On October 14, 2022, President Joe Biden signed Executive Order 14036, directing the Department of Health and Human Services (“HHS”) to consider innovative actions to drive down certain single-source prescription drug costs as the Biden-Harris Administration works to implement the Inflation Reduction Act of 2022 (the “Act”).
The Act includes provisions targeting Medicare prescription drug costs, which could have wide-ranging effects for any party involved in the pharmaceutical industry, including drug developers, researchers, manufacturers, distributors, insurance companies, pharmacy associations and consumers. Indeed, one company, Alnylam Pharmaceuticals Inc., is reportedly halting clinical trials on a drug to treat a rare eye disease in order to evaluate the price limitations imposed by the Act.
The Act creates a framework for the Secretary of Health and Human Services (the “Secretary”) to negotiate prices for certain drugs covered under Medicare Parts B and D. Companies that raise prices faster than inflation will be required to pay Medicare a rebate. The Secretary is required to negotiate prices for 10 single-source drugs, beginning in 2026 and increasing each subsequent year through 2029, when 20 single-source drugs will be chosen for pricing negotiation. The drugs that are chosen to enter the negotiation process will be selected from among the 50 drugs with the highest spending for each of Medicare Parts B and D. Certain categories of drugs will not be eligible to be selected for the negotiation process, including generic drugs, drugs with less than $200 million of Medicare spending, certain orphan drugs, and plasma-derived products. “Small Biotech” drugs are also excluded until 2029. Drugs that are 1% or less of all Part D expenditures and are 80% or more of Part D spending as to that manufacturer qualify for the “Small Biotech” exemption.
Once a sole-source drug or authorized generic drug is selected for the negotiation process, the Secretary and the drug manufacturer will enter a negotiation period to determine a “maximum fair price” for such drug. The agreed upon “maximum fair price” for the drug will be published and made available at the publicly available price to “maximum fair price eligible individuals” and the hospitals and providers who furnish health care services to “maximum fair price individuals.” For “Small Biotech” drugs, the Act provides a temporary “maximum fair price” floor of not less than 66 percent of the average non-Federal average manufacturer price for such drug for 2021 (or the first full year following the market entry for such drug). The agreement between Medicare and the drug manufacturer will remain in place until the single-source or authorized generic drug is no longer selected for negotiation.
The “maximum fair price” will not be applied to the pricing of drugs which are subject to an agreement between a provider and manufacturer covered by the federal 340B drug pricing program if the “maximum fair price” ceiling is higher than the 340B program pricing.
Failure of manufacturers to engage in the negotiation process may result in an excise tax beginning at 65% and increasing to a maximum of 95%. Continued non-compliance may result in civil monetary penalties (“CMPs”) of up to $1,000,000 for each day of such violation. Further, additional limitations on judicial or administrative review of certain provisions of the law such as the determination of the “maximum fair price” for the drug and the calculation of certain rebates the manufacturer would pay to Medicare, make compliance considerations paramount as implementation begins.
What this means to you
Under Executive Order 14036, we anticipate HHS will submit a report to Congress in three months, which will outline its plans to further lower drug costs and promote access to new drug therapies for Medicare participants. Clients involved in any stage of the prescription drug supply chain including pharmacy benefit managers, providers who participate in the federal 340B drug pricing program, prescribers of high-priced single-source drugs, and those that negotiate drug pricing directly with manufacturers should consult with their professional advisors to assess whether they may be subject to the prescription drug pricing reforms imposed by the Inflation Reduction Act and if further steps may be advisable.
Additionally, given the near-term implementation time horizon of 2026 to 2029, sponsors of clinical trials for drugs seeking eventual FDA approval and subsequent coverage by governmental and commercial health insurance, should evaluate these provisions, as well as the Medicare Part D benefit provisions, take effect in 2024.
No matter where you are in the drug supply chain, advance planning for how to approach the negotiation of a “maximum fair price,” handling compliance and reporting requirements, can help you avoid a potential CMP of up to $1 million a day. Such planning will be crucial to implementing a successful and cost-effective single source drug organizational plan under this new pricing framework.
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