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:
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:
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 to counteroffer.
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, including:
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 penalty.
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:
Among other provisions, the Inflation Reduction Act also:
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