The Inflation Reduction Act of 2022 (Public Law 117-169) (the Act) contained an array of novel prescription drug provisions, which we described in our August 29, 2022, alert. On Wednesday, March 15, 2023, the Centers for Medicare and Medicaid Services (CMS) posted the names of the first drugs and biologics sanctioned for excessive price increases under the Medicare Prescription Drug Inflation Rebate Program (the Rebate Program). CMS’s announcement, including the first list of products penalized under the Rebate Program, can be found here.

The Act contains two key provisions that are intended to target the dramatic rise in drug and biologic costs for both federal government health insurance programs and individual beneficiaries in recent decades. First, the Act created the Rebate Program, which is aimed at capping price increases across drug and biologics at the overall U.S. rate of inflation (the CPI-U). As reflected in the March 15 announcement, the Rebate Program is underway; additional details about its implementation are below. Second, the Act also created the Medicare Drug Price Negotiation Program (the Negotiation Program), modeled on a successful Medicaid prescription cost management program enacted in 1990. The Negotiation Program will negotiate maximum fair prices for a small number of single source drugs and biological products that impose the highest expenditure burden on Medicare. The Act afforded CMS far greater lead time for implementing the Negotiation Program compared with the Rebate Program. The Negotiation Program will not start to impact product until 2026. CMS has just published initial guidance on the Negotiation Program, available here.

The Rebate Program, which is now officially underway, requires drug companies to pay rebates into the Medicare Trust Fund when the companies raise prices for certain Medicare-reimbursed drugs faster than the rate of inflation. In general, the rebate amount is calculated based on the total number of product units furnished in the rebate quarter multiplied by the amount that the product’s price rise exceeded an inflation-adjusted benchmark. The Rebate Program extends over all single source drugs and biologics, including biosimilar products, covered by Medicare Part B, with limited exceptions, such as certain vaccines and drugs with annual average total allowed charges of less than $100 per individual. A second arm of the Rebate Program extends over all Part D-covered drugs approved under a new drug application (NDA) or an abbreviated new drug application (ANDA) where there is no brand equivalent being sold—except for drugs with an annual average total cost per individual of $100 or less. In early February, CMS published separate guidelines for manufacturers detailing how the agency plans to implement inflation rebates for Part B-reimbursed products and Part D-reimbursed products: The guidelines concerning Part B-reimbursed products are available here and   the guidelines for Part D-reimbursed drugs are available here.

The Part B and Part D arms of the Rebate Program operate on different timelines. Each quarter, CMS will gather pricing information about and post the names of Part B products subject to inflation rebates. For Part D drugs, CMS will gather information about and post the names of Part D drugs subject to inflation rebates on a yearly basis. The just-published initial list, which includes 27 different products, is comprised solely of Part B-reimbursed drugs and biologics. The first list of Part D drugs subject to inflation rebates is scheduled for publication in October. CMS does not plan to actually invoice manufacturers for inflation rebates in connection with either Part B or Part D products until Fall 2025. In the meantime, Part B drugs with prices that have risen faster than inflation will be subject to quarterly coinsurance adjustments. Beginning in April, coinsurance rates for penalized products will be limited to 20 percent of the “inflation-adjusted” cost of the drug (e.g., the cost of the drug if its price rise in the previous quarter was capped by the rate of inflation).  The extent to which individual Medicare beneficiaries will enjoy this cap on cost-sharing will depend on the kinds of other (non-Medicare) coverage they use. For the quarter starting in April, CMS estimates that the Medicare beneficiaries may see coinsurance charges that are reduced by as much as $2 to $390 per average dose.

Wilson Sonsini continues to monitor the implementation of prescription drug and biologic provisions under the Act and looks forward to publishing more information in this area.