The ability to directly negotiate drug prices has been a policy goal for Democrats for many years and was recently accomplished through the Inflation Reduction Act’s (“IRA”) Medicare Drug Price Negotiation Program (the “Negotiation Program” or “Program”). While the parameters of this Program are established in statute, Congress directed the Centers for Medicare & Medicaid Services (“CMS”) to work out the details. CMS released initial and revised policy guidance on the Negotiation Program (“Negotiation Program Guidance”) for comment earlier this year. It also released the list of 10 drugs selected for inclusion in the Negotiation Program for 2026 (the “Selected Drugs”) at the end of August.
As CMS and pharmaceutical manufacturers (“Manufacturers”) of Selected Drugs prepare for negotiations on the maximum fair price (“MFP”) of the Selected Drugs, CMS is facing significant pushback from Manufacturers and other industry stakeholders.
This article outlines some of the more controversial or noteworthy decisions by CMS, and the potential repercussions of those decisions. To learn more about the mechanics of the Negotiation Program, see our article on the Negotiation Program’s Basics, and see here for our high-level analysis of the current legal challenges brought against the Negotiation Program.
Drug Groupings and Application to Insulin:
The Negotiation Program Guidance outlines how CMS identifies the Selected Drugs. As part of this process, CMS groups “all dosage forms and strengths of the drug with the same active moiety and the same holder of a New Drug Application (“NDA”), inclusive of products that are marketed pursuant to different NDAs.” This decision has drawn criticism from Manufacturers, who argue that the statutory language requires that a qualifying drug be defined by a single NDA or Biologics License Application (“BLA”). In fact, AstraZeneca is specifically challenging the decision to aggregate different products approved under different NDAs / BLAs in its lawsuit challenging the Program.
The application of this interpretation has drawn further criticism, as it has resulted in Novo Nordisk’s NovoLog and Fiasp insulin products being grouped together. Although both are medical insulin products, Fiasp is manufactured with different ingredients from NovoLog for faster absorption, and both products have separate NDAs. Absent the grouping across NDAs, neither NovoLog nor Fiasp would have individually made the Selected Drugs list, but by bundling the products together, both are now included on the Selected Drugs list.
The inclusion of NovoLog and Fiasp is further noteworthy because Fiasp is expected to face biosimilar competition next year. This leads to the next controversy facing the Negotiation Program: CMS’s use of “bona fide” marketing to identify generic or biosimilar drug competition.
“Bona Fide” Marketing Standard:
Another area of controversy centers on how CMS defines if and when there is generic or biosimilar competition for a drug. This determination is critical because it is used by CMS to (i) determine which drugs can qualify as Selected Drugs, as only those drugs with no generic or biosimilar competition may be included, and (ii) identify when drugs may be delisted from the Selected Drugs list.
CMS’s position is that generic or biosimilar competition exists only if a generic drug or biosimilar product has undergone “bona fide marketing.” CMS states that “bona fide marketing” is more than “de minimis” marketing, and that it will use a “totality of the circumstances” test, including the use of data, to determine whether marketing of a generic drug or biosimilar product is occurring. The data will include a review of prescription drug event (“PDE”) and average manufacturer price data.
Manufacturers and stakeholders are challenging this position, arguing that CMS has no basis under the statute to take this approach. Rather, PhRMA and Manufacturers argue that when the statute refers to whether a generic drug is “approved and marketed,” it is using marketing as the term is generally understood in the pharmaceutical industry to mean “introduction or delivery for introduction into interstate commerce of a drug product.” Under the challengers’ reading, there is an objective point in time when a drug has been marketed, compared to CMS’s more subjective interpretation of when the degree of marketing reaches “bona fide.” AstraZeneca is challenging CMS’ interpretation of “marketing” in this manner.
The penalties against Manufacturers of Selected Drugs that opt not to participate in the Negotiation Program or who fail to reach an agreement with CMS is also a point of controversy (and subject to litigation). A Manufacturer of a Selected Drug that opts not to sign an agreement with CMS for participation in the Negotiation Program can either lose Medicare and Medicaid coverage for all of its drug products or be referred to the IRS to pay an excise tax on the sale of Selected Drugs during the period of noncompliance.
The IRA expressly ties a Manufacturer’s participation in the Negotiation Program to a Manufacturer’s ability to participate in the Medicaid Drug Rebate Program, the Medicare Coverage Gap Discount Program, and the Manufacturer Discount Program. Meaning, if a Manufacturer fails to participate in the Negotiation Program, it will no longer be eligible to participate in the Medicaid Drug Rebate Program, the Medicare Coverage Gap Discount Program, or the Manufacturer Discount Program, and further, none of such Manufacturer’s other drugs may be covered by Medicare or Medicaid. Manufacturers are arguing that this provision constitutes a takings under the Fifth Amendment and is a form of government coercion.
Alternatively, the IRS may impose an excise tax on any Manufacturer of a Selected Drug that fails to participate in the Program. Tax rates could range from 65% to 95% of the Selected Drug’s sales, depending on the duration of noncompliance. PhRMA estimates this could result in an effective excise tax rate of between 185% and 1,900% of daily drug revenues. As a result, many Manufacturers argue that this penalty constitutes excessive fines under the Eighth Amendment.
Use of Therapeutic Alternatives As a Starting Point for the Initial Offer of the MFP:
Although not a focus of any of the current lawsuits, CMS received numerous comments and pushback related to its decision to use Part D net price or the average sale price (“ASP”) of Selected Drugs’ therapeutic alternatives as a starting point for developing the initial offer of the MFP. As part of the process, CMS will identify pharmaceutical therapeutic alternatives for each of the Selected Drugs, using data submitted by Manufacturers and the public. Therapeutic alternatives may include generic drugs and biosimilar products. After identifying the therapeutic alternative(s) and identifying the applicable net price or ASP (or range of net prices, ASPs, or both), CMS may adjust the starting point of the MFP based on the clinical benefit of the Selected Drug.
This construct requires Manufacturers, as part of the negotiations, to understand the brand and generic competitive market. It also requires CMS to understand the therapeutic landscape and to comprehend a significant amount of information in a relatively short timeframe. A primary concern here is whether negotiations between CMS and Manufacturers on the MFP will stall as a result of competing experts disagreeing on the clinical benefits of therapeutic alternatives. Further, CMS’s decision to include generics and biosimilars as potential therapeutic alternatives drew criticism as it could enable CMS to undervalue certain drugs.