CMS on Thursday released initial guidance on the Medicare Prescription Drug Inflation Rebate Program, outlining how Medicare will leverage its new authority to fine drugmakers for price increases that outpace the rate of inflation.

CMS' initial guidance on the Medicare Prescription Drug Inflation Rebate Program

On Thursday, CMS outlined the Medicare Prescription Drug Inflation Rebate Program — the first of two major drug price reforms included in the Inflation Reduction Act (IRA).

Under the Medicare Prescription Drug Inflation Rebate Program, drug companies will be required to pay rebates to the Medicare Trust Fund for price increases that outpace the rate of inflation, especially brand name drugs, which account for 80% of all prescription drug spending. CMS will start sending invoices to drug companies for the rebates in 2025.

CMS will impose a civil monetary penalty of $125% of the rebate amount for drug companies that do not pay.

According to CMS, these rebates may help cut future increases in prescription drug spending. Over the next decade, these reforms are expected to save Medicare around $170 billion.

Starting April 1, people with traditional Medicare and Medicare Advantage plans may also pay a lower coinsurance for specific Part B drugs with price increases higher than inflation. According to CMS, if this law was in place from July 2021 to July 2022, over 1,200 prescription drugs may have been subject to the inflation rebates.

Director of Center for Medicare Meena Seshamani said the guidance is "an important step in our work to lower out-of-pocket drug costs and strengthen the sustainability of the Medicare program for current and future enrollees."

In addition, "[t]he inflation rebate program intends to hold drug companies accountable," said Seshamani.

Last week, President Joe Biden in his State of the Union address noted the effort underway. "We're taking on powerful interests to bring your healthcare costs down so you can sleep better at night," he said.

According to CMS, the public has until March 11 to comment on the guidance. Medicare will then revise and publish final guidance on the program. The authors of the IRA, which granted Medicare additional powers in August, is giving the agency a just few months to finalize the details of the policy.

"Public feedback is critical to successful implementation of the new drug law," said Seshamani. "Technical expertise and feedback from a wide range of interested parties is crucial for our ability to strike the right balance in implementing the law, ensuring access to affordable and innovative therapies." 

Reaction

So far, the guidance has already garnered reactions from industry stakeholders. In particular, many experts have noted the potential challenges CMS is facing with such a short deadline.

"Congress has pushed them very hard," said Richard Frank, a senior fellow at the Brookings Institution who served in HHS under President Barack Obama. "They're building the ship and trying to sail it at the same time."

To address the short timeline, the agency is hiring 75 additional employees to join its new group overseeing the effort, NPR's "Shots" reports.

Meanwhile, drug companies, which spent $160 million lobbying the government in 2022, have their own teams working diligently. "We are definitely not sitting on our hands," said Alice Valder Curran, who advises drug companies on pricing strategy at law firm Hogan Lovells. "We're going to scour the guidance."

According to Curran, since the IRA passed, these companies have spent months analyzing its potential impact on their current and future product offerings.           

As Medicare works to finalize and publish guidance on price negotiation, many industry stakeholders have said they are surprised lawmakers passed the measure. "We're having to wrestle with responding to guidance about something we never thought was going to happen," said Jenny Bryant, EVP for policy and research at the industry trade group PhRMA.

According to Bryant, the group is fully focused on the forthcoming guidance, which targets some of the industry's top sellers. "Our energy is going into thinking about this completely novel thing we know extraordinarily little about how the agency is going to approach," Bryant said.

"Manufacturers are absolutely going to be looking to mount a legal challenge," said former Senate advisor Anna Kaltenboeck. In addition, PhRMA said it is anticipating increased pressure for legislative change.

Since there are high legal stakes surrounding the guidance, many stakeholders have expressed concern about the agency moving so quickly through such technical work.

The Affordable Care Act (ACA) was also written and implemented on a short timeline. Ultimately, a few words accidentally included in the ACA's final language landed it in front of the Supreme Court.

"I do think the lessons learned from the ACA are fresh on people's minds," Frank said.

Separately, Seshamani, who helped implement the ACA, said that's why the agency has "set up monthly technical calls with drug manufacturers [and] regular strategic policy meetings with patients groups, providers [and insurance] plans." (Walker/Gorenstein, "Shots," NPR, 2/9; Morse, Healthcare Finance, 2/9; CMS fact sheet, 2/9)