The bill (available here) will next proceed to the House of Representatives for consideration on August 12 and is expected to pass without modification on a party-line vote and be signed into law by President Biden shortly thereafter. If the bill were to become law, it would provide for, among other things:
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A drug price negotiation program for certain high Medicare spend drugs without competition, with prices generally capped by reference to non-federal average manufacturer price (non-FAMP);
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Rebates on drugs paid under Medicare Part B or D whose prices increase faster than inflation; and
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Certain Medicare Part D benefit redesign provisions, including lowering the beneficiary out-of-pocket threshold and substituting the manufacturer coverage gap discount program with a new Manufacturer Discount Program.
The Congressional Budget Office (CBO) estimated the July 2022 Senate Finance Committee draft of these three provisions would generate approximately $287 billion in savings to the federal government over ten years. In December 2019, CBO estimated these provisions in the House-passed H.R.3, Elijah E. Cummings Lower Drug Costs Now Act, would have reduced federal spending by $482 billion over ten years.
Below, we provide a high-level summary of the major provisions in the bill.
Drug Price Negotiation Program
The proposed legislation would establish a “Drug Price Negotiation Program” that seeks to lower the prices of certain high Medicare spend drugs without generic/biosimilar competition with respect to Medicare Parts B and D beneficiaries, starting in 2026.
What drugs would be eligible for selection for negotiation?
How would drugs be selected for negotiation?
How would the negotiated price be set?
- Maximum fair price
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The maximum fair price would be capped at a specified percentage of non-FAMP or an amount reflecting an average market price. Specifically, the maximum fair price generally may not exceed the lower of:
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A specified percentage of average non-FAMP for 2021 (or, where there is no non-FAMP for 2021, the average of non-FAMP for the first full year following market entry), increased by an inflation factor from September 2021 to September of the year prior to the selected drug publication date,
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A specified percentage of average non-FAMP for the year prior to the selected drug publication date (except for initial price applicability year 2026), or
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An amount equal to:
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For Part B drugs. The amount determined under section 1847A(b)(4) of the Social Security Act (SSA) for the year prior to the year of the selected drug publication date.
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For Part D drugs. A plan-specific amount determined as the sum of the enrollment weighted net negotiated prices of the drug under each Part D plan or Medicare Advantage Prescription Drug (MA-PD) plan. This amount is determined net of “all price concessions received by such plan or pharmacy benefit managers on behalf of such plan."
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The specified percentages are determined by the length of time the drug has been on the market.
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For long-monopoly drugs, for which at least 16 years have elapsed from approval or licensure to the initial price applicability year (excluding vaccines), 40 percent.
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For extended-monopoly drugs, for which at least 12 years but less than 16 years have elapsed from approval or licensure to the initial price applicability year (excluding vaccines and drugs selected for negotiation prior to 2030), 65 percent.
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For short-monopoly drugs, which encompasses all other drugs, 75 percent.
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For 2029 and 2030, there would be a maximum fair price floor of 66 percent of average non-FAMP for small biotech drugs.
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Factors for consideration. In negotiating the maximum fair price, the Secretary would be required to consider:
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Certain information submitted by the manufacturer, including the research and developments costs and the extent to which manufacturer has recouped such costs, current costs of production and distribution, federal financial support for discovery and development, data regarding pending and approved patents, FDA market exclusivities, market and sales data; and
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Evidence about alternative treatments, including the extent to which the drug is a therapeutic advancement, the costs of alternatives, and comparative effectiveness between the drug and the alternative.
What would the timeline for negotiation be?
What would happen after the negotiated price is set?
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Offer of maximum fair price. Starting the year at issue, the manufacturer would be required to offer the drug at the maximum fair price with respect to Medicare beneficiaries.
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Annual adjustment of maximum fair price. The maximum fair price would be adjusted each year by an inflation factor for a specified preceding 12-month period.
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Renegotiation of maximum fair price. Starting in 2028, the Secretary could select drugs for renegotiation.
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The Secretary would be required to select for renegotiation a drug that becomes a long-monopoly drug or an extended-monopoly drug.
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The Secretary would be permitted to select for renegotiation a drug for which there is a new indication or a material change in the factors considered.
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Cessation of maximum fair price. A drug would cease to be subject to the maximum fair price starting the year that begins at least 9 months after a generic or biosimilar comes to market.
What happens if a generic or biosimilar launches?
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Implications of a generic or biosimilar launch after a drug or biological product is selected for negotiation.
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If a generic or biosimilar were to enter the market before or during the negotiation period, the negotiation process would stop.
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If a generic or biosimilar were to enter the market after the negotiation period, the selected drug or biological product would be subject to the maximum fair price until the start of the first year that begins 9 months after the generic or biosimilar entered the market.
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Special delay for anticipated biosimilar market entry before a biological product is selected for negotiation.
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The Secretary could delay selection of a biological product that would otherwise be selected for negotiation by one or two years.
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Such delay would be allowed in specified circumstances:
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The biological product must be an extended-monopoly drug,
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The delay must be requested by the biosimilar manufacturer, and
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The Secretary must determine there is a high likelihood that the biosimilar will be licensed and marketed within two years of what otherwise would be the biological product’s selected drug publication date.
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The biological product manufacturer would be subject to a rebate if, after a one-year delay, the Secretary determines that there is no longer a high likelihood of the biosimilar entering the market within the specified period, or if, after a two-year delay, the biosimilar does not enter the market. The rebate would be owed for each year that the delay was granted.
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For Part D drugs. The rebate would be calculated as the sum of the products of:
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75 percent of the amount by which the average manufacturer price (AMP) of the biological product for each calendar quarter during the delay period exceeds:
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With respect to a first one-year delay period, the maximum fair price, OR
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With respect to a second one-year delay period, the maximum fair price increased by an inflation factor, AND
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The number of units dispensed under Part D during each such calendar quarter of the delay period.
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For Part B drugs. The rebate would be calculated as the sum of the products of:
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80 percent of the amount by which the Medicare Part B payment amount, as determined under as determined under section 1847A(b)(4) of the SSA, for the biological product for each calendar quarter during the delay period exceeds:
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With respect to a first one-year delay period, the maximum fair price, OR
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With respect to a second one-year delay period, the maximum fair price increased by an inflation factor, AND
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The number of units (excluding packaged units) administered under Part B during each such calendar quarter of the delay period.
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For biological products that become long-monopoly drugs at the time they are selected for negotiation following a delay, 65 percent of the average non-FAMP of the biological product in 2021 (or the first full year following market entry) increased by an inflation factor would be substituted for the maximum fair price in the rebate calculation.
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Any manufacturer that fails to comply pay a rebate would be subject to a civil monetary penalty (CMP) equal to ten times the amount of the rebate the manufacturer failed to pay.
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The following exclusions apply to the special delay for anticipated biosimilar market entry:
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Biological products for which the biosimilar is more than one year out from licensure and has not yet been marketed.
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Biological products for which the biosimilar manufacturer:
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Also manufactures the reference product,
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Has entered an agreement with the reference product manufacturer that requires or incentivizes the biosimilar manufacturer to submit a request for a delay, or
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Has entered an agreement with the reference product manufacturer that restricts the quantity of the biosimilar that may be sold in the United States.
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A biological product that become a long-monopoly drug during a first year of delay would not be eligible for a second year of delay.
How would the requirements on manufacturers be enforced?
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CMPs. Manufacturers would be subject to significant CMPs for:
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Failing to offer the maximum fair price with respect to a Medicare beneficiary.
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Violating the terms of the negotiation agreement, including the requirement to submit the requisite information to the Secretary.
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Knowingly providing false information.
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Excise tax. Manufacturers would be subject to a significant excise tax for failing to (1) timely enter into the negotiation agreement, (2) timely agreeing to a maximum fair price, or (3) timely submitting the requisite information to the Secretary.
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The excise tax would not apply during period when the manufacturer has terminated all applicable Medicare agreements (Medicare coverage gap discount program, Manufacturer Discount Program, and Medicaid Drug Rebate Program) and none of its drugs are included in any such agreement.
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If a manufacturer decided to terminate all such agreements to avoid the excise tax, none of its drugs could be paid for under Medicare Part B or D or using federal funds under Medicaid, even if a determination were made that the drug is essential to the health of program beneficiaries.
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A manufacturer would no longer be subject to the excise tax when a generic or biosimilar comes to market.
Other provisions of note:
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The payment amount under Part B for negotiated drugs would be 106 percent of the maximum fair price.
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The negotiated price under Part D for negotiated drugs would be no greater than the maximum fair price.
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Part D plans would be required to include negotiated drugs on their formularies.
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Best price under the Medicaid Drug Rebate Program for negotiated drugs would include the maximum fair price.
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AMP under the Medicaid Drug Rebate Program would exclude the maximum fair price.
Part B and Part D Inflation Rebates
The proposed legislation would require manufacturers to pay a rebate on a unit of a drug paid under Part B or D where the price of the drug increases faster than inflation. Rebates could be due only on Medicare units and, because of a decision by the Senate parliamentarian under rules of procedure governing reconciliation measures, unlike the Build Back Better Act, rebates could not be owed on commercial units.
Starting Q1 2023, Part B inflation rebates could be owed as follows:
- Part B rebatable drug. Drugs subject to the Part B inflation rebate would be single source drugs or biologicals (as defined in section 1847A(c)(6)(D) of the SSA, excluding a qualifying biosimilar biological product (as defined in section 1847A(b)(8)(B)(iii) of the SSA), paid under Part B, excluding certain vaccines and low Medicare spend drugs.
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Rebate calculation. The rebate would be calculated as:
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the total number of Medicare Part B units of the drug in the rebate quarter, excluding 340B units and packaged units;
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multiplied by the amount (if any) by which the rebate quarter Part B payment rate exceeds the inflation-adjusted benchmark quarter Part B payment rate.
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Subsequently approved drugs. For a subsequently approved drug, defined as a drug approved after December 1, 2020:
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the rebate could first be owed on the later of the Q1 2023, or the sixth full calendar quarter after the drug was first marketed; and
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the payment amount benchmark quarter would be the third full quarter after the drug was first marketed, and the benchmark period CPI-U would be the CPI-U for the first month of the first full calendar quarter after the drug was first marketed.
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Treatment of selected drugs. Drugs subject to negotiation under the drug price negotiation program would be subject to the standard rebate calculation. After the price applicability period ends (due to a generic or biosimilar launch), the payment amount benchmark quarter would be the Q1 of the last year of the price applicability period, and the benchmark period CPI-U would be July of the year before the last year of the price applicability period.
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Beneficiary coinsurance. For any Part B drug for which a rebate is triggered, Part B beneficiary coinsurance would be reduced to 20 percent of the inflation-adjusted benchmark quarter Part B payment amount. This provision would take effect Q2 2023, meaning the first rebate period (Q1 2023) would not have a coinsurance cap.
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Rebate invoicing. A manufacturer subject to a rebate would receive a rebate invoice within 6 months of the end of the rebate quarter. The Secretary may choose to delay sending invoices for calendar quarters in 2023 and 2024 to not later than September 25, 2025. A manufacturer would be required to pay the rebate within 30 days of invoice receipt.
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CMPs. A manufacturer that does not timely pay a rebate would be subject to a CMP in an amount at least equal to 125 percent of the rebate amount.
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Administrative and judicial review. There would be no administrative or judicial review of determinations of rebate units, whether a drug qualifies as a Part B rebatable drug, rebate calculations, or beneficiary coinsurance calculations.
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Government price reporting. The rebates would be excluded from average sales price (ASP), best price, and AMP calculations.
For each one-year period starting with the one-year period beginning October 1, 2022, Part D inflation rebates could be owed as follows:
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Part D rebatable drug. Drugs subject to the Part D inflation rebate would be drugs or biologicals paid under Part D, excluding low Medicare spend drugs.
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Rebate calculation. The rebate would be calculated as:
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the total number of Medicare Part D units of the drug in the rebate year (excluding 340B units beginning in 2026);
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multiplied by the amount (if any) by which the volume-weighted average annualized AMP for the rebate year exceeds the inflation-adjusted volume-weighted average annualized AMP for the benchmark year.
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The volume-weighted average annualized AMP would be calculated by multiplying the quarterly AMP for a unit of a drug by the ratio of the number of AMP-reported units for the quarter to the number of AMP-reported units for the year and adding the result to the results of the same calculation for each of the other three quarters in the year.
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The inflation-adjusted volume-weighted average annualized AMP for the benchmark year would be calculated by increasing the volume-weighted average annualized AMP for the payment amount benchmark period (i.e., Q1 2021 – Q3 2021) by the percentage (if any) by which the benchmark period CPI-U (i.e., the CPI-U for January 2021) is exceeded by the CPI-U for the first month of the rebate year.
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Subsequently approved drugs. For a subsequently approved drug, defined as a drug approved after October 1, 2021, the rebate calculation would be the same as the standard rebate calculation, with the exception that the benchmarks used for calculating the inflation-adjusted payment rate would be as follows:
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the payment amount benchmark year would be the first calendar year beginning after the date on which the drug was first marketed; and
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the CPI-U benchmark month would be the CPI-U for January of the first calendar year beginning after the date on which the drug was first marketed.
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Treatment of selected drugs. Drugs subject to negotiation under the prescription drug pricing negotiation program would be subject to the standard rebate calculation. After the price applicability period ends (due to a generic or biosimilar launch), the payment amount benchmark period would be the last year of the price applicability period, and the benchmark period CPI-U would be January of the last year of the price applicability period.
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Line extensions. The Secretary would establish the rebate calculation for line extensions of oral solid dosage form Part D rebatable drugs, consistent with the treatment of line extensions under the Medicaid Drug Rebate Program at section 1927(c)(2)(C) of the SSA. The definition of “line extension” mirrors the Medicaid Drug Rebate Program definition, in that it expressly includes extended release formulations, but does not include abuse-deterrent formulations.
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Rebate invoicing. A manufacturer subject to a rebate would receive a rebate invoice within 9 months of the end of the applicable year. Invoices for years beginning October 1, 2022, or October 1, 2023, may be delayed to December 31, 2025. A manufacturer would be required to pay the rebate within 30 days of invoice receipt.
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Adjusting rebate calculations. The Secretary would provide a method and process for adjusting a rebate calculation where a prescription drug plan or MA-PD plan submits a revision to the number of Medicare Part D units of the drug in the rebate year. The manufacturer would be required to rectify any resulting underpayment within 30 days of notification of such underpayment.
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CMPs. A manufacturer that does not timely pay a rebate would be subject to a CMP in an amount equal to 125 percent of the rebate amount.
Part D Benefit Redesign
The Inflation Reduction Act would make a number of changes to Medicare Part D. Specifically, the legislation would modify Medicare Part D coverage, as follows:
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Eliminate the coverage gap, such that Part D beneficiaries, after having met the deductible, would proceed through an initial coverage phase followed by a catastrophic phase. This change would take effect in 2025.
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Reset the out-of-pocket threshold to $2,000 starting in 2025, subject to annual increases tied to aggregate Part D expenditures. This would replace the current $7,050 out-of-pocket threshold.
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Eliminate beneficiary cost sharing in the catastrophic phase, after beneficiaries reach the out-of-pocket threshold. This change would take effect in 2024.
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Reduce the Medicare reinsurance amount, from 80 percent to 20 percent where a drug is subject to the new Manufacturer Discount Program, and from 80 percent to 40 percent where a drug is not subject to the program. This change would take effect in 2025.
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Premium stabilization changes that limit increasing the annual beneficiary base premium by more than 6 percent year-to-year from 2024 to 2030.
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Permitting smoothing of out-of-pocket costs. A beneficiary would be able to opt to pay out-of-pocket costs on a monthly basis subject to a cap, defined as the beneficiary’s outstanding out-of-pocket costs for a plan year divided by the remaining months in the plan year. This change would take effect in 2025.
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Expands low-income-subsidy (LIS) benefits, such that benefits previously available to individuals below 135 percent of the poverty line would now be available to those below 150 percent of the poverty line. This change would take effect in 2024.
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Vaccines. Starting in 2023, vaccines recommended by the Advisory Committee on Immunization Practices would be covered under Part D with no deductible and no coinsurance or other cost sharing.
In addition, the bill would adopt a new Manufacturer Discount Program whereby the Secretary would enter into agreements with manufacturers to provide discounted prices for applicable drugs dispensed to applicable Medicare beneficiaries. This program, starting January 1, 2025, would be structured as follows:
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Discount. A manufacturer with an agreement with the Secretary must offer:
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A 10 percent discount off the negotiated price for an applicable drug where an applicable beneficiary has incurred costs equal to or above the deductible and below the out-of-pocket threshold.
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A 20 percent discount off the negotiated price for an applicable drug where an applicable beneficiary has incurred costs equal to or above the out-of-pocket threshold.
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Applicable drugs. An applicable drug is a covered Part D drug approved under a new drug application or licensed as a biologic or biosimilar biological product (i.e., not including drugs approved under an abbreviated new drug application) for which benefits are available through a Part D plan (on a formulary or otherwise) but does not include drugs subject to the negotiation program discussed previously.
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Selected drugs. Where a beneficiary who has not yet incurred costs equal to or above the annual out-of-pocket threshold is dispensed a drug does not qualify as an applicable drug because it is a selected drug for purposes of the negotiation program discussed previously, then the Secretary must provide the plan a subsidy of 10 percent of the negotiated price of that drug (which for such drugs would be 10 percent of the maximum fair price).
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Applicable beneficiaries. Applicable drugs subject to an agreement as described below can only be dispensed to a Part D beneficiary enrolled in a prescription drug plan (or a Medicare Advantage prescription drug plan) but not in a qualified retiree prescription drug plan (defined as employment-based retiree health coverage). The beneficiary also must have incurred costs above the applicable deductible for that beneficiary to be eligible for an applicable drug.
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Agreement. The Secretary shall establish a manufacturer agreement governing the terms of the discount program. Manufacturers are required to enter the discount program agreement for fiscal year 2025 by March 1, 2024.
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Phase in for drugs dispensed to LIS beneficiaries. Where:
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A specified manufacturer, defined as a manufacturer that, in 2021:
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Had a coverage gap discount agreement,
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For which the expenditures for all drugs of that manufacturer under Part D are less than one percent of total expenditures under Medicare Part D, and
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For which the expenditures for all single source drugs and biologicals of that manufacturer for which payment may be made under Part B are less than one percent of total expenditures for all drugs or biologics for which payment may be made under Medicare Part B,
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And the drug of that manufacturer has been dispensed to a LIS beneficiary, then
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The discounts under the Manufacturer Discount Program shall be phased in:
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From a 1 percent discount in 2025 to a 10 percent discount in 2029 and each subsequent year, for an applicable beneficiary that has incurred costs below the out-of-pocket threshold and
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From a 1 percent discount in 2025 to a 20 percent discount in 2031 and each subsequent year, for an applicable beneficiary that has incurred costs at or above the out-of-pocket threshold
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Phase in for specified small manufacturers. Where:
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The expenditures for a specified manufacturer, as defined previously, for a single drug of that manufacturer under Part D are equal to or exceed 80 percent of the total expenditures for the drugs of that manufacturer under Part D for 2021 that were covered under a coverage gap discount agreement in that year, then
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The discounts under the Manufacturer Discount Program for an applicable drug of the specified small manufacturer dispensed to an applicable beneficiary shall be phased in according to the same percent discounts as for drugs dispensed to LIS beneficiaries discussed above.
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Enforcement. Manufacturers that fail to provide discounted prices for an applicable drug can be subject to civil monetary penalties equal to 1.25 percent times the discount that the manufacturer should have paid under the agreement. The Secretary may also terminate an agreement with a manufacturer for a knowing and willful violation of the terms of the agreement as established by the Secretary.
Other Provisions
In addition to the provisions above, the proposed legislation would:
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Further delay implementation of the final rule entitled Anti-Kickback Statute Safe Harbor Protections for Prescription Drug Rebates until January 1, 2032. The rule was previously set to go into effect on January 1, 2022, but implementation was delayed until January 1, 2026, by the Infrastructure Investment and Jobs Act, and, more recently, to January 1, 2027, by the Bipartisan Safer Communities Act. We previously published an alert on this final rule, available here.
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Establish a payment rate for biosimilars under Part B during the initial period. For biosimilars furnished on or after July 1, 2024, the initial period payment rate would be the lesser of the biosimilar’s wholesale acquisition cost plus three percent, or 106 percent of the reference product’s ASP.
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Increase the Part B add-on payment for qualifying biosimilars from six percent to eight percent of the reference product’s ASP for a five-year period. During this period, the payment for such biosimilars would be one hundred percent of the biosimilar’s ASP plus eight percent of the ASP of the reference biological.
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We will monitor this bill as it goes to the House and, if it becomes law, as it is implemented. As always, it is important that you carefully review the proposed legislation to identify all issues relevant to your organization.
Authored by Alice Valder Curran, Beth Roberts, Beth Halpern, Cybil Roehrenbeck, Ken Choe, Melissa Bianchi, Stuart Langbein, Kathleen Peterson, Anna Weinstein, Samantha Marshall, Ashley Ifeadike, and Mahmud Brifkani.
