CMS Updates IRA Landscape for Future Medicare Drug Price Negotiations

The Centers for Medicare & Medicaid Services on May 3, 2024, released its draft guidance on administration of the Medicare Drug Price Negotiation Program for initial price applicability year 2027. The program—established by the Inflation Reduction Act and currently in active negotiations with manufacturers of the first 10 drugs selected for initial applicability year 2026—grants CMS the authority to negotiate with manufacturers of certain high expenditure drug products that represent substantial Medicare spend for the maximum price the Medicare program will pay for such drugs.

Overview of Negotiation Process

As described in detail below, the Centers for Medicare & Medicaid Services (CMS) proposes that the second cycle of the negotiation program proceed in the following manner:

Qualifying Drugs

As the first step in the negotiation process, CMS identifies the qualifying single source drugs that, barring any exclusions, will comprise the list of negotiation-eligible drugs.

Generally, the drugs subject to negotiation are older products with no generic or biosimilar competition. For purposes of the negotiation program, a “qualifying single source drug” is a drug for which at least seven years have elapsed since the date of approval or biological product(s) for which at least 11 years have elapsed since the date of licensure, with the same active moiety or ingredient and the same new drug application (NDA) or biologics license application (BLA) holder, aggregated across all dosage forms and strengths and inclusive of those products marketed under different NDAs or BLAs.

Accordingly, to be considered a qualifying single source drug for initial price applicability year 2027, the initial approval for a drug product must have been on or before February 1, 2018, and the date of initial licensure for a biological product must have been on or before February 1, 2014.

For both drug and biological products, the “selected drug” will include certain products of the same dose, strength, and active ingredient or moiety that are repackaged, relabeled, and marketed under the same application when the manufacturer is engaged in “bona fide marketing.” Whether a manufacturer is engaged in “bona fide marketing” is a holistic test that includes review of:

• The manufacturer’s prescription drug event (PDE) data and Average Manufacturing Price;
• Whether the generic drug or biosimilar is regularly and consistently available for purchase through the pharmaceutical supply chain; and
• Whether any licenses or other agreements between a Primary Manufacturer and a generic drug or biosimilar manufacturer limit the availability or distribution of the selected drug.

Drugs Eligible for Exclusion

Once the list of qualifying drugs is identified, CMS will exclude certain drugs from the list if a drug meets any of the following: (1) the orphan drug exclusion; (2) the low-spend Medicare drug exclusion; (3) the plasma-derived product exclusion; (4) the small biotech drugs exception (until 2029); (5) exclusion based on the presence of generic or biosimilar availability; (6) eligibility for the biosimilar delay; or (7) exclusion based on selection for negotiation in initial applicability year 2026.

Once the above drugs are excluded, CMS will select the 15 highest ranked (or all, if such number is less than 15) negotiation-eligible drugs by identifying the drugs that have the highest total expenditures under Part D during the applicable 12-month period. The number of negotiated drugs is cumulative, meaning the 15 drugs selected for price applicability year 2027 will be added to the 10 drugs selected for price applicability year 2026, totaling 25 negotiated drugs.

And while it cannot be known at this time if the number of selected drugs will be expanded beyond 60, during his state of the union speech, President Joseph Biden noted that his administration may pursue expansion of the number of selected drugs from 60 to 500. Accordingly, companies would be well advised to review their respective portfolios and prepare for any potential pricing challenges or impacts that may be ahead.

Submissions to CMS to Engage in the Negotiation Process

To implement the negotiation program, CMS will impose a series of reporting requirements based on whether a manufacturer of a selected drug is designated as a Primary or Secondary Manufacturer (as these definitions are used in the current cycle of the negotiation program).

If the Primary Manufacturer of a selected drug voluntarily elects to enter into a signed agreement with CMS, the Primary Manufacturer is required to submit the following data:

• Information on the non-federal average manufacturer price (non-FAMP);
• Any information CMS requires to carry out negotiations, including but not limited to:
  • Research and development (R&D) costs of the Primary Manufacturer for the selected drug, as well as the extent the Primary Manufacturer has recouped these costs;
  • Current unit costs of production and distribution of the selected drug, averaged across the Primary Manufacturer and any Secondary Manufacturer(s);
  • Prior federal financial support for novel therapeutic discovery and development for the selected drug;
  • Data on pending and approved patent applications, exclusivities recognized by the Food and Drug Administration (FDA), and applications and approvals under Section 505(c) of the Federal Food, Drug, and Cosmetic Act or Section 351(a) of the Public Health Service Act for the selected drug; and
  • Market data and revenue and sales volume data for the selected drug in the United States for the Primary Manufacturer and any Secondary Manufacturer(s).

The deadline for submission is March 1, 2025, and manufacturers are under an ongoing obligation to timely report any updates to all prior submissions. Failure to timely execute an agreement with CMS could expose manufacturers to potential significant excise tax liability. (See 26 U.S.C. § 5000D for additional information regarding the excise tax.)

Manufacturers may elect to file with CMS a notice of exit from the Medicare Coverage Gap Discount and Manufacturer Discount Programs and the Medicaid Drug Rebate Program. However, approval of such notice would withdraw all manufacturer products from all government sales channels.  

Standards of Review

CMS will use the manufacturer-reported data elements, as well as evidence on therapeutic alternatives for the indications of a selected drug, to adjust the preliminary price offer. Additionally, CMS will implement a confidentiality policy respecting certain categories of data submitted by the Primary Manufacturer, including R&D costs and recoupment, treating non-publicly available information as proprietary. However, CMS intends to publish high-level commentary about the data it has received, including statements such as “the manufacturer has recouped its research and development costs.” For purposes of price applicability year 2027, CMS will treat information on non-FAMP as proprietary.

Companies would be well advised to scrutinize all confidentiality policies and to monitor any changes in said policies going forward.

Negotiation Process

The negotiations between CMS and the Primary Manufacturer will proceed in a series of offers, counteroffers, and negotiation meetings as illustrated in the CMS chart below.

Infographic - Datasource Item: CMS Medical Drug Price Negotiation Process

Note that CMS and a Primary Manufacturer may renegotiate the MFP for a selected drug, beginning with initial price applicability year 2028. Generally, CMS anticipates that renegotiation of the MFP might be appropriate in the event of material changes to the selected drug’s National Drug Code (NDC), such as changes to the NDC due to the addition of a new indication. However, CMS plans to release more specific guidance related to the renegotiation process moving forward.

Continued Monitoring

After an agreement on MFP is reached, CMS will closely monitor the Primary Manufacturer’s compliance with the requirements of the negotiation program, including compliance with operational and statutory timelines, procedural and reporting requirements, and system instructions.

Among these requirements is an obligation on the Primary Manufacturer to ensure the MFP is available to all MFP-eligible individuals at pharmacies, mail order services, and other dispensing entities at the point of sale. To support verification that the selected drug was dispensed to an MFP-eligible individual, CMS will require that all Primary Manufacturers register with a Medicare Transaction Facilitator (MTF) and participate in the MTF data exchange. Note that the Primary Manufacturer is not required to provide access to the MFP for MFP-eligible individuals to be furnished, administered, or dispensed the selected drug under the 340B Program if the 340B ceiling price is lower than the MFP.

If CMS determines—whether through audits, investigations, or complaint processes—that a Primary Manufacturer has failed to comply with certain aspects of the negotiation program, the Primary Manufacturer may be subject to excise tax liability, as well as the imposition of civil monetary penalties of up to $1,000,000 for each day of such violation. If a manufacturer knowingly provides false information to apply the aggregation rule for the Small Biotech Exception, the penalties increase to $100 million for each item of false information.

Removal from the Selected Drug List

A selected drug will no longer be subject to the negotiation process if the FDA approves a generic drug or licenses a biosimilar that identifies the selected drug as its reference product and the generic or biosimilar is marketed pursuant to such approval or licensure. If a drug is removed from the selected drug list before or during the negotiation process, no MFP will apply. If a drug is removed from the selected drug list after an MFP is in effect, the MFP will continue to apply for one to two years, depending on when CMS determines the drug meets the criteria for removal. If the reason for removal dissipates, the drug or biologic could again become eligible for negotiation in future price applicability years.

Key Takeaways

There remain many unknowns regarding future outcomes of the Inflation Reduction Act (IRA) drug price negotiations. And while manufacturers of selected drugs remain compliant with program obligations, litigation continues. Given that pharmaceutical drug pricing and reimbursement remain a bipartisan focus as the November presidential election draws closer, it cannot be known if, or to what degree, the IRA drug price negotiation program may expand. And with ever increasing pressure and scrutiny on manufacturers and drug prices, companies would be well advised to carefully assess their product portfolios and diligently prepare for potential future selection.

Morgan Lewis will continue to monitor the IRA price negotiations and any additional guidance that CMS releases on program implementation in the coming months. Any manufacturer that anticipates selection of a drug and/or biological product for negotiation in price applicability year 2027 should consider commenting on the draft guidance. Comments are due by July 2, 2024.

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