The Inflation Reduction Act (“IRA”) was passed just over a year ago with a goal of lowering high drug costs for Medicare beneficiaries and reducing costs incurred by Medicare. A central piece to achieving the IRA’s goal of lowering drug costs is the Medicare Drug Price Negotiation Program (“Negotiation Program” or “Program”), under which the federal government has the ability to negotiate drug prices for certain high-expenditure Medicare Part D drugs, and eventually Part B drugs. As expected, however, the Program has been the focus of much controversy and legal action. Here, we provide an overview of the key mechanics of the Program, while in other articles, we take a deeper dive into some of the more controversial components of the Program and summarize the current legal challenges being brought against the Program.
What Is the Negotiation Program?
The Program was established with the passage of the IRA and requires the Department of Health and Human Services (“HHS”), through the Centers for Medicare & Medicaid Services (“CMS”), to directly negotiate with participating manufacturers (“Manufacturers”) the prices of certain high-expenditure, single source drugs that have no generic or biosimilar competition.
What Selected Drugs Are Included in the Program for 2026?
CMS released the list of 10 drugs selected for negotiation (“Selected Drugs”), with prices for such Selected Drugs expected to go into effect for Part D coverage beginning on January 1, 2026. The Selected Drugs include:
Bristol Myers Squibb’s Eliquis (prevention and treatment of blood clots)
Lilly’s Jardiance (diabetes; heart failure)
Johnson & Johnson’s Xarelto (prevention and treatment of blood clots)
Merck’s Januvia (diabetes)
AstraZeneca’s Farxiga (diabetes; heart failure; chronic kidney disease)
Novartis’ Entresto (heart failure)
Amgen’s Enbrel (rheumatoid arthritis; psoriasis)
J&J’s Imbruvica (blood cancers)
J&J’s Stelara (psoriasis; Crohn’s disease)
Novo Nordisk’s Fiasp / Novolog (diabetes)
How Did CMS Select and Identify the Selected Drugs?
The Selected Drugs represent the top ten “qualifying single source” drugs with the highest expenditures under Medicare Part D.
To identify the Selected Drugs, CMS started with covered Part D drugs with “no generic or biosimilar competition” (the meaning of which is discussed further below) meeting either of the following criteria:
- Small molecule drug products that were approved by the US Food and Drug Administration (“FDA”) more than 7 years ago with no generic drug competition; or
- Biological products licensed by the FDA more than 11 years ago with no biosimilar competition.
And then excluded from that list:
- Orphan drugs, which are drugs designated for only one rare disease or condition under section 526 of the FD&C Act and for which the only approved indication (or indications) is for such rare disease or condition;
- Low-spend drugs, which are drugs or biological products with less than $200 million in combined expenditures under Medicare Parts B and D; and
- Plasma-derived products, which CMS defines as a licensed biological product that is derived from human whole blood or plasma, as indicated on the approved product labeling.
Once CMS identified the negotiation-eligible qualifying drugs, CMS used prescription drug event (“PDE”) data from June 1, 2022 through May 31, 2023 to calculate total expenditures for each negotiation-eligible qualifying drug under Part D. After removing identified drugs whose manufacturers applied for and were granted a “small biotech drug exception,” CMS identified the top 50 drugs with the highest Part D expenditures and selected the top 10 drugs from that list as Selected Drugs under the Program.
How Does CMS Determine if a Selected Drug Has Generic or Biosimilar Competition?
CMS considers a drug to have generic or biosimilar competition (and thus not be eligible for the Negotiation Program) if there is an available generic / biosimilar product that is “marketed on a bona fide basis.” To date, CMS has opted not to establish an objective numerical threshold for what constitutes “bona fide” marketing. Rather, CMS will undertake a “holistic inquiry” using a “totality of the circumstances” test, relying in part on PDE and average manufacturer price data to determine if the product is being dispensed or purchased. CMS also clarified that “token” or “de minimis” availability of generic or biosimilar products in the marketplace would be insufficient to establish bona fide marketing (which we discuss in more detail here).
What Are the Next Steps for Manufacturers of the Selected Drugs?
Now begins a nearly yearlong process of “negotiations” between CMS and each Manufacturer of a Selected Drug. The negotiations will culminate in the release of a maximum fair price (“MFP”) for each drug by September 1, 2024, which will be effective on January 1, 2026. Below is a brief timeline of the negotiations:
- October 1, 2023: Manufacturers of the Selected Drugs now have until October 1, 2023 to enter into a Manufacturer Negotiation Agreement (“Agreement”) with CMS, which will initiate negotiations of the Selected Drug’s MFP.
- October 2, 2023: Manufacturers must have submitted certain data to CMS, including data on the non-federal average manufacturer price, research and development costs, market data, and any “information that CMS requires to carry out negotiation” of the Selected Drugs.
- February 1, 2024: CMS presents “initial offer” of MFP to each applicable Manufacturer.
- March 2, 2024 (or 30 days from receipt of initial offer): Manufacturers have 30 days after receipt of initial offer to present a counter-offer MFP.
- April 1, 2024 (or 30 days from receipt of Manufacturer’s counter-offer): CMS has 30 days from receipt of Manufacturer’s counter-offer to respond.
- July 15, 2024: If no agreement is yet made through the process discussed above, CMS will make a final MFP offer to each applicable Manufacturer.
- August 1, 2024: All negotiations must end.
- September 1, 2024: CMS publishes the final MFP of each Selected Drug for 2026.
How Does CMS Develop Its Initial Offer of the MFP?
To develop the initial offer for the MFP of each Selected Drug, CMS begins with the cost of therapeutic alternatives that it identifies. CMS then adjusts the MFP of the Selected Drug depending on whether the Selected Drug offers more or less clinical benefit compared to the therapeutic alternative. CMS can also make further adjustments based on the manufacturer-specific data provided.
There will be a ceiling for the MFP of each Selected Drug. The ceiling / upper limit of the MFP is the lower of (1) the Selected Drug’s enrollment-weighted negotiated price net of rebates and all price concessions; or (2) a percentage of the Selected Drug’s non-federal average manufacturer price (non-FAMP).
What if a Manufacturer Does Not Sign an Agreement or if CMS and the Manufacturer Do Not Agree on the MFP?
A Manufacturer technically has the option not to sign an Agreement or not to participate in the Program. However, if a Manufacturer declines participation in the Negotiation Program and refuses to sign an Agreement, none of the Manufacturer’s products will be covered by Medicare or Medicaid moving forward. Alternatively, CMS can refer Manufacturers that fail to sign the Agreement or reach an agreement on the MFP to the IRS, and the IRS can then impose steep excise taxes on the sale of the Selected Drug. PhRMA, a pharmaceutical manufacturers’ trade association that initiated a lawsuit challenging the Program, estimates that the excise taxes could reach up to 1,900% of a drug’s daily revenues.
How Are Manufacturers Responding to the Negotiation Program?
Following CMS’s release of the final list of Selected Drugs for 2026, six manufacturers (Merck, Bristol Myers Squibb, Johnson & Johnson, Boehringer Ingelheim, AstraZeneca, and Novartis), as well as the US Chamber of Commerce and PhRMA have filed suit challenging the legality of the Program. Read more about the legal challenges here.
What Will Happen in 2026?
The MFP negotiated between CMS and the Manufacturers will become effective in 2026. Meaning, applicable Manufacturers must ensure that the MFP is available to beneficiaries of a Medicare Part D plan or a Medicare Advantage Prescription Drug plan (including Employer Group Waiver Plans) who receive their drug at a pharmacy, by a mail order pharmacy, or by another dispenser. Manufacturers are not required to make the MFP available to Medicare beneficiaries who use other sources of prescription drug coverage, such as a plan that receives the Retiree Drug Subsidy, prescription drug discount cards, or cash. Part D sponsors must include all Selected Drugs on their formulary (however, for 2026, CMS will not set tier placement or utilization management requirements).
What if a Generic Drug or Biosimilar Product Is Released Prior to 2026?
If a generic drug or biosimilar product is approved and “marketed” prior to 2026, the Selected Drug will no longer be eligible for negotiations and would no longer be a Selected Drug. As discussed above, CMS will consider an approved generic drug or licensed biosimilar product to be marketed when using a holistic inquiry or a “totality of the circumstances” test.