The final guidance weighs in at just under 200 pages. This alert focuses on key policies that changed, or that did not change despite what we understand to be significant stakeholder pushback. The final guidance is available here, and the updated proposed ICR is available here.[1]

What drugs are eligible for selection for negotiation?

When CMS issued its initial guidance, it specified that Section 30 of that guidance, governing the identification of drugs that are negotiation-eligible, was final and not subject to comment. Stakeholders were not dissuaded from commenting on Section 30, however, and CMS’s final guidance acknowledges the receipt of such comments. CMS made some revisions to what the agency issued in March, although most key definitions and standards remain unchanged. More specifically:

• Qualifying single source drug:

  • Initial guidance: Under the initial guidance, a qualifying single source drug is considered a Food and Drug Administration (FDA) approved drug/biological product for which at least 7/11 years have elapsed since approval/licensure and for which there is no generic/biosimilar biological product on the market. Further, CMS considers all dosage forms and strengths of products with the same active moiety/ingredient and the same New Drug Application (NDA)/Biologics License Application (BLA) holder to be the same qualifying single source drug. For fixed combination products with two or more active moieties/ingredients, CMS considers a distinct combination of active moieties/ingredients as a distinct active moiety/ingredient for purposes of identifying a qualifying single source drug, such that all formulations of such a combination offered by the same NDA/BLA holder are considered the same product.

  • What changed? Nothing. Despite significant stakeholder feedback opposing the same active moiety/ingredient standard based on the language of the IRA itself, CMS did not change its qualifying single source drug definition.

• Exclusions from qualifying single source drug and negotiation-eligible drug definitions:

  • Initial guidance: CMS set forth standards implementing the statutory exclusions from the definition of a qualifying single source drug for (1) certain orphan drugs, (2) low Medicare spend drugs, and (3) plasma-derived products. CMS also set forth its standards for the exclusion of small biotech drugs from the list of high Medicare spend negotiation-eligible drugs.

  • What changed?

    • As to certain orphan drugs. Nothing, but CMS did clarify that withdrawn designations/indications will not be considered. CMS’s final guidance reaffirms that the orphan drug exclusion applies to drugs that are designated as orphan drugs for only one rare disease or condition and for which the only approved indications are for that disease or condition. But the final guidance clarifies that CMS will consider only active designations/approvals when evaluating a drug for the exclusion, such that designations/indications withdrawn before the selected drug publication date will not be considered. CMS also clarifies that, if a drug loses its orphan drug exclusion status, the agency will use the earliest date of approval/licensure to determine whether the product is a qualifying single source drug, not the date the drug loses such status, as some stakeholders had requested.

    • As to plasma-derived products. Nothing, but CMS clarifies that it will consult with FDA as needed and confirms that cellular and gene therapies are not categorically ineligible for the exclusion. CMS stands by its decision to rely to product information on the FDA Approved Blood Products website and FDA online Label Repository to make this determination, but also acknowledges that certain products may require additional consultation with FDA. CMS confirms it will evaluate cell and gene therapies using the same standards as other biological products.

    • As to small biotech drugs. Nothing, but CMS does provide that it will publish a list of qualifying drugs. CMS does not alter its substantive standard for the small biotech drug exclusion. Manufacturers were required to submit a small biotech drug exception request by July 3, 2023, to be eligible for consideration for the exclusion. In the final guidance, however, CMS clarifies that it “will publish the number of drugs that applied for and received the Small Biotech Exception for initial price applicability year 2026 as part of publishing the selected drug list on September 1, 2023.”

• Delay in selection of biological product on account of anticipated biosimilar biological product market entry.

  • Initial guidance: CMS’s initial guidance set forth CMS’s process for delaying by one or two years selection for negotiation of a biologic that would otherwise be selected, where (1) the biologic would have been an extended-monopoly drug if selected, (2) the delay is requested by a biosimilar biological product manufacturer, (3) the biosimilar biological product manufacturer submits certain specified information, (4) CMS determines that there is a high likelihood that the biosimilar biological product will be licensed and marketed within two years of what otherwise would be the selected drug publication date, and (5) certain disqualifying circumstances are not present.

  • What changed? Nothing, but CMS does provide that it will publish the list of reference biological products benefiting from such delay. CMS states that it will “publish the number of Reference Drugs that would have been selected drugs for initial price applicability year 2026, absent successful Initial Delay Requests, as part of publishing the selected drug list on September 1, 2023.”

What about the bona fide marketing standard?

• Initial guidance: A drug/biological product cannot be selected for negotiation where a generic/biosimilar biological product “is marketed” by the selected drug publication date or during the negotiation period. In addition, a selected drug generally will cease to be subject to the maximum fair price (MFP) at the start of the year that begins at least 9 months after a generic/biosimilar biological product “is marketed.” In the initial guidance, CMS indicated its intent to define “is marketed” under a qualitative standard based on the total volume of product on the market, and that CMS would use Medicare Part D prescription drug event (PDE) data for a specified 12-month period to determine whether a generic/biosimilar biological product is the subject of “bona fide marketing.”

• What changed? Nothing fundamentally, but average manufacturer price (AMP) data will also be used to make the determination. CMS indicates that it intends to use AMP data, in addition to PDE data, to make its “bona fide marketing” determination. CMS confirms in the preamble to the final guidance that a “token” amount of sales on the market is insufficient to meet the “bona fide marketing” test and that it will continue to evaluate, on an ongoing basis, whether a generic/biosimilar biological product continues to meet the “bona fide marketing” test after a drug/biological product is determined ineligible for selection for negotiation on account of such test being met.

How will drugs be selected for negotiation?

• Initial guidance:

  • For initial price applicability year (IPAY) 2026, CMS will identify the 50 qualifying single source drugs with the highest total Part D expenditures over a specified 12-month period (June 1, 2022, through May 31, 2023) using PDE data.

  • CMS will then rank these drugs, highest to lowest, and select the 10 highest ranked drugs on this list for negotiation, unless removed from the list on account of a delay in the selection of a biological product for negotiation.

• What changed? Nothing. The final guidance did not make any changes in this regard. CMS declined a request by some commenters to notify manufacturers of selected drugs before publication of the selected drug list, noting that it would be “operationally infeasible due to the time constraints required to meet statutory deadlines and the complexity of the preparation that must be undertaken in advance.”

How will the negotiated price be set?

• Negotiation of a single MFP.

  • Initial guidance: CMS will negotiate a single MFP, subject to a single MFP ceiling, across all dosage forms and strengths of the selected drug and based on a 30-day equivalent supply.

  • What changed? Nothing. CMS will continue to calculate a single MFP ceiling for purposes of negotiating a single MFP.

• MFP ceiling.

  • Initial guidance: The MFP must be capped at the lower of a specified percentage of the average non-federal average manufacturer price (non-FAMP) or an amount reflecting the Part D plan specific enrollment weighted amounts. For IPAY 2026, the MFP may not exceed the lower of:

1. A specified percentage (discussed below) of average non-FAMP for 2021 (or, where there is no non-FAMP for 2021, the average non-FAMP for the first full year following market entry), increased by an inflation factor 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, or

   • The specified percentage is determined by the length of time the drug has been on the market.

     • For long-monopoly drugs, for which at least 16 years have elapsed since approval or licensure (excluding vaccines), 40 percent.

     • Starting with IPAY 2030, a drug will qualify as an extended-monopoly drug where at least 12 years but less than 16 years have elapsed since approval or licensure (excluding vaccines). The applicable percentage for such drugs will be 65 percent.

     • For short-monopoly drugs, which encompass all other drugs, 75 percent.

2. The sum of the plan specific enrollment weighted amounts, which CMS will calculate using the enrollment-weighted amount for each Part D prescription drug plan or Medicare Advantage prescription drug plan based on the Part D negotiated price of the selected drug under such plan net of price concessions received by such plan or its pharmacy benefit manager.

• What changed? Nothing, but we note the following:

  • With respect to average non-FAMP, CMS declined commenters’ request to use an average over the federal fiscal year, as under the Veterans Health Act, which is the statute that created non-FAMP, and instead finalized its proposal to use a calendar year average.

  • With respect to the specified percentage, CMS clarified in the final guidance that the time period for determining whether a selected drugs qualifies as a long- or extended-monopoly drug runs to the start of the IPAY, and not the selected drug publication date.

• Factors for consideration — manufacturer-specific information.

  • Initial guidance: In negotiating the MFP, CMS is required to consider certain information submitted by the manufacturer, including information regarding research and developments costs; production and distribution costs; federal financial support for discovery and development; pending and approved patents, FDA exclusivities, and FDA applications; and market, revenue, and sales volume data. In the initial guidance, and the accompanying initial proposed ICR, CMS proposed definitions of the data elements to be submitted and other data submission requirements. Among other things, CMS indicated that it intended to use data submitted on revenue in comparison to data submitted on research and development costs to determine whether a manufacturer has recouped its investment for a selected drug as part of the negotiation of the MFP.

  • What changed? Product acquisition costs now are to be considered as research and development costs, plus CMS makes changes to certain other data category definitions and requirements.

    • With respect to manufacturer-specific information, the final guidance, and the accompanying updated proposed ICR, make changes to certain definitions related to negotiation factors and propose updates to other data submission requirements. Notably:

      • CMS includes acquisition costs in research and development costs under the final guidance.

      • As updated, indirect costs can be included as research and development costs only at the basic pre-clinical research stage.

      • CMS has consolidated and rearranged some of the questions related to research and development costs.

      • CMS is adding a requirement to report, for a selected drug, U.S. lifetime net revenue, in addition to global total lifetime net revenue.

      • CMS is no longer requiring the submission of the 340B ceiling price or prime vendor prices as part of market data and revenue and sales volume data but is continuing to require the submission of best price, AMP, the Federal Supply Schedule price, and other Big 4 pricing metrics.

      • CMS is no longer requiring reporting of “manufacturer average net unit price to Part D Plan sponsors,” “manufacturer average net unit price to Part D Plan sponsors—without patient assistance programs,” and “manufacturer average net unit price to Part D Plan sponsors—best,” but is continuing to require the reporting of the equivalent metrics on a U.S. commercial basis.

• Factors for consideration — evidence regarding alternative therapies.

  • Initial guidance: The initial guidance addressed the evidence regarding alternative treatments to be collected, including the extent to which the selected drug represents a therapeutic advancement; the costs of therapeutic alternatives; FDA-approved prescribing information for the selected drug and therapeutic alternatives; the comparative effectiveness of the selected drug and the therapeutic alternatives; and the extent to which the selected drug and the therapeutic alternatives address unmet medical needs.

  • What changed? An apparent broadening of cost effectiveness data that may be considered. CMS clarifies in the final guidance that it will not use Quality-Adjusted Life Years, but it “may use content in a study that uses a cost effectiveness-measure if it determines that the cost-effectiveness measure used is permitted in accordance with the law and does not treat extending the life of an individual who is elderly, disabled, or terminally ill as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill.” CMS specifically acknowledges several cost-effectiveness measures recommended by commenters, including Generalized Cost-Effectiveness Analysis (GCEA), but did not commit to using any specific measure. CMS also defines certain terms with respect to evidence about alternative therapies, including “therapeutic alternative,” “outcomes,” “patient-centered outcome,” specific populations,” “health equity,” and “unmet medical need.”

What is the timeline for negotiation?

• CMS agreement.

  • Initial guidance: CMS will publish the list of drugs selected for IPAY 2026 by September 1, 2023. CMS stated it intends to post the list on the CMS IRA webpage, and manufacturers must enter into an agreement to negotiate by October 1, 2023.

  • What changed? Effectuation of an agreed-to MFP through an addendum to the agreement and clarification that manufacturers retain responsibility for an agreement unless and until all NDAs/BLAs of a selected drug are divested.

    • CMS published the agreement on July 3, 2023, with no opportunity for public comment.

    • CMS clarifies that it will effectuate agreement to the MFP, after negotiation, through an addendum to the agreement, the form of which was published with the agreement.
    • CMS clarifies that, if a manufacturer sells an NDA/BLA of a selected drug to another manufacturer, it will retain responsibility for the agreement unless it transfers all NDAs/BLAs of the drug.

• Submission of data and CMS meetings.

  • Initial guidance: The manufacturer must submit specified information to CMS by October 2, 2023.

  • What changed? Addition of a manufacturer presentation to CMS before the initial offer, plus CMS statements regarding audits of data submissions.

    • CMS provides that, should it determine that any submitted information is incomplete or inaccurate, CMS will notify the manufacturer that it is required to correct and resubmit the information. Such correction must happen within five business days. Other interested parties are also permitted to submit relevant information to CMS during the negotiation process, and CMS will aim to share such information with the manufacturer in redacted form as feasible. CMS also intends to audit manufacturer submission of data.

    • CMS also provides that, following the manufacturer’s data submission, CMS will have one meeting with the manufacturer, in Fall 2023, before the initial offer. CMS explains that the purpose of such meeting is for the manufacturer to provide additional context regarding its data submission, and the manufacturer may bring up to 50 pages of materials (including documents, slides, charts, and graphs) to facilitate discussion. CMS states that a manufacturer may not submit any new manufacturer-specific data under Social Security Act (SSA) §1194(e)(1) at the meeting, and that presented information should only contextualize the pre-meeting data submission.
    • In contrast, CMS will accept new information on therapeutic alternatives under section 1194(e)(2) of the SSA, including from the manufacturer. CMS will also host patient-focused listening sessions with external stakeholders, such as patients, beneficiaries, caregivers, and consumer and patient organizations.

What will happen after the negotiated price is set?

• Publication of the MFP.

  • Initial guidance: For IPAY 2026, the MFP will be published on the CMS website by September 1, 2024, and CMS will publish an explanation of the MFP by March 1, 2025.

  • What’s changed? Nothing, but more details were provided. CMS clarifies that the published explanation “will contain the single MFP for a 30-day equivalent supply of the selected drug, the NDC-9 per unit price, and NDC-11 per package price and will be updated annually to show the inflation-adjusted MFP for the selected drug.” CMS also clarifies that the explanation of the MFP will be published no later than March 1, 2025, or earlier if feasible. The explanation will include, subject to the confidentiality policy, “any data or circumstances that may be unique to the selected drug” and “redacted information regarding . . . data received, exchange of offers and counteroffers, and the negotiation meetings, if applicable.”

• Application of the MFP.

  • Initial guidance: In the initial guidance, CMS indicated that it intended to apply the MFP ceiling twice: first at the drug level, i.e., by reference to the single MFP ceiling determined for the selected drug as a whole, and then a second time, for each dosage form and strength of the selected drug, i.e., by reference to the dosage form or strength-specific MFP ceiling for each dosage form and strength. Stakeholders opposed this “double haircut.”

  • What changed? No double haircut, and the opportunity to submit “suggestions of error.”

    • CMS indicates it will cap the single MFP per 30-day equivalent supply only at the drug level. No secondary comparison of the dosage form or strength-specific as-applied MFP to a dosage form or strength-specific MFP ceiling will occur.

    • CMS will permit manufacturers to submit a suggestion of error to CMS where they believe there has been an error in calculating the MFP ceiling or the as-applied MFP.

    • Where an NDC is new, but where there are not sufficient wholesale acquisition cost (WAC) or PDE data from 2022 to calculate an as-applied MFP, “CMS will determine whether there is an existing, comparable NDC to which the MFP for the selected drug has been applied” and will “impute” the data necessary to calculate the as-applied MFP for the new NDC by reference to the data for the comparable NDC.

• Access to the MFP.

  • Initial guidance: In the initial guidance, CMS proposed to give manufacturers discretion to provide access to the MFP either as an up-front discount or as an after-the-fact rebate. Manufacturers were to ensure that pharmacies and other dispensers are reimbursed for the difference between their acquisition costs and the MFP within 14 days.

  • What changed? Nothing fundamentally, but CMS clarified that the 14 day clock does not start until the manufacturer can validate eligibility for an MFP rebate and signaled an intent to help facilitate a rebate model.

    • CMS clarified that the 14 day clock for paying an MFP rebate starts from the date “of determining that the selected drug was dispensed to an MFP-eligible individual.”

    • CMS is “exploring whether manufacturers could offer a standardized refund amount, such as the [WAC] of the selected drug minus the MFP (WAC-MFP), in order to meet this obligation.”

    • CMS “intends to engage with a Medicare Transaction Facilitator . . . to facilitate the exchange of data between pharmaceutical supply chain entities to support the verification of an MFP-eligible individual who is dispensed a selected drug,” but the details of this approach are still to be determined.

• Nonduplication of MFP and 340B ceiling price.

  • Initial guidance: CMS acknowledged the statutory requirement that manufacturers need only offer the lesser of the MFP or the 340B ceiling price to 340B covered entities, not both.

  • What changed? Nothing. CMS notes that it “is examining options with respect to identification of 340B units in consultation with HRSA and interested parties. In addition to any policies or procedures that CMS may adopt in this regard, CMS will also work with HRSA to ensure the MFP is made available where appropriate in a nonduplicated amount to the 340B ceiling price.”

Other topics

• Confidentiality and the proposed “gag” and record destruction proposals.

  • Initial guidance: CMS indicated it would prohibit manufacturers from disclosing to the public any information in offers from CMS, any justification from CMS, or the price contained in any offer. In addition, manufacturers would be prohibited from using such information for any purpose other than the Drug Price Negotiation Program and would have to destroy all information received from CMS during negotiations within 30 days after the drug no longer qualifies as a selected drug.

  • What changed? Gag and record destruction proposals abandoned. CMS no longer intends to prohibit manufacturers from disclosing to the public any information in offers from CMS, any justification from CMS, or the price contained in any offer. CMS does not intend to publicly discuss the negotiation process, but notes that it reserves the right to do so if a manufacturer makes such a disclosure first. CMS does not intend to disclose proprietary information of the manufacturer, but, if a manufacturer discloses such information, CMS will deem it no longer proprietary. Manufacturers further will not be required destroy all information received from CMS during negotiations.

• Monitoring for compliance.

  • Initial guidance: CMS intends to monitor manufacturer compliance with the Drug Price Negotiation Program.

  • What changed? Nothing fundamentally, but some procedural details were clarified. CMS states that it will provide manufacturers with reminder letters prior to deadlines with warnings of potential applicability of excise taxes or civil monetary penalties (CMPs), written requests for corrective action when applicable, and written notification that a Primary Manufacturer may be subject to enforcement action and/or written confirmation that a Primary Manufacturer may no longer be subject to enforcement action, as applicable.

• Enforcement and Agreement termination.

  • Initial guidance: The statute subjects manufacturers to significant CMPs for:

    • Failing to offer the MFP with respect to a Medicare beneficiary.

    • Violating the terms of the negotiation agreement, including the requirement to submit the requisite information to CMS.

    • Knowingly providing false information with respect to certain aggregation rules for the small biotech exception and the biosimilar biological product delay provision.

  • What changed? A definition of “knowingly” was provided, and CMS clarified the process for declining to enter into, or terminating, the agreement, to avoid enforcement. CMS offers additional details as to how it will notify manufacturers of potential noncompliance, in addition to opportunities to address potential noncompliance, but did not otherwise make substantial changes to these proposals. In addition:

    • With respect to the small biotech drug exception and biosimilar biological product delay provisions, if CMS determines that any manufacturer knowingly provides false information with respect to the aggregation rules governing these provisions, such manufacturer shall be subject to a CMP equal to $100,000,000 for each item of such false information. CMS is defining “knowingly” as when a manufacturer “(1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information. No proof of specific intent to defraud is required.”

    • Under the final guidance, a manufacturer that does not wish to enter into an agreement can issue a notice of decision not to participate in the program to CMS and a request to expeditiously terminate its Medicaid Drug Rebate Program, the Medicare Coverage Gap Discount Program, and the Manufacturer Discount Program agreements, which CMS will grant for good cause. CMS is establishing a similar process to terminate an executed agreement.

• Part D plan requirements.

  • Initial guidance: Part D plans will be required to include negotiated drugs on their formularies, as required by statute.

  • What changed? CMS expects plans to not disadvantage selected drugs on formulary. CMS clarifies in the final guidance that the formulary requirement extends to all dosage forms and strengths to which the MFP applies. CMS will implement a formulary review process “to assess: (1) any instances where Part D sponsors place selected drugs on non-preferred tiers, (2) any instances where a selected drug is placed on a higher tier than non-selected drugs in the same class, (3) any instances where Part D sponsors require utilization of an alternative brand drug prior to a selected drug with an MFP (i.e., step therapy), or (4) any instances where Part D sponsors impose more restrictive utilization management (i.e., step therapy and/or prior authorization) for a selected drug compared to a non-selected drug in the same class.”

• Reasonable assumptions.

  • Initial guidance: CMS did not address reasonable assumptions to support data submissions.

  • What changed? Use of reasonable assumptions denied. CMS states it will not allow manufacturers to rely on, and/or submit, statements of reasonable assumptions along with their submissions. CMS appears to believe that the standards it has set for the data submissions are sufficiently clear and uniformly applicable such that no reasonable assumptions will be needed. As a practical matter, it is unclear how CMS can prohibit a manufacturer from relying on such assumptions where it identifies ambiguities in CMS’s standards.

What’s next?

We will learn more about the selection process when the list of selected drugs is announced, no later than September 1, and the final ICR for the data submissions is issued shortly before then. Any manufacturer that anticipates selection of a drug/biological product for negotiation for IPAY 2026 or a later year should consider commenting on the updated proposed ICR, particularly in light of CMS’s statement that no reasonable assumptions will be needed. As a reminder, those comments are due by August 2, 2023.

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We will monitor the implementation of this guidance, and any additional guidance CMS issues with respect to the Drug Price Negotiation Program. As always, it is important that you carefully review all such guidance to identify issues relevant to your organization.