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President Biden has now signed into law the $700 billion Inflation Reduction Act of 2022, a package
comprised of health care, climate change, and taxation policy
reforms. It is a scaled-back version of the Build Back Better Act
that passed the House last year, and is the culmination of months
of negotiation by top Democrat lawmakers, particularly Senate
Majority Leader Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WV).
The final text, a Senate-amended version of H.R. 5376, was passed
through the reconciliation process and on a party-line vote in both
chambers. The Parliamentarian ruled that the language requiring
drug companies to pay Medicare for inflationary rebates in the
private market was not compliant with the Senate rules on
reconciliation. Prior to the Parliamentarian’s ruling, the
Congressional Budget Office (CBO) projected that the drug pricing
provisions of the bill may save up to $287 billion over the next 10
years, a number that would presumably be reduced by the private
market carve-out. .
Among many other things, the Inflation Reduction Act has
significant implications for the pharmaceutical industry due to
Medicare drug price negotiation, some inflationary rebates, and
Medicare Part D redesign. Below are the relevant details:
Price Negotiation and Maximum Fair Prices
Subtitle B, Part I, of Title I (Committee on Finance) reforms
prescription drug pricing through the creation of a program that
allows the federal government to negotiate prices for a limited
number of high-cost single-source drugs (lacking generic and/or
biosimilar substitutions). The Secretary of Health and Human
Services will have the ability to choose a list of 50 pharmacy
drugs (Medicare Part D) and 50 drugs administered at a
physician’s office (Medicare Part B) that will be priced in
accordance with this methodology.
The timeline will work as follows:
- By September 1, 2023, the Center for Medicare and Medicaid
Services (CMS) must publish the highest ranked Medicare Part D
drugs selected for negotiation. These single source drugs must have
been on the market for at least seven years at the time of the
selection. While the effective date of the first round of ten Part
D drug is not until CY2026, those drugs will be selected in CY2023.
For this first year, a total of 10 drugs can be selected, and can
only be from the Part D program.
- The number of drugs selected in CY2025 will increase to 15 for
the effective release of CY2027 (totaling 25), and can still only
be from the Part D program. Beginning this year, the Maximum Fair
Pricing will be published on November 30 of the selection
- Medicare Part B drugs become eligible for selection on February
1, 2026, and these single source drugs must have been on the market
for nine years or more at the time of selection. A total of 15
drugs from Part D or Part B (combined) will be selected in CY2026
for the effective date of CY2028 (totaling 40).
- The Secretary will choose a total of 20 drugs in the Part D or
Part B programs each of the subsequent years for the next three
years – CY2027, CY2028, CY2029 – for the effective dates of
CY2029, CY2030, and CY2031. In total, by 2031, 100 drugs will be
subject to negotiation.
The Department of Health and Human Services (HHS) will rank
negotiation-eligible drugs according to total expenditure for them
under Medicare Parts B and D during the most recent period of 12
months prior to the selected drug publication date (two years prior
to the price applicability date). Drugs with the highest total
expenditures will be selected to become negotiation-eligible. HHS
will request information from the manufacturers of selected drugs
and will provide a written initial offer, with justification
included, based on several criteria. The manufacturer has a chance
Negotiated prices will be capped by the length of time a drug
has been on the market as of the drug applicability date. This
maximum fair price (Maximum Fair Price) is capped at 75 percent of
the Average Manufacturer Price for those on the market for nine to
11 years (25 percent discount offered by the drug maker); or 65
percent for 12 to 15 years (35 percent discount offered by the drug
maker); or 40 percent for 16 years or longer (60 percent discount
offered by the drug maker).
There are several guidelines for the negotiation process,
- Medicare Part D drugs selected for negotiation are required to
have been on the market for at least seven years as of the date of
- Medicare Part B drugs selected for negotiation are required to
have been on the market for at least nine years as of the date of
- Medicare Part B drugs are ineligible until February 1,
- Drugs have to have been on the market for at least nine years
for small-molecule drugs and at least 13 years for biologics.
- Drugs owned by companies where a single drug accounts for at
least 80 percent of revenue but less than one percent of overall
Medicare expenditure on prescription medicines are exempt from
- Drugs approved for a single condition (rare disease) and
products derived from plasma are excluded from negotiation.
- Manufacturers are eligible for two one-year exemptions if they
have a reasonable expectation that they will face competition by
generic and/or biosimilar competition by the price applicability
date (as opposed to the selection date).
- However, if a generic or a biosimilar does not end up coming to
market, the biologic manufacturer must pay a fee to HHS.
- However, if a generic or a biosimilar does not end up coming to
- Should a drug maker choose not to participate in the
negotiation process, the federal government will tax the company at
65 percent of the previous year’s sales of the drugs, with a
concurrent increase of 10 percent per quarter up to 95 percent for
being out of compliance for 270+ days.
Subtitle B, Part II, of Title I (Committee on Finance) provides
guidance to discourage pharmaceutical companies from raising drug
prices faster than inflation, with the penalty fine being the
difference between the actual price and the inflated price. It is
important to note that such inflation rebate liabilities apply
only to Medicare Part B drugs without competition
and Part D drugs that cost more than $100 per year, and not to
private market sales (though these types of rebates already exist
within Medicaid). Section 11101, Medicare Part B Rebate by
Manufacturers, and Section 11102, Medicare Part D Rebate
by Manufacturers, require drug manufacturers to issue a rebate
to the federal government based on the Average Sales Price
beginning in the first quarter of 2023 relative to the third
quarter of 2021 (Part B) or the Annual Manufacturer Price beginning
in FY2023 relative to FY2021 (Part D). Whereas the rebate amount
for Medicare Part B is to be paid quarterly, that for Part D is to
be paid annually. Anyone who chooses not to pay the penalty fee
will get fined a further fee that costs 125 percent of the original
Part D Redesign
Subtitle B, Part III, of Title I (Committee on Finance),
Part D Improvements and Maximum Out-of-Pocket Cap for Medicare
Beneficiaries, makes changes to the way Medicare covers
expensive drugs, including:
- Elimination of five percent cost-sharing in the catastrophic
phase of the Part D benefit, effective in 2024;
- Capping patients’ out-of-pocket costs at $2,000, effective
- Capping out-of-pocket insulin spending at $35 per month;
- Cost smoothing throughout the year;
- Limiting premium growth to no more than six percent each year
between 2024 and 2029;
- Making private insurance plans and manufacturers pay more, with
Medicare spending significantly less overall.
Among other provisions, the Inflation Reduction Act also:
- Extends enhanced Affordable Care Act subsidies passed as part
of the American Rescue Plan for an additional three years through
- Allows Medicare patients to receive vaccines that are covered
by pharmacy benefits free of cost beginning in January 2023.
- Further delays the implementation of a drug rebate rule
published under then-President Donald Trump until January 2032. The
rule can be found here.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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