CMS Issues Initial Guidance on IRA Medicare Prescription Drug Inflation Rebate Program

On February 9, 2023, the Centers for Medicare & Medicaid Services (“CMS”) released a fact sheet and two initial guidance documents outlining the process for collecting inflation-based rebates as part of the Inflation Reduction Act (“IRA”) (Public Law No. 117-169). The guidance documents offer initial requirements and procedures for implementation of the Medicare Prescription Drug Inflation Rebate Program (“Inflation Rebate Program”) for Part B and Part D. CMS also released a notice for public comments on select components of the Part B Inflation Rebate Program Initial Guidance and Part D Inflation Rebate Program Initial Guidance. Comments are due on March 11, 2023 and should be sent to IRARebateandNegotiation@cms.hhs.gov.

This client alert summarizes the guidance documents related to the Inflation Rebate Program and outlines considerations for stakeholder input. More background on the IRA and the Inflation Rebate Program is available in Covington’s webinars on the IRA and value frameworks or the firm’s prior client alerts covering the IRA as enacted and the Medicare Negotiation Program Implementation Plan. Please contact us to learn more.

Medicare Prescription Drug Inflation Rebate Program Overview

The IRA establishes mandatory rebates for certain Part B drugs and Part D drugs with prices that have increased faster than the rate of inflation. The rebate amount is calculated by multiplying the total number of units dispensed under Part B and Part D, respectively, by the amount by which the price exceeded the inflation-adjusted benchmark. The rebate amounts paid by manufacturers will be deposited into the Federal Supplementary Medical Insurance Trust Fund. Noncompliance with the Inflation Rebate Program may result in a Civil Monetary Penalty (“CMP”) of 125% of the rebate amount.

On February 7, 2023, the Department of the Health and Human Services (“HHS”) Office of Inspector General (“OIG”) published a Technical Assistance Brief on the implementation of inflation-based rebates for Part B drugs under the IRA. The brief provides potential solutions to identified challenges for implementing Part B inflation rebates. Without directly citing the technical brief, CMS references several of HHS-OIG’s proposed solutions, particularly as they relate to developing a methodology to apportion units and rebates for single source drugs and biological products (“biologicals”) from multiple manufacturers (section 50.13), utilizing 340B modifiers (section 50.8.1), and identifying drugs and biologicals subject to the Medicaid Drug Rebate Program (“MDRP”) (section 50.8.2).

Although the guidance documents contain new procedural and technical information, much of the content refers to the IRA statutory requirements. CMS also highlights that the Agency has the statutory authority to delay invoicing manufacturers for the first two years’ rebate amounts until September 30, 2025 (for Part B) and December 31, 2025 (for Part D). In addition, CMS notes that it intends to issue more guidance regarding the form and manner in which Rebate Reports would be sent to manufacturers, how manufacturers would submit calculation errors, and how the Agency would reconcile potential overpayments.

Part B Inflation Rebate Program Initial Guidance

The Part B Inflation Rebate Program Initial Guidance provides information for manufacturers regarding the inflation-based rebate payments for Part B rebatable drugs, which took effect on January 1, 2023. Due to the need to implement the adjustment to beneficiary cost sharing by April 2023, CMS has deemed several components of the Part B Inflation Rebate Program Initial Guidance to be final: (1) Determination of Part B Rebatable Drugs; (2) Computation of Beneficiary Coinsurance and Amounts; and (3) Calculation of the Medicare Part B Inflation Rebate Amount. Highlights from the final sections of the guidance include:

• Determination of Part B Rebatable Drugs (section 30): For each calendar quarter, CMS intends to identify: (1) single source drugs and biologicals, including biosimilars, for which payment is made under Part B; and (2) applicable Healthcare Common Procedure Coding System (“HCPCS”) codes for such drugs and biologicals. CMS plans to align these processes with those currently used to identify separately payable single source drugs and biologicals for determining quarterly payment limits and plans to use the most recently available data sources, including data submitted to the Agency by manufacturers (e.g., average sales price (“ASP”) figures, including the date of first sale), FDA.gov information (e.g., the Food & Drug Administration’s (“FDA’s”) Orange Book, approval information), and drug pricing compendia files.

CMS intends to exclude the following products from the identification process described above on a quarterly basis:

• Drugs where the average total allowed charges—meaning the payment amount, inclusive of beneficiary liability and Medicare payment for the covered Part B item or service—per individual that uses such drug or biological under Part B are less than $100 per individual using such drug per year, adjusted by changes in the CPI-U;
• Certain vaccines (e.g., influenza, pneumococcal, hepatitis B, and COVID-19 vaccines);
• Multiple source drugs;
• Qualifying biosimilars; and
• Drugs and biologicals that are billed using an “unclassified,” “unspecified,” or “not otherwise classified” HCPCS code or claims for such drugs and biologicals when no other HCPCS code is applicable.

• Computation of Beneficiary Coinsurance and Amounts Paid Under Section 1833(a)(1)(EE) of the Social Security Act (section 40): Starting on April 1, 2023, when the specified amount for a Part B rebatable drug for a calendar quarter exceeds the inflation-adjusted payment for such quarter, beneficiary coinsurance for the rebatable drug will be equal to 20% of the inflation-adjusted payment amount for such quarter. CMS plans to publish this information in the quarterly pricing files for each HCPCS code on the CMS website. CMS notes that the Agency will make revisions to the coinsurance adjustment based on updated information (e.g., manufacturer submits revised ASP data to CMS).

• Calculation of the Medicare Part B Inflation Rebate Amount (sections 50.2-50.7 and 50.9): CMS delineates the relevant calculations for determining when the specified amount exceeds the inflation-adjusted payment amount, including Identification of the Specified Amount for the Calendar Quarter, Payment Amount Benchmark Quarter, Benchmark Quarter CPI-U, Rebate Period CPI-U, as well as the Determination of Inflation-Adjusted Payment Amount and Adjustments for Changes to HCPCS Codes. Section 80 includes examples and formulas associated with the different calculations.

In addition, CMS seeks comments related to a number of new processes that the Agency intends to use to:

• Determine the total number of drug units for calculating rebates, including but not limited to the removal of 340B units, units that are packaged into the payment amount for an item or service and are not separately payable, units that become multiple source drugs, and dual-eligible units (i.e., when a Medicaid drug rebate was paid for a covered outpatient drug) (section 50.8);
• Assess operational considerations related to the inclusion of units furnished to Medicare Advantage beneficiaries (section 50.8.5);
• Reduce or waive the rebate amount in the case of a drug shortage or supply chain disruption (sections 50.11, 50.12);
• Apportion the financial responsibility for the rebate amount for a calendar quarter where there is more than one manufacturer of the rebatable drug (section 50.13); and
• Ensure the integrity of the rebate determination process by allowing manufacturers to relay miscalculations or missing exclusions within 10 days of receipt of the quarterly Preliminary Rebate Report. The Preliminary Rebate Report would be available five months after the end of each calendar quarter, but CMS may exercise its statutory authority to delay the reports for calendar years 2023 and 2024 (section 60).

Part D Inflation Rebate Program Initial Guidance

The Part D Inflation Rebate Program Initial Guidance provides information to manufacturers of Part D rebatable drugs as well as Medicare Part D Prescription Drug Plans and Medicare Advantage–Prescription Drug Plans (“Part D plan sponsors”). According to the timeline established by the IRA, the first 12-month period for which manufacturers will be required to pay rebates to Medicare for price increases exceeding inflation for certain Part D drugs began October 1, 2022. CMS intends to invoice manufacturers for such rebates not later than nine months after the end of each applicable period. Unlike certain sections of the Part B guidance, the Part D guidance is not final, and CMS explicitly seeks comment on the following provisions:

• Part D Rebatable Drug (section 30): The IRA defines a “Part D rebatable drug” to mean, with respect to a 12-month applicable period, a drug or biological that is a covered Part D drug, and, as of the first day of the applicable period, is a drug or biological approved under certain FDA pathways. CMS plans to consult with FDA and use resources such as the FDA Orange Book, National Drug Code (“NDC”) Directory, and Drugs@FDA to identify reference products and authorized generics. CMS will exclude vaccines and products where the average annual total cost under Part D is less than $100 per individual using such drug per year, adjusted by changes in the CPI-U.

  The IRA specifies sources of information that CMS must use for determining Part D inflation rebates, including the pricing and product information submitted by manufacturers under the MDRP. Specifically, CMS will use the Average Manufacturer Price (“AMP”) for each dosage form and strength of a drug and the corresponding total number of units. Where a manufacturer does not have a currently effective MDRP agreement, CMS plans to exclude such manufacturer’s Part D rebatable drugs because the Agency will not have access to the requisite information needed to calculate inflation rebates. However, CMS seeks feedback on other sources for this information that would allow the Agency to determine Part D drug inflation rebates for manufacturers that do not have active MDRP agreements.

• Calculation of the Part D Drug Inflation Rebate Amount (section 40): CMS plans to determine the rebate amount separately for each dosage form and strength of a Part D rebatable drug using the NDC-9 level. CMS intends to calculate the total rebate amount to be paid by the manufacturer for each NDC-9 for an applicable period by finding the product of: (1) the total number of units of the dosage form and strength of each Part D rebatable drug dispensed under Part D and covered and paid by Part D plan sponsors during the applicable period; and (2) the amount by which the annual manufacturer price (“AnMP”) for such dosage form and strength of such Part D rebatable drug for the applicable period surpasses the inflation-adjusted payment amount for the dosage form and strength of such Part D rebatable drug for the period, subject to certain qualifications. As relevant to this section, CMS seeks comment on ways to identify the rebatable billing units on the prescription claim and Part D Prescription Drug Event file to ensure that manufacturers are being accurately billed for inflation rebates, as well as feedback on methods to identify and exclude 340B units beginning in 2026.

  CMS also seeks feedback on the following procedures outlined in the guidance:

• How to apply the inflation rebate to rebatable line extension drugs (section 40.2);
• Mechanisms to waive or reduce the rebate amount in the case of a shortage or severe supply chain disruption (section 40.5);
• Processes to ensure integrity of the Part D drug inflation rebate invoicing process, including the use of Preliminary Rebate Reports and Preliminary True-Up Reports (sections 50.3, 60.1); and
• Mechanisms by which to impose CMPs on manufacturers that fail to pay rebates (section 60).

Considerations for Stakeholder Comments