1. Introduction
On June 30, 2023, the Centers for Medicare and Medicaid Services (CMS) released its much-anticipated final guidance (“Final Guidance”) for the Medicare Drug Price Negotiation Program (“Negotiation Program”) through the Inflation Reduction Act (IRA).[1] The Negotiation Program is an unprecedented program intended to lower the cost of healthcare for millions of Americans by requiring that manufacturers of the top ten highest cost prescription drugs covered by Medicare engage in a negotiation process to determine a “maximum fair price” (MFP). The Final Guidance, which follows an initial guidance released on March 15, 2023 (“Initial Guidance”),[2] provides few substantive changes to the Initial Guidance but does fill in some details in response to public comments regarding the Negotiation Program.[3] While the Final Guidance consists of almost two hundred pages of text, this post highlights some of the key changes and clarifications established by CMS.
2. Final Guidance
A. Selection of Drugs for Initial Price Applicability Year 2026
- Qualifying Single Source Drugs for 2026 (Section 30.1)
The foundational issue of what constitutes a “qualifying single source drug,” which are the drugs that are eligible for price negotiation, was addressed in Section 30 of the Initial Guidance as final guidance, without opportunity for comment. CMS reiterated in the Final Guidance that Section 30 would not be revisited. Nonetheless, CMS acknowledged that it received many comments about the identification of qualifying single source drugs and noted that it would continue to consider these comments as it develops guidance and rulemaking for future years of the Negotiation Program. Some commenters were specifically concerned about CMS’s decision to consider all doses and strengths of a drug as one qualifying single source drug. Despite these concerns, CMS did not alter the definition of a qualifying single source drug, stating that the term is clearly required by the IRA to include all doses and strengths as one qualifying single source drug, leaving CMS no room to deviate. CMS specifically rejected the suggestion to define qualifying single source drugs in terms of individual New Drug Applications (NDAs) and Biologics License Applications (BLAs).
- The Orphan Drug Exclusion (Section 30.1.1)
The Final Guidance provided the following clarifications of the Orphan Drug Exclusion, which excludes a drug or biologic from constituting a qualifying single source drug if the drug or biologic is designated for only one rare disease or condition under section 526 of the FD&C Act and for which the only approved indication (or indications) is for such disease or condition:
- If a drug previously qualified for the Orphan Drug Exclusion and loses eligibility for such exclusion, CMS will still use the date of the approval or licensure of the drug or biological product to determine whether the product is a qualifying single source drug.
- Drugs with multiple orphan designations will not be eligible for the Orphan Drug Exclusion, even if the drug does not have any approved indications for the additional orphan designation(s).
- CMS responded by stating that it would not only review the relevant FDA databases, but also would consult with FDA as needed to make its determinations.
- CMS will only consider active orphan designations and active approvals. Withdrawn orphan designations and approvals will not factor into the Orphan Drug Exclusion determination.
- Low-Spend Medicare Drug Exclusion (Section 30.1.2)
In the Initial Guidance, CMS stated that drugs that have combined Medicare Parts B and D expenditures of less than $200,000,000 would not be eligible for price negotiation. In the Final Guidance, CMS clarified that a drug’s Part B expenditure calculation will not include expenditures in which payment for the drug was “bundled” with another payment.
• Plasma-Derived Products Exclusion (Section 30.1.3)
The Plasma-Derived Products Exclusion exempts from the Negotiation Program products that are “derived from human whole blood or plasma.” The Plasma-Derived Products Exclusion did not change significantly between guidance drafts.
In response to commenters, the guidance clarified that cellular and gene therapies “are not categorically ineligible” for the Plasma-Derived Products Exclusion. CMS stated that it will apply the criteria for this exclusion to cellular and gene therapies in the same manner that it does to other products.
- Small Biotech Exception (Section 30.2.1)
The Initial Guidance outlined the Exception for Small Biotech Drugs, which allows drugs that constitute a small percentage of CMS’s expenditures, but a large percentage of CMS’s total payments to the drug’s manufacturer, to be exempt from the price negotiation process. This process remains largely the same in the Final Guidance. CMS clarified that it would publish a breakdown of how many drugs applied for and received the Exception for Small Biotech Drugs.
- Biosimilar Delay (Section 30.3.1)
Inclusion of a negotiation-eligible drug on the ranked list of fifty drugs may be delayed if such drug includes the reference product for a biosimilar and there is a high likelihood that the biosimilar will be licensed and marketed before the date that is two years after the selected drug publication date for the initial price applicability year (“Biosimilar Delay”).
One of the requirements in the Initial Guidance for granting a Biosimilar Delay is that the biosimilar manufacturer must have an approved license under section 351(k) of the Public Health Service Act. In response to comments, CMS clarified that it also would consider this requirement met if the biosimilar manufacturer has submitted a license application and received a complete response letter from FDA.
In addition to the license requirement for granting a Biosimilar Delay to 2026, the biosimilar must have a “high likelihood” of being marketed before September 1, 2025. In the Initial Guidance, CMS indicated that it would look at two factors when determining whether the “high likelihood” requirement is met: whether there are significant patent obstacles that could block the biosimilar’s pathway to market and whether the biosimilar manufacturer will have the necessary operations in place to market the biosimilar. In the Final Guidance, CMS clarified that active patent litigation will not disqualify a product for the Biosimilar Delay if the litigation is “related to another reference product included in the Reference Drug that is not applicable to the Biosimilar.” Finally, CMS stated that it will publish a list of drugs that would have been subject to price negotiation if not for a Biosimilar Delay.
B. Manufacturer Requirements
Section 40 of the Final Guidance, which identifies specific requirements applicable to manufacturers with respect to the agreement they must enter into with CMS, largely remains unchanged from the Initial Guidance, with a few key clarifications.
- Agreement with CMS (Section 40.1)
The Final Guidance added an expedited process that allows manufacturers to end participation in Medicare and Medicaid if they are unwilling to enter into an Agreement for the Negotiation Program. Under this process, a manufacturer submits a notice to CMS stating that it does not intend to participate in the Negotiation Program and requests termination of its agreements to participate in the Medicaid Drug Rebate Program, Medicare Coverage Gap Discount Program, and the Manufacturer Discount Program. CMS stated that it is committed to approving these termination requests and will expedite the termination of the agreements to meet the statutory minimum of thirty days. Additionally, CMS addressed the process by which the manufacturer will terminate its applicable agreements under the Medicare Coverage Gap Discount Program and the Manufacturer Discount Program. CMS noted that a hearing concerning the manufacturer’s termination request will be held prior to the effective date of termination with sufficient time for such effective date to be repealed. The ability for manufacturers to timely terminate the required participation agreements has been one point raised in recent litigation challenging the Negotiation Program.
- Submission of Manufacturer Data (Section 40.2)
CMS made several clarifications regarding the confidentiality of the negotiation process in response to comments that called for both greater insight into the Negotiation Program and greater protections for proprietary information submitted as part of the Negotiation Program. In the Final Guidance, CMS clarified that it will not publicly discuss the negotiation process. While the manufacturer is free to publicly discuss the negotiation process, CMS advised that any information shared by the manufacturer will no longer be considered confidential by CMS and therefore may be subject to being shared with the public. CMS also clarified the data that it will consider proprietary when submitted as part of the price negotiation process, which includes research and development costs and recoupment, unit costs of production and distribution, pending patent applications, market data, revenue, and sales volume data.
- Providing Access to the MFP (Section 40.4)
The Final Guidance noted that many manufacturers prefer a “retrospective refund” model for implementing the MFP. Rather than providing the drug to the pharmacies at the MFP, under a retrospective refund model the manufacturer would provide reimbursement to pharmacies following the sale of the drug to an MFP-eligible customer. Several comments expressed interest in CMS implementing procedures to ensure that the MFP is effectuated under a retrospective refund model. In the Final Guidance, CMS reiterated that manufacturers must provide access to the MFP in one of two ways: (1) prospectively ensuring that the price paid by the dispensing entity when acquiring the drug is no greater than the MFP, or (2) providing retrospective reimbursement for the difference between the dispensing entity’s acquisition cost and the MFP. CMS stated that it intends to work with a Medicare Transaction Facilitator to ensure that manufacturers and pharmacies receive access to the necessary data to support the process of verifying an MFP-eligible individual, and that it intends to continue to work to identify processes that would be the most viable for the supply chain to operationalize ensuring that dispensers have access to the MFP. CMS will release more information regarding ensuring access to the MFP for the 2026 initial price applicability year. CMS is also exploring the use of a standardized refund amount from the manufacturers to the pharmacies under a retrospective refund model.
- Suggestion of Error (Section 40.5)
Several commenters requested the availability of a dispute resolution process. In the Final Guidance, CMS provided that Primary Manufacturers can submit a suggestion of error if they in good faith believe that CMS made an error in the calculation of the ceiling for the selected drug or the computation of MFP across dosage forms and strengths. CMS will respond to suggested errors within thirty days.
C. Negotiation Factors (Section 50)
The Final Guidance clarified the types of therapeutic alternative data that can be considered during negotiation. CMS will consider health outcomes and other outcomes as negotiating factors, including “changes to productivity, independence, and quality of life.” The guidance also specifies that CMS will not use Quality-Adjusted Life Years (QALYs). This is a change from the Initial Guidance, which did not allow “certain uses” of QALYs. However, the agency noted that it “may review the underlying data, results, or other content in studies that employ QALYs.”
D. Negotiation Process (Section 60)
CMS provided several updates to the negotiation process in order to increase transparency with manufacturers during the negotiation process and the public post-negotiation. During negotiations, CMS will now aim to provide the primary manufacturer redacted data regarding any alternative treatment evidence that CMS receives from interested parties during the negotiation process. After a drug’s MFP has been established, CMS clarified that the CMS website will list (and annually update) each selected drug’s single MFP for a thirty-day equivalent supply, NDC-9 per unit price, and NDC-11 per package price.
The Final Guidance also creates more opportunities for manufacturers and patients to communicate with the agency. The negotiation process will now include a CMS-manufacturer meeting, where manufacturers can present and give context to their submission. Manufacturers are allowed to share up to fifty pages of material with the agency during the meeting, which can include slides, charts, and graphs. Additionally, the agency will host public listening sessions in fall 2023, targeted to patients, beneficiaries, caregivers, and consumer and patient organizations. Through the listening sessions, CMS aims to gather feedback on therapeutic alternatives for selected drugs and the selected drugs themselves, such as whether the selected drugs meet unmet medical needs (the Final Guidance expanded this definition to include drugs for which existing therapeutic alternatives do not sufficiently address a disease or condition). CMS will use this feedback to help determine the initial offer for certain selected drugs; although, exactly how this feedback will be weighed in the overall determination remains unclear. The extent and nature of transparency during the negotiation process continues to be a subject of the pending litigation challenging the Negotiation Program.
Additionally, CMS provided more details on how a selected drug’s price ceiling and initial offer price will be determined. While CMS will not consider the cost of therapeutic alternatives when determining an initial price offer, CMS will look to public and private evidence regarding any therapeutic alternatives, including clinical guidelines and peer-reviewed literature. Notably, CMS may consider biosimilars and generics to be therapeutic alternatives. CMS also revised how the agency determines ceilings for an MFP offer amount. In response to concerns that the ceiling would be applied twice (at the drug level and at the dosage/strength level), the Final Guidance clarified that CMS would apply a ceiling price “across all dosage forms and strengths of the selected drug.”
CMS added several formalities to the negotiation process. Specifically, the Final Guidance includes the following:
- CMS must respond to a manufacturer’s counteroffer within thirty days.
- The Primary Manufacturer and CMS must sign an Addendum to the Agreement in order for the agreed-upon MFP to be effectuated.
- At the end of the negotiation period, if an agreement has not been reached, an excise tax could be assessed against the Primary Manufacturer.
Finally, CMS clarified that it would make available to the public a summary of the negotiation process for each drug that is selected for price negotiation. No later than seven months post-negotiation, a narrative explanation of each completed negotiation will be posted, along with redacted data and information regarding offers, counteroffers, and negotiation meetings.
E. The Bona Fide Marketing Standard (Sections 30.1, 70)
The Final Guidance instituted some safeguards to prevent drug companies from exploiting CMS’s “bona fide marketing” standard. Under the IRA, a drug is not a qualified single source drug subject to price negotiation if there is an approved generic alternative or biosimilar of that drug “that is being marketed.” This exclusion is meant to ensure that negotiations are focused on drugs with prices that are not already driven down by competitors. In interpreting this provision, the Initial Guidance stated that CMS will determine whether “bona fide marketing” of a drug’s generic or biosimilar has occurred by reviewing a manufacturer’s Prescription Drug Event (PDE) data and considering factors such as if the generic or biosimilar is “regularly and consistently available for purchase.” The Final Guidance clarifies that “meaningful competition” requires “more than solely token or de minimis availability of the products.” As an example, the guidance points to market-limiting agreements with generic competitors, where “only a nominal quantity of product is allowed to enter the market.” However, rather than instituting an explicit market-share threshold, as suggested by some researchers, the guidance states that CMS will determine whether a generic is being meaningfully marketed based on “the totality of circumstances” as a “holistic inquiry.” Additionally, the guidance expands the type of data CMS will use in making this determination, to include not only PDE data, but also Average Manufacturer Price (AMP) data.
F. MFP-Eligible Individuals (Section 80)
Beneficiaries who use their Part D plan (including Medicare Advantage Prescription Drug plans and Employer Group Waiver Plans) to pay for a selected drug must be provided a selected drug’s MFP, so long as the drug is covered under that plan. The Final Guidance clarified, however, that the MFP for a selected drug need not be provided to beneficiaries who pay for the drug in any other way, such as subsidies, discount cards, or cash. In response to comments noting that MFPs for Part D drugs would be used by commercial plans to inform negotiations or to establish payment and reimbursement amounts for the selected drug outside of the Medicare program, CMS noted that CMS already establishes and publishes rates for Part B drugs using Average Sales Price methodology that can be used by other payers. Additionally, during initial price applicability year 2026, the MFP does not need to be provided to hospitals, physicians, service providers, and suppliers who administer a selected drug to individuals enrolled in Medicare Part B.
G. Enforcement – Civil Monetary Penalties (Section 100)
In the Final Guidance, CMS provides additional details on the enforcement process for violations by a Primary Manufacturer for failure to ensure access to the MFP, violation of terms of the Agreement, and provision of false information. If CMS discovers and confirms failure to make the MFP available, it will send the Primary Manufacturer a Notice of Potential Noncompliance. The Primary Manufacturer will then have ten business days to response to the Notice to provide additional context, refuting evidence, proof of mitigation, and other factors for consideration.
CMS emphasized in the Final Guidance that in applying CMPs for violations of the Agreement, CMS intends to use discretion so that CMPs are reserved for instances of substantive noncompliance. The Final Guidance lists several examples of substantive violations. CMS also clarified the processes that may apply during determination of non-compliance. For example, if additional information is requested, Primary Manufacturers would be afforded reasonable timeframes for responding and could request deadline extensions no later than three calendar days prior to the initial deadline. Additionally, if a CMP is warranted due to failure to provide requested information, no CMP would be imposed if a Primary Manufacturer submitted the requested information on the day after the deadline.
CMS adopted a definition for “knowingly” that is consistent with language used by the Office of the Inspector General in administration of CMPs at 42 C.F.R. § 1003.110, which does not require proof of specific intent to defraud. This standard will be applied in determining whether a manufacturer either knowingly provided false information in connection with the Small Biotech Exception, or in connection with the Biosimilar Delay. CMS removed the “knowingly” requirement related to the submission of false information under the Manufacturer Agreement.
Finally, CMS adopted the existing procedures, as codified in 42 C.F.R. § 423 (Appeal Procedures for Civil Monetary Penalties) that currently apply to Part D sponsors and manufacturers under the Coverage Gap Discount Program. Pursuant to this appeals process, the manufacturer will have sixty calendar days from the date of receipt of the CMP Notification to request a hearing, which will be established and conducted pursuant to the applicable regulations.
H. Part D Formulary Inclusion of Selected Drugs (Section 110)
In response to comments requesting clarification in order to prevent plans from steering beneficiaries away from selected drugs by including only one dosage form and strength on a formulary, or placing selected drugs on less favorable tiers, CMS clarified that all dosage forms and strengths of a selected drug must be included on a formulary. CMS noted that for 2026, it would not implement explicit tier placement requirements or utilization management requirements for selected drugs but would continue to assess potentially concerning findings with its formulary review process.
I. Application of Medicare Parts B and D Prescription Drug Inflation Rebate Program to Selected Drugs (Section 120)
CMS restated that selected drugs will also be subject to the Part D drug inflation rebate, as required by statute. CMS clarified, however, that the MFP for a selected drug would not be included in the AMP for the selected drug and, hence, would not affect the Part D inflation rebate calculation.
3. Next Steps
CMS has stated that it will continue to provide additional guidance on certain provisions applicable to initial price applicability year 2026, as well as future years. We will continue to monitor developments as additional program instructions emerge.
Elena Klonoski, a summer associate in our Boston office, and Lauren Limbach, a summer associate in our Washington, D.C. office, contributed to the drafting of this post.
[1] CMS, Final Guidance to Interested Parties: “Medicare Drug Price Negotiation Program: Revised Guidance, Implementation of Sections 1191 –1198 of the Social Security Act for Initial Price Applicability Year 2026” (June 30, 2023).
[2] CMS, Initial Guidance to Interested Parties: “Medicare Drug Price Negotiation Program: Initial Revised Guidance, Implementation of Sections 1191–1198 of the Social Security Act for Initial Price Applicability Year 2026, and Solicitation of Comments” (March 15, 2023).
[3] We note that several lawsuits have been filed by drug manufacturers and industry groups, challenging the constitutionality of the Negotiation Program, as discussed in our prior blog post.
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