costs equal to or above the out-of-pocket threshold.  

The program applies to covered Part D drugs approved under a new drug application or licensed as a biologic or biosimilar biological product for which benefits are available through a Part D plan. It does not include drugs subject to the Drug Price Negotiation Program addressed above. Covered drugs can only be dispensed to a Part D beneficiary enrolled in a prescription drug plan (or a Medicare Advantage plan), but not in a qualified retiree prescription drug plan. The beneficiary also must have incurred costs above the applicable deductible for that beneficiary to be eligible for an applicable drug. Manufacturers that fail to provide discounted prices for an applicable drug can be subject to civil monetary penalties equal to 1.25 percent times the discount that the manufacturer should have paid under the agreement.

Overview of Medicare Part D Coverage Changes

In an effort to keep prescription drug costs low for Medicare beneficiaries, the law would also make a number of important modifications and updates to the Medicare Part D prescription drug benefit. This includes limiting Medicare beneficiaries’ out-of-pocket costs to $2,000, subject to annual increases tied to aggregate Part D expenditures (effective 2025). It would also eliminate the Part D coverage gap and eliminate beneficiary cost-sharing in the so-called “catastrophic” phase of coverage. Further, vaccines would be covered under Medicare Part D without a deductible or coinsurance, among several other enhancements to the Medicare Part D benefit. The law would also cap insulin prices at $35 per month for Medicare beneficiaries.

Pharmacy Benefit Manager Rebate Rule Further Delayed

Notably, the Inflation Reduction Act further delays the implementation of a November 2020 HHS final rule that would have removed Anti-Kickback Statute safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through Pharmacy Benefit Mangers, unless the price reduction is required by law. The rule’s implementation was previously delayed until January 1, 2026, and this legislation further extends that delay to January 1, 2032.

Conclusion

Goodwin’s attorneys will continue to monitor the Inflation Reduction Act of 2022 as it is finalized in Congress as well as HHS’s regulatory efforts to implement the law’s requirements over the coming years.

^[1] Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. (as passed by Senate, Aug. 7, 2022).
^[2] The legislation requires the Secretary to negotiate the maximum number of drugs each year, to the extent that number of drugs qualify for negotiation. The law also specifies a detailed contracting process, that requires HHS and the relevant drug maker to trade offers and negotiate a final price by November 1 of the year two years prior to the date the price will go into effect. For example, HHS and the drug manufacturer must reach an agreement for 2027 pricing by November 1, 2025.
^[3] For example, 40% of the non-FAMP for drugs approved for more than 16 years, 65% of the non-FAMP for drugs approved for 12–16 years, and 75% of the non-FAMP for small molecule drugs approved for 7–12 years (11–12 years for biologics).
^[4] For example, R&D costs, whether the drug maker has recouped these costs, other product and distribution costs, grants or financial support for drug discovery and development from the government, or other data. 
^[5] This information includes the extent to which the drug is a therapeutic advancement, the costs of alternatives, and comparative effectiveness between the drug and alternatives.