Medicare Part B Inflation Rebates

Under current law, Medicare pays for most covered Part B drugs and biologics under a “buy-and-bill” system, under which physicians, hospitals and other providers purchase drugs from manufacturers or distributors and are reimbursed at the rate of 106 percent of the drug’s quarterly average sales price (ASP). ASP is generally calculated as the average net price of the drug, without taking into account price concessions that do not affect the Medicaid “best price” calculation.¹ While the ASP system was adopted as an alternative to earlier “average wholesale price” mechanisms in order to align reimbursement amounts with drug acquisition prices, it has been criticized for not limiting the amount that manufacturers can charge for their products, either at launch or through post-launch price increases. Moreover, the reimbursement methodology may incentivize providers to select higher-priced products over lower-priced therapeutic alternatives because the six percent of ASP provider margin of a high price is more than six percent of a low price (in each case, on average across all providers), thereby in turn creating an incentive for manufacturers to raise prices to increase or defend market share.

In general terms, the IRA requires manufacturers to pay inflation rebates on their “Part B rebatable drugs” when the ASP of those drugs increases faster than the rate of the consumer price index. As such, the ability of manufacturers to increase revenues through price increases will be limited similar to the manner in which “additional rebates” under 42 U.S.C. § 1396r-8(c) limit the effect of price increases on revenue for drugs covered under Medicaid. The inflation rebates payable by manufacturers will be deposited into the Medicare Trust Fund, and consequently represent a mechanism to reduce Medicare costs and finance other spending under the IRA.²

Part B rebatable drugs generally include all single source drugs or biologics, including biosimilars. However, Part B rebatable drugs do not include: (i) multiple source drugs, including generics; (ii) “qualifying biosimilar biological products,” defined as biosimilars with ASPs below those of their reference biologicals during every quarter of a five-year period beginning with the fourth quarter of 2022, or for new biosimilars, beginning in the first quarter marketed;³ (iii) Part B drugs or biologics for which the average annual allowed charges for individuals using the drug are less than $100 (adjusted for inflation, for years after 2023); and (iv) pneumococcal and hepatitis B vaccines. In addition, the IRA requires the Secretary of Health and Human Services (Secretary) to waive or reduce rebates for drugs or biologics subject to FDA-listed shortages, or for biologics subject to supply chain disruptions.

The calendar quarter beginning January 1, 2023 will be the first calendar quarter for which a Part B inflation rebate will be payable. The amount of the quarterly rebate is generally equal to the product of: (i) the number of quarterly units under the billing and payment code of the rebatable drug, less the number of units for which the manufacturer provided a 340B program discount and the number of units for which the drug was paid under a bundled payment amount; and (ii) the difference between (A) the Part B payment amount for the drug during the quarter and (B) the “inflation adjusted payment amount” for the drug from a “benchmark” quarter. The benchmark quarter is the third quarter of 2021, or in the case of drugs approved after December 1, 2020, the third full calendar quarter after the product was first marketed. The inflation adjustment is based upon changes in the CPI-U⁴ from January 2021 to the first month of the quarter two quarters before the quarter in question (e.g., for the first quarter of 2023, July 2022), or in the case of newly approved products, from the first month of the first quarter after the product is first marketed. The statute also contains special calculation rules for drugs that are “selected drugs” subject to price negotiation by the Secretary.

The mechanics of the program are as follows. First, within six months after the end of each quarter, the Secretary will provide manufacturers with an estimated rebate amount, number of units, and total amount due – although the Secretary is permitted to delay submission of these rebate invoices for quarters in 2023 and 2024 until as late as September 30, 2025. Second, the manufacturer must pay the invoiced amounts within 30 days of its receipt of the invoice. The law does not include specific dispute resolution processes, and precludes administrative and judicial review of rebatable drugs, rebatable units, and rebate amount calculations. Further, the IRA authorizes a civil monetary penalty in the amount of 125 percent of the rebate amount in the event of manufacturer noncompliance.

Finally, the statute contains provisions intended to ensure that patients realize coinsurance savings in situations where manufacturers pay inflation rebates. In such circumstances, the patient’s financial responsibility will be equal to 20 percent of the inflation-adjusted payment amount (rather than the current ASP-based payment amount). For example, if the current payment amount based on the drug’s ASP were $120 but the inflation-adjusted payment amount were $100, the patient’s financial responsibility would be $20 rather than $24. Further, for purposes of determining reimbursement to the provider, the effective coinsurance rate will be calculated as the quotient of the patient’s actual responsibility divided by the current payment amount (i.e., $20/$120, or 16.7 percent, in the example above), and the payment due to the provider will be (i) the current payment amount, multiplied by (ii) the difference between 100 percent and the effective coinsurance rate (i.e., 83.3 percent in the example above). The effect of these adjustments is that Medicare’s share of the allowable payment to providers will be increased so that providers do not lose reimbursement associated with patient coinsurance reductions.⁵

Medicare Part D Rebates

Similarly, the IRA includes a new inflation rebate obligation applicable to products covered under Medicare Part D, which takes effect on October 1, 2022.⁶ In the context of Medicare Part D, manufacturers of “Part D rebatable drugs” must pay inflation rebates as invoiced by CMS on an annual basis, and such rebates are likewise deposited into the Medicare Trust Fund.

Part D rebatable drugs include covered Part D drugs that are: (i) drugs approved under a new drug application; (ii) biologics; or (iii) certain generic drugs approved under an abbreviated new drug application (ANDA), where the drug is effectively a single source generic. Specifically, a generic drug will be included where the corresponding reference drug is not being marketed, and there is no other therapeutically equivalent drug approved under an ANDA, except where the manufacturer is a “first applicant” during the 180-day Hatch-Waxman exclusivity period or the “first approved applicant” for a competitive generic therapy (expedited approvals of generics for which there is no more than one drug marketed that is either the reference drug or a generic).

Drugs and biologicals having an average annual total cost under Part D for individuals using the drug of $100 or less (adjusted for inflation, for periods beginning on or after October 1, 2023) are excluded. As with the Part B inflation rebate provisions, the law also requires the Secretary to reduce or waive rebates for drugs listed on the FDA shortage list, and for generic part D rebatable drugs or biosimilars which the Secretary determines are subject to severe supply disruptions or which the Secretary determines would likely be listed on the FDA shortage list in the absence of the reduction or waiver.

Part D inflation rebates will be determined on an annual basis, for each 12-month “applicable period” that runs from October 1 to September 30, beginning with the applicable period October 1, 2022 to September 30, 2023. For each applicable period, an “annual manufacturer price” will be calculated, for each dosage form and strength of each Part D rebatable drug, equal to the weighted average Medicaid average manufacturer price (“AMP”) for the four quarters of the applicable period. Similarly, an “inflation adjusted payment amount” for each applicable period will be calculated for each dosage form and strength, as the weighted average AMP for the “payment amount benchmark period” of January 1, 2021 through September 30, 2021, increased by the change in the CPI-U from January 2021 to the first month of the applicable period (e.g., for the first applicable period, the increase in CPI-U from January 2021 to October 2022). There are alternative rules for drugs first approved after October 1, 2021, line extensions (such as extended release formulations), and “selected drugs” subject to price negotiation by the Secretary.

The amount of the rebate for each dosage form and strength will equal the amount (if any) by which the annual manufacturer price per unit exceeds the inflation-adjusted payment amount, multiplied by the number of units of such dosage form and strength dispensed under Part D during the applicable period. Beginning with plan year 2026, the Secretary must exclude units of products for which the manufacturer provided a discount under the 340B drug discount program.

In short, for products approved before October 1, 2021, the Part D rebate amount reflects the amount by which the product’s AMP has increased faster than the consumer price inflation, as measured by the change in the CPI-U from January 2021 to the first month (October) of the applicable period. Notably, the current change in the CPI-U from January 2021 through July 2022 already exceeds 13 percent, and may well be higher through October 2022;⁷ further, the change in CPI-U will continue to be measured from January 2021 for subsequent applicable periods. Consequently, percentage increases in AMP from the January to September 2021 benchmark period to the given applicable period will need to exceed those levels in order to trigger a Part D inflation rebate.

The Secretary will invoice manufacturers within nine months of the end of each applicable period (i.e., invoices for an applicable period will be submitted by the following June 30), and manufacturers must pay rebate amounts within 30 days of the invoice.⁸ The Secretary is directed to establish a “method and process” to reconcile rebate amounts and manufacturer payments based on revised data regarding the number of dispensed units of Part D rebatable drugs reported by Part D plan sponsors; manufacturers are required to pay any additional rebates based upon such reconciliation within 30 days of the invoice.

Like the Part B rebate provisions, the IRA restricts administrative and judicial review of many Part D inflation rebate program elements, and provides for civil money penalties in the event of manufacturer noncompliance.⁹

Discussion and Potential Implications

Systemic inflationary price control incentives

The IRA’s inflation rebate provisions create financial disincentives against manufacturer price increases exceeding the rate of inflation. With that said, the ultimate impact of the provisions will vary based on a number of factors, including the competitive environment and payor mix of a given product (and of course the general rate of inflation).

For example, in the context of Part B drugs, it remains to be seen whether the rebate’s disincentive against price increases will overcome the underlying provider reimbursement incentive in favor of more expensive products. Moreover, for both Part B and Part D drugs, financial benefits from increasing prices for utilization covered by commercial health insurance plans may warrant above-inflation price increases, despite (or perhaps even because of) the obligation to pay inflation rebates on Medicare utilization. On the other hand, manufacturers are often subject to obligations to pay “price protection” rebates under their agreements with pharmacy benefits managers (PBMs) and managed care organizations, particularly on Part D and commercial utilization, when prices are increased above a defined threshold (or, in some cases, by any amount). Consequently, the combination of the new Medicare inflation rebates with existing price protections might result in certain price increases actually reducing the manufacturer’s net revenue after rebates for a given product.

Significantly, manufacturers of new products retain the ability to set higher launch prices, resulting in higher benchmark period prices, creating at least one way to reduce the need for later price increases and thereby minimize future inflation rebate liabilities for those products. The Congressional Budget Office acknowledged this potential for higher launch prices leading to higher Medicaid and Medicare Part B spending, but suggested that “[o]ver time, slower price growth would attenuate the effect of higher launch prices.”¹⁰ In similar conditions, the analogous Medicaid “additional rebate” has resulted in significant federal Medicaid rebates and deep discounts to 340B covered entities, but has not necessarily slowed the rate of price increases for certain products.

Implementation questions

Beyond the issue of whether the inflation rebates will moderate price increases, the law raises numerous interpretive and operational questions. For example:

• Will ASP inflation rebates apply to non-drug/biologic items for which ASPs must be reported (e.g., hyaluronic acid products), as if they were drugs and biologics? If so, will that also be the case with respect to wound care management products, which the Centers for Medicare & Medicaid Services (CMS) separately has proposed to reimburse as “supplies” using bundled payment methods under the physician fee schedule?
• For Part B products that do not yet have unique HCPCS billing codes and are billed on the basis of a miscellaneous code, how will CMS determine the number of Part B rebatable units?
• Will Part B rebatable units include “excess” discarded units for which CMS seeks separate refunds from manufacturers pursuant to Section 90004 of the Infrastructure Investment and Jobs Act?
• At what frequency will drugs be evaluated for the “low cost” exception to the Part B inflation rebate statute?
• Will inflation rebates be payable with respect to Part B products reimbursed by Medicare Advantage plans? The statutory rebate formula refers to “the number of units for [the] billing and payment code of [the Part B rebatable] drug furnished during such calendar quarter,” without any indication of whether or not that includes drugs furnished under the Part B benefit of a Medicare Advantage plan.¹¹
• Will CMS need to modify claims submission mechanisms under Part B to enable it to identify and determine how many units of a Part B rebatable drug are excludable from rebatable units by virtue of the manufacturer having provided the drug at a 340B program discount? If not, what data will CMS rely on to calculate these exclusions?
• Similarly, in the context of Part D, will CMS mandate that Part D plans and PBMs implement provisions to require pharmacies to identify claims associated with 340B program discounted drugs (and will such a mandate preempt state laws to the contrary)? Any such obligations may have impacts on a range of 340B-related issues, including manufacturer efforts to avoid paying voluntary rebates on prescriptions filled with 340B-discounted products and PBM and payor initiatives to reduce reimbursement to pharmacies and other providers for products purchased at a 340B discount.
• Will the agency provide any informal dispute resolution mechanism for Part B or Part D rebate disputes, given the preclusion of administrative review?
• How and when will CMS advise providers with respect to the Part B coinsurance percentage to be collected from a beneficiary for individual drugs during a given calendar quarter?

Commercial pricing and contracting practices

Further, of course, manufacturers should carefully consider the potential rebate impacts associated with price increases as part of their commercial pricing and contracting strategies. Overall, inflation rebates are likely to add a significant new dimension to manufacturer pricing and contracting decisions, with a variety of potential ramifications. Given the broad scope of the products to which these rebates apply and the fact that potential inflation rebate liability will begin within a few months after the IRA’s enactment, we believe this is one of the most significant near-term aspects of the legislation for evaluation and planning by manufacturers and other industry participants.

In the simplest sense, smaller price increases will of course have the tendency to minimize inflation rebate liabilities, but there may be a variety of other mechanisms that manufacturers may consider going forward. As noted, initial launch prices for new drugs may be higher to minimize future rebate liabilities, and going forward, larger price increases with less frequency may trigger significant rebates in a period which decline over time until the next price increase, in a manner that may affect cash flow. At the same time, such “timing” mechanisms might be used to minimize rebate liabilities if a product’s utilization is seasonal (e.g., price increases occurring in ASP calculation periods that will correspond to payment periods with lower utilization). Similarly, the coordination of the timing of contractual commercial rebate payments and price increase cycles might also minimize exposure (i.e., rebates payable in price increase periods will tend to offset price increase revenue in the ASP calculation to the maximum extent given “smoothing” of retrospective rebates in the calculation and assuming continuing inflation). Finally, given that the inflation rebates are tied to pricing-related metrics (ASP and AMP), manufacturers may explore other, non-price mechanisms such as bona fide service fee relationships or patient support programs to help ensure patient access for their products, but will need to evaluate such approaches carefully in light of other health care compliance risks.

Beyond that, manufacturers should consider the potential impacts of the new law in light of their existing (and future) contracts. Inflation rebates will be incremental to existing contractual rebates payable to PBMs and other customers for Part B or Part D drugs, including “price protection” rebates. Manufacturers may wish to consider whether modifications to existing or future agreements are possible, including under “change of law” or similar clauses. More generally, inflation rebates are one aspect of numerous changes made to the drug pricing environment by the IRA, including negotiation of “maximum fair prices” by the Secretary for “selected drugs” and redesign of Medicare Part D, which replaces existing coverage gap discounts with mandatory manufacturer discounts applying throughout the different phases of the Part D benefit. As such, the cumulative impact of these changes may warrant renegotiation of existing rebate agreements, with the potential for termination if new terms cannot be mutually agreed.

Issues for non-manufacturer stakeholders

While the principal impact of the inflation rebate provisions will fall upon manufacturers, other stakeholders may be subject to indirect impacts. As noted, the IRA does not itself modify Part B ASP payment amounts or Part D reimbursement methods in light of the inflation rebates, but health care providers may need to implement processes to identify 340B prescriptions and manage changing Part B copayment amounts for multiple products. If such 340B claims are identified, providers may face future reimbursement pressure from third party commercial or Part D plans with respect to such claims.

For their part, Part D plan sponsors and their PBM vendors may eventually be required to implement processes to identify claims for drugs purchased at a discount under 340B, including in the context of contract pharmacy arrangements, which often operate on retrospective replenishment models. Moreover, those plans and PBMs may face contractual disputes or more aggressive rebate contract negotiations with respect to covered drugs from manufacturers seeking to adjust rebate terms in light of the IRA changes.

1. See 42 U.S.C. § 1395w-3a. The 106 percent amount is effectively subject to reduction – currently two percent – due to the sequestration provisions of other budgetary laws. The percentages of ASP in this Client Alert are those prior to sequestration.
2. The Congressional Budget Office estimated that Part B and Part D inflation rebates would result in net decreases in direct spending and increases in revenues of approximately $100 billion over 10 years. “Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022, as Amended in the Nature of a Substitute (ERN22335) and Posted on the Website of the Senate Majority Leader on July 27, 2022,” revised August 5, 2022, available here, at pp. 6 and 9.
3. Separate from the Part B rebate provisions, the IRA includes a variety of reimbursement and other mechanisms intended to promote the further development and introduction of biosimilar price competition. For example, in the Medicare fee-for-service context, the current payment amount for a biosimilar is equal to its ASP, plus 6 percent of the reference biologic’s ASP. Under the IRA, for an initial five-year period applicable to a qualifying biosimilar biological product, the amount of the “add on” payment will be increased to 8 percent of the reference biologic’s ASP as long as the qualifying biosimilar’s ASP remains below that of the reference biologic.
4. “CPI-U” refers to the consumer price index for all urban consumers (United States city average).
5. The statute contains analogous provisions applicable in the context of drugs furnished in ambulatory surgery and hospital outpatient contexts.
6. While Medicare Part D generally operates on a calendar year basis, we note that October 1 is the first day of the federal fiscal year.
7. Based upon U.S. Bureau of Labor Statistics CPI-U data available here.
8. The Secretary may defer fiscal year 2023 and 2024 invoices until not later than December 31, 2025.
9. Both Part B and Part D inflation rebates are excluded from the calculation of ASP, AMP, and Medicaid “best price.”
10. Congressional Budget Office, letter to Honorable Jason Smith (August 4, 2022), available here.
11. New subsections (i)(3)(A)(i) and (i)(3)(B) of Section 1847A of the Social Security Act, as added by IRA Section 11101(a).

In-Depth 2022-210