Reed Smith In-depth

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”),1 an omnibus budget law that contains significant reforms affecting prescription drug pricing and reimbursement. This Client Alert is the fourth in a series addressing the IRA’s prescription drug reforms.2 Below, we provide an overview of the new requirements relating to federal price negotiation of “maximum fair prices” for “selected drugs” under Medicare Parts B and D, applicable beginning in 2026 (the “Program”).
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For many years, Democratic Party lawmakers have sought to limit prescription drug prices through bills which would require the federal government’s “negotiation” of such prices with pharmaceutical manufacturers. The IRA contains provisions to implement that goal, albeit only with respect to prices paid under Medicare Parts B and D, and only for certain narrowly defined high-expenditure drugs, with prices negotiated for a limited number of such drugs each year. Moreover, the process appears to be less of a negotiation than a mechanism through which the government can specify the maximum prices manufacturers will receive for drugs paid for by Medicare, with manufacturers potentially facing the limited alternatives of agreeing to the price the government demands, paying punitive excise taxes, or withdrawing their products from coverage under the Medicare and Medicaid programs.

The IRA establishes a process by which the Secretary of Health and Human Services (Secretary) will identify certain single source drugs accounting for significant Part B and/or Part D expenditures, and will negotiate a “maximum fair price” (MFP) for a specified number of such drugs with their respective manufacturers.3 The MFPs for the initial set of such “selected drugs” will be negotiated over a ten month period beginning October 1, 2023 and applicable in 2026. Once negotiated, MFPs will continue in effect until at least nine months after a selected drug is subject to generic or biosimilar competition. The MFPs cannot exceed certain statutory ceilings, but generally are not subject to any floors. Manufacturers will be required to make the MFPs available to pharmacies and providers for dispensing or administration to eligible patients under Parts B and D, although the operational details relating to how that will occur are yet to be determined – with significant potential implications for pharmacies, wholesalers and other drug supply chain participants.

Negotiation Process Timeline

Under the Program, the Secretary will establish an annual price negotiation process with respect to a specified number of “selected drugs.” The MFPs negotiated for those selected drugs first become applicable during the “initial price applicability year” (referred to herein as “IPAY”) for such drugs. The first IPAY is calendar year 2026. The IPAY and each subsequent year during which a drug is a selected drug is the “price applicability period” for such selected drug.

The IRA specifies a somewhat different negotiation timeline for the 2026 IPAY than for 2027 and each subsequent IPAY. The two timelines are illustrated in Figures 1 and 2, and described in detail below.

Inflation Reduction Act Figure 01

Inflation Reduction Act Figure 02