The Inflation Reduction Act (“IRA”) was signed into law by President Biden on August 16, 2022. The expansive legislation includes key health care provisions, including drug pricing reforms, inflationary rebates, Medicare Part D benefit redesign, as well as myriad other updates. Overall, the healthcare provisions of the IRA reflect the Administration’s goal of expanding the accessibility of healthcare to individuals by reducing costs to beneficiaries and capping charges by drug manufacturers. Nonetheless, additional clarification in the form of regulations is anticipated, as the text of the IRA defers multiple matters to the Department of Health and Human Services (“HHS”) for implementation.

Medicare Drug Price Negotiation Program

The IRA charges HHS with establishing a Drug Price Negotiation Program (the “Program”), whereby certain high-priced drugs will be selected for negotiation by HHS with drug manufacturers to obtain a “maximum fair price” (called an “MFP”). The drugs subject to the Program are single source drugs, covered by Medicare Part B or Part D, for which there is no biosimilar or generic equivalent.

Timing. To start the program, HHS will rank negotiation-eligible drugs by the total expenditures in the most recent 12-month period. The first list of up to 10 Part D negotiation-eligible drugs will be published in 2026, the earliest “price applicability date” at which the Program takes effect. The drug publication date for 2026 will be chosen by September 1, 2023. After 2026, the timing for publication is standardized – the February 1^st two years prior to the price applicability date will be the drug publication date. Fifteen more Part D drugs are set to be published in 2027, followed by 15 Part D and Part B drugs, collectively, in 2028. Annually thereafter, HHS will publish up to 20 additional negotiation-eligible Part D and Part B drugs.

Negotiation-Eligible Drugs. Drugs eligible for negotiation must be FDA-approved for at least 7 years and marketed in conformance with the Federal Food, Drug, and Cosmetic Act. With respect to biological products, however, such drugs must be licensed in accordance with the Public Health Service Act (“PHSA”) for at least 11 years, and marketed in conformance with the PHSA. Drugs excluded from the Program are drugs: (i) used to treat rare diseases/conditions, (ii) that comprise low-spend Medicare drugs, (iii) through 2028, whose costs account for less than 1% of the total Medicare expenditure under Part B or Part D (as applicable) AND which drugs account for a minimum of 80% of the drug manufacturer’s revenues, and (iv) derived from plasma.

Negotiation Process. Following the drug publication date, HHS will request information from drug manufacturers to make an initial MFP offer, with a justification explaining the basis for such proposal. Drug manufacturers will have an opportunity to accept the proposal or submit a counteroffer. The factors considered in negotiating the MFP of a selected drug include manufacturer-specific data (e.g., research and development costs, production and distribution costs, market data and revenue and sales volume data, etc.) and evidence regarding alternative treatments. Eventually, the parties will enter into a negotiated agreement setting forth the MFP on the selected drug. The MFP may not exceed a certain percentage of the non-federal average manufacturer price for drugs, which percentage decreases with the greater the number of years that the selected drug has had FDA approval or licensure under the PHSA, as applicable. Drug manufacturers are granted an opportunity to delay negotiation for up to two years where it is highly likely that a biosimilar or generic product will be marketed by the price applicability date. However, if the biosimilar/generic drug is not marketed within two years (even if the drug is appropriately licensed), the drug manufacturer whose drug was selected will be required to pay a rebate to HHS. The rebate is determined as follows:

• Part D Drugs:

  • The sum of 75% of the difference between the average manufacturer price that applied to drugs sold in each quarter of the price applicability period that would have applied (if there never was a negotiation delay) and the MFP that would have applied to such drugs.

• Part B Drugs:

  • The sum of 80% of the difference between the payment amount for drugs each quarter of the price applicability period that would have applied (if there never was a negotiation delay) and the MFP that would have applied to such drugs. Drugs bundled as part of an item or service that are not separately payable under Medicare Part B are excluded from such calculation.

• Long-Monopoly Drugs:

  • There is a special rule for calculating rebates for long-monopoly drugs (defined as drugs which have been FDA-approved/licensed under the PHSA for at least 16 years, but excluding certain vaccines). Long-monopoly drug rebates are 65% of the average non-federal average manufacturer price in 2021 (or, if there is no average price available in 2021, the first full year following the drug’s market entry) with a CPI adjustment from September 2021 (or December of the first full year following market entry) to September of the year prior to the selected drug publication date with respect to the initial price applicability year that would have applied.

Program Compliance. Penalties under the Program are severe. Drug manufacturers who fail to comply with the Program’s requirement that selected drugs be sold at or below the MFP will be subject to penalties amounting to 10 times the difference between the price at which the selected drug was sold and the MFP established for such drug. If a drug manufacturer violates a requirement under an agreement with HHS, then the drug manufacturer will be subjected to civil monetary penalties amounting to $1 million per day that the drug manufacturer is in violation of the agreement. If a drug manufacturer knowingly provides false information, it will be subject to penalties amounting to $100 million per item comprising false information. Drug manufacturers may also be assessed an excise tax between 65%-95% depending upon the number of days that the drug manufacturer is out of compliance.

Prescription Drug Inflation Rebates

The IRA requires drug manufacturers to pay a rebate to the extent that the prices of their drugs payable under Medicare Part B or Part D increase at a faster rate than inflation. Specifically, the rebate provisions apply to single source Part B drugs and to all Part D drugs. Drugs excluded from inflation rebates include Part B drugs or Part D drugs for which the average total cost is less than $100 (subject to a CPI adjustment) and certain vaccines.

The rebates to be paid by drug manufacturers are set at a rate determined by comparing the actual drug price against the inflation-adjusted price of the drugs. For Part B drugs, the rebates are determined and must be paid within 30 days of notice on a quarterly basis, while Part D drug rebates are determined and must be paid within 30 days of notice on an annual basis. The benchmark quarter (Part B) or year (Part D) that applies, to determine the inflation-adjusted price, is contingent upon the approval date of the drug.

If a drug manufacturer fails to pay the rebate in accordance with the rebate provisions, a civil monetary penalty of at least 125% of the total rebate will be assessed against the drug manufacturer.

Other Updates

Additional updates of note include:

• ACA Premium Tax Credit Eligibility. The IRA includes a three-year extension of enhanced financial assistance for people enrolled in health insurance through the marketplaces under the Affordable Care Act. Essentially, the moratorium on the requirement that, to be eligible for a premium tax credit, household income must be at or below 400% of the federal poverty level, is extended through 2025.

• Catastrophic Phase Cost-Sharing. As of 2024, the 5% cost-sharing under Part D for beneficiaries has been eliminated when costs exceed $7,000 (i.e., the “catastrophic phase”).

• Out-of-Pocket Costs. Beginning in 2025, Part D beneficiaries’ out-of-pocket costs are capped at $2,000 (subject to annual adjustments).

• Premium Stabilization. Premiums for Part D plans will be subject to a premium stabilization plan under which they are capped at an increase of 6% annually through 2029.

• Monthly Cap on Cost-Sharing Payments under Prescription Drug Plans and Medicare Advantage Prescription Drug Plans. Commencing as of 2025, beneficiaries may enter into payment plans (subject to a monthly cap) administered by their Part D sponsor or Medicare Advantage organization to pay off cost-sharing amounts for Part D drugs.

• Continued Delay of Implementation of Prescription Drug Rebate Rule: The IRA extends the moratorium on the final rule, published November 30, 2020 (85 Fed. Reg. 76666), addressing the removal of safe harbor protection for prescription drug rebates under the Anti-Kickback Statute and creating two new safe harbors:

  • A safe harbor applicable to certain prescription drug point-of-sale discounts as offered to Medicare and Medicaid beneficiaries to reduce their direct out-of-pocket prescription drug costs. Essentially, this safe harbor protects reductions in the price of prescription pharmaceutical products offered to Medicare Part D plan sponsors, Medicaid managed care organizations, or through a pharmacy benefit managers (“PBM”) acting under contract with either if: (1) the price reduction is set in advance; (2) the price reduction does not involve a rebate, unless the full value of the price reduction is accomplished through chargebacks or is a rebate required by law; and (3) the price reduction is completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.

  • A safe harbor applicable to flat fee arrangements paid by pharmaceutical manufacturers directly to PBMs for PBM services. This safe harbor protects a qualifying fixed fee arrangement between pharmaceutical manufacturers and PBMs for the provision of PBM services to one or more health plans from scrutiny under the Anti-Kickback Statute, provided that certain conditions are met. Some of the requirements to meet this safe harbor are as follows: the PBM and pharmaceutical manufacturer must have a signed, written agreement, compensation paid to the PBM must be fair market value at a fixed rate (and not vary based upon the volume or value of referrals), and the PBM must make disclosures as to the health plans with which it contracts to HHS.

The final rule will not be implemented or enforced prior to January 1, 2032. For more information on this final rule, see our blog.

• Treatment of Cost-Sharing for Adult Vaccines. Beginning as of January 1, 2023, adult vaccines recommended by the Advisory Committee on Immunization Practices (a committee within the Centers for Disease Control and Prevention) will not be subject to cost-sharing for Medicare Part D beneficiaries.

• Incentivization of Biosimilar Products. For biosimilar products furnished on or after July 1, 2024, the amount payable is the lesser of 103% of their wholesale acquisition cost or 106% of the average sales price. Further, certain biosimilar products qualify for an enhanced Medicare Part B payment amount of 8% (rather than 6%) of the average sales price during a 5-year period.

• Expansion of Eligibility for Low-Income Subsidies under Part D. Subsidies under Medicare Part D are expanded so that, as of January 1, 2024, beneficiaries with income at or below 150% (from 135%) of the federal poverty line are subsidy eligible.

• Improvement of Access to Adult Vaccines under Medicaid and CHIP. Certain vaccines must be covered under Medicaid and certain cost-sharing is eliminated. The federal medical assistance percentage is increased by 1% for adult vaccines and their administration. Under the Children’s Health Insurance Program, approved recommended adult vaccines and their administration for individuals 19 and older must be covered, and any cost-sharing for such vaccines is eliminated.

• Insulin Products. Out-of-pocket costs for insulin are capped at $35 per month during years 2023-2025 and then, as of 2026, they will be capped at the lesser of $35, 25% of the MFP for insulin, or 25% of the negotiated price for insulin. Coinsurance amounts and adjustments to supplier payments under Medicare Part B for insulin furnished via durable medical equipment are limited.

• Safe Harbor for Absence of Deductible for Insulin. The IRA provides that, as of December 31, 2022, a health plan should not fail to be deemed a high deductible health plan just because there is no deductible for certain insulin products.

*Lotan Helfman, a law clerk in the firm’s Washington D.C. office, also contributed to this article.