Inflation Reduction Act Implementation: Serious Hurdles to Accurately Calculating Medicare Part B Inflation Rebates

The U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) has issued a Technical Assistance Brief (the Brief) identifying anticipated challenges the Centers for Medicare & Medicaid Services (CMS) will face in implementing the inflation-indexed rebates for Medicare Part B drugs under the Inflation Reduction Act (IRA). The Brief builds on findings from prior evaluations by HHS-OIG of potential Part B drug rebates. According to OIG, unless CMS takes action to remedy several significant administrative hurdles, the agency will face the following key challenges in implementing the rebates: (1) identifying products subject to Part B rebates, particularly products associated with Part B payment codes that represent single-source drugs from multiple manufacturers; (2) excluding claims from Part B rebate calculations that are subject to rebates under the Medicaid Drug Rebate Program; and (3) excluding claims from Part B rebate calculations that are subject discounts under the 340B Drug Pricing Program. If CMS fails to address these obstacles, the Medicare Part B inflation rebate framework may be subject to legal challenge.

Background

As we previously reported here, beginning in 2023, the IRA requires pharmaceutical manufacturers to pay a rebate for Medicare Part B and Part D products if the applicable average sales price or average manufacturer 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 new Part B drugs, rebates will be delayed until six quarters after the drug was first marketed. 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 inflation rebates. Manufacturers that do not comply with the new inflation rebate requirement under the IRA will be subject to civil monetary penalties equal to 125% of the rebate amount.

HHS-OIG Technical Assistance Brief

Issued on February 7, 2023, the Brief states that unless CMS takes action to remedy several administrative hurdles, the agency will face the following three challenges in implementing and collecting rebates:

1) Identifying products subject to Part B rebates, particularly products associated with payment codes that represent single-source drugs from multiple manufacturers.

The IRA requires that only single-source drugs (i.e., brand name with no available generic versions) are subject to Part B rebates. Rebates are calculated on the basis of increases in Part B payments, which are set at the HCPCS code level. However, in a small number of cases, a single HCPCS code may represent several single-source drugs from different manufacturers. Under these circumstances, price increases for just one drug could disproportionately cause the code’s payment amount to rise faster than inflation and therefore require some manufacturers to pay disproportionate rebates for the increase. OIG concluded that, for these codes, CMS would find it difficult to determine which manufacturer(s) owe rebates as well as the number of units and amount of rebates associated with each drug.

To address this challenge, OIG proposes that CMS require providers to include on their claims submitted to CMS the National Drug Codes (NDCs) identifying the specific drug administered and the manufacturer of such drug. Alternatively, for HCPCS codes associated with single-source drugs from multiple manufacturers, CMS could develop a method to apportion the number of units and amount of rebates to each manufacturer. This would require, however, significant changes in claims submission and operation, which may not be feasible before the required implementation date.

2) Excluding claims from Part B rebate calculations that are subject to rebates under the Medicaid Drug Rebate Program.

The IRA requires CMS to exclude from Part B rebate calculations units that are subject to rebates under the Medicaid Drug Rebate Program. Units on a Part B claim would, however, still be subject to Medicaid rebates if Medicaid pays only a portion of a claim, which could be the case if the claim is for a dual-eligible beneficiary. OIG noted that there are, currently, no fields on a Part B claim form that would allow CMS to determine whether the units on the claim are subject to Medicaid rebates.

To address this challenge, OIG proposes three potential solutions:

• First, CMS could use the Medicare Modernization Act (MMA) File to identify whether a Part B claim is for a dual-eligible enrollee. However, systematically excluding all Part B drug claims for dual-eligible enrollees, even if Medicaid did not pay a portion of the claim, would, OIG cautioned, result in Medicare not receiving all rebates it is owed.

• Second, CMS could add a field to Part B claims forms to indicate whether Medicaid will pay a portion of the claim as a proxy to identify dual-eligible beneficiaries. However, using this method would likewise result in Medicare not receiving all rebates it is owed. This possible fix also would depend on provider accuracy in completing that new field, which is, at least, an untested assumption.

• Third, CMS could develop an automated mechanism to identify Part B claims for which Medicaid will pay a portion. This approach would likely entail significant systems integration efforts. To our knowledge, no such system exists at present. Successful development would also require substantial preimplementation deadline testing. Notably, OIG’s proposed solutions do not explicitly address whether or how manufacturers required to pay Part B rebates can verify the accuracy of the relevant process.

3) Excluding claims from Part B rebate calculations that were already subject to discounts under the 340B Drug Pricing Program.

The IRA requires CMS to exclude from Part B rebate calculations units that are subject to discounts for drugs purchased by covered entities at discounted prices under the 340B Drug Pricing Program. CMS recently announced that effective January 2024, modifiers indicating that a drug was purchased at 340B discount prices will be required on all Part B claims for these drugs. The modifier requirement has been in place since 2018 for hospital entities but is new for non-hospital covered entities as well as affiliated physicians and suppliers. Critics have expressed concerns that covered entities, providers, and suppliers may fail to adjust their billing systems to the new requirement or that rebate administration systems will not accurately process the data submitted with the claims.

To address this challenge, OIG proposes that CMS consider monitoring the use of 340B modifiers, especially among covered entities that are newly implementing the modifiers. Under OIG’s proposal, continued duplicate discounts between the programs can be expected.

Stakeholders should carefully monitor CMS’ implementation efforts with respect to the calculation of Medicare Part B inflation rebates, including opportunities to comment. If CMS fails to address the obstacles it faces in accurately calculating Medicare Part B inflation rebates, the Medicare Part B inflation rebate framework may be subject to legal challenge.

This Brief highlights the complexity in implementing the prescription drug provisions of the IRA, which will have a significant effect on many in the pharmaceutical industry. Sidley is closely monitoring the prescription drug provisions of the IRA. Contact your Sidley attorney or the authors below for more information on the implementation of the legislation.