Drug Pricing Executive Order Aims to End Inflation Reduction Act “Pill Penalty,” Resurrect Policies From First Trump Administration

On April 15, President Trump signed an executive order directing the U.S. Department of Health and Human Services (HHS) to take several actions aimed at reducing the costs of prescription drugs. Notably, the order calls for a legislative fix to the so-called “pill penalty” in the Inflation Reduction Act (IRA) as well as additional guidance and greater transparency within the Medicare Drug Price Negotiation Program. Certain provisions of the order may require formal agency rulemaking or legislative action from Congress to have any effect.

The executive order directs HHS to take the following actions.

Actions Related to the IRA

• Ending the IRA “Pill Penalty.” The executive order requires the Secretary of HHS to work with Congress to modify the Medicare Drug Price Negotiation Program to align the treatment of small molecule prescription drugs with that of biological products. Under the IRA, small molecule drugs are eligible for price negotiation nine years following Food and Drug Administration (FDA) approval, while biological products become eligible after 13 years. The executive order does not identify specific actions the Secretary and Congress must take to correct the pill penalty. The executive order notes that the current discrepancy in the program “threatens to distort innovation by pushing investment towards expensive biological products, which are often indicated to treat rarer diseases, and away from small molecule prescription drugs, which are generally cheaper and treat larger patient populations.” Among the various directives included in the executive order, this is the only one directing the Secretary of HHS to work with Congress.
  
• Proposing Additional Guidance for the Medicare Drug Price Negotiation Program. The executive order directs the Secretary of HHS to propose and seek comment on guidance for the Medicare Drug Price Negotiation Program for initial price applicability year 2028 and manufacturer effectuation of the maximum fair price (MFP) for 2026, 2027, and 2028. The order states that the guidance shall “improve the transparency of the Medicare Drug Price Negotiation Program, prioritize the selection of prescription drugs with high costs to the Medicare program, and minimize any negative impacts of the maximum fair price on pharmaceutical innovation within the United States.” The order requires that such guidance be issued by June 14, 2025.

Actions Related to Medicare

• Accounting for Acquisition Costs of Drugs in Medicare. The executive order directs the Secretary of HHS to publish in the Federal Register a plan to conduct a survey under Section 1833(t)(14)(D)(ii) of the Social Security Act to determine the hospital acquisition cost for covered outpatient drugs at hospital outpatient departments. Following the conclusion of this survey, the Secretary must consider and propose any appropriate adjustments that would align Medicare payment with the cost of acquisition, consistent with the budget neutrality requirement in Section 1833(t)(9)(B) of the Social Security Act. The order requires that the plan be published by October 12, 2025.

  This directive appears to be an effort by the Trump Administration to resurrect its prior efforts to reduce Medicare reimbursement for 340B drugs. Specifically, in the CY 2018 OPPS/ASC Final Rule, the Centers for Medicare & Medicaid Services (CMS) adjusted the payment rate for 340B drugs in the hospital outpatient setting to average sales price minus 22.5% “to reflect more accurately the actual costs incurred by 340B hospitals when acquiring 340B drugs.”¹ However, in 2023, CMS reversed this payment adjustment in light of the United States Supreme Court’s decision in American Hospital Association et al. v. Becerra, in which the Court found that the updated payment rate was unlawful because CMS did not rely on survey data to justify the reduced payment rates to 340B hospitals.² The Court noted that CMS could vary payment rates by hospital groups if the agency first surveyed hospital acquisition costs. CMS attempted a survey of 340B hospitals for the first time in 2020 and, as part of the 2021 OPPS Proposed Rule, proposed to further reduce payment rates to 340B hospitals based on the survey results.³ However, CMS did not finalize this proposal.

• Stabilizing Part D Premiums. The executive order directs the Assistant to the President for Domestic Policy, in coordination with the Secretary of HHS, the Director of the Office of Management and Budget (OMB), and the Assistant to the President for Economic Policy to provide recommendations to the President on how best to stabilize and reduce Medicare Part D premiums. Such recommendations are required by October 12, 2025.

  Changes to the Part D benefit under the IRA, including the $2,000 cap on out-of-pocket spending and the increase in Part D plan liability for drug costs, have led to concerns about possible premium increases. However, beginning in 2024, the IRA limits the growth in the base beneficiary premium (used to calculate the plan-specific basic premium) to a 6% annual increase. In July 2024, CMS announced premium stabilization measures for stand-alone Part D plans as part of a three-year voluntary demonstration program to begin in 2025. It is unclear whether the current Administration will continue the implementation of this voluntary demonstration program.
  

• Developing a New Payment Model for Medicare. The executive order directs the Secretary of HHS to, within one year, develop and implement a rulemaking plan and select for testing a payment model to improve the ability of the Medicare program to obtain better value for so-called "high-cost" prescription drugs and biological products covered by Medicare, including those not subject to the Medicare Drug Price Negotiation Program.
  
• Evaluating Current Medicare Regulations. The executive order directs the Secretary of HHS to evaluate and, if appropriate, propose regulations to ensure that payment within the Medicare program “is not encouraging a shift in drug administration volume away from less costly physician office settings to more expensive hospital outpatient departments.” This directive appears to be an effort to address observations that Medicare Part B spending is shifting from physician offices to hospital outpatient departments. For example, a 2023 Issue Brief published by the HHS Assistant Secretary for Planning and Evaluation found that the share of Part B spending in the hospital outpatient setting nearly doubled between 2008 to 2021 (from 23% to 41%), while the share of spending in the physician office setting decreased by 10% (from 63% to 53%). The order requires that this review be conducted by October 12, 2025.

Actions Involving FDA

• Increasing Prescription Drug Importation. The executive order directs the FDA Commissioner to, by July 14, 2025, take steps to “streamline and improve” the Importation Program under Section 804 of the Federal Food, Drug, and Cosmetic Act. The order states that the Commissioner’s actions should “make it easier for States to obtain approval without sacrificing safety or quality.”
  
  On October 1, 2020, the first Trump Administration issued a final rule allowing the commercial importation of certain prescription drugs from Canada through FDA-authorized, time-limited programs. To date, however, these programs have struggled to meet the statutory requirements of (1) posing no additional risk to the public’s health and safety; and (2) resulting in a significant reduction in the cost of covered products to the American consumer.
• Accelerating Approval of Generics. The executive order directs the FDA Commissioner to issue a report by October 12, 2025, providing administrative and legislative recommendations to:  
  
  (a) accelerate approval of generics, biosimilars, combination products, and second-in-class brand name medications; and
  
  (b) improve the process through which prescription drugs can be reclassified as over-the-counter medications, including recommendations to optimally identify prescription drugs that can be safely provided to patients over the counter.

Other Actions Directed Under the Executive Order

• Reevaluating the Role of “Middlemen.” The executive order directs the Assistant to the President for Domestic Policy, in coordination with the Secretary, the OMB Director, and the Assistant to the President for Economic Policy, to provide recommendations to the President on “how best to promote a more competitive, efficient, transparent, and resilient pharmaceutical value chain that delivers lower drug prices for Americans.” Such recommendations are required by July 14, 2025.
  
• Increasing Transparency of Pharmaceutical Benefit Manager (PBM) Fees. The executive order directs the Secretary of Labor to propose regulations pursuant to Section 408(b)(2)(B) of the Employee Retirement Income Security Act of 1974 to improve employer health plan fiduciary transparency into the direct and indirect compensation received by PBMs. Such regulations are required to be proposed by October 12, 2025.
  
• Enhancing Oversight of Medicaid Drug Payments. The executive order directs the OMB Director, the Assistant to the President for Domestic Policy, and the Assistant to the President for Economic Policy, in coordination with the Secretary of HHS, to provide recommendations to the President on how best to (1) ensure that manufacturers pay accurate Medicaid drug rebates consistent with Section 1927 of the Social Security Act, (2) promote innovation in Medicaid drug payment methodologies, (3) link payments for drugs to the value obtained, and (4) support states in managing drug spending. Such recommendations are required by October 12, 2025.
  
• Ensuring Access to Insulin. The executive order directs the Secretary of HHS to, by July 14, 2025, take action to ensure that future grants available under Section 330(e) of the Public Health Service Act, as amended, 42 U.S.C. 254b(e), are conditioned upon health centers establishing practices to make insulin and injectable epinephrine available at or below the discounted price paid by the health center grantee or sub-grantee under the 340B Drug Pricing Program to individuals with low incomes, as determined by the Secretary, who (1) have a high cost-sharing requirement for either insulin or injectable epinephrine, (2) have a high unmet deductible, or (3) are uninsured. The first Trump Administration issued a Notice of Proposed Rulemaking on September 28, 2020 that included this proposal.
  
• Reducing Purported “Anti-Competitive” Behavior of Pharmaceutical Manufacturers. The executive order directs the Secretary of HHS to conduct joint public listening sessions with personnel from the Department of Justice, the Department of Commerce, and the Federal Trade Commission and issue a report with recommendations to reduce purported “anti-competitive” behavior from pharmaceutical manufacturers. The listening sessions are required be conducted by October 12, 2025.

Sidley will continue to closely monitor any legislative or agency actions related to this executive order.