Inflation Reduction Act’s Medicare Part B and D inflation rebates explained

Medicare Part B and Part D inflation rebates

Ken Choe, partner in the Hogan Lovells Health practice group, introduced the session by noting that the Inflation Reduction Act of 2022 (IRA) was signed into law by President Biden on August 16, 2022. The legislation, which we summarized on August 8 (online here), revived many of the prescription drug provisions proposed last fall in the Build Back Better Act, but with some notable differences.

This session focused on the Medicare Part B and Part D inflation rebate provisions of the IRA, which were enacted in an effort to control price increases by imposing inflation-based rebates on certain drugs paid under Medicare Part B and D. Alice Valder Curran, partner in the Hogan Lovells Health practice group, emphasized that it is important that manufacturers act now to understand the impact of these provisions and how their implementation will impact patients and customers in the coming months. The effective dates for the applicable rebates are rapidly approaching: Q1 of 2023 for Part B or Q4 2022 for Part D.

How will Part B inflation rebates work? 

Turning first to Part B inflation rebates, Alice explained that the pool of drugs subject to this rebate are single source drugs or biologicals for Part B purposes (as defined in section 1847A(c)(6)(D) of the Social Security Act (SSA), excluding low Medicare spend drugs, qualifying biosimilar biological products (having an average sales price (ASP) of not more than ASP of the reference product during a specified five-year period), and certain vaccines. Alice also explained the rebate is only owed on units reimbursed by Part B, excluding packaged units, 340B units, and Medicaid units. Moreover, the Secretary is required to waive or reduce the rebate amount for products on the 506E shortage list and for biosimilars experiencing severe supply chain disruptions. 

For drugs approved on or before December 1, 2020, Alice explained that the rebate formula is calculated by multiplying:

• the total number of eligible Medicare Part B utilization
• by the amount (if any) by which the rebate quarter Part B payment rate exceeds the inflation-adjusted benchmark quarter Part B payment rate.   

In turn, the inflation-adjusted benchmark quarter Part B payment rate is calculated by multiplying:

• the Part B payment rate for the benchmark quarter
• by the percentage (if any) by which the rebate period Consumer Price Index for All Urban Consumers (CPI-U) exceeds the benchmark period CPI-U.

The same calculations apply generally for subsequently approved drugs (approved after December 1, 2020); however, the benchmark payment quarter for these drugs is the third full quarter after the drug was first marketed, and the benchmark period CPI-U is the CPI-U for the first month of the first full calendar quarter after the drug was first marketed.

Finally, Alice explained that where a drug selected for Medicare negotiation (i.e., a “selected” drug) is no longer subject to a maximum fair price (MFP), its benchmarks change, such that the benchmark payment quarter becomes Q1 of the last year of the price applicability period and the benchmark period CPI-U becomes the July of the year preceding the last year of the price applicability period.

These benchmarks are summarized in the chart below:

Responding to an audience question regarding whether bundled units are included in the formula, Alice pointed out that there were “potentially different outcomes” depending on which provision was at issue, because of varying terminology when referencing “packaged” versus “packaged and bundled” units.

Alice also pointed out that there appear to be no exceptions to the standard Part B inflation rebate calculations for eligible drugs that are also selected for negotiation under the IRA’s drug price negotiation program and subject to MFP. Therefore, absent some action by CMS to somehow carve out these units, the effective MFP paid by Medicare may actually be lower than the price negotiated by CMS.

Importantly, for drugs approved on or before December 1, 2020, the benchmark payment quarter (Q3 2021) and benchmark period CPI-U (CPI-U for January 2021) are already set and rebate liability will start in Q1 2023. David Chan, President and General Manager of Riparian, provided a number of specific illustrative examples of these calculations. He noted that CPI-Us for relevant past quarters are already available, as are Congressional Budget Office (CBO) estimates for future CPI-Us. Manufacturers can perform these calculations now to provide estimated rebate liabilities for key products.

Turning to the rebate invoicing process, Alice explained that CMS will issue rebate invoices within six months of the end of each rebate calendar quarter. The invoice will include the Part B utilization that is subject to a rebate, the amount by which the rebate quarter Part B payment amount exceeded the inflation-adjusted Part B payment amount, and the total rebate owed. A manufacturer is required to pay the rebate within 30 days of receipt of the invoice. Alice noted that the Secretary may choose to delay sending invoices for calendar quarters in 2023 and 2024 to not later than September 30, 2025. Addressing an audience question, Alice noted that the Secretary has the incentive to issue invoices as soon as possible, but from a practical point of view, there could conceivably be a delay in operational readiness in adjusting CMS procedures.

Next, David walked the audience through timelines for drugs approved on or before December 1, 2020 and subsequently approved drugs, as illustrated below:

Alice then posed the important question of whether beneficiaries will share in these rebate savings. The short answer, she noted, was yes, but “it’s complicated”. Effective in Q2 2023, beneficiary coinsurance will be set at 20 percent of the Part B inflation-adjusted payment amount.  Alice emphasized that this was her “number one operational concern” for manufacturers under the IRA: how to implement a coinsurance to go live on April 1, 2023 and communicating with patients and payors to understand the new processes. Providers will in principle be made whole by CMS reimbursement of 80% of the Part B payment amount plus the difference between the 20% of the Part B payment amount and 20% of the inflation adjusted payment amount.

Turning to implementation, Alice noted that there is no process for rebate adjustments under Part B – at least not yet. While not required under the IRA, it is unclear whether CMS will account for adjustments to inflation rebate liability in response to late arriving data, utilization changes, or ASP restatements. Nor is there any obligation to issue guidance directed to implement the Part B inflation rebates (unlike Part D). Alice noted that it would be surprising if there was not some guidance or potentially regulation issued around the process.

Alice noted that the IRA does, however, provide guidance for civil monetary penalties (CMPs) for noncompliance. 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. In addition, the IRA provides that there is no administrative and judicial review of determinations of rebate units, whether a drug qualifies as a Part B rebatable drug, rebate calculations, beneficiary coinsurance calculations, or computation of payment amount for Part B rebatable drugs. Alice also noted that for government price reporting purposes, the rebates would be excluded from ASP, best price, and AMP calculations.

How will Part D inflation rebates work?

Turning to Part D, Alice explained that the list of drugs subject to the Part D inflation rebate is slightly different than those under Part B. The Part D list includes all products approved under a New Drug Application (NDA) or licensed under a Biologics License Application (BLA) (including biosimilars), as well as certain generics that “feel like” an innovator, while again excluding low Medicare spend drugs. Alice also explained the rebate is only owed on units reimbursed by Part D, excluding 340B units beginning in 2026. Moreover, as with Part B, the Secretary is required to waive or reduce the rebate amount for products on the 506E shortage list and for biosimilars experiencing severe supply chain disruptions.

For drugs approved on or before October 1, 2021, the rebate formula is calculated by multiplying:

• the total number of eligible Medicare Part D utilization of the drug in the rebate year
• by the amount (if any) by which the volume-weighted average annualized AMP (VAAMP) for the rebate year exceeds the inflation-adjusted volume-weighted average annualized AMP (IVAAMP) in the payment amount benchmark period. 

The VAAMP is 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.

The IVAAMP is calculated by increasing VAAMP for the payment amount benchmark period by the percentage (if any) by which the benchmark period CPI-U exceeds the benchmark period CPI-U.

Similarly, for subsequently approved drugs (approved after October 1, 2021), the rebate calculation runs the same as the standard rebate calculation, except that the benchmark period is the first calendar year after the drug is first marketed and the benchmark period CPI-U is January of the first calendar year beginning after the date on which the drug is first marketed.

Where a formerly “selected” drug is no longer subject to MFP, its benchmarks will change, and the benchmark period becomes the last year beginning during the price applicability period and the benchmark period CPI-U becomes January of the last year beginning during the price applicability period.

These scenarios can be summarized as follows:

Turning to the rebate invoicing process, Alice explained that CMS will issue a rebate invoice within nine months of the end of each rebate year. The invoice will include the amount of the excess VAAMP relative to the IVAAMP and the total rebate owed. While not expressly required, Alice also noted that it would be surprising if the invoice did not also include utilization rates. A manufacturer would be required to pay the rebate within 30 days of receipt of the invoice. As with Part B, the Secretary has some discretion to delay Part D rebate invoices for calendar years beginning October 1, 2022 or October 1, 2023 to not later than December 31, 2025 – which, as noted above, may arise due to operational readiness.

David then provided examples of these timelines in practice. The standard case, for drugs approved on or before October 1, 2021, is presented graphically below.

David noted that the benchmark period is (oddly) three quarters. Moreover, the timing of the basic scenario has some holes; for example, there is no guidance provided for a scenario in which a drug was approved on or before October 1, 2021, but where there may not be sales in the benchmark period.

David also noted that for subsequently approved drugs (approved after October 1, 2021) the rebate period is not delayed and in fact overlaps with the benchmark period:

David pointed out that from a life cycle management perspective, manufacturers should strongly consider the rebate payment consequences of a product launch in Q4.

Moving on to line extensions, Alice explained that the Secretary must establish a 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 (MDRP) at section 1927(c)(2)(C) of the SSA. The definition of “line extension” mirrors that under the MDPR and expressly includes extended release formulations, but excludes abuse-deterrent formulations. Alice also pointed out that the MDRP definition of “new formulation” is very broad, and manufacturers should closely watch the interpretation of these provisions.

Regarding rebate adjustments, Alice explained that the Secretary must establish a process for adjusting rebate calculations where a prescription drug plan or Medicare Advantage prescription drug (MA-PD) plan restates its Part D utilization for a rebatable drug. The IRA provides for reconciliation process for over- and underpayments, and any underpayment would have to be rectified within 30 days. The IRA, however, does not specifically address changes in rebate liability that are not due to utilization data (such as change in AMP), and manufacturers should closely monitor and consider advocacy around guidance in this regard.

As with Part B, the IRA details CMPs in the event a manufacturer does not timely pay a rebate. In the Part D context, a manufacturer would be subject to a CMP in an amount equal to 125 percent of the rebate amount (versus “at least” 125 percent in the context of Part B).

Here again, the IRA provides that there is no administrative and judicial review for determinations of rebate units, whether a drug qualifies as a Part D rebatable drug, or calculation of the rebate amount. For government price reporting purposes, Part D rebates would be excluded from ASP, best price, and AMP calculations. Alice also mentioned that unlike Part B, CMS is directed to implement the Part D inflation rebates through guidance for years 2022, 2023, and 2024.

Next steps

In the meantime, stakeholders will be looking to identify areas of potential agency discretion during the implementation process and can continue to advocate in those areas. Manufacturers of drugs potentially subject to rebate liability should consider how they will engage with patients and customers to prepare for these changes in the coming months.

Please contact the authors or the Hogan Lovells attorneys with whom you regularly work for guidance on your specific product needs.

You can find summaries of parts 1 and 3 of our Inflation Reduction Act webinar series online here:

• Webinar summary: Inflation Reduction Act – Drug Price Negotiation Program explained 

• Webinar summary: Inflation Reduction Act – Medicare Part D benefit redesign explained

Authored by Mahmud Brifkani, Alice Valder Curran, Ken Choe and Ashley Ifeadike