Summary of Medicare Drug Negotiation Program in Inflation Reduction Act and Impact on Pharmacies and Providers

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The U.S. House of Representatives is expected today to pass legislation passed by the U.S. Senate that will significantly alter the landscape for pharmaceutical pricing and reimbursement under the Medicare program for certain high-cost drugs. The U.S. Senate passed the Inflation Reduction Act (IRA) on August 7, and the president is expected to sign the legislation into law shortly after House passage.

The IRA is a far-reaching spending package that includes provisions addressing climate and energy, tax provisions, and healthcare. A key healthcare provision allows Medicare to negotiate drug prices with pharmaceutical manufacturers for a select number of high-cost drugs, starting in 2026. The negotiation program will have significant financial and operational implications for pharmacies that are paid for drugs under Medicare Part D and providers that are paid for drugs under Medicare Part B, including hospitals, ambulatory surgical centers, and physician offices. In particular, the program will reduce prices for drugs selected for negotiation by 25-65%. Medicare will reimburse pharmacies and providers for selected drugs based on negotiated prices, significantly altering the “buy and bill” system through which pharmacies and providers purchase drugs and generate revenue.

Overview of Negotiation Program

Drugs selected for negotiation, referred to as “selected drugs,” will be subject to a maximum fair price (MFP), whereby a manufacturer must sell a selected drug for use by Medicare beneficiaries at no more than the MFP. The requirement will not apply to sales of a selected drug when used by non-Medicare patients. Manufacturers that fail to comply with the MFP requirements will be subject to a civil monetary penalty equal to ten times the difference between the price the manufacturer sold the drug at and the MFP, multiplied by the total number of units furnished during the year. Manufacturers will also be subject to an excise tax during periods of noncompliance.

The MFP will be capped at the lower of the following:

  1. A percentage discount off a drug’s average non-federal average manufacturer price (non-FAMP) for 2021 (or for the first full year after market entry) increased by inflation.
  2. A percentage discount off the average non-FAMP for the year prior to selection (for years 2027 and onward).
  3. The prior year’s Part B or Part D payment for the drug.

The MFP discount percentage for a drug will differ based on how long a drug has been sold, with the discount percentage increasing the longer a drug is on the market. The MFP ranges are as follows:

Type of Product MFP Discount
off non-FAMP
Short-Monopoly Drug
(<12 years since approval)
25% Discount
Extended-Monopoly Drug
(12-15 years since approval)
35% Discount
Long-Monopoly Drug
(>16 years since approval)
60% Discount

Manufacturers will be required to provide the MFP to Medicare beneficiaries, so cost-sharing for a selected drug will be based on the MFP. Medicare will reimburse pharmacies and providers for selected drugs based on the MFP. Medicare will pay the MFP + 6% for Part B drugs instead of the current reimbursement rate of the average sales price (ASP) + 6%. Medicare will pay the MFP plus a dispensing fee for Part D drugs.

Because reimbursement to pharmacies and providers will be based on the MFP, manufacturers will also be required to provide the MFP to pharmacies and providers so that their acquisition costs do not exceed their reimbursement. The IRA does not dictate how manufacturers will provide pharmacies and providers with access to the MFP.

Drugs Selected for Negotiation

Beginning in 2026, the Secretary of the Department of Health and Human Services (HHS) will choose a set number of drugs to be negotiated each year (selected drugs). The Secretary will choose from a list of the top 50 most expensive Medicare Part D drugs and the top 50 most expensive Medicare Part B drugs.

In 2026, the Secretary will choose 10 Part D drugs, followed by an additional 15 Part D drugs in 2027. In 2028, the Secretary will choose 15 additional drugs from among the most expensive Part D and Part B drugs. In 2029 and subsequent years, the Secretary will select an additional 20 drugs among the most costly Part D and Part B drugs. The selection of drugs each year will be cumulative, adding to the previously selected drugs. A selected drug will continue to be negotiated until there is an approved generic or biosimilar for the product, at which point it will no longer be subject to negotiation.

The IRA includes several important limitations on which drugs will be negotiated:

  • Only single-source brand name drugs or biologics without approved generics or biosimilars (not including authorized generics) will be eligible for negotiation.
  • Small molecule drugs will not be subject to negotiation unless they have been approved for at least nine years.
  • Biological products will not be subject to negotiation unless they have been licensed for at least 13 years.

The following products are also excluded from negotiation:

  • Drugs that have received an “orphan drug” designation from the Food and Drug Administration for only one rare disease or condition and the only approved indication(s) is for such disease or condition.
  • Low spend Medicare drugs for which total spending under Medicare Parts B and D is less than $200 million in 2026 (increased by inflation in subsequent years).
  • Biological products derived from human whole blood or plasma.
  • Small biotech drugs for which total Part D or Part B spending for the drug during 2021 is equal to or less than 1% of total Part D/Part B spending for all drugs and is equal to at least 80% of total Part D/Part B spending for the manufacturer’s drugs covered under Part D/Part B (only applies in 2026, 2027, and 2028). In 2029-2030, the MFP for small biotech drugs will not be subject to an MFP less than 34% off the non-FAMP.

The IRA also gives the Secretary authority to delay the selection of biologics for negotiation if a biosimilar is likely to enter the market. To exercise such authority, the Secretary must determine, based on a manufacturer request, that there is a high likelihood that a biosimilar product for which the biological will be the reference product will be licensed and marketed within two years after the biologic would be selected for negotiation.

Next Steps and Financial and Operational Considerations for Pharmacies and Providers

The House is expected to pass the IRA today, and we expect the president to sign the bill into law shortly after that. After enactment, HHS will proceed with implementing the new negotiation program, which will result in regulations and guidance issued before the start of negotiation in 2026. Agency rulemaking and guidance will likely answer several questions not directly addressed by the IRA, such as the mechanism through which manufacturers will provide pharmacies and providers with access to the MFP.

In the meantime, there are many potential financial and operational implications for pharmacies and providers to consider:

  • Changes in Medicare reimbursement for selected drugs are likely to have significant financial implications, as there may be little difference between drug acquisition costs and reimbursement for selected drugs. For Part D and Part B drugs, manufacturers will be required to provide pharmacies and providers with access to the MFP, ensuring that acquisition costs are not higher than the MFP. However, purchasing selected drugs at the MFP would leave only the Part D dispensing fee or the 6% of MFP add-on under Part B as revenue. Note that the IRA does not address what the Part D dispensing fee would be. Pharmacies and providers would be left to negotiate deeper discounts with manufacturers to access greater revenues.
  • For Part B providers, the add-on payment will decrease significantly compared to current payments based on ASP. The MFP may be considerably lower than ASP. As such, 6% of MFP under the add-on for selected drugs would result in a much smaller add-on payment than the 6% of ASP add-on under current rates.
  • Providers participating in the 340B drug pricing program will be impacted differently, as they will still have the option of purchasing selected drugs at 340B prices. However, providers will generate fewer 340B savings when using 340B drugs for Medicare beneficiaries in light of the reduced reimbursement rates.
  • The negotiation program will also impact pharmacy and provider operations, as a mechanism will be needed to allow pharmacies and providers to access selected drugs at both MFP and non-MFP pricing. The IRA does not address how manufacturers will be required to provide access to MFP prices. Several inventory management options could potentially allow pharmacies and providers to access both MFP and non-MFP pricing. For example, pharmacies and providers could: 1) maintain a virtual inventory where replenishment orders are placed at MFP pricing after drugs are used for Medicare beneficiaries; 2) purchase selected drugs at non-MFP pricing and submit a rebate/chargeback request to receive MFP pricing retroactively, reducing the net price to the MFP; or 3) maintain separate inventories, including inventory purchased at the MFP to be dispensed or administered to Medicare beneficiaries, and inventory purchased at non-MFP pricing to be used for non-Medicare patients. Pharmacies and providers may also need to implement new inventory management systems to ensure compliance with program rules and prevent MFP inventory from being used for non-Medicare patients. Future regulations could address these questions.
  • Manufacturers could react to the negotiation program in ways that could impact pharmacy operations, depending on how HHS implements the negotiation program and addresses manufacturers’ obligation to make the MFP available to pharmacies. For example, manufacturers could limit the distribution of products selected for negotiation to a limited network of pharmacies, thereby limiting the number of pharmacies to which they must make the MFP available and minimizing administrative burden.

Pharmacies and providers should monitor HHS rulemaking to implement the Medicare negotiation program, identify any operational or financial concerns, and consider submitting comments to make HHS aware of such concerns.

We will continue to monitor developments related to the IRA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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