CMS Issues Proposed Guidance on Inflation Rebates Under Medicare Part B

On February 9, 2023, the Centers for Medicare & Medicaid Services (CMS) released initial program guidance addressing the inflation rebate provisions of the Inflation Reduction Act of 2022 (IRA).^[1]  These provisions apply to how the Medicare Part B and Part D programs pay for the costs of drugs and biologics provided to Medicare beneficiaries. They require drug and biologics manufacturers to pay rebates to the Medicare program if their products’ pricing increases at a rate that exceeds the pace of inflation. Comments are due to CMS by March 11, 2023.^[2]

Key Takeaways — Medicare Part B

The guidance documents include many complex details. We have attempted to break down the information in a clear manner, including incorporating graphics to help better explain the moving parts of these documents.

• Which drugs are subject to the inflation rebate under Part B?

  Drugs and biologics subject to the Part B inflation rebate, which CMS calls “rebatable drugs,” include single-source drugs, biologics, and biosimilars. Two months before the start of each calendar quarter, CMS will identify Part B rebatable single-source drugs and biologics, including biosimilars, and their relevant HCPCS codes.

• Which drugs are excluded from the inflation rebate?

  CMS clarifies that the following are excluded from the inflation rebate:

• Multiple-source drugs (i.e., marketed drugs for which there are two or more drug products that are rated therapeutically equivalent in the Orange Book, are pharmaceutically equivalent and bioequivalent, and are marketed);
• Biosimilars that have an average sales price, or ASP, less than or equal to the reference biologic’s ASP;
• Drugs and biologics billed as “unclassified,” “unspecified,” or “not otherwise classified”;
• Influenza, pneumococcal, hepatitis B, and COVID-19 vaccines;
• Units of drug sold under the 340B program at deep discounts, with CMS considering whether the drugs are billed with certain coding modifiers or whether the Health Resources & Services Administration has identified specific claims as related to 340B covered entities^[3];
• Units that are sold under the Medicaid Drug Rebate Program; CMS specifically seeks comments on (a) excluding drug units during a quarter when an individual has dual coverage under Medicare and Medicaid; and (b) state data sources that would facilitate identifying dual-eligible individuals^[4];
• Claims for drugs that are packaged into a bundled payment and are not separately payable.

CMS will also exclude any drugs for which the Medicare Part B “allowed charges” for the drug for a year per drug user falls below a specified threshold, adjusted for inflation (i.e., low Medicare spend drugs). For drugs furnished in calendar year 2023, this threshold is $100 per year per beneficiary who used the drug. For drugs furnished in future calendar years, CMS will update the previous year’s threshold using an inflation factor.

Medicare Advantage challenges. CMS notes that accounting for units of product administered to Medicare beneficiaries under a Medicare Advantage plan “poses significant operational complexities,” and CMS requests comment from the public on sources of information to determine the number of units provided to Medicare Advantage enrollees and to remove appropriate units as required under the statute. 

• How will CMS calculate the inflation rebate under Part B?
  
  The IRA requires manufacturers to pay quarterly rebates to CMS for pharmaceutical prices that increase faster than the pace of inflation. Manufacturers will be invoiced quarterly for these rebates. The rebates reflect the difference between (a) the actual Part B payment for products and (b) the amount that CMS believes Medicare would have paid had the price of the drug kept pace with inflation since a specified lookback or benchmark period. CMS clarifies the Part B inflation rebate calculation — done on a per form and dosage basis for each HCPCS code relating to the drug —as follows:

Number of Part B rebatable drug units during the rebate quarter CMS will look at data disclosed by manufacturers for each drug’s relevant HCPCS code, as disclosed in quarterly pricing data submitted to CMS. CMS will use claims data to determine the number of units of drug furnished for each applicable HCPCS code during the relevant calendar quarter, removing any excluded units or drugs subject to a drug shortage or supply chain waiver.

X

(Specified Amount for the rebate quarter This is the payment limit that CMS issues for each calendar quarter for Part B drugs in its pricing files.[5] CMS issues quarterly payment limits for Part B prior to the applicable quarter. (Ex: Jan. 1, 2023 – Mar. 31, 2023, payment limits were released in Dec. 2022).

MINUS

Inflation-Adjusted Payment Amount for the rebate quarter) CMS determines how the drug would be priced in the rebate quarter had its price increased at the rate of inflation, using data from a specified lookback period, which varies based on when the drug was approved.

• How does this apply to our products that have been approved and are on the market already?
  
  When a drug is approved and first sold has an impact on how the inflation-adjusted payment amount is calculated, which affects the size of the rebate owed and when inflation rebate calculations might start.
  • For drugs approved on or before December 1, 2020, CMS will look at the January 2021 price and the consumer price index data for the calendar quarter beginning July 1, 2021, to determine how much pricing should be adjusted for inflation.
  • For drugs approved after December 1, 2020, CMS will leverage a complex series of lookbacks, described below, to determine how much pricing should be adjusted for inflation.

• What happens to Medicare beneficiaries’ coinsurance obligations?
  
  Starting April 1, 2023, if the Specified Amount for the quarter (i.e., the Medicare payment limit for the quarter) is greater than the Inflation-Adjusted Payment Amount for the quarter, Medicare beneficiaries will be required to pay only 20% coinsurance on the Inflation-Adjusted Payment Amount. In other words, CMS essentially determines how the drug would be priced if its price had increased at the rate of inflation since a specified lookback period, which varies based on when the drug was approved. Medicare beneficiaries’ coinsurance obligations would be calculated based on this adjusted amount. CMS will identify the Inflation-Adjusted Payment Amount and whether beneficiaries’ coinsurance obligations are reduced when it releases the quarterly pricing files for the relevant quarter. Put another way, CMS will reduce Medicare beneficiaries’ coinsurance obligations in real time.

• What happens if there is a supply chain disruption or drug shortage?
  
  CMS incorporates some relief from the inflation rebates by offering to “reduce or waive” the inflation rebate for drugs experiencing supply shortages and severe supply chain disruptions.
  • Drug shortages. CMS will look at FDA drug shortage lists to determine which drugs are eligible for a reduction or waiver of the rebate amount for a particular rebate quarter. CMS specifically seeks comments on the amount and duration of such a reduction and under what circumstances a waiver should be considered. How should CMS reduce or waive the rebate amount for drugs on the shortage list? How might CMS adjust the rebate amount in cases where not all of the drug codes for the Part B rebatable drug are “current” on the shortage list? Are there specific types of Part B rebatable drugs where CMS might reduce or waive the rebate amount differently? Why? Are there specific causes for or types of shortages where CMS might reduce or waive the rebate amount differently — for example, drugs that treat certain conditions or address critical need — and how does CMS identify these drugs? Are there certain scenarios where a greater reduction or a waiver would be appropriate? What safeguards would discourage a manufacturer from intentionally maintaining a Part B rebatable drug on the shortage list?
  • Biosimilar supply chain disruption. CMS specifically will permit a reduction or waiver of the inflation rebate for changes in production or distribution when HHS determines that there is a severe supply chain disruption caused by a natural disaster or other unique or unexpected event. CMS will require the manufacturer to demonstrate that the disruption occurred during the particular quarter, directly affected the manufacturer, and was due to a natural disaster or other unique or unexpected event. A manufacturer must make the request within 60 days of the first day of the event and must resubmit information for the next quarter.

    
    CMS seeks comments on the amount and duration for which CMS might reduce or waive the rebate amount. CMS is also seeking comments on the definitions of severe supply chain disruption, natural disaster, and other unique or unexpected event. CMS also wants to understand if there are ways to enact the policy to reduce the likelihood of future severe supply chain shortages. CMS also seeks comments on the supporting documentation to be submitted.

• What happens if a HCPCS code is revised?
  
  If the HCPCS code for a relevant drug changes (for example, the code’s dose description changes or a new code is assigned), CMS will apply a conversion factor in its inflation rebate calculation and develop a crosswalk between the changes and codes to apply the inflation rebate provisions appropriately.

• What happens if multiple manufacturers’ products use the same HCPCS code?
  
  CMS notes that because the program relates to single-source drugs for the most part, only one manufacturer will be connected to any one HCPCS code. But in some cases there are multiple manufacturers (for example, one drug is produced by one manufacturer, and another manufacturer is a repackager or relabeler or markets an authorized generic). In these cases, the national drug codes, or NDCs, for all such manufacturers would be assigned to the same HCPCS code, and each would be responsible for reporting ASP data to CMS. CMS will apportion financial responsibility for the rebate amount among the manufacturers by dividing (a) the sum of the individual manufacturer’s billing units during the quarter by (b) the sum of all manufacturers’ billing units sold during the quarter. CMS specifically is soliciting comments on this process.^[6]

• How will CMS bill manufacturers for the inflation rebates owed?
  
  While the statute requires CMS to issue only one invoice to the customer that identifies the amount of an inflation rebate owed to Medicare, for each calendar quarter, CMS intends to issue four such invoices. The invoicing calendar is as follows:
  • No more than 5 months after the quarter ends: CMS provides a Preliminary Rebate Report that identifies (1) the total number of units of the billing codes for each drug in the quarter; (2) the amount by which the Payment Amount increase exceeds the Inflation-Adjusted Payment Amount for a calendar quarter; and (3) the rebate amount. The Preliminary Rebate Report is not mandated under the statute.

    Manufacturers have 10 days to review the Preliminary Rebate Report and suggest calculation errors to CMS. CMS has “discretion to review such suggestions.”

  • No more than six months after the quarter ends: CMS sends the Rebate Report (i.e., the official invoice); rebates must be paid no later than 30 days after receiving the Rebate Report. CMS can delay providing these reports for CY 2023 and CY 2024 until September 30, 2025. CMS defines the date of receipt as “the calendar day after the day on which the Rebate Report was issued.” CMS plans to issue more guidance on the form and manner of the report.

    When CMS calculates the rebate amount, it will confirm the Part B rebatable drugs for the calendar quarter using the “most recent information available” (pricing data submitted to CMS from the manufacturer; FDA.gov information; information contained in pricing compendia).

  • Payment is due no later than 30 days after receipt of the Rebate Report. Receipt is deemed one calendar day after the Rebate Report is sent.
  • One year after the Preliminary Rebate Report: CMS will conduct a true-up recalculation to allow for updated payment data submitted by the manufacturer, revisions to CMS payment limits, revisions to CPI-U, and updates to claims data.

    Manufacturers have 10 days to review the Preliminary True-Up Report and submit suggestions of calculation errors.

  • One year after the Rebate Report – CMS sends the Final True-Up Report no later than one year after the Rebate Report is sent.
  • Additional payments are due no later than 30 days after receipt of the Final True-Up Report. CMS notes that if the Final True-Up Report results in an amount owed to the manufacturer, CMS will reconcile payments. CMS expects to issue additional information about reconciling potential overpayments in future guidance.

Manufacturers can expect to receive four quarterly Preliminary Rebate Reports; four quarterly Rebate Reports; four quarterly Preliminary True-Up Reports; and four Final True-Up Reports for each drug subjected to the inflation rebate.

CMS makes clear that there is no administrative or judicial review and that CMS will not provide an administrative dispute process. According to the proposed guidance, we can anticipate future guidance on (a) how manufacturers can submit suggestions of calculation errors and (b) reconciling potential overpayments. CMS also reserves for itself the ability to submit demands for additional payment from manufacturers at any time, not just during the procedures described in this notice. This appears to offer the agency a substantial amount of discretion in demanding payment from manufacturers for rebates owed.

What kind of enforcement landscape can manufacturers anticipate?

• Drug manufacturers that do not comply with the requirements to pay Part B inflation rebates within 30 days are subject to civil monetary penalties of at least 125% of the rebate amount for a drug in the applicable calendar quarter. CMS will establish a process for establishing CMPs in regulations. In other words, CMS will likely issue notice-and-comment rulemaking for applying the inflation-based rebate CMPs.

Are there areas that CMS indicates are not open for public comment?

• CMS makes clear that several topics in its proposed guidance are off-limits for public comment. These include CMS’s process for determining which drugs are considered Part B rebatable; CMS’s computation of beneficiary coinsurance requirements; and how CMS identifies the relevant payment amounts, determines benchmark quarters for calculating inflation adjustments, and sets the inflation-adjusted payment amounts.

* * *

Comments are due to CMS by March 11, 2023. Please contact Matt Wetzel (mwetzel@goodwinlaw.com) or Heath Ingram (hingram@goodwinlaw.com) if you would like further information or would like to consider submitting comments to CMS.

 

 

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^[1] See Social Security Act § 1847A (42 U.S.C. § 1395w-3a); Centers for Medicare & Medicaid Services, Medicare Part B Drug Inflation Rebates Paid by Manufacturers: Initial Memorandum, available at https://www.cms.gov/files/document/medicare-part-b-inflation-rebate-program-initial-guidance.pdf (Feb. 9, 2023); Centers for Medicare & Medicaid Services, Medicare Part D Drug Inflation Rebates Paid by Manufacturers: Initial Memorandum, available at https://www.cms.gov/files/document/medicare-part-d-inflation-rebate-program-initial-guidance.pdf (Feb. 9, 2023).
^[2] CMS clarifies that it is “voluntarily seeking comment on certain topics,” which should be submitted to IRARebateandNegotiation@cms.hss.gov with the subject line “Medicare Part B Inflation Rebate Comments” or “Medicare Part D Inflation Rebate Comments,” as applicable.
^[3] The US Department of Health & Human Services Office of Inspector General (OIG) released a Technical Assistance Brief in February 2023 that identifies recommendations for how CMS can surmount several challenges posed by the Part B inflation rebate. See US Department of Health & Human Services, Office of Inspector General, Technical Assistance Brief: Implementation of Inflation-Indexed Rebates for Part B Drugs, OEI-BL-23-00170, Feb. 2023 (OIG Technical Assistance Brief). OIG bases this report on its past auditing work with respect to Medicare prescription drug programs.

OIG predicts that CMS will face a challenge in identifying which units are subject to the 340B program, noting that the new 340B modifiers that CMS recently announced do not go into effect until January 2024; given that the use of these modifiers is new, 340B covered entities may need to time to incorporate them. OIG’s advice is to simply monitor the claims that use 340B modifiers without much additional direction. See OIG Technical Assistance Brief, at 6-7.
^[4] OIG identifies as the second of three issues that CMS will face challenges in identifying drug units subject to Medicaid drug rebate. Namely, OIG states that there are no fields on the Part B claims that indicate whether Medicaid will pay a portion of the claim and that as a result, the units would be subject to Medicaid rebates. OIG poses three suggestions:

• Use enrollment data to identify Part B claims for dual-eligible enrollees.
• Add a field to Part B claims to indicate whether Medicaid will pay a portion of the claim (i.e., put the obligation on the provider to document Medicaid involvement).
• Develop an automated mechanism to identify Part B claims for which Medicaid will pay a portion.
See OIG Technical Assistance Brief, at 4-5.

^[5] For single-source drugs and biologics, 106% of ASP or WAC or 106% Maximum Fair Price. For biosimilars, 100% of ASP plus 6% of reference biologic’s ASP.

^[6]In its Technical Assistance Brief, OIG highlights this issue as one that posed a challenge in previous OIG Medicare Part B audits and evaluations. OIG notes that CMS will find it difficult to determine which manufacturers owe rebates if there is more than one manufacturer per HCPCS code. OIG recommends requiring providers to include on claims the NDC codes identifying the specific drug administered and the manufacturer of the drug. Alternatively, OIG recommends that for HCPCS codes associated with single-source drugs from multiple manufacturers, CMS should develop a method to apportion the number of units and amount of rebates to each manufacturer. See OIG Technical Assistance Brief, at pages 2-3.