Almost 11 months after President Biden signed the Medicare Drug Price Negotiation Program (“Negotiation Program”) into law, the Centers for Medicare and Medicaid Services (CMS) has issued revised guidance that clearly details the process by which Medicare will cap the prices of select high expenditure drugs and biologics starting in 2026. On July 3, 2023, CMS announced in the Federal Register that it had issued final guidance concerning the mechanisms of the Negotiation Program’s first round. The first round, which is set to get underway by the end of the summer, will result in year-long price caps on up to 10 high expenditure drugs and biologics scheduled to enter effect on January 1, 2026. In this client alert, we recap what makes the Negotiation Program so significant, touch on legal challenges brought against it, consider what the recent published guidance means for industry, and look forward down the path of implementation.

Negotiation Program Recap

As described in our prior alert, the Negotiation Program is a key healthcare provision of the Inflation Reduction Act of 2022, aimed at lowering prices for single source drugs and biologics and reining in healthcare cost inflation. A relatively small number and share of drugs and biologics, usually available from only a single source, account for a disproportionate share of Part B and Part D spending. Until now, Medicare afforded pharmaceutical and biologics manufacturers a free hand in price setting, an approach which critics say has fueled enormous growth in Medicare costs and, more broadly, healthcare price inflation. The Negotiation Program employs a similar approach to the Medicaid Prescription Drug Rebate Program enacted in 1990 which has long been touted as having helped Medicaid successfully manage costs.

Beginning in 2026, the Negotiation Program calls for the Secretary of U.S. Department of Health and Human Services to 1) publish a list of selected high expenditure drugs and biologicals, 2) enter into agreements with manufacturers of the selected products, 3) negotiate and, where needed, renegotiate maximum fair prices for some selected products, and 4) administer, monitor compliance with, and enforce the Program. In the negotiations, CMS will consider the selected drug’s clinical benefit, the extent to which it fulfills an unmet medical need, and its impact on people who rely on Medicare, among other considerations, such as costs associated with research and development and production and distribution for selected drugs.

Products selected for negotiation will be subject to a one-year maximum fair price cap. Maximum prices for drugs and biologics paid by Medicare will be tethered to average prices in sales outside the program. Medicare will have the ability to negotiate price using information in key areas such as cost, comparative effectiveness, and sales trends shared by the manufacturer. By 2029, up to 20 products will be subject to annual price caps under the Negotiation Program. The program is aimed bringing Medicare’s enormous latent bargaining leverage to bear toward checking the ongoing growth in the federal health insurance program’s outlays for therapy products.

Legal Challenges

The prospect of Medicare price caps under the Negotiation Program threatens lower payments from Medicare and, indirectly, from other health insurers for current and future high-cost therapies. On June 21, 2023, the Pharmaceutical Research and Manufacturers of America (PhRMA), the leading industry trade group, along with the National Infusion Center Association and the Global Colon Cancer Association, filed a complaint in Texas federal court stating that the law is unconstitutional. The PhRMA suit is the most recent addition to a list of constitutional cases against the Negotiation Program already launched by Merck & Co., and by other major pharmaceutical manufacturers and industry lobbying groups. Among other things, the cases allege that by forcing manufacturers to sell at heavily discounted prices, the law violates the Fifth Amendment guarantees that reasonable compensation will be paid for private property taken for public use. Other assertions state that the law violates the First Amendment free speech rights and the Eight Amendment prohibition against excessive fines. The outlook for these cases appears doubtful, but there cannot be any doubt concerning the large sums of money and considerable legal expertise being wielded in hopes of overturning the law or at least disrupting its implementation timetable. This last week PhRMA stated that the recently published revised guidance does not mitigate the negative impacts of the Negotiation Program and that underscored its intention to proceed with its challenge.

Negotiation Program Guidance 2.0

On March 15, 2023, CMS released initial draft guidance for the Negotiation Program and invited public comments on its proposal. Since then, CMS received more than 7,500 comments from consumer and patient groups, drug companies, pharmacies, and individuals on the initial guidance, which CMS says it took into account when releasing its revised guidance at the end of June. Over the course of 198 pages, CMS spelled out many changes to the Negotiation Program that the agency states are aimed at improving transparency. For example, the new guidance affords drug companies discretion whether to publicly discuss details from the price negotiation process. Companies will no longer have to abide by the agency’s previous proposal to destroy all data received from CMS during the negotiation process. Other changes include:

• clarifications of how CMS will identify selected drugs (e.g., CMS will only consider active designations and approvals when evaluating a drug for the orphan drug exclusion);
• revisions for and clarifications of the process applicable for participating drug companies of selected drugs (e.g., revising the confidentiality policy to state that CMS will release information about the negotiation when the explanation of the maximum fair price is published and that drug companies may choose to publicly discuss the negotiation at their discretion);
• clarifications of how CMS will consider the negotiation factors (e.g., CMS will review and consider certain cost-effectiveness measures as permitted by statute for the first round of negotiation);
• clarifications of how CMS will engage in compliance and oversight activities (e.g., CMS intends to engage a Medicare Transaction Facilitator to facilitate the exchange of data between supply chain entities);
• clarifications regarding Part D formulary inclusion for selected drugs (e.g., Medicare prescription drug plans are expected to provide CMS with a reasonable justification to support submitted plan designs for non-preferred tier placement of selected drugs with a maximum fair price); and
• inclusion of additional opportunities for drug companies and members of the public to engage with CMS during the negotiation process on the selected drug.

CMS noted that topics that are not relevant to the Negotiation Program for 2026, such as the process for renegotiating caps on previously selected products, are not addressed in the revised guidance, since 2026 will be the first year that negotiated prices will apply. CMS said that it plans to provide additional information related to program guidance for 2027 and 2028 in the future.

What’s Coming Down the Pike?

In the meantime, the Negotiation Program timeline will continue as follows:

• By September 1, 2023, CMS will publish the first 10 Medicare drugs selected for initial price applicability year 2026 under the Negotiation Program.
• By October 1-2, 2023, participating drug companies that manufacture the drugs selected for the Negotiation program must sign agreements to participate and submit manufacturer-specific data to CMS for consideration in the negotiation for a maximum fair price.
• On February 1, 2024, CMS will kick-off the negotiation period by sending initial offers of a maximum fair price with a justification for a selected drug to each company participating in the Negotiation Program. The negotiation period ends on August 1, 2024.
• By September 1, 2024, the maximum fair prices that are negotiated for these drugs will be published by September 1, 2024, and prices will be in effect starting January 1, 2026.

CMS said that it will provide additional engagement opportunities in Fall 2023 through patient-focused listening sessions. These listening sessions will be open to the public, including patients, beneficiaries, caregivers, patient/consumer advocacy organizations, and other interested parties to participate. Additional information about these public listening sessions will be shared in the late summer. Also in Fall 2023, CMS will provide an additional engagement opportunity for participating drug companies that manufacture selected drugs to meet with CMS to discuss their October 2 data submission.