Inflation Reduction Act: CMS Finalizes Medicare Prescription Drug Inflation Rebate Program Policy in Regulation

In the recently issued calendar year 2025 Physician Fee Schedule final rule (Final Rule), the Centers for Medicare & Medicaid Services (CMS) finalized a number of policies related to the Medicare Prescription Drug Inflation Rebate Program (the Program). CMS established the Program to implement the Inflation Reduction Act of 2022 (IRA) requirement that drug manufacturers pay rebates for certain products reimbursed under Medicare Part B and Part D if the price of those products increases faster than the rate of inflation, as previously discussed here and here. The Final Rule codifies existing policies that CMS previously issued in its December 14, 2023, revised guidance for the Medicare Part B Drug Inflation Rebate Program and Medicare Part D Drug Inflation Rebate Program and finalizes new and revised policies to implement the Program. To establish Program requirements, CMS relied on rulemaking rather than program guidance, as the IRA permits guidance-based implementation of the Part D Program only through 2024.

The Final Rule is effective on January 1, 2025, and, unless otherwise specified, applies to rebate calculations for applicable periods beginning on or after January 1, 2023, for Part B rebatable drugs and October 1, 2022, for Part D rebatable drugs.

Medicare Part D Drug Inflation Rebate Program

CMS finalized the following key new program policies related to Part D inflation rebates.

• Identification and Removal of 340B Units. In response to strong objections in comments, including objections that the estimation methodology conflicts with the IRA and the data CMS proposed to use has known limitations, CMS declined to finalize its proposed 340B estimation methodology for the applicable period that begins on October 1, 2025. The proposed estimation methodology was intended to fulfill the IRA requirement to remove 340B units from rebate calculations for Part D inflation rebate calculations beginning on January 1, 2026. Instead, CMS notes in the Final Rule that it will explore establishing a Medicare Part D claims data repository in future rulemaking to comply with this statutory requirement. No timeline is given for this future rulemaking, leaving manufacturers with another instance of significant uncertainty with respect to preventing 340B duplicate discounts under the IRA’s various provisions. Healthcare stakeholders should monitor updates as this topic will continue to evolve.
• Missing Average Manufacturer Price (AMP) Benchmark Period Identification. The Final Rule finalizes a new policy that for Part D rebatable drugs missing manufacturer reported AMP data, the payment amount benchmark quarter is the first calendar year, starting from calendar year 2021 or later, when at least one quarter of AMP is reported for such NDC-9s.
• Reconciliation Process for Revised Information, Errors, or Misreporting. The Final Rule establishes a new reconciliation process similar to the process outlined above for Part B rebates. For Part D, CMS will issue a Preliminary Rebate Report to manufacturers no later than eight months after each applicable calendar quarter, and manufacturers can submit a Suggestion of Error to CMS no later than 10 calendar days after receiving the Preliminary Rebate Report. CMS will then issue the Rebate Report no later than nine months (compared with six months for Part B) after the end of each applicable calendar quarter. The Final Rule provides for two regular reconciliations, one at 12 months and one at 36 months, after the issuance of the Rebate Report as well as discretionary reconciliations when CMS identifies an agency error within five years of receipt of the Rebate Report or at any time due to manufacturer misreporting.
• CMPs. Under the Final Rule, CMS establishes a process to impose CMPs on manufacturers that do not pay the rebate amount for Part D rebatable drugs in full by the payment deadline, both codifying existing policy and implementing new policy. The Part D CMP provisions mirror the CMP provisions for Part B drugs outlined above.

Medicare Part B Drug Inflation Rebate Program

The Final Rule finalizes the following key new Program policies with respect to Part B inflation rebates.

• Identification and Removal of 340B Units. CMS finalized its proposal to exclude units of Part B rebatable drugs purchased through the 340B program from the inflation rebate calculations, both codifying existing policy and implementing new policy. To do so, CMS will exclude units in claims with 2023 and 2024 dates of service from suppliers that are 340B covered entities listed by the Health Resources and Services Administration (HRSA) 340B Office of Pharmacy Affairs Information System (OPAIS) as participating in the 340B Program. To identify 340B covered entities, CMS states that it will use national provider identifiers (NPIs) and/or Medicare provider numbers (MPNs) when available, or, if unavailable, other OPAIS fields, such as names and addresses. CMS will also exclude units in all professional claim lines for 2023 dates of service that were billed with the “JG” or “TB” modifiers, which indicate that the drugs were acquired through the 340B program. CMS declined to provide claim-level data to manufacturers for manufacturers to validate that 340B units are not included in inflation rebate calculations and to prevent duplicate discounts. CMS noted that the Rebate Reports and reconciliation policy will allow manufacturers to review rebate calculations and raise mathematical errors, thereby not requiring validation of 340B data. CMS also noted that the agency will only collect the net rebate amount due, if any, upon reconciliation, to prevent any duplicate payments.
• Reconciliation Process for Revised Information, Errors, or Misreporting. The Final Rule finalizes a new policy that establishes processes to reconcile Part B rebate amounts to account for revised information, calculation errors, or misreporting by manufacturers. Under the Part B Inflation Rebate Program, CMS will issue a Preliminary Rebate Report to manufacturers not later than five months after each applicable calendar quarter, and manufacturers can submit a Suggestion of Error to CMS no later than 10 calendar days after receiving the Preliminary Rebate Report, and CMS will consider revising the Rebate Report based on the revised information included in the Suggestion of Error. CMS will then issue a Rebate Report to manufacturers no later than six months after each applicable calendar quarter, which will serve as the invoice for the applicable rebates. The Final Rule provides for one automatic, regular reconciliation, which will occur within 12 months of after issuance of the Rebate Report to ensure the accuracy of the rebate amount and account for updated data and information that should be included in the rebate calculation. Additionally, CMS may conduct a discretionary reconciliation to correct agency errors identified no later than three years from the date of receipt of the reconciled rebate amount for the applicable quarter, or at any time if CMS determines the manufacturer misreported the information used to calculate the rebate amount. CMS states it will also exclude units of refundable single-dose container or single-use package drugs subject to discarded drug refunds from rebate calculations during the reconciliation process.
• Coinsurance Adjustment. Under the IRA, the beneficiary coinsurance for Part B rebatable drugs is adjusted when the payment amount for the drug in a given quarter exceeds the inflation-adjusted payment amount. To determine whether the criteria for coinsurance adjustment are met, the Final Rule codifies existing policy that CMS will compare the published payment amount in quarterly pricing files to the inflation-adjusted payment amount.
• Product Exclusions. The Final Rule codifies existing policy that excludes separately paid radiopharmaceuticals and skin substitutes from the Program, in addition to the statutorily excluded vaccines, meaning that these products also will not be subject to any coinsurance adjustment.
• Benchmark Quarter Identification. The benchmark quarter is the designated period against which CMS measures future price changes to determine inflation rebate obligations. The Final Rule finalized an existing policy that for Part B rebatable drugs approved by the Food and Drug Administration (FDA) on or before December 1, 2020, but with a first marketed date after December 1, 2020, CMS will use the third full calendar quarter after the drug’s first marketed date for the payment amount benchmark quarter. For a Part B rebatable drug billed using a not otherwise classified (NOC) code in the calendar quarter starting July 1, 2021, or the third full calendar quarter after the drug’s first marketed date, whichever is later, the payment benchmark quarter is the third full calendar quarter after the drug is assigned a non-NOC code.
• Civil Money Penalties (CMPs). The Final Rule establishes a process to impose CMPs on manufacturers that do not pay the rebate amount for Part B rebatable drugs in full by the payment deadline, both codifying existing policy and implementing new policy. Under the Final Rule, the CMP is equal to 125% of the rebate amount. If a reconciled rebate amount results in an increase to the rebate amount due, CMS may impose a separate CMP for the failure to pay the increased rebate amount by the payment deadline. The Final Rule establishes procedures for manufacturers to appeal CMP determinations.

Since its inception, the Program has confronted implementation issues that have required correction. In certain cases, CMS has published updates of drugs subject to the inflation rebates that have used incorrect methodologies, resulting in stakeholders flagging errors in rebate calculations for CMS review and correction. Given the errors to date, it is critical that affected manufacturers closely monitor and conduct their own calculations to confirm CMS’s calculations. In addition, manufacturers will need to monitor closely for 340B duplicate discounts given CMS’s failure to identify an acceptable methodology for removal of 340B units for purposes of the Part D inflation rebate calculations and the indirect method finalized by CMS for removal of 340B units from Part B inflation rebate calculations.