On March 15, 2023, the Centers for Medicare & Medicaid Services (CMS) issued an initial guidance memorandum[1] on the Medicare Drug Price Negotiation Program (Negotiation Program) created by the Inflation Reduction Act of 2022 (IRA). Public comments are due to CMS by April 14, 2023.
CMS did not issue the guidance through notice and comment rulemaking. Instead, CMS states that it is “voluntarily soliciting comment on certain topics” in the guidance and asserts that certain aspects of the guidance are “not subject to the notice-and-comment requirement of the Administrative Procedure Act or Medicare statute.”[2] Some significant areas of the guidance accordingly are being issued as final and immediately effective. For certain other areas of the guidance, CMS states that it intends to issue revised guidance by summer 2023 after considering the public comments received in response to this initial guidance.
CMS’s March 15 memorandum applies primarily to the implementation of the first price year of the Negotiation Program, 2026 (the 2026 Initial Price Year). CMS also states that because the IRA does not require Part B products to be subject to maximum fair prices (MFPs) until initial price applicability year 2028, this March 15 guidance concerns only Part D drugs and biologics. While the memorandum does not address future years of drug price negotiations or Medicare Part B drugs, agency decisions with respect to Part D drugs in 2026 may shed light on CMS’s intended future approach for Part D and Part B products.
As we have previously reported, the IRA established a Medicare Inflation Rebate Program that requires drug manufacturers to pay inflation rebates to the federal government if the prices of their rebate-eligible Medicare Part B or Part D drugs increase faster than the rate of inflation. Click here for our prior Alerts on the Part B and Part D inflation rebates.
This Alert provides an overview of the process that CMS lays out in its guidance to identify and select the Medicare Part D drugs and biologics for which it will negotiate an MFP for the 2026 Initial Price Year, the data and evidence that manufacturers will be required to submit that will inform CMS’s initial price proposals, and the structure of the negotiation process, as well as implementation and enforcement of the MFP along with other important considerations and requests for public comment.
I. Proposed Process to Identify and Negotiate MFPs for the Selected Drugs
Below is an overview of the currently contemplated process through which CMS will identify and negotiate an MFP for the Part D Selected Drugs in 2026.
a. Identification of Negotiation-Eligible Drugs
CMS will identify negotiation-eligible drugs from a larger pool of “qualifying single source drugs,” subject to certain exceptions. The universe of drugs eligible for selection for negotiation generally includes:[3]
- Drug Products: Food and Drug Administration (FDA)–approved drugs for which at least seven years have elapsed from approval and for which there is no generic on the market.
- Biologics: FDA-licensed biologics for which at least 11 years have elapsed since licensure and for which there is no biosimilar on the market.
- Fixed Combination Drugs: For a fixed combination drug with two or more active moieties/ingredients, CMS considers the distinct combination of active moieties/ingredients as one active moiety/ingredient for purposes of identifying a qualifying single source drug, such that all formulations of a distinct combination offered by the same new drug application (NDA)/biologics license application (BLA) holder will be considered to be the same distinct product. A product containing only one (but not both) of the active moieties/ingredients that is offered by the same NDA/BLA holder will not be considered to be the same single source drug as the fixed combination drug.
The universe of drugs eligible for selection for negotiation excludes:
- Orphan Drugs: The orphan drug exclusion applies to drugs that are designated as orphan drugs for only one rare disease or condition and for which the only approved indications are for that disease or condition.[4]
- Low-spend Medicare Drugs: The low-spend Medicare drug exclusion applies to a drug for which total Parts B and D expenditures over a specified period are less than $200 million, increased over time by an inflation factor. CMS states that it will identify low-spend Medicare drugs using Part D prescription drug event (PDE) data and Part B claims data.[5]
- Plasma-derived Products: CMS will exclude any licensed biological product that is derived from human whole blood or plasma, as indicated on the FDA-approved product labeling.[6]
- Small Biotech Drugs: For the 2026 Initial Price Year through 2028, under the statute, CMS will exempt “small biotech drugs,” which the CMS memorandum defines as qualifying single source drugs with total 2021 Part B or Part D expenditures that constitute (i) no more than 1% of the total 2021 expenditures for all drugs of all manufacturers and (ii) at least 80% of total 2021 expenditures for all drugs of a given manufacturer, subject to certain exceptions. A manufacturer must submit a Small Biotech Exception request as specified in future guidance. CMS anticipates that the deadline for submission will be June 2023.[7]
b. Identification of Selected Drugs
For the 2026 Initial Price Year, CMS will first identify the 50 negotiation-eligible drugs with the highest Part D total expenditures over a specified 12-month period (June 1, 2022, through May 31, 2023) using PDE data. CMS will then rank these drugs, highest to lowest. By September 1, 2023, CMS will publish the 10 highest-ranked drugs on this list that will be selected for negotiation.[8]
c. Required Manufacturer Data Submission
The holder of the NDA or BLA (the Primary Manufacturer) will be required to enter into a Medicare Drug Price Negotiation Agreement within 30 days of CMS’s publication of its product’s selection—i.e., by October 1, 2023.[9] By October 2, 2023, the Primary Manufacturer will be required to submit to CMS specified data on behalf of itself and, in some cases, Secondary Manufacturers.[10] A “Secondary Manufacturer” either (i) is listed as a manufacturer in the NDA or BLA for the selected drug or (ii) markets the selected drug pursuant to an agreement with the Primary Manufacturer — for example, an authorized generic manufacturer or a repackager or relabeler.[11] The Primary Manufacturer must submit on behalf of itself and any Secondary Manufacturer(s) (i) non–Federal Average Manufacturer Price (non-FAMP) data from 2021 or the first full calendar year after a drug’s market date, (ii) current unit costs of production and distribution, and (iii) market data and revenue and sales volume data.[12] Additionally, the Primary Manufacturer must submit (i) its research and development costs, (ii) information on prior federal financial support, and (iii) data on patents, exclusivities, and applications and approvals under the Federal Food, Drug, and Cosmetic Act or Public Health Service Act.[13]
We would highlight for manufacturers that, if selected for the Negotiation Program, there will be only a limited window of time available to collect and submit to CMS key data about the relevant drug — including data that must be requested from and provided by secondary manufacturers.
d. Determination of Ceiling Price and Initial Offer
i. Calculation of a Single Price
CMS intends to calculate a single MFP, calculated across all dosage forms and strengths of the selected drug and based on a 30-day equivalent supply, and then translate that price to the unit level.
ii. MFP Ceiling
The MFP must be capped at a specified percentage of non-FAMP or an amount reflecting an average market price. The MFP cannot exceed the lower of:
- The sum of “Plan Specific Enrollment Weighted Amounts” — i.e., a weighted average of the Part D negotiated price (net of point-of-sale and direct and indirect remuneration (DIR) price concession amounts) adjusted for plan enrollment size,[14] or
- A specified percentage of average non-FAMP — i.e., a specified percentage of the average non-FAMP across the four quarters of calendar year 2021 (or across the first full calendar year after market entry, as applicable), subject to an inflationary adjustment. The specified percentage will vary based on the duration of the selected drug’s monopoly. For the 2026 Initial Price Year, the specified percentage for “short monopoly drugs” (defined as drugs approved after September 1, 2007) is 75%, and for “long monopoly drugs” (defined as drugs approved on or before September 1, 2007) is 40%.[15]
iii. Developing the Initial Offer
CMS intends to use the Part D net price(s) and/or the Part B average sale price(s) of therapeutic alternative(s) as the “starting point” for developing the initial offer, unless such price is higher than the MFP ceiling.[16] If there are no therapeutic alternatives or if such price is higher than the MFP ceiling, CMS intends to instead use the Federal Supply Schedule or Big Four Agency price, unless such price is higher than the MFP ceiling.[17] If such price is higher than the MFP ceiling, CMS intends to instead use the MFP ceiling. This starting point would then be adjusted based on the clinical benefit of the selected drug compared to that of the therapeutic alternative(s), or, if there are no therapeutic alternatives, based on the extent to which the selected drug meets an unmet medical need.[18] CMS would adjust the resulting “preliminary price” based on manufacturer-specific information submitted by the manufacturer.
Put another way, CMS will identify therapeutic alternatives based on feedback from the public — providers, patient groups, etc. — regardless of whether FDA ranks the “alternative” as therapeutically equivalent. Therapeutic alternatives will be selected by FDA based on review of (i) data submitted by the Primary Manufacturer and the public, (ii) FDA-approved indications, (iii) indications in CMS-approved Part D compendia, (iv) peer-reviewed studies, (v) “widely accepted” clinical guidelines, and, when a therapeutic alternative has not yet been incorporated into “widely accepted” clinical guidelines, (vi) literature searches.[19] Any member of the public can submit evidence regarding therapeutic alternatives. CMS also will prioritize research and real-world evidence specifically relating to Medicare populations.[20] Accordingly, it is critical for manufacturers to ensure that, if selected for the program, their submissions to CMS provide a strong narrative that identifies the appropriate therapeutic alternatives — if any.
CMS also makes clear that it will adjust its initial offer upward or downward based on a few factors, including (a) whether there are existing patents or exclusivities, (b) whether the manufacturer has recouped its research and development costs, and (c) whether the manufacturer received federal financial support as part of the research process.
e. Summary of Negotiation Timeline
As discussed above, by September 1, 2023, CMS will publish the list of drugs selected for the 2026 Initial Price Year on the CMS IRA webpage. Manufacturers must enter into an agreement to negotiate by October 1, 2023. CMS has not yet published the terms of that agreement and states that it will make reasonable efforts to make the manufacturer agreement available to the public before publishing the list of selected drugs. The manufacturer must submit specified information by October 2, 2023.
CMS must make a written initial offer by February 1, 2024. The initial offer must include a concise justification based on the factors that CMS is required to consider. The manufacturer must accept the offer or make a written counteroffer within 30 days. If CMS rejects a counteroffer, it intends to hold between one to three meetings with the manufacturer within 30 days of receiving the counteroffer. For the 2026 Initial Price Year, these meetings would conclude by June 30, 2024. CMS makes clear that it is not obligated under the statute to hold these in-person meetings but will do so regardless. If a meeting is held, CMS intends to send the manufacturer a “Notification of Final Maximum Fair Price” before negotiation concludes. For the 2026 Initial Price Year, this notice would be sent by July 15, 2024, and the manufacturer would then provide a response, either accepting or rejecting the final offer, by July 31, 2024. The negotiation must conclude by August 1, 2024.[21]
f. Post-Negotiation Publication and Implementation of MFP
For the 2026 Initial Price Year, by September 1, 2024, CMS will publish the agreed-upon MFP on its website. CMS will also publish an explanation for the MFP, which will focus at a high level on the factors that had the greatest influence on determining the MFP, without disclosing proprietary information. In the event that CMS and a manufacturer are unable to agree upon an MFP, CMS will so indicate on its website.[22]
The manufacturer will be required to provide access to the MFP with respect to Medicare Part D beneficiaries. This means that the Primary Manufacturer must also ensure that any Secondary Manufacturers are providing access to the MFP with respect to Medicare Part D beneficiaries. Under the guidance, CMS proposes to give Primary Manufacturers discretion to provide access to the MFP either as an up-front discount or as an after-the-fact rebate.[23] As proposed, each Primary Manufacturer:
- Must submit to CMS at least 30 days before the start of the initial price applicability year the process by which the manufacturer will ensure that it and its Secondary Manufacturers are providing access to the MFP
- Must ensure that all pharmacies, mail order services, wholesalers and other similar entities are reimbursed for the difference between their acquisition costs and the MFP within 14 days[24]
For the 2026 Initial Price Year, such plans will be due to CMS by December 2, 2025. Additionally, Primary Manufacturers must notify CMS of any changes to the plan at least 30 days before such changes are implemented.[25]
II. Other Key Considerations and Topics
a. Enforcement
CMS intends to create a mechanism by which pharmacies and beneficiaries will be able to report manufacturers’ failure to provide access to the MFP.[26] In addition, manufacturers are subject to significant civil monetary penalties (CMPs) for non-compliance. Failure to honor the MFP, for example, will result in a penalty equal to 10 times the difference between the actual price charged and the MFP. CMS intends to use the net price, not including service fees, to determine the price actually offered. In addition, manufacturers who fail to honor the terms of the Medicare Drug Negotiation Program Agreement (e.g., by failing to timely submit required data) are subject to penalties as high as $1 million per day of violation, and manufacturers who knowingly submit false information are subject to penalties as high as $100 million per violation.[27]
CMS intends to provide notice to manufacturers of any CMP, and manufacturers would have 60 days from the date of receipt of such notice to request a hearing. If a manufacturer does not request a hearing, the CMP would be due 60 days following the date of receipt of the notice.
b. Primary and Secondary Manufacturer Reliance Considerations
Importantly, Primary Manufacturers will need to be able to collect and rely on the accuracy of data provided by Secondary Manufacturers to fulfill the Primary Manufacturer’s reporting obligations under the Negotiation Program.[28] This will necessitate a level of privity between Primary and Secondary Manufacturers to ensure that the appropriate data can be properly shared. Separate contracts among the manufacturers will likely need to be negotiated (or existing contracts amended) regarding compliance oversight of MFP data inputs, confidentiality, general data sharing, and other relevant protections. Manufacturers should also note that, as currently drafted, CMS’s proposed guidance leaves Primary Manufacturers subject to significant CMPs for utilizing inaccurate data provided by a Secondary Manufacturer.
c. Confidentiality
CMS takes a particularly hard line with respect to the confidentiality of information discussed during the negotiation process. Namely, CMS states that it intends to prohibit manufacturers from disclosing to the public any information in offers from CMS, any justification from CMS, or the price contained in any offer. Manufacturers may not use such information for any purpose other than the Drug Price Negotiation Program, and must destroy all information received from CMS during negotiations — and sign a certification to this effect — within 30 days after the drug no longer qualifies as a selected drug.[29] This creates clear record-keeping and document retention concerns, and CMS has specifically noted that it is open to comments on this approach.
d. Generic or Biosimilar Launch
A selected drug generally will cease to be subject to the MFP at the start of the year that begins at least nine months after a generic or biosimilar comes to market.[30] CMS’s guidance also outlines additional details regarding the ability of a biosimilar maker to request a delay in the applicability of the Negotiation Program for reference biologic makers.
e. Part D Plan Requirements
Part D plans will be required to include negotiated drugs on their formularies. The Part D negotiated price must be no greater than the MFP plus a dispensing fee.[31]
III. Specific Topics Solicited for Public Comment
CMS specifically solicits comments on the following topics:
- The terms and conditions contained in manufacturer agreements, including manufacturers’ and CMS’s responsibilities[32]
- The approach for considering (a) the manufacturer-reported data elements and (b) evidence about alternative treatments[33]
- The process for the offer and counteroffer exchange between CMS and manufacturers[34]
- The content of an explanation for the MFP[35]
- The method for applying the MFP across different dosage forms and strengths of a selected drug[36]
- The dispute resolution process for specific issues that are not exempt from administrative and judicial review under Section 1198 of the Social Security Act[37]
- The processes for compliance monitoring and imposition of CMPs for violations[38]
Other than these sections, CMS notes that it is either not accepting or narrowing opportunities for public comment on other aspects of the memorandum. Interested stakeholders should consider developing and submitting comments on these topics and others contained in recent CMS Negotiation Program guidance.
* * *
Comments are due to CMS by April 14, 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.
[2] Id. at 1. Despite CMS’s statement to the contrary, CMS’s positions in this guidance and the lack of related public comment are likely to raise concerns under the Administrative Procedure Act and add to the potential for IRA-related litigation.
[3] Id. at Section 30.1.
[4] Id. at Section 30.1.1.
[5] Id. at Section 30.1.2.
[6] Id. at Section 30.1.3.
[7] Id. at Section 30.2.1.
[8] Id. at Sections 30.3-30.3.1 and 30.4.
[9] Id. at Section 40.1.
[10] Id. at Section 40.2, Appendix C.
[11] Id. at Section 40.
[12] Id. at Section 50.1.1.
[13] Id. at Section 50.1.
[14] Id. at Section 60.2.2.
[15] Id. at Section 60.2.3.
[16] Id. at Section 60.3.
[17] Id. at Section 60.3.2.
[18] CMS also will take into account, for purposes of the initial offer, Primary Manufacturer–submitted information regarding research and development costs, unit costs of products, the existence of federal financial support in drug development, market-based revenue and sales data, and relevant patents or exclusivities.
[19] Id. at Section 60.3.1.
[20] Id. at Section 50.2.
[21] Id. at Section 60.4.3.
[22] Id. at Section 60.6.
[23] Manufacturers and their contracted entities would not be permitted to charge any transaction fee for this process, and the manufacturer would be subject to record-keeping requirements.
[24] Id. at Section 40.4.
[25] Id.
[26] Id. at Section 90.
[27] Id. at Section 100.
[28] Id. at Sections 40 and 50.1.
[29] Id. at Section 40.2.1.
[30] Id. at Section 70.
[31] Id. at Section 40.4.
[32] Id. at Section 40.
[33] Id. at Section 60.
[34] Id.
[35] Id.
[36] Id.
[37] Id.
[38] Id. at Section 90.
Contacts
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Matt Wetzel
PartnerLife Sciences Regulatory & Compliance
