On July 31, the Centers for Medicare and Medicaid Services (“CMS”) published its mammoth proposed rule entitled “Medicare and Medicaid Programs: Calendar Year 2025 Payment Policies under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; Medicare Prescription Drug Inflation Rebate Program; and Medicare Overpayments” (“CY25 PFS Proposed Rule”).

The CY25 PFS Proposed Rule came on the heels of another CMS rule, published on July 22, covering “Medicare and Medicaid Programs: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems”—and more (“CY25 OPPS Proposed Rule”). Both rules have a comment period that closes on September 9.

In addition to changes to the physician fee schedule and Medicare overpayments, the CY25 PFS Proposed Rule includes changes to Medicare Part B payment policies to ensure that payment systems are updated to reflect changes in medical practice; relative value of services; and changes in the statute; codification of, and proposing policies for, the Medicare Prescription Drug Inflation Rebate Program under the Inflation Reduction Act (IRA) of 2022; updates to drugs and biological products under Medicare Part B including immunosuppressive drugs; and establishing payment for drugs covered as additional preventive services.

We discuss several noteworthy provisions of the CY25 PFS and OPPS Proposed Rules below: 1) inflation penalty drugs, meaning Part B and Part D drugs with prices rising faster than the rate of inflation; 2) the exclusion of 340B drug units from inflationary rebates; 3) refunds for certain discarded drugs; and 4) skin substitutes.

Inflation Penalty Drugs

The Inflation Reduction Act of 2022 (“IRA”) established the Medicare Drug Inflation Rebate Program (“Inflation Rebate Program”), which penalizes drug manufacturers that raise Part B and Part D drug prices faster than the rate of inflation.

Under the Part B Inflation Rebate Program, CMS imposes a penalty on manufacturers when prices of certain Part B drugs and biologicals increase faster than the rate of inflation on a calendar quarterly basis. The IRA exempts certain drugs with charges under $100 per year and vaccines from the Inflation Rebate Program. CMS has issued quarterly lists of such “Part B rebatable drugs,” which are subject to coinsurance protections for Medicare and Medicare Advantage beneficiaries.

The Part D Inflation Rebate Program imposes its penalties when the price of a Part D drug or biological increases faster than the rate of inflation over a 12-month period. In accordance with the IRA, CMS implemented the Inflation Rebate Program through guidance but has started codifying various components. 

In the CY25 OPPS Proposed Rule, CMS further codified components of its Medicare Part B Drug Inflation Rebate Program and Medicare Part D Drug Inflation Rebate Program Revised Guidance to implement the Inflation Rebate Program, and also proposes additional changes, as summarized in part, at a high-level, below:

• In accordance with statutory requirements under the IRA, CMS proposes to use different methodologies to calculate inflation rebates for Part B and Part D but states that CMS “attempted to align policies across the Medicare Part B Drug Inflation Rebate Program and Medicare Part D Drug Inflation Rebate Program to the extent possible.”
• CMS proposes certain updates to its rebate calculation methodology, including, for Part B rebatable drugs, removing 340B units for professional claims with dates of service during 2023 and 2024 submitted by participants in the 340B program and removing “refundable single-dose container or single-use package drugs subject to discarded drug refunds” units from the rebate amount. CMS also includes proposals on its method of including more recently approved drugs in the rebate calculations for Part B and Part D.
• CMS proposes a reconciliation process to address the accuracy of its rebate calculations to determine whether the rebate amount should be adjusted due to updated claims and payment data.
• CMS proposes an invoicing process, which would generally include CMS sending a preliminary rebate report to manufacturers with an opportunity for certain feedback, a rebate report, a preliminary reconciliation rebate report to manufacturers with an opportunity for certain feedback and sending a final reconciliation rebate report to manufacturers. Notably, the process for Part D drugs also includes a second reconciliation.
• CMS also addresses civil monetary penalties for manufacturers’ failure to pay invoices and its severability policy on the proposed regulations across the Medicare Drug Inflation Rebate Program.

Exclusion of Drug Units Discounted under the 340B Program (“340B Drug Units”) from Inflationary Rebates

The IRA requires CMS to exclude 340B Drug Units from its inflationary rebate calculations under the Medicare Part B and Part D programs. The CY25 PFS Proposed Rule proposes methodologies for implementing such exclusion of 340B Drug Units. These methodologies follow the revised Medicare Part B Inflation Rebate Guidance.

Medicare Part B Methodology for Excluding 340B Drug Units

The IRA excludes 340B Drug Units from the drug utilization for which a manufacturer may have Part B inflation rebate liability. The CY25 Proposed Rule codifies prior CMS guidance requiring all covered entities to include claim level modifiers for separately payable Medicare Part B drugs with a date of service beginning no later than January 1, 2024. CMS proposes to exclude professional service billing units with dates of service in 2023 and 2024 from covered entities listed by the Health Resources and Services Administration (HRSA) 340B Office of Pharmacy Affairs Information System as participating in the 340B program. Effective January 1, 2025, all 340B covered entities must report the “TB” modifier.

Medicare Part D Methodology for Excluding 340B Drug Units

Beginning January 1, 2026, the IRA requires CMS to exclude 340B Drug Units from the Part D inflationary rebate calculations. The CY25 PFS Proposed Rule proposes CMS’s methodology for implementing such exclusion. Due to CMS’s lack of access to claim level data on Part D claims dispensed with 340B Drug Units, CMS is proposing an estimation methodology based on a ratio derived from the total number of 340B Drug Units purchased by covered entities divided by the total drug units sold. In the initial Medicare Part D Drug Inflation Rebate Guidance, CMS considered requiring a 340B indicator to be included on the Prescription Drug Event (PDE) record at the time of dispense to identify 340B Drug Units. Yet due to industry feedback, CMS states that it is not pursuing such an identifier requirement at this time. Although this approach theoretically would have been more comprehensive, CMS seems to have been persuaded by comments that such an identifier would pose “operational challenges, administrative burden[s], and potential for increased dispensing fees and reimbursement issues.”

To calculate the estimated 340B Drug Units, CMS states that it would use: (i) data from HRSA’s Prime Vendor Program (“PVP”) to determine 340B Drug Units purchased and (ii) existing manufacturer reporting under the Medicaid Drug Rebate Program to determine total units sold. CMS recognizes flaws in this approach, including the limitations with using PVP data (a subset of covered entity purchases) and that the estimation percentage would not be payor-specific. For this reason, CMS is soliciting comments as to whether further adjustments to the numerator and denominator for the estimation percentage are necessary. CMS considered imposing new reporting requirements on manufacturers to provide the 340B Drug Unit and total drug sales data but, recognizing the burden of new tracking and reporting mechanisms, decided not to propose such requirements at this time.

For a “future year,” CMS is soliciting comments on establishing a Medicare Part D claims data repository where covered entities (and/or possibly 340B third-party administrators) would be required to submit and attest to data elements from 340B-identified Part D claims to that repository. CMS is soliciting comments on requiring covered entities to submit specified fields to the repository within three months of a given quarter and additional time to allow covered entities to resubmit data previously submitted in error or with errors.

340B covered entities and contract pharmacies likely welcome the estimation methodology, since it involves CMS obtaining information from other third parties and does not place any new operational burdens on the covered entity or the pharmacy to submit identifiers Part D claims for 340B claims. However, any such reprieve for covered entities may only be temporary, since CMS appears to be poised to eventually establish rules that would require covered entities to submit 340B-identified Part D claims data into a repository.

Manufacturers, on the other hand, may take issue with the potential of being subject to inflationary rebates based only on “estimated” 340B purchases (particularly if there are risks of under reporting). Manufacturers could potentially challenge the estimation methodology as being inconsistent with statute.

Refunds for Discarded Amounts of Certain Single-Dose Container and Single-Use Package Drugs

Section 90004 of the Infrastructure Investment and Jobs Act (“Infrastructure Act”) requires manufacturers of certain drugs covered under Medicare Part B and sold in single-dose containers to pay refunds to CMS for discarded amounts. The refund amount is the amount of the discarded drug that exceeds an applicable percentage, which must be at least 10 percent, of total charges for the drug in a given calendar quarter. The genesis for this provision was criticism that manufacturers deliberately overfilled these drug containers, which allowed providers to inflate their Part B reimbursement.

The CY25 PFS Proposed Rule makes substantive changes to existing rules regarding refundable drugs. The Infrastructure Act provides for certain exclusions from the refund requirement and CMS is proposing to modify one of these exclusions. The statute excludes from refundable drugs a drug approved or licensed by the FDA on or after November 15, 2021, and for which payment has been made under Part B for fewer than 18 months. In other words, there is a limited time period for this exclusion.

CMS previously provided that the 18-month period begins on the first day of the calendar quarter following the date of first sale as reported to CMS for the first National Drug Code (NDC) assigned to the Healthcare Common Procedure Coding System (HCPCS) code. Because the first date of sale does not always approximate the date of payment of the first Part B claim, CMS is proposing to modify this start date to be the date on which the drug is first paid under Part B, if the date of first sale as reported to CMS does not approximate the first date of Part B payment. In comments, manufacturers will likely want to support this change as it potentially allows for a slightly longer period of exclusion from refundability for new drugs.

CMS is also proposing to modify the definition of a refundable drug. CMS previously provided that refundable drugs would be those described in FDA-approved labeling as being supplied in a “single-dose” container or “single-use” package. However, CMS has since learned that some product labeling—for certain drugs approved prior to October 2018—does not specify the package type and/or does not include discard instructions for leftover product. Accordingly, CMS is proposing to include, as part of the definition of a refundable drug: 1) Injectable drugs with a labeled volume of 2mL or less and that lack the package type terms in their product labeling; and 2) Drugs contained in ampules and for which the labeling does not include a package type or a discard statement. As CMS’s proposed change expands the scope of drugs subject to refundability, manufacturers may want to consider comments to support reducing the labeled volume maximum that triggers refundability and/or may want to consider arguments for why ampules and injected drugs of 2mL or less should not be added to the list of refundable drug products.

Skin Substitutes

CMS proposes generally to maintain the status quo for how skin substitute products are reimbursed under the CY25 PFS Proposed Rule and CY25 OPPS Proposed Rule.

For CY 2025, CMS is not proposing to implement reforms related to the reimbursement of skin substitutes under the CY25 PFS Proposed Rule—whether payment specifically for the use of skin substitutes or other broader payment policies that may generally implicate skin substitute products. In the prior rulemaking cycle, CMS solicited comments regarding different approaches to identify practice expense direct costs for skin substitute products, in an effort to examine ways to treat skin substitute products as incident-to supplies. Similar to CY 2024, CMS continues to exclude skin substitutes from the identification of refundable drugs for calendar quarters in 2025. Additionally, CMS proposes to codify existing policy to include skin substitutes on the list of product categories not considered Part B rebatable drugs. CMS continues to examine skin substitute policy changes that may be part of future rulemakings.

For CY 2025, CMS proposes to continue application of the high-cost/low-cost status methodology to the reimbursement of skin substitutes under the CY25 OPPS Proposed Rule. Generally, CMS assigns skin substitutes to the high-cost group if either the product’s geometric mean unit cost exceeds CMS’s geometric mean unit cost threshold or the product’s per day cost exceeds CMS’s per day cost threshold. This high-cost/low-cost methodology for the reimbursement of skin substitutes has been in effect since 2014.

Next Steps

Interested parties should be sure to comment on both rules before the comment period closes on September 9. As authorized by the IRA, the Biden-Harris Administration has been negotiating directly with drug companies to improve access to Medicare Part B and Part D drugs. Lower prices for the ten drugs covered under Part D were announced on August 15; these prices will go into effect for those with Medicare Part D prescription drug coverage on January 1, 2026. Draft guidance for the second cycle was issued this past spring and those comments were due in early July. By February 1, 2025, CMS will select up to 15 more drugs covered under Part D for negotiation for 2027. Stakeholders should continue to be attentive to other developments that may affect drug pricing and reimbursement as IRA implementation continues.

Epstein Becker Green Staff Attorney Ann W. Parks contributed to the preparation of this post.