CMS Issues Proposed Guidance on Inflation Rebates Under Medicare Part D

On February 9, 2023, the Centers for Medicare & Medicaid Services (CMS) released initial program guidance on the inflation rebate provisions of the Inflation Reduction Act of 2022 (IRA).^[1] These provisions apply to how Medicare Part B and Part D 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 D

• How will CMS calculate the inflation rebate under Part D?
  
  The IRA requires drug manufacturers to pay annual rebates to CMS for drug prices that increase faster than the pace of inflation. Rebates will be calculated for each “applicable period,” which is a 12-month window that runs from October 1 through September 30 of the following year. Manufacturers will be invoiced annually. 
  
  The Part D inflation rebate calculation — performed on each dosage form and strength of a Part D rebatable drug dispensed during the applicable period — is as follows:

• Which drugs are subject to the Part D rebate (i.e., “rebatable drugs”)?
  
  Drugs and biologics subject to the Part D inflation rebate are as follows:
  
  • Covered Part D drugs (i.e., included in a Part D plan’s formulary)^[4];
  • Drugs approved under a 505(c) new drug application, or NDA;
  • Drugs approved under a 505(j) abbreviated new drug application, or ANDA, if (1) the reference drug, including any authorized generic, is not being marketed (as identified in FDA’s National Drug Code directory); (2) there is no other therapeutically equivalent, approved drug; (3) the manufacturer is not a “first applicant” during the 180-day exclusivity period; and (4) the manufacturer is not a “first approved applicant” for a competitive generic therapy; 
  • Biologics.


• Which drugs are not subject to the Part D rebate?
  
  • Drugs without a Medicaid Drug Rebate Program agreement — for now. As noted above, CMS will use data submitted by manufacturers under the Medicaid Drug Rebate Program (MDRP) (i.e., average manufacturer price for each dosage form and strength of the drug, which is reported monthly under the MDRP, as well as total number of units of the drug). CMS acknowledges that not every drug that may qualify for a Part D rebate is marketed by a manufacturer with an MDRP agreement. These manufacturers do not have an obligation to report pricing and product data that CMS may need to calculate the inflation rebate. 
    
    CMS clarifies that it will look at other measures to collect this information in the future and is soliciting comments on other sources of information that would enable CMS to invoice manufacturers for Part D drug inflation rebates, even if the manufacturer does not have an MDRP agreement. CMS also seeks comments on how to address the scenario when Part D covered drugs are not subject to MDRP reporting, including any other sources of documentation.
  • 340B units. CMS will exclude any drugs for which the manufacturer has provided a discount under the 340B Program; however, CMS will not exclude such units until January 2026. CMS is soliciting comments on how best to distinguish between 340B claims and Part D claims, and whether to require a special identifier on pharmacy claims to distinguish between 340B units and Part D units.  
  • Low-Medicare spend drugs. CMS will exclude drugs and biologics for which the per year average total cost under Part D per individual who uses the drug is less than $100 for the applicable period starting October 1, 2022. This threshold amount is increased for subsequent periods based on an inflation factor.
  
  
• What happens if there is a new formulation of the drug? 
  
  For a new formulation or “line extension” of a drug (for example, an extended-release formulation), CMS intends to use MDRP data to establish two separate inflation-adjusted rebate amounts for the applicable period based on two separate calculations and will use the greater of the two (i.e., the inflation rebate amount and the alternative inflation rebate amount). This would be used to calculate the total rebate amount owed by the manufacturer for each dosage form and strength of the Part D rebatable line extension drug for the applicable period.


• What effect does a drug’s date of approval have on the CMS’s inflation rebate calculations?
  
  When a drug is approved and first sold are important factors in understanding how the inflation rebate is calculated. For drugs approved on or before October 1, 2021, the time period for establishing benchmark pricing and inflation rates is the first three quarters of 2021 (January – September). For drugs approved after October 1, 2021, CMS will establish a benchmark period to track pricing and inflation that covers the full calendar year after the drug is first marketed.


• What happens if there is a supply chain disruption or drug shortage? 
  
  CMS incorporates some relief from the Part D inflation rebate — similar to the Part B inflation rebate — by offering to “reduce or waive” the inflation rebate for drugs experiencing supply shortages and severe supply chain disruptions, which appears to acknowledge the cost of goods sold as an important component of pharmaceutical pricing. CMS will reduce or waive the rebate requirement in three cases:
  
  1. A Part D rebatable drug is on the FDA’s drug shortage list. To be eligible, at least one NDC-11 for the Part D rebatable drug must have its shortage status listed as “current” on the shortage list during an applicable period and must not have its status designated as “discontinued,” “to be discontinued” or “resolved.” 
     
     CMS seeks comment on the amount and duration of the reduction and when a waiver should be considered. For example, should CMS provide a variable reduction in the rebate amount based on the length of time that the drug is on the shortage list? Or should CMS provide a standard reduction in the rebate amount (a flat rate, so to speak) across the board during a shortage period? How should the agency reduce or waive the rebate amount for drugs on the shortage list? Are there specific types of Part D rebatable drugs or specific types of shortages that might cause CMS to reduce or waive the rebate amount differently? What safeguards would discourage misusing the shortage list?
  2. A generic Part D rebatable drug or biosimilar is experiencing a severe supply chain disruption caused by a natural disaster or other unique or unexpected event. CMS will permit a reduction or waiver of the inflation rebate for changes in production or distribution when HHS determines that there is a several supply chain disruption caused by a natural disaster or other unique or unexpected event. Routine interruptions in manufacturing do not count.
     
     CMS is seeking 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 several supply chain disruption, natural disaster, and other unique or unexpected event. CMS wants to understand if there are ways to enact the policy to reduce the likelihood of future several supply chain shortages. CMS also seeks comments on the supporting documentation to be submitted.
  3. A generic Part D rebatable drug — not a biosimilar — if CMS decides that without the reduction or waiver, it will be described as in shortage on the shortage list during a subsequent period.


• How will CMS bill manufacturers for 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 12-month applicable period, CMS intends to issue four such invoices. The invoicing calendar is as follows:  
  
  • No later than six months after the end of the applicable period: CMS will furnish a Preliminary Rebate Report that identifies (1) the total number of units for each drug in the applicable period; (2) how much the AnMP for each dosage form and strength of the Part D rebatable drug exceeded the Inflation-Adjusted Payment Amount; and (3) the rebate amount owed. 
  • Manufacturers have 10 days to review the Preliminary Rebate Report and suggest calculation errors to CMS. 
  • No later than nine months after the end of the applicable period: The Rebate Report contains the same data elements as the Preliminary Report and serves as the official invoice for the rebate amount due, if any, and includes the rebate amount of the NDC of all drugs determined to be Part D rebatable drugs for the period. CMS plans to issue more guidance on how these reports are developed and sent.
  • 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 reconciliation for each applicable period approximately one year after the Rebate Reports are sent and rebate amounts paid. This is performed to capture any potential price and/or unit restatements of AMP data by manufacturers and revisions in reporting by Part D plan sponsors of the units dispensed that occurred after the rebate amounts were calculated and paid.  
  • Manufacturers have 10 days to review the Preliminary True-Up Report and submit suggestions of calculation errors.
  • CMS sends the Final True-Up Report no later than one year after the Rebate Report is sent.
  • If applicable, additional payments are due no later than 30 days after receipt of the True-Up Rebate 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 may provide suggestions of calculation errors, but CMS makes clear that there is no administrative or judicial review and that CMS will not provide an administrative dispute process as part of this process. According to CMS’s 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 expect?
  
  Drug manufacturers that do not comply with the requirements to pay Part D 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 period. CMS notes that it will provide a notice to the manufacturer with information regarding the CMP, including an opportunity to request a hearing. The CMP notice will include the basis for the CMP, the amount due, the deadline to respond, a method to submit payment, and information on the right to request a hearing.  

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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.

^[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] AMP is the average price paid to the manufacturer for the drug in the United States by: (i) wholesalers for drugs distributed to retail community pharmacies; and (ii) retail community pharmacies that purchase drugs directly from the manufacturer. See Social Security Act § 1927(k)(1).
^[4] See 42 C.F.R. § 423.100 (definition of Covered Part D Drug).