Unprecedented Changes to Medicare Programs Leave Many Questions Unanswered for Pharmaceutical Manufacturers

Earlier this month, President Biden signed into law the Inflation Reduction Act of 2022 (Act), which includes sweeping changes to the Medicare program. Beginning in 2023, the Act imposes inflation rebates on drug manufacturers for products reimbursed under Medicare Parts B and D if the price of those products increases faster than inflation. Beginning in 2025, significant changes to the Medicare Part D benefit design will cap beneficiary annual out-of-pocket spending at $2,000, with new discount obligations for pharmaceutical manufacturers. Finally, beginning in 2026, the Act imposes a price cap (referred to as a “maximum fair price”) for a fixed number of drugs reimbursed under the Medicare Parts B and D programs following a process described in the Act as a “negotiation.”

According to the Congressional Budget Office, the Act will reduce drug spending by $288 billion over a 10-year period and has widespread implications for the pharmaceutical industry. Below, we provide an overview of key provisions of the Act of interest to pharmaceutical manufacturers, investors, and life sciences private equity firms.

Inflation Rebates

Beginning in 2023, the Act requires pharmaceutical manufacturers to pay a rebate for Medicare Part B and Medicare Part D products if the price (i.e., average sales price or average manufacturer price-based price, respectively) of those products increases faster than inflation. The base year for measuring price changes would be 2021 except for certain new drugs.

For certain Part B new drugs, rebates will be delayed until six quarters after the drug was first marketed. For certain Part D new drugs, the base year will be the first full calendar year after the drug was marketed, with rebates owed for the following year.

This new rebate obligation is limited to the Medicare program and does not extend to products covered under commercial health insurance as was proposed in earlier versions of the bill. Neither the Medicare Part B nor the Medicare Part D program has previously involved any pharmaceutical drug rebates, though the Medicaid Drug Rebate Program has a requirement. Manufacturers that do not comply with the rebate requirement will be subject to civil monetary penalties equal to 125% of the rebate amount.

Part D Benefit Redesign

Beginning in 2025, Part D beneficiaries’ annual out-of-pocket spending will be capped at $2,000, and the current Medicare Coverage Gap Discount Program will be converted to a benefit-wide manufacturer discount program. Namely, manufacturers will be responsible for 10% of brand, biologics, and biosimilar costs during the initial coverage phase and 20% during the catastrophic phase. The redesign has the potential of having a significant impact on discounts owed by manufacturers for Part D drugs.

Maximum Fair Price

For the first time, the Act directs the Department of Health and Human Services (HHS) to establish price caps for certain pharmaceutical products. Namely, the Act establishes a new program (described as a price negotiation program in the Act) in which the government can impose a “maximum fair price” for “qualifying single source drugs.” Although the program is framed as a negotiation, the Act establishes price caps, generally tied to a percentage of the non-federal average manufacturer price metric.

Qualifying single source drugs are either of the following:

1. a covered Part B or Part D drug that

a. is approved as a new drug under the Federal Food, Drug, and Cosmetic Act (FDCA) and marketed pursuant to such approval;
b. will have been on the market for at least seven years upon selection; and
c. is not the listed drug for any drug that is approved or marketed as a generic under the FDCA

or

2. a biological product that

a. is licensed as a biologic under the Public Health Service Act (PHS),
b. will have been on the market for at least 11 years upon selection, and
c. is not the reference product for any biological product that is licensed and marketed as a biosimilar under the PHS.

The Act further states that authorized generic products, which are prescription drugs produced by brand pharmaceutical companies and marketed under a private label at generic prices, will not count as a separate drug from the innovator product. The term “qualifying single source drug” explicitly excludes certain categories of drugs, such as orphan drugs and certain low-spend Medicare drugs, including those for which the total expenditures under Medicare Parts B and D are less than $200 million for the 12-month period beginning October 1 of each year, beginning October 1, 2022.

The first list of 10 negotiation-eligible drugs selected for participation in the program will be selected by the HHS Secretary by September 1, 2023, and the “maximum fair price” will be applied to these products beginning in 2026. The total number of negotiation-eligible drugs will increase to 15 drugs in 2027 and 2028 and to 20 drugs by 2029.

Pharmaceutical manufacturers of the selected products that fail to comply with the government’s price negotiation process will be subject to a substantial tax.

The provision leaves many questions unanswered, including how the maximum fair price will be realized by stakeholders (e.g., patients, pharmacies, and providers), whether and how applicable sales will be identified at the point of sale, and the interplay with other programs such as the 340B Drug Discount Program and the Medicaid Drug Rebate Program. For example, based on the language of the Act, manufacturers are required to provide the “maximum fair price” to 340B covered entities for drugs dispensed “at the entity” only if the maximum fair price is lower than the 340B ceiling price.

The benefit to patients is also not explicitly addressed in the provision’s text, although presumably patients could see a reduction in copayment amounts for negotiated drugs in at least some settings.

* * *

The Act drastically changes the Medicare program and will have significant effects on the pharmaceutical industry. Stakeholders should closely monitor implementation of the Act, including opportunities for comment and legal challenges.

For more resources on the Inflation Reduction Act, click here.